Not Boring by Packy McCormick

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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Welcome to the 2,104 newly Not Boring people who have joined us since last Monday!If you aren’t subscribed, join 39,996 (so close!) smart, curious folks by subscribing here:🎧 To get this essay straight in your ears: listen here or on Spotify (in ~30 minutes)Today’s Not Boring is brought to you by… SecureframeSecureframe helps companies get enterprise ready by streamlining SOC 2 and ISO 27001 compliance. Secureframe allows companies to get compliant within weeks, rather than months and monitors 40+ services, including AWS, GCP, and Azure.Whether you’re an enterprise or a small startup, if you want to sell into enterprises, you’re going to need to be compliant. Secureframe makes the process faster and easier, saving their customers an average of 50% on audit costs and hundreds of hours of time.Secureframe’s team of compliance experts and auditors are happy to help answer any questions and give you an overview of SOC 2 or ISO 27001, even if you don't need it today. Schedule a demo and learn how: Hi friends 👋 ,Happy Monday! Today’s post is one that I’ve been wanting to write for a while, made timely by some big funding news last week. It’s Fantasy M&A time.Let’s get to it. Soundtrack the World(You can click on ☝️ to go straight to the full post online)Back in April 2019, a recruiter reached out to me about a role I might be interested in: Managing Director, North America at Epidemic Sound. I’d never heard about Epidemic before. It was a fast-growing Swedish music company, but not that fast-growing Swedish music company. But I was itching to leave Breather and I decided to take the interview. After an hour in the office, I was sold. Epidemic Sound’s mission is to “soundtrack the world.” It commissions artists to make music, which it licenses royalty-free to content creators who want to avoid dealing with all of the messiness of music labels and Performing Rights Organizations (PROs). The team was sharp, passionate, strategically savvy, well-read, and Swedish. The company had patiently grown for ten years and was beginning to bring its two ecosystems -- creators and musicians -- together in powerful ways. It was a dream job. I didn’t get it. Epidemic went with Spotify’s former Australia Head, Kate Vale. Told you they were smart; that was very obviously the right call.In July 2019, Epidemic raised $20 million at a $370 million valuation. Last week, Epidemic announced a massive $450 million raise at a $1.4 billion valuation from Blackstone and EQT, a solid 12x increase from the reported €100 million valuation at the time of my interview.After I left the first day of interviews, my first thought was, “Spotify needs to buy this company.” The time wasn’t right then, though. Now, even at a 12x higher price tag, I think it is. Spotify is coming off of a phenomenal year. It’s stock price has more than doubled year-over-year. It’s rolling out new features and products at a rapid clip. Its podcast Streaming Ad Insertion is showing early signs of working. And it’s charging labels to get their artists’ songs heard by more listeners. At 40% music streaming market share, the labels need to play ball with Spotify. In late February, it hosted its “Stream On” event and Analyst Q&A. Without explicitly saying it, Spotify is slowly increasing its power over the record labels to whom it pays out the majority of its revenue. Things are going well for Spotify, but that arrangement is a thorn in Spotify’s side. It depresses margins.  Spotify backward integrated into supply via podcasts, and it should do it again in the core of its business, music streaming, by acquiring Epidemic Sound. That’s right, it’s Fantasy M&A time. I’ll tell you a little about Spotify, a little about Epidemic, and then walk through the rationale of a merger. * Spotify’s Problem with Labels* Spotify Streams On* Enter Epidemic Sound* Spotify x EpidemicThe logic for the deal starts with Spotify’s long-standing problem with labels. Spotify’s Problem with Labels Spotify changed the music industry by working with the music industry. In 2001, Napster let people download songs for free, which predictably crushed sales. From a 1999 peak of $14.6 billion, the US music industry shrank to $11.8 billion by the time Daniel Ek founded Spotify in 2006, and another $3 billion to $8.8 billion by the time it launched in Sweden in 2008. The music industry sued Napster into oblivion, but the genie was out of the bottle. Spotify wrangled the entropy Napster created, and more broadly that a new form of digital distribution made inevitable. Spotify worked with the labels, and listeners could pay one monthly subscription fee (or listen to some ads) to access most of the world’s music in one easy-to-use interface. That came with a cost for Spotify -- they had to pay the labels the majority of the revenue they brought in through subscriptions and ads. Music labels, the biggest of which are Universal Music Group, Sony Music Entertainment, and Warner Music Group, do a few important things for artists: A&R Support and Funding, Marketing and Promotion, Distribution, and Admin. Until recently, making a high-quality recording of a song required expensive studio time, sound engineers, and producers. Getting that song out to people required expensive distribution and the right relationships with radio stations, record stores, or Digital Service Providers (DSP) like Spotify, Apple Music, or Tidal. All of that cost money, which most new musicians don’t have. So they sign with labels. The label pays the artist upfront (an advance) and pays for all of the upfront costs of making, marketing, and distributing an album or song. In exchange, they get paid first when the artists start making money. After the labels recoup their costs, they pay the artist a percentage of revenue on an ongoing basis. Artists generally make 13-20% of ongoing revenue from major labels that paid them an advance, and can make up to 50% with smaller indie labels that don’t pay advances. Labels have traditionally made the most money in the music value chain. To see why, let’s look at an example. Take an artist who signed with a major record label, and assume they’ve paid back the advance and upfront costs and receive 15% of streaming royalties. For simplicity, let’s say Spotify makes $10 billion total, and this artist’s songs make up 0.1% of all streams (meaning its share of revenue is $10 million), and that Spotify pays out 70% of revenue to the labels (in range with reality). Here’s how the payments flow from the $10 million attributable to the artist:* Spotify pays out $7 million and keeps $3 million (30% gross margin) * The Label makes $5.95 million of the $7 million (85%)* The Artist makes $1.05 million of the $7 million (15%) Plus, the labels own the valuable back catalogs (unless they sell them off to an investor; see Taylor Swift v. Scooter Braun). That gives them massive leverage over Spotify and the artists. If Spotify wants the songs that its listeners want to listen to, it needs to work with the labels.In Earshare: The Idiot’s Guide to Investing in Spotify, I wrote about the predicament that Spotify was in coming into 2020: In its current state, it is essentially a marketplace business with little leverage over the supply side, the labels who own the valuable back-catalogs of music that the demand-side of the marketplace demands. Spotify pays about 70% of subscription revenues out to the labels for the right to stream their artists’ music...Adding to the complexity, as part of its early licensing deals, Spotify gave 18% of its equity to the record labels. Most of the labels have sold off their stakes, but Universal Music Group still owns roughly 3.5% of the company. If it sells, it will split the money with its artists. For most of Spotify’s life, it’s been in a weird spot with the labels: it, along with other DSPs, have been largely responsible for saving the music industry, but the labels still hold most of the power, and therefore, most of the economics. Even as the music industry has recovered on the back of streaming -- according to Spotify CEO Daniel Ek, global music industry revenue was at $17 billion in 2008, when Spotify launched, hit a nadir of $14 billion in 2014, and rebounded to $20 billion in 2019, $11.4 billion of which came from streaming -- Spotify’s gross margins remained flat at around 25% thanks to payouts to labels. In 2019 and 2020, Spotify began an aggressive push to take leverage back from the labels by investing heavily in audio content the labels couldn’t touch: podcasts. Between February 2019 and November 2020, Spotify spent $1 billion to acquire podcast technology and content, not including exclusive deals with Michelle and Barack Obama, Kim Kardashian, DC Comics, and others, the terms of which were not disclosed.Spotify’s strategy here -- backward integration -- is not new in streaming. Netflix is the poster child there. For the first 16 years of its life, Netflix did deals with studios for non-exclusive rights to their content. Then, in 2013, it successfully released its first major original show, House of Cards, the rights for which it paid $100 million. That year, Netflix spent a total of $2.4 billion on original content. This year, Netflix is expected to spend $19 billion. The more Netflix spends on original content, the better its margins get. In 2012, its gross margins were 26.5%. According to Atom Finance, its gross margins are expected to hit 43.3% this year. Most people agree that Spotify’s push into podcasts is an attempt to do something similar: the higher proportion of time Spotify listeners spend on podcasts versus music, the less of its revenue it has to pay labels. This is quasi-true for now; while the details aren’t public, podcasts might not impact the amount of money Spotify pays labels under current agreements, but more podcast time means more leverage for Spotify in the next round of negotiations. Podcasts are big and growing. Spotify isn’t just stealing share from market-leader Apple in podcasting; it’s stealing from radio and expanding the podcast ad market. Spotify thinks it can grow podcasting into a $15 billion industry. To start, it’s bringing podcasting up to par with other ad formats through Streaming Ad Insertion, first in its original & exclusive podcasts, and next, thanks to its Megaphone acquisition, to any podcast via the recently announced Spotify Audience Network. The market clearly understands and appreciates the argument. When I wrote about Spotify last March, it was trading at $137. A year later, it’s more than doubled to $279. Not everyone is convinced, though. In January, Citi put a sell rating on the stock, citing no material benefit in app downloads or gross Premium subscriptions from the podcast push. In my humble opinion, Citi is looking at it the wrong way: the move isn’t about short-term download numbers or Premium subscription sales; it’s about: * Shifting earshare from nearly 100% label-dependent music to a mix of music and podcasting,* Slowly diversifying the revenue mix, * Proving it can build businesses without middlemen, * Building up leverage, * And ultimately, using that leverage to improve margins. As I wrote last March, Ek has always been focused on winning audio long-term. He fully expects podcasts to become an increasingly important part of that mix, and is investing accordingly, but music will always be the key. Spotify expects streaming music to be a $75 billion market by 2030, 5x the size of podcasts. If Spotify is to achieve its 30-40% long-term gross margin target, it’s going to need to fight the labels on their home turf. Spotify Streams On Spotify’s stated mission is, “To unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art, and billions of fans the opportunity to enjoy and be inspired by it.” Its externally-unspoken business mission is to build as much leverage over the music labels as humanly and algorithmically possible, and one day cut them out for everything except their back catalogs. It’s finally getting the scale it needs to act. In 2014, Spotify was a small fry. Pandora led the nascent music streaming market with a 31% share; Spotify came in fourth at 6%. By 2019, Pandora was effectively dead at 2%, and Spotify sat alone atop the leaderboard at 36% market share, twice Apple Music’s. During its Stream On event, it pegged its own share at 40%. Labels can certainly hurt Spotify by pulling their catalogs, but now, Spotify can inflict even more damage on labels if it chooses to. For now, it’s mutually assured destruction, but it’s becoming less mutual, and Spotify’s destruction less assured, by the day. On the surface, Spotify is a friendly company. Its whole Stream On event was a celebration of the artists, songwriters, and podcasters who have built lives on top of the platform. Ek never came out and said, “We need you less and less, labels.” But Spotify is a wolf in sheep’s clothing, and if you watch the event closely enough, you’ll see veiled threats everywhere. Ek opened the event with a speech in which he talked about the state of the industry when Spotify was born (not good) and how streaming saved the day: Over the past decade and a half, what we’ve seen and helped drive is an audio renaissance. And I use that word intentionally. It really is a renaissance, and what it is not is a restoration. We’re moving forward, not turning the clock back. People love to look back fondly on the music industry two decades ago, the era of the record store and the FM radio, a time before piracy. And I understand the nostalgia, I get it…. But what really strikes me is how limiting it was...Case in point, back in 2002, just over 30,000 albums were released in the U.S., and only 8,000 sold more than 1,000 copies, representing 98% of sales of new releases. By comparison, in 2020, 1.8 million albums were released on Spotify in the U.S., and six times as many albums represented 98% of the streams for these releases. So it's not just the possibility that more artists can be heard by a global audience, it is that more artists are being heard. Ek’s opening remarks, and the full event, are worth watching in their entirety. Ek spoke softly and almost sweetly, but he sent a message to the labels: “We’re never going back to the world you dominated. Your power is waning.” It’s clear in the numbers: there are 60x more new albums and 6x as many successful albums today than there were 20 years ago. The easier it is to release an album, and the more successful artists there are, the less power middlemen have. Over the next 100 minutes, Spotify dropped subtle clues about the labels’ diminishing power. Today, Spotify is the unquestioned audio aggregator, which allows it to do all of the things that labels can do, at scale, more cheaply. Recall what a label does: A&R Support and Funding, Marketing and Promotion, Distribution, and Admin. Spotify quietly flexed its capabilities in each area throughout the event (we’re going to ignore Admin - Spotify has dashboards and payments).  A&R Support and Funding Charleton Lamb on Spotify’s Marketplace Team talked up the capabilities of Soundtrap, a 2017 Spotify acquisition that gives creators a collaborative recording studio in the cloud, and the ability to find any person you’d need to produce a high-quality song via the marketplace. Recording doesn’t need to be expensive, and a marketplace for talent replaces gatekeepers who “know a guy.” The role of A&R as tastemaker is weakening, too. Popular artist Khalid talked about his experience uploading Location to Spotify, getting picked up by the Mellow Bars playlist, and rocketing from 8k monthly listeners to half a million to 24 million to the #1 most-streamed artist on Spotify. Location now has over 1 billion streams. Khalid signed with RCA Records -- the label is not yet obsolete -- but he surely did so on better terms than he would have without Spotify. Marketing and PromotionThe balance of power is clearly shifting in Spotify’s favor here, as evidenced by the fact that labels are now paying Spotify for better placement and a better chance at inclusion in playlists. Everything with enough eyeballs eventually becomes an advertising business. Additionally, Spotify’s RADAR program finds and supports up-and-coming artists from around the globe with marketing and editorial support. Spotify takes out billboards to promote artists on its platform, and lets artists promote ticket sales and merch through Spotify. Increasingly, Spotify is part of any new album’s marketing plan, and artists are even adjusting songs to fit Spotify’s model. Plus, as Matthew Ball wrote, Spotify has the data to market better than the artists or labels themselves: Spotify and Apple Music have not just the majority of an artists’ fans on their platforms, but also the greatest insight into these fans. No one can do a better job of reaching Beyoncé fans than Spotify — including Beyoncé. And it costs the company nothing to reach them.DistributionMusic distribution is digital now. Getting played on the radio is less and less important, and record stores are practically non-existent. Spotify playlists are the new record store shelves. As Spotify pointed out time and again, getting on the right playlist can make an artist’s career. Playlist inclusion is based on a combination of algorithms and human editorial that Spotify’s Chief R&D Officer Gustav Söderström called “Algotorial.” With 8 million creators creating more than 70 million tracks, 4.5 billion playlists, and 2 million podcasts, all of which can be mixed and matched to create personalized experiences for Spotify’s 345 million listeners, labels aren’t as well-suited for modern distribution as Spotify itself is. But they can pay for it. In an overt example of the shift in power, Spotify highlighted Marquee, which lets artists’ teams pay to sponsor music recommendations. Marquee gives songs an extra boost with the algorithm, but doesn’t guarantee inclusion. Now, if labels want to give their artists the best shot at getting listens, they can pay Spotify directly.Increasingly, these tools are becoming self-serve. Spotify for Artists lets artists and their team submit pitches to Spotify’s playlist editors for inclusion, and Marquee is opening up a self-serve platform after being restricted to a small test pool. The more democratized these tools, the more power Spotify has over the labels. Alec Benjamin, whose Let Me Down Slowly has 766 million streams, said, “I can either sign a record deal or do this by myself. That’s not a choice I would have had before.” Lauv, the I Like Me Better artist with over 1 billion streams on Spotify, put it more bluntly than Spotify’s team could itself: “To be able to do that without having to sign to a major label, to be able to fund the operation internally, is so sick.” Spotify is the aggregator in audio. Increasingly, it’s where the listeners are, which means that talented artists can find an audience with or without a label. As Ek explains the flywheel: A more connected, more engaged community of listeners creates more demand, and more opportunities for artists and podcasters to make a living, and the more people creating, the more there is for people to discover. It's a virtuous cycle, a flywheel.Presenting to analysts in a Q&A after the event, he shared this graphic:Spotify changed the way music is distributed and consumed, and it’s slowly but surely making the labels less important, but its flywheels tell only half of the modern music distribution story. Enter Epidemic Sound  Epidemic Sound’s mission is to soundtrack the world. It commissions music from artists, and licenses it royalty-and-headache free for content creators to use in the stories they tell. Spotify is B2C Music, Epidemic is B2B and B2B2C Music. Spotify directly connects Creators and Consumers, Epidemic Sound connects Storytellers and Musicians. Spotify is a subscription marketplace, Epidemic is a SaaS business.Spotify changed the music industry by working with the music industry. Epidemic Sound decided to skip that and build its own “completely new music industry.” Remember how an artist typically gets paid when their song streams on Spotify from earlier? It’s complex, but things get so much messier when the artist’s song is embedded in a YouTube or TikTok video, played in the background of a movie or TV show, or piped into your favorite store. Licensing a song for use in an online video, movie, or store was historically a nightmare. Labels owned the rights to songs, and Performing Rights Organizations (PROs) enforced royalty collections for every play, which was a huge headache for everyone involved. I have a friend who worked on a digital streaming platform that shut down, and a year after they closed up shop, the last thing they were still dealing with were music royalty claims. Epidemic Sound launched in Sweden in 2009 to make the whole process dead simple. The company started small, commissioning tracks and licensing them to Swedish TV and commercial producers. One night, the story goes, co-founder and CEO Oscar Höglund was sitting at home flipping through channels, and heard Epidemic’s music on each and every one. They were ready to scale. To do that, they identified their two customers: Storytellers and Musicians. For Storytellers, who were used to dealing with all sorts of licensing and royalty headaches, they set out to make the process as simple as possible. As Höglund describes it: We built a completely new music industry from scratch. We didn’t invite the PROs and we didn’t invite the labels, and they were furious. We re-engineered how you produce music. We re-engineered the product, the business model, and we got rid of everything that was tied to reporting.One monthly fee gave Storytellers the right to a catalog of tracks and sound effects, all rights included, without ever having to worry about royalties again. They turned a confusing variable cost into a straightforward fixed cost, and attracted movie and TV producers, Netflix (they soundtracked Narcos), YouTubers like PewDiePie and thousands more, Multi-Channel Networks (MCNs, groups of YouTube channels), ad agencies, podcasters, Twitch streamers, commercial producers, and more. They even worked with restaurant and store chains to provide royalty-free music to pipe into physical locations. For Musicians, they turned variable and unpredictable revenue into a clear upfront payment. Epidemic commissioned tracks with certain attributes, and interested artists could accept the gigs and create based on clear parameters. Before Li Jin popularized the idea of the Creator Economy Middle Class, Epidemic made it possible for musicians to earn a living somewhere between playing shows every night and making it big. An artist might get paid $5,000 per track, directly from Epidemic, with no label in the middle. Epidemic built two networks, Storytellers and Musicians, and then something happened. As Höglund told an audience in 2018: “the network effects started giving network effects on top of each other.” As Storytellers’ videos took off on YouTube, TikTok, Twitch, and more, commenters started asking, “What’s that song?!” Epidemic decided to lean in, streamed the songs to Spotify and other DSPs, and posted links in the comments. They drove thousands, then millions of streams, which brought in “a shitload of money.” This is what got me so excited about the business when I interviewed. Because they owned the rights, they could do what they wanted with the money, so they decided to split streaming revenue 50/50 with Musicians (recall that most major labels pay 13-20%). That meant Musicians had both a comfortable floor and a high ceiling, which attracted more Musicians, which meant better music, which attracted more Storytellers, which meant more money. The flywheel was spinning. Even better, Storytellers pay Epidemic to do their distribution for them! That’s massive. Marketing and distribution is the labels’ biggest cost, and Epidemic gets it better than free. When Storytellers’ videos succeed, Epidemic succeeds with them. At the time Höglund described the dual flywheels in 2018, he said Epidemic’s songs were getting played 20 billion times per month. Last week, when TechCrunch announced Epidemic’s unicorn round, they wrote, “YouTube videos using music from Epidemic Sound artists are played 1.5 billion times each day,” not including plays across TikTok, Instagram, Facebook, Snapchat, Twitch, podcasts, on TV, in stores, or on Spotify itself. That’s 45 billion plays per month on YouTube alone across Epidemic’s library of 32,000 tracks. Epidemic Sound’s songs are sneaky popular on Spotify, too. In 2017, the music industry got very angry with Spotify for putting so many “fake” Epidemic songs in its playlists. Music Business Worldwide wrote an article called, “WHY SPOTIFY’S FAKE ARTISTS PROBLEM IS AN EPIDEMIC. LITERALLY.” The problem, as one music label exec explained it, is that by including Epidemic’s tracks in playlists, Spotify was “watering down our beer.” Since it pays out royalties based on a percentage of overall plays, the argument went, Spotify was able to pay label-backed artists less by pumping more Epidemic streams into the pool. Epidemic pushed back and said that there was nothing fake about the songs. They were popular on YouTube so Epidemic uploaded them to Spotify, they became popular, got picked up in playlists, and got more popular. Spotify paid out royalties to Epidemic just like they would to a traditional label. But it makes you think, if the criticisms had been right: more Epidemic songs, lower royalty payments to the labels, higher margins. That sounds like Spotify’s unspoken business goal -- lower label dependency and improve margins -- doesn’t it? Fantasy M&A: Spotify x Epidemic SoundSpotify and Epidemic have made sense as a pair for a long time. Some of the reasons are obvious and a little on the nose: * They’re both Swedish (Sweden is a music tech powerhouse), and share investors. * Epidemic’s songs are very popular on Spotify already -- I’ve been listening to Epidemic’s playlists while writing this, and I’ve recognized a ton of songs from other playlists.* The two companies have complementary databases and algorithms that could be used not only to build better recommendations for listeners, but also better recommendations for Musicians. Spotify/Epidemic could reduce the risk in making music, at scale.* Epidemic’s mission has always been to “Soundtrack the Internet.” Look what Spotify says on its Investor Relations page:Those are all bonuses. There are two main reasons Spotify should acquire Epidemic: acquiring Epidemic would help Spotify solve its biggest challenge, and double down on its biggest strength.Solving Spotify’s Biggest Challenge Spotify’s biggest challenge is its margin profile. It’s essentially a subscription marketplace business with flat gross margins dictated by the labels. It gets very little operating leverage with scale - every time a song is played, ~70% goes to the label, whether it’s the only song or the 100 billionth song played that month. That’s the reason that it’s worth only $53 billion as the world’s most popular audio company, and why its Enterprise Value / Revenue ratio is only 5.5x compared to Netflix’s 9.5x. That’s why it’s spent so much money to backward integrate in podcasting, where it has the high upfront cost, low marginal cost structure that makes tech investors go gaga.Epidemic Sound, on the other hand, is a high-margin SaaS business. It pays for music upfront, and millions of Storytellers pay Epidemic every month for access to an ever-expanding catalog of tracks. That’s operating leverage. As I wrote in one of my first ever essays, The Rise of the Natively Integrated Company:They took principal risk from the outset in order to better control the product and produce outsized margins. They leveraged the quality and ease of their product to attract demand, used that demand to build more quality supply, and used that supply strategically expanding into new verticals. Epidemic Sound is a Natively Integrated Company.By acquiring Epidemic Sound, Spotify would backward integrate into owning supply, improve its margins, and own a platform on top of which it could build its own modern label. To hit its long-term goal of 30-40% gross margins, it’s going to need to keep a much bigger portion of music streaming revenue. Assuming that music streaming is a 5x bigger market than podcasting in 2030, as Spotify does, it would be impossible to get to 40% gross margins on the back of podcasting alone. For years, people have suggested that Spotify might start its own label one day to get there; acquiring Epidemic does that in one fell swoop. The time wasn’t right before. Spotify hasn’t had enough power over the labels to do it. It does now, as it cheerily threatened throughout Stream On. Had Spotify tried to acquire Epidemic when I interviewed in 2019, the labels could have pulled their artists’ music in protest; today, I don’t think they could. Instead, labels will continue to work with Spotify on their back catalogs and biggest stars, while Spotify and Epidemic could create a new type of label that puts more money in smaller artists’ pockets by replacing much of what a label does manually with software. Doubling Down on Spotify’s Biggest StrengthSpotify’s biggest strength is that it is the single biggest distribution channel for artists. It’s the audio aggregator. Spotify and its playlists are half of the modern music distribution playbook. The other half is discovery through Storytellers. The youths don’t find new music on the radio; they find new music on TikTok, YouTube, Snap, and Twitch. Acquiring Epidemic would let Spotify leverage Epidemic’s Storyteller distribution machine.Artists who sign with Spotify / Epidemic could easily get their songs played across YouTube, TikTok, Instagram, Twitch, and other video platforms. As virtual worlds become more abundant, and AR takes off, there will be limitless opportunities for soundtracking, which mean limitless opportunities to drive traffic back to Spotify. Today, Spotify can’t play in that space with its own music, because it doesn’t have its own music. A Spotify / Epidemic label could. This is where the two companies’ sets of flywheels could interact to create an unrivaled marketing and distribution machine: Just as Snap has Bitmoji as its Trojan Horse into other platforms, Spotify’s original & exclusive music could be its Trojan horse into the world’s streaming videos, video games, and physical locations. It would give Spotify full 360 ownership of modern music distribution and marketing. Beautifully, what today is the label’s biggest cost would actually become a profit center for Spotify. That’s impossible to compete with. If done right, Spotify and Epidemic could truly Soundtrack the World. The combined company would generate absurd margins, build an unrivaled distribution machine, and put more money, more reliably in musicians’ pockets. The history of the modern internet isn’t about rebuilding old models online; it’s about fundamentally reshaping the way industries work. Typically, that’s meant cutting out the middleman. Music labels, which got hit by the internet hardest and first, have actually held on the longest because back catalogs of music are the most valuable back catalogs in media and entertainment. There’s no substitute for the Beatles. But the fact remains that today’s new artists don’t need labels nearly as much as new artists did a couple of decades ago. Artists have the talent, brand, and direct connection with fans. Spotify and Epidemic bring the A&R, distribution, and marketing. The artists and the Aggregators make the money, the middle gets cut out. It’s a shining example of Power to the Person.Ek was right. This is an audio renaissance; there’s no going back.Thanks to my brother Dan for editing. Go follow him on Twitter for NYC love.How did you like this week’s Not Boring? Your feedback helps me make this great.Loved | Great | Good | Meh | BadNo newsletter Thursday - see you next week!Thanks for reading,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 1,747 newly Not Boring people who have joined us since Sunday!If you aren’t subscribed, join 39,474 smart, curious folks by subscribing here:This week’s Not Boring is brought to you by… UserLeapHi friends 👋 ,Happy Thursday! Our little Not Boring family is growing — nearly 7,000 of you joined the party in the past month alone. That’s wild. I continue to be amazed that this is my job. One of my favorite parts of the job is writing Sponsored Deep Dives. (More on how I pick sponsors here). I love getting to tell you about the next big companies before they take off. The first two companies I did Sponsored Deep Dives on — MainStreet and Pipe — announced $60 million and $50 million fundraises this week, respectively. Today’s sponsor, UserLeap, is already taking off. Public companies like Square, Opendoor, Adobe, and Dropbox use it to collect and categorize real-time customer feedback, and the company has raised $20 million from First Round and Accel.You’ll be hearing about UserLeap a lot more, and interacting with it to share your insights on your favorite products across the internet. You heard it here first. As always, I’ll tell you how I’m getting paid: today is a mix of CPM and CPA.Let’s get to it.UserLeap & Differentiating InsightsActing On Continuous Research If you’ve made it to the bottom of these essays over the past few weeks, you’ve probably noticed something new: That’s a microsurvey I set up in five minutes working with today’s sponsor, UserLeap. UserLeap, which is backed by Accel and FirstRound, helps product teams continuously discover customer needs and evaluate the user experience via short, highly targeted surveys (microsurveys) displayed contextually within the product. The magic of UserLeap is that it quantifies qualitative feedback by collecting rich, written responses, in real-time, and using machine learning to analyze and categorize the responses to pull out themes. An example would help, and I’m an open book, so I’ll share what you’ve told me: I’m proud that 92% of responses are good and above, and it’s awesome to see that people generally love these Sponsored Deep Dives, but the point of continuous research is to adjust and improve in real-time. To whit, the most common negative feedback is that sponsored posts, “Feel like ads with no analysis.” Ouch. That’s only four people out of the 631 responses you’ve left, but UserLeap recommends that I take action, so let’s do it. This is going to be a meta-post: I’m using today’s sponsor’s product to make my Sponsored Deep Dives even better. I’m taking your input to heart and beefing up the analysis in this one. UserLeap’s working already. To that end, today, we’re going to cover: * The Need for Speed* The Modern PM Tech Stack vs. User Research Tools* Meet UserLeap* Building Moats in a Competitive Market* UserLeap’s Vision: The Two KPIsUserLeap is free for up to 10,000 monthly tracked users (more on why later), and if you or your company builds something online, you should go sign up for it now: The Need for SpeedUserLeap founder and CEO Ryan Glasgow joined his first startup as founding PM in college. The company, ExtraBux, was acquired by eBates in 2010, but that’s not the important part of the story. The important part is that to build a relatively straightforward company, Ryan and team had to set up their own servers, build out their own infrastructure, and run their own PHP. That was a familiar experience for anyone starting a company a decade ago, or even five years ago. It will always be difficult to start, run, and grow a company, but just a few years ago, it was hard to just start one. Today, starting a company is much, much easier, because many of the startups launched over the past couple of decades were built specifically to make starting and scaling a company easier. Just last night, Lattice CEO and UserLeap investor Jack Altman tweeted:This is an ever-present theme in Not Boring, so excuse me while I do the Ben Thompson self-referential thing for a minute. Just this Monday, Ben Rollert and I wrote about a wave of no-code and low-code startups Inspired by Excel that “aim to create powerful general purpose, highly flexible software targeted at a broad audience, including non-technical users.” With the rise of Inspired by Excel products, the universe of people who can create software products ballooned from the 25 million or so software developers in the world to everyone with a computer. Two weeks ago, in Power to the Person, I wrote about the idea that, “Thanks to new tools and technologies, we are nearing the point at which the costs of carrying out a transaction through the market are getting so low that firms are less necessary.” More powerful tools mean that one person is able to build a bigger business than multi-thousand-person companies could a few decades ago. One of the reasons for that is the explosion of API-first companies, about which I wrote:When a company chooses to plug in a third-party API, it’s essentially deciding to hire that entire company to handle a whole function within its business. Imagine copying in some code and getting the Collison brothers to run your Finance team.These developments are incredibly exciting. AWS, Google Cloud, Netlify, Stripe, and hundreds of other products mean that people and companies are able to focus on doing the things that they do best without having to worry about all of the slow and painful work of setting up servers, building their own authentication and security from scratch, figuring out how to accept payments, or doing many of the things that each individual startup had to do just to get off the ground not so long ago. As a result, the cost of starting a startup has come down dramatically over the past few decades, and particularly over this past one. More entrepreneurship is a great thing for the world, but it also presents a challenge, which I summarized in Shopify and the Hard Thing About Easy Things: Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up. The lower something’s cost, the more demand for it. As building products and starting companies got cheaper, more and more people started doing it. As fewer and fewer company hours and resources went towards setting up servers and infrastructure, more and more time has gone towards iterating on the product itself. Taken together, building something good enough has gotten easier, everything has gotten a lot faster, but standing out from all the noise is harder than ever.The question, then, is no longer, “Can we get this product to market?” but “Can we create a product that customers love?” That has huge implications for how startups are built and what they focus on. It’s why CEOs are spending less time coding in dark rooms and more time on Twitter, to lend some of their personal brand to their company. It’s why every company now seems to talk about their “community.” It’s why “10x designers” are suddenly harder to hire than 10x engineers.This trend isn’t new. It’s been obvious that things have been getting faster and more competitive for a while. That’s why most software that product teams use is fast, easy, and integrated. User research software has not kept up. The Modern PM Tech Stack vs. User Research Tools Almost daily on Twitter, one Product Manager or another tweets out their tech stack, the set of tools that they use to help build great products. Lenny Rachitsky, who literally writes the book (well, newsletter) on product management, polled his audience in December to see which tools the most PMs rely on (tweet here).Each one of these tools is easy to set up, fast, and collaborative. Each has a free plan through which users can get a good sense of whether the product will work for their needs. This is what PMs have come to expect. For PMs and growth teams that want to better understand their users on a quantitative level, there’s a set of modern tools like Amplitude, Segment, and Hotjar. They’re slightly harder to set up than the products above because they need to integrate with the product or website to track how users behave, but once they’re in, it’s relatively easy for PMs and growth teams to build their own events tracking and dashboards without needing to go back to the engineering team. All of these tools remove bottlenecks and let PMs move more quickly to build and iterate on the product without needing to rely on (or take time from) engineers. And then there’s user research. Certainly, user research software exists. The industry has come to call itself “experience management.” And it’s massive. Qualtrics, the leader, is worth $22 billion. Its founder now owns the Utah Jazz. Medallia has a market cap of $4.4 billion, and SurveyMonkey, which is aimed at SMBs, is worth $2.6 billion. But none of these is built for the way that modern software development happens, starting with the sales and onboarding process. Buying and integrating Qualtrics or Medallia takes a long time. I’ve been through the process. It’s frustrating and expensive. A good rule of thumb for whether a company should be disrupted is whether or not it’s easy to find pricing on its website. Go try to find Qualtrics or Medallia’s pricing.Welcome back. No luck? From his time as a PM, Glasgow realized that user research, which was becoming more important as competition increased, still operated on a timeframe that was out of sync with the rest of the business. Software hasn’t worked on quarterly or annual release cycles for a long time -- companies ship changes and improvements to their product and website every minute -- but user research still typically works on a much slower cycle. If you’ve worked in a customer facing or user research role, the standard research process might be familiar: quarterly projects, lots of planning and survey design, email surveys with 2-5% response rates, then tons and tons of unstructured responses for the user researcher to sift through and manually tag and categorize, followed by a presentation to the exec or product team, from which a decision may or may not be made, three months after the question was asked.That process makes sense for big, irreversible projects like rebrands, market expansions, and product extensions, but it’s far too slow for most of the things for which a tech company needs user insights. So companies often just skip structured customer research, and rely on numbers and anecdotes to make product decisions. That’s a problem: companies have modern tools like Amplitude and Segment to tell them what is happening in their product, but only slow, outdated, and complex tools to tell them why.That’s why Glasgow started UserLeap.Meet UserLeapAfter ExtraBux, Glasgow went on to be the founding PM at four more companies, including Vurb (acquired by Snap) and Weebly (acquired by Square). Over the course of those experiences, he learned three lessons: * Customers have crucial insights, but it’s impossible to read their minds.* Analyzing a lot of open-ended, qualitative data is hard and tedious.* Customer research tools haven’t kept up with the modern Product Manager tech stack.Glasgow left Weebly in 2018 to build UserLeap based on those insights. UserLeap flips the traditional user research process on its head, enabling continuous user research, through ongoing microsurveys embedded in the product. UserLeap is like Stripe for Research. It’s trivial to plug in, and that ease masks a ton of complexity and power behind the scenes. Here’s how it works: * Sign up for a free UserLeap account. * Drop in a couple lines of code.* Anyone on the team can spin up microsurveys, using a library of templates or their own imagination.* UserLeap is built on an events-based architecture, meaning that surveys are triggered based on things that a user does on the site. * Users answer short quantitative or qualitative questions. * UserLeap's AI groups similar answers and presents categorized insights, saving hours of manual tagging and sorting in spreadsheets. A human review process ensures high accuracy, while also providing data which allows the AI to become increasingly more accurate.By making the process fast and easy, UserLeap is trying to answer the question: how can any customer facing employee become a user researcher? In one of my favorite pieces written in the last year, Why Figma Wins, Kevin Kwok wrote:The core insight of Figma is that design is larger than just designers. UserLeap’s parallel insight is that user research is larger than just user researchers. In other words, UserLeap is attempting to do for customer research what Looker is doing for business intelligence and Figma is doing for design. By pushing user research tools throughout the organization, companies can glean valuable insights dramatically more quickly. So how do you build a product that turns anyone into a user researcher? You make the assumption that those people don’t know how to do user research, and that they’re busy. You make it easy, you make it intuitive, and you make it fast. Everything about UserLeap is built for speed, starting with the sales process. Instead of top-down sales, UserLeap, like many modern SaaS businesses, takes a product-led growth approach. Its pricing is front and center: free for up to 10k tracked accounts, $124/month for up to 25k, $275/month up to 50k, and $425/month up to 100k. The generous free plan means that customers can start testing the product before ever talking to a salesperson. Setup is also incredibly simple. Even a non-technical person can implement microsurveys with no code, and UserLeap integrates easily with products like Segment, with a deep bench of integrations with tools like Amplitude and mParticle on the very near-term roadmap.One notoriously data-driven company set aside a full Hack Week to install and integrate UserLeap, and finished the whole process in 30 minutes. They canceled the rest of the Hack Week. See for yourself: get UserLeap up and running in less time than it takes to read a Not Boring essay. Once UserLeap is up and running, it’s trivially easy to start running microsurveys and getting actionable insights. UserLeap is like an API-first company in that it gives you the full powers of a best-in-class user research team with a few lines of code. For example, UserLeap’s library of templates lets non-user researchers start with the thing they’re trying to do, click a couple of buttons, and get a well-designed survey live. For example, Superhuman CEO Rahul Vohra famously broke Product-Market Fit (PMF), previously a “you know it when you have it” phenomenon, down to a science. If 40% of your customers would be “very disappointed” if they could no longer use your product, you have PMF. Teams spend months agonizing over this question. UserLeap turned it into a template, including tips on who to target and when to use it. At Breather, we measured Net Promoter Score (NPS) by paying for a product called Delighted that emailed our users when they finished a reservation to ask how likely they were to recommend Breather to a friend. UserLeap, you guessed it, turned that into a template.There are templates for most things PMs want to achieve: Gauge Feature Satisfaction, Identify Customer Goals, Improve the Onboarding Experience, Understand Churn, and thirteen more. If a template isn’t there today, chances are UserLeap’s own team of researchers will spin one up for you.  With UserLeap, you can ask both quantitative questions -- “How likely are you to recommend [product] to a friend or family member?” -- or open-ended, qualitative questions -- “What made you give that rating?” If you’ve done any user research before, the thought of continuous open-ended microsurveys at scale probably just made you a little nauseous. Normally, that means having to download responses into a spreadsheet and spending hours tagging and categorizing them. That’s the most magical part of UserLeap: its AI does that for you. In my survey, for example, UserLeap pulled out nine positive themes, automatically. Clicking into “The research and depth,” you can see that UserLeap was able to group a bunch of related open-ended responses into one, easy-to-understand category. It would have taken me hours to do that myself. Frankly, I probably wouldn’t have done it. And that’s just for my small response pool. Some of the fastest-growing tech companies in the world (and Lenny) use UserLeap to collect millions of responses from customers.Khatabook, the fast-growing Indian startup, collects over half a million responses each month via UserLeap, 10-15% of which are open-ended text. Before UserLeap, pulling insights from all of that text would have required hiring teams of people to manually tag and categorize responses, or using word clouds to quickly see the words people mention most and trying to divine what that means. Instead, UserLeap’s AI matches and groups words and concepts that mean the same thing, pulling out real, actionable insights. Customers seem to like it. “I fucking love open-ended response analysis,” one UserLeap customer CEO said, “I used to go through my Typeform responses and tag them every morning from 6-8am. This saves me so much time.” UserLeap expands the number of people who can do user research and dramatically speeds up the process, which means that companies are doing a lot more user research. That creates a ton of open-ended responses, which would have been a nightmare to deal with, but like a polite dinner guest, UserLeap cleans up after itself. UserLeap is the first-to-market and best-funded company in the continuous research space, but it’s not the only one. The way it thinks about competition and moats in a competitive space is instructive for anyone building software products today.Building Moats in a Competitive SpaceUserLeap’s approach to competition is pretty meta. The same macro trends that make now the right time for UserLeap -- software is getting faster, easier to build, and more competitive -- mean that UserLeap itself will face more competition. If you look up “survey” on ProductHunt, there are dozens of small competitors. In order to win, UserLeap is relying on the same power it gives its customers: speed. No one has ever taken a product-led growth strategy targeted at the middle market and enterprise to user research before. UserLeap is first. They believe that you can’t start downmarket and move upmarket -- you need to start at the top -- but that even in enterprise software, customers expect a consumer-like brand and experience. That’s the approach that’s worked for Figma, Loom, and Airtable. The product-led approach relies on a generous free plan. GitHub just announced that it’s giving away its personal product for free, as did Notion. Potential customers can have UserLeap up and running, for free, before they can even get their first sales call with Qualtrics set up. Incumbents can’t compete with that speed. Meanwhile, since UserLeap makes its money upmarket, giving away its basic plan for free means that new entrants targeted at SMBs would have to be willing to bleed money for years in an attempt to win those customers’ business versus UserLeap. Product-led growth targeted upmarket requires doing two hard things at once -- making the product fast and smooth, and making it robust enough for enterprises. To that end, UserLeap has raised $20 million from top venture capitalists including Accel, First Round, Elad Gil, and Figma’s Dylan Field in order to build out a robust product. They’ve barely spent money on marketing until now, choosing to focus on getting the infrastructure ready for scale. UserLeap is doing a ton of work on scale-level infrastructure. The company’s VP of engineering scaled Uber’s realtime marketplace logistics platform from three to 300 cities around the world. Just this week, an engineer joined from SpaceX. The event-based attribution system that they’ve built, which none of the incumbents offer and would have to start over to build, took a significant amount of time and talent. It’s paying off. In December alone, UserLeap handled more than 10 billion API interactions. As more companies use UserLeap, it gets smarter, and its lead extends. It has dozens of neural network models running, and has already logged nearly 10 million responses on top of a strong machine learning structure, with humans in the loop to train the data. Glasgow likens it to a self-driving car:If you want to win the self-driving race, it’s all about miles driven with the right sensors, collecting the right data. If your neighbor drives the same car as you, it gets to know your neighborhood, where the potholes are, where the stop signs are. Similarly, the words and phrases customers use are similar within industries, so we’re getting smarter at organizing the responses and delivering insights for each industry.Incumbents, in this analogy, are like GM and Ford. They’ve logged a ton of miles, but without the right structure or sensors in place to collect data, they’re going to struggle to catch up with Tesla. As UserLeap gets smarter, its customers do too. What gets measured gets managed. By making it easier to measure and understand customers, Glasgow hopes to expand what companies optimize for. UserLeap’s Vision: The Two KPIsUserLeap’s vision is for a world in which companies have two sets of KPIs: one north star for the business side and one north star for customers. The companies that will win are the ones that best align the two. Remember how hard it was to cancel those cleaning startups like Homejoy and Handy? Those companies optimized for a business KPI -- reduce churn -- at the expense of customer happiness. Over time, the latter catches up to the former. Amazon, on the other hand, famously gave up short-term profits for years by focusing relentlessly on giving customers the lowest possible price. That bet has paid off. UserLeap believes that by understanding how a customer feels about your product in real-time, and how that changes with each change you make, they can shrink the gap between business goals and customer happiness. To do that, it’s expanding the market of who can become a user researcher, and giving the people responsible for business KPIs the ability to collect customer insights as they iterate and build. By integrating with all the tools your business uses, and embedding directly into the product at the right points in the customer journey, UserLeap can tie customer insights to business results, and prove the causal relationship between the two. What happens to the user researcher in this vision? As with designers in companies that use Figma and data scientists in companies that use Looker, user researchers at companies that use UserLeap are freed up to stop spending time sorting through open-ended text responses. They can spend more time on bigger, less reversible decisions that require the full arsenal of skills they bring to bear, like new products, new markets, and brand positioning. UserLeap’s vision is one that resonates with me: one in which power shifts from the company to the customer. Competition naturally does that, and that’s the way everything is heading, with or without UserLeap. UserLeap is there to make sure that companies actually know what their customers want so they can better serve them, and in turn, build stronger businesses that stand out in crowded and hypercompetitive markets. If your business is built on software and has customers, get started with UserLeap for free.Know a product manager or user researcher who would love UserLeap? And of course, I gotta ask… how did you like this week’s Not Boring? Loved | Great | Good | Meh | Bad Packy  This is a public episode. 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Welcome to the 1,359 newly Not Boring people who have joined us since last Monday! 🤯 If you aren’t subscribed, join 37,881 smart, curious folks by subscribing here:This week’s Not Boring is brought to you by … Michael Bolton(Okay, not actually Michael Bolton. But he does star in this sponsor’s latest ad campaign, so ... close enough.)I’ve talked (and written) about Public.com before, so you know the deal. One part investing app, one part community where you can discuss business trends and companies you believe in. Some of you might be looking for a new brokerage these days, so you should know that Public is making the process of transferring your portfolio over ridiculously easy. They’re even covering the transfer fees from your old brokerage.For this week only, download the app with my link and you’ll start with $20 in free stock.You can even follow me and Michael Bolton there (@packym and @michaelbolton, respectively). Our music video drops soon 🔥*The fine print: This offer is valid for U.S. residents 18+ and is subject to account approval. Free stock offer valid for new accounts only. See Public.com/disclosures/Hi friends 👋 ,Happy Monday! One of the places I learn the most is a group chat I have with my friends Dror Poleg and Ben Rollert. Dror, who writes about the history and future of work, cities, and finance, and Ben, who is the founder and CEO of Composer, are two of the smartest people I know. Ben, the most technical of the trio (followed by Dror, then me), also happens to be an excellent writer. In late February, he released The Composer Manifesto, to make the case for investing as a creative endeavor. It’s tailor made for the two types of people who read Not Boring -- investors and tech people -- and you should read it: So when Ben texted us about how underrated Excel’s power is, I asked him to write about it with me. He opened my eyes to so much depth I didn’t know existed in the product in which I spent every waking hour for the formative years of my career. We’ll try to do the same for you. Let’s get to it. Excel Never DiesIn the popular marketing book Alchemy, Rory Sutherland writes, “A spreadsheet leaves no room for miracles.” We could not disagree more strongly.Most software we use at work exists in one of two categories: * It’s new and we love it for now. * It’s old but we have to use it and we hate it. But there’s one software product born in 1985, before many of us were even a twinkle in our parents’ eye, that inhabits its own category: it’s old, but we love it, we always will, and you’ll have to pry it from our cold, dead, fingers. That product, of course, is Microsoft Excel. Anyone who has worked in finance or consulting grew up on it, learned to love it over thousands of hours of practice and improvement. Whether they realized it or not, they were becoming programmers, or at least no-code practitioners before the no-code movement took off. “Proficient in the Microsoft Office Suite” is so meaningless that it’s become a meme, but the ability to bend one specific Office program, Excel, to one’s will is a badge of honor. But the enduring, passionate user fervor for the product isn’t even its most unique attribute. Excel’s most lasting impact extends beyond the spreadsheet itself.Excel may be the most influential software ever built. It is a canonical example of Steve Job’s bicycle of the mind, endowing its users with computational superpowers normally reserved for professional software engineers. Armed with those superpowers, users can create fully functional software programs in the form of a humble spreadsheet to solve problems in a seemingly limitless number of domains. These programs often serve as high-fidelity prototypes of domain specific applications just begging to be brought to market in a more polished form. If you want to see the future of B2B software, look at what Excel users are hacking together in spreadsheets today. Excel’s success has inspired the creation of software whose combined enterprise value dwarfs that of Excel alone. There are two main ways Excel has set the broad roadmap for the B2B software industry for decades, and will continue to for years to come:* The Unbundling of Excel. Hundreds of B2B startups have been built by taking a job currently being done in Excel and trying to accomplish the job in more optimized, purpose-built B2B software. Every time you hear an entrepreneur say, “We’re replacing siloed spreadsheets and outdated processes with purpose-built software,” you’re hearing the Unbundling of Excel in real time. Many popular SaaS applications fall in this category. And yet, despite being “unbundled,” Excel keeps getting stronger. * Inspired by Excel. That resiliency has inspired entrepreneurs to look more deeply at what makes Excel tick, and why. Adventurous builders are creating new software that doesn’t unbundle Excel, but is Inspired by Excel. Excel’s balance of usability and flexibility can be found in popular no-code and low-code products created over three decades since Excel first graced the screen. This source of inspiration is less direct and more meta; it is less about recreating anything concrete that happens in Excel, and more about capturing the essence of what makes Excel so successful.We love Excel, everyone reading this probably loves Excel, and still, its impact is deeply underappreciated. Today, we’re going to fully appreciate it by covering: * The History of Excel* Excel as a Language  * The Lindy Effect* Excel’s Limitations * No-Code and the Unbundling of Excel* Why Excel Will Never DieA little competition isn’t new to Excel. It was born fighting. The Spreadsheet WarsWe have Steve Jobs to thank for Microsoft Excel, and Microsoft Excel to thank for Apple. Spreadsheet software was the first truly killer app for the Mac and home PC, and the Mac’s graphical interface helped bring spreadsheets to the masses. The two propelled each others’ growth.  Excel wasn’t the first digital spreadsheet. When HBS student Dan Bricklin had to decide between doing spreadsheets for a case study by hand or on the school’s mainframe, he, like so many entrepreneurs, realized there had to be a better way. He launched VisiCalc, a “visible calculator,” in 1978. Computer Associates followed two years later in 1980 with SuperCalc. That same year, Mitch Kapor sold VisiPlot/VisiTrend to VisiCalc’s parent company, Personal Software, for $1 million, and joined to work as a product manager on VisiCalc. In 1982, Kapor left to build a yet-to-be-named product that combined the spreadsheet with graphing, and somehow convinced Personal Software to carve the product out of his non-compete. “I am not sure why they agreed to this,” he wrote in an email, “Perhaps they felt I lacked credibility to pull off something this ambitious. If so, they underestimated me.”Kapor founded Lotus in 1982 and launched 1-2-3 in 1983. In its first year of operations, Lotus did $53 million in revenue and IPO’d. The next year, it tripled revenue to $156 million. SaaS has replaced discrete sales as the go-to business model for software because it’s better for the customer, generates recurring revenue, and can lead to a higher Lifetime Value, but no SaaS company has ever put up such big numbers as quickly as Lotus did.The same year Kapor founded Lotus, Bill Gates and the Microsoft gang released its first spreadsheet software: Multiplan. It was notable for using R1C1 addressing (row then column) instead of A1 (the column then row we’re used to), for aiming to be the most portable spreadsheet application, runnable on over 50 different computers, and not for much else. Lotus 1-2-3 crushed Multiplan, and Microsoft went back to the drawing board with “Project Odyssey.” They originally built Odyssey to be a better spreadsheet than Lotus 1-2-3 on the PC, but two critical things happened during development that would catapult the project into a lead that it still holds today, 36 years later. First, was the team’s motto: “Recalc or die.” According to Jeff Raikes, Mutiplan’s product manager and the man behind Office, “A brilliant programmer named Doug Klunder figured out how to do the calculation algorithm in two dimensions simultaneously so that we could recalculate even faster than Lotus 1-2-3.” Klunder’s innovation meant that instead of having to recalculate (recalc) every cell every time a cell changed, Odyssey only recalculated the affected cells. That gave it a huge speed and performance advantage over 1-2-3, which created the magical experience that any Excel user is familiar with: change an input, and watch worksheets full of outputs respond immediately.Second, Gates and Raikes decided that they needed to take advantage of the graphical interface, so they switched mid-project from building for the PC, which was operated via command line interface, to building exclusively for Mac. Jon Devaan, who worked on Odyssey, credited Jobs’ machine’s broad usability: “That was really the important thing at the time, to bring software from PhD thesis mode into something that an average person could use.” With those two innovations, Microsoft launched Excel in 1985 exclusively on the Macintosh. It was that counterintuitive decision to launch on its competitor’s computer while Lotus 1-2-3 was stuck on its own MS-DOS, that brought Excel into the mainstream. If you want to go really deep on the history of Excel, watch this whole video:Excel quickly became the most popular spreadsheet program on the Mac, and then the most popular on Microsoft’s first GUI OS, Windows. It rode Windows’ growth to become the world’s most popular spreadsheet software by revenue (in 1991) and units shipped (in 1992). It hasn’t looked back. While it’s difficult to break out spreadsheet market share today since Excel comes bundled with Office and Google’s Sheets comes with GSuite, Excel holds a dominant position (~80%+) by most estimates, with a near monopoly for more intensive use cases like financial modeling. After 36 years, it’s hard to imagine a world without Excel. It’s likely the single application that would cause the most damage if it were wiped off the face of the earth tomorrow. Many of the world’s largest companies and financial institutions rely on Excel models to run their businesses, and today, Excel isn’t just a spreadsheet software; it’s a language.Excel as a LanguageExcel is the most popular programming language on earth, and most people who program in Excel don’t even realize they are, in fact, programming. There are an estimated 1.2 billion people who use Microsoft Office, and while it’s hard to know exactly how many people use Excel regularly, estimates put it at 750 million users. By comparison, as of 2018, there were only 10.7 million Javascript developers and 7 million Python developers.Python and Javascript, the two most popular programming languages after Excel, are both Turing complete; that is, they can be used to perform any computation (in very simplified terms). Excel, on the other hand, was not Turing complete until very recently. In practical terms, this means that Excel simply could not be used as a substitute for a “true” programming language for many types of computational problems, no matter how clever the hacks a power user might think of. Even if Excel is not as powerful as the languages professional developers use, and even if most of its users do not consider themselves programmers by trade, it’s hard to argue that working in Excel isn’t programming. When you layout formulas in cells in Excel, you are working with a kind of functional language. Excel is functional in that its formulas (or functions) generate the same exact output, given the same input, no matter what else is happening in your spreadsheet or workbook. You can also chain functions, passing the output of one function as the input to another, allowing for an enormous number of potential computational pipelines. Each time Excel adds a function, the power and flexibility of Excel is multiplied, since that new function can be chained to a large number of existing functions.So if working in Excel is programming, why is it so much more accessible than other languages? DeclarativeExcel is declarative in that you define what you want by typing a formula, without having to worry about how to perform the step-by-step computations. I can calculate the Internal Rate of Return (IRR) on an investment without needing to know the formula, let alone how to program it. I just type =IRR(C4:G4) and voila! With each update to Excel’s spreadsheet engine, the how gets faster and better, without the user having to lift a finger. Most conventional languages are lower level, meaning that the programmer needs to formally define the computations that a formula or function needs to perform. Not just =(IRR…), not even just the full formula, but do this, then this, then this, then this, then this, then this. Depending on how these computations are implemented, there can be huge consequences for performance, accuracy, and stability - a large burden placed directly on the shoulders of the developer.By operating at a very high level of abstraction, an Excel user is spared the headache of dealing with a lot of minutiae and incidental detail that is intimidating and frankly uninteresting to most people. Instead, Microsoft assigns an army of well-compensated developers to worry about the details, and the user just has to pick the right function to use. Mental Model InertiaJakob Nielson, the iconic User Experience designer, defines a mental model as “what the user believes about the system at hand.” He stipulates that mental models are based on belief, not facts, and each user has their own mental model. Mental models are also susceptible to inertia: “There's great inertia in users' mental models: stuff that people know well tends to stick, even when it's not helpful. This alone is surely an argument for being conservative and not coming up with new interaction styles.”Excel leverages a mental model that has been deeply ingrained in our culture for decades: a two dimensional grid using A1 notation. By assigning rows with numbers and columns with letters, a user can identify a single cell in a large 2D grid without confusion or ambiguity. By sticking to the same conceptual model that has been in use since at least 1979, people can understand how Excel arranges data without learning anything new. The persistence of this grid model has led applications outside of Excel to adopt the same or at least a similar model, which in turn only reinforces the ubiquity of the mental model, making it a permanent fixture of our collective consciousness. Whether a 2D grid is optimal for many domains is hotly debated amongst engineers, but it’s almost irrelevant outside of technical circles given its inertia amongst the vast majority of potential users.ReactiveOne of the most magical aspects of Excel is that it is reactive. When you change an input to a formula in Excel, any output that depends on that input is automatically updated. Because Excel has been with us for so long, we take this property for granted. But most conventional programming languages are not like this: when an input is changed, each step that depends on that input needs to be deliberately re-run for the output to reflect the change. By being reactive, Excel allows for a kind of playful interactivity. You can play with inputs and toggles to a workbook, simulating different hypothetical scenarios. For the insatiability curious, it can be downright addictive. But more than anything, reactivity makes it easy to get very fast feedback, and the faster a system provides feedback, the easier it is to understand how that system works. Excel is designed to optimize the speed at which its users develop skill at operating it.Acquisition of skills requires a regular environment, an adequate opportunity to practice, and rapid and unequivocal feedback about the correctness of thoughts and actions.― Daniel Kahneman, Thinking, Fast and SlowNaturally Full StackExcel users are not only unwittingly programmers, they’re also unwittingly full stack programmers. An Excel workbook can be an entirely self-contained, end-to-end piece of software. One sheet might contain a database, another sheet might contain a set of formulas to transform the sheet with the database, and another sheet might be a user interface of sorts. The user interface sheet might offer the end user controls to manipulate inputs, while also presenting summary data and charts of the final outputs. These familiar tabs are actually a front-end, back-end, and database, all in spreadsheet form.Another piece of Excel magic is the ability to inspect and manually update the entries of a database contained in a sheet. This is just not the norm with most databases, which typically require developer skills and permissions of a database administrator to update.By being naturally full stack, a single person can build a complex model in Excel without needing to rely on outside help. And for tasks that don’t lend themselves to easy division of a labor, this is an essential quality. Investment Bankers have long argued the reason that analysts and associates will spend 80 to 100 hours a week on financial models (in Excel, of course) is the lack of divisibility of their work; often only one person has all the needed information to build the model.  Excel combines the power of a programming language, the immediate usability of consumer software, and the skill progression of a video game with the flexibility to adapt to nearly infinite use cases. That’s a combination no other software offers, and it’s why Excel has been able to survive and thrive while millions of other applications have come and gone. And it’s not going anywhere. Lindy SoftwareExcel has been around a long time, so we can expect Excel to be around for a long time. That’s the Lindy Effect at work: the longer something lasts, the longer it can be expected to last. Something that has been around for a year is expected to be around for another year, but something that has been around for 100 years is expected to be around for another 100 years. There are a couple of reasons for that:* Quality. Cream rises to the top, and only the strong survive. Part of the Lindy Effect can just be explained by the fact that some things are higher-quality than others, that people recognize and appreciate quality, and that over time, higher-quality things tend to outlast lower-quality things. If you put Aristotle’s The Nicomachean Ethics on a permanent bookshelf and had people choose between it and some modern high kid’s philosophical ramblings in an ongoing tournament, generation after generation would recognize that Aristotle is better, and Aristotle’s work would survive.* Network Effects. As people recognize something’s quality and as it lasts longer, they become more comfortable building on top of it, which increases the odds that the thing sticks around. That’s a form of network effect, specifically a Two-Sided Platform Network Effect. As Aristotle’s work persists, more philosophers build on top of it, and more philosophy professors build their curricula around it, which creates lock-in and makes it even more likely that his work survives for millennia hence. Excel is Lindy software. Introducing seamless reactivity to spreadsheets in a graphical interface created such a magical and intuitive experience that Excel was able to steal the lead from Lotus 1-2-3. As it’s evolved, new competitors have tried to steal market share, most seriously Google Sheets, but those doing serious analytical work in Excel’s core focus area wouldn’t dream of switching. Excel is too good at what it does. It won, and continues to win, on quality.Meanwhile, Excel continues to build up serious network effects: many of the models that run businesses and markets are built on Excel, developers build plug-ins for Excel, banks and consulting firms train incoming classes of analysts on Excel, they practice Excel non-stop for years and get really good, and when they go on to start and run companies, they mandate the use of Excel. It’s also interoperable between firms -- you can send an Excel spreadsheet to any investment bank or hedge fund in the world and they’ll be able to open and work in it, which makes the lock-in stronger. As a test, pick your favorite hedge fund analyst, send them your model in Google Sheets, and see how seriously they take your idea. John Updike has a quote that’s my favorite about New York: “The true New Yorker secretly believes that people living anywhere else have to be, in some sense, kidding.” That perfectly captures how Excel users feel about their favorite spreadsheet software: Excel has stood the test of time by creating excellent software that turns anyone into a programmer, with a programmer’s snobby preference for their own language. Excel has been around for 36 years, so we should expect that it will be around for another 36. That resiliency gives people the comfort to build on top of it for an ever-increasing amount of use cases. The combined daily efforts of 750 million users push Excel to, and beyond, its limits.Excel’s Limitations Nothing in life is without trade-offs, and Excel is no exception. Excel’s flexibility and power is a double edged sword. Unlike many domain specific SaaS applications, Excel lets you do just about anything you want. Excel is not very opinionated software, nor is it constrained to prevent the user from doing things that might get them in trouble. In fact, Excel doesn’t even know the domain you’re working in. If you screw up a model of say, FIFO inventory tracking, no one even thinks to blame Excel - it’s assumed it’s your fault. If you use specialized FIFO inventory tracking software, it’s likely there are guardrails in place to prevent doing things that make no logical sense, at the cost of flexibility.There is also a lack of data provenance in Excel. In scientific research, provenance refers to the origin of any data that is collected, along with a history of all changes or transformations to the original data. Provenance is essential for the reproducibility of research, otherwise a scientist cannot take the same raw data and get the same results. And provenance isn’t just an issue for academic scientists - it’s an essential quality for anyone doing data analysis. Unfortunately, Excel lets you do all kinds of complicated transformations of data, and yet lacks any sort of history of the sequence of those computations. The ability to copy and paste data into a tab that serves as a database means that any steps leading up to the pasted data are lost. What if the data that is pasted in is total gibberish? What if a sheet of numbers made sense at one point, but someone scrambled them? While transformations that live in code are documented in such a way to reproduce each change to your data, changes in a spreadsheet are not.Excel is very hard to version and compare changes. While code is intimidating in many respects, the fact that it is saved as text makes it very easy to version and compare changes from one version to another. Most professional programmers use some form of version control and will share their code for feedback from other developers using tools like Github. An Excel workbook, on the other hand, isn’t very readable, at least not the way text is. A workbook might have multiple sheets, each with formulas referencing data on other sheets, making it impossible to grok what’s going on in any sort of ordered, sequential fashion. So even though Microsoft’s cloud suite allows some form of versioning today, it’s nowhere near as easy to reason about changes to an Excel file as it is to code.While the 2D grid structure has a ton of mental model inertia going for it, it’s not always the right model, nor is it the only model with inertia. Long before computers, humans have organized information into hierarchical, tree-like structures. In fact, cognitive scientists have known for some time that the brain naturally processes information using hierarchical representations. Trying to implement a hierarchical, tree-like structure in a 2D grid is theoretically possible, but very unnatural and can quickly turn into a mess.Roam Research has attracted a cult following by arguing the best way to structure notes and research is an associative graph, taking inspiration from Zettelkasten, a method for organizing information that dates all the way back to the 1500’s. So there are credible arguments that Excel’s ubiquity is leading us to cram information into a format that is less than ideal in many circumstances. Until recently, Excel had one additional limitation: you couldn’t actually compute quite anything you could in other programming languages in Excel. LAMBDA: Limitation No LongerOn February 9th of this year, Satya Nadella, Microsoft’s CEO, made a big announcement on Twitter: Excel is now Turing complete. In practical terms, this means Excel can compute anything you might crunch in Python, Javascript, or any other Turing complete language. At the root of this step change in flexibility and power is the introduction of LAMBDA - the ability for users to define reusable functions using Excel’s formula language. These LAMBDA-defined functions can call other LAMBDA-defined functions, allowing for recursion, transforming Excel into a “true” programming language.While LAMBDA functions are arguably the biggest Excel release in a decade, they also sharpen the double edged sword that is Excel’s flexibility and power. A common refrain from experienced programmers is that just because you can implement something in a language, doesn’t mean you should. With LAMBDA, it’s rational to expect more and more complicated programs implemented in Excel, and some of these programs will turn into maintainability time bombs. LAMBDA increases power without addressing the limitations around versioning, reproducibility, provenance, and readability we talked about above.Luckily, LAMBDA won’t only give Excel users more powers; it will give entrepreneurs more ideas for stable, single-use software based on the creative uses that Excel users come up with. Because Excel users have been setting the roadmap for B2B software for decades. Excel’s Influence: Unbundled and InspiringExcel’s influence reaches beyond the borders of the spreadsheet. It has a bigger impact on what software is built and how than it gets credit for. An enormous percentage of the successes in the last couple decades of B2B software have come from unbundling Excel, and we suspect that many of the next couple decades’ biggest winners will be Inspired by Excel. The Unbundling of Excel Excel serves a wider range of use cases well than any other software on the planet, but because of its limitations, there are some use cases that purpose-built software can handle best. Excel’s flexibility lets businesses build all sorts of work flows and processes in the humble spreadsheet. They build databases, customer relationship management tools, calendars, to-do lists, project management dashboards, invoices, bug tracking, accounting tools, and more. The uses for Excel within a business are limited only by the users’ imaginations. That creates an emergent product roadmap for the B2B software industry. Instead of needing to sit in a room and think up the future, a couple generations of observant entrepreneurs simply watched what people were cooking up in spreadsheets, sized the market, and built dedicated, less flexible tools for each specific use case. In a 2017 blog post inspired by Andrew Parker’s 2010 The Spawn of Craigslist, Redpoint’s Tomasz Tunguz wrote about The Unbundling of Excel:Excel has done a phenomenal job educating hundreds of millions of people about the power of software. Startups are taking advantage of this newly data-literate user base and carving out individual applications, replacing Excel with dedicated workflow that’s optimized for a particular function.In May 2019, Ross Simmonds followed up on Tunguz’ post with These SaaS Companies Are Unbundling Excel -- Here’s Why It’s a Massive Opportunity. In it, he included a non-exhaustive graphic of some of the companies built to pick off pieces of Excel for specific verticals and functions. There is nearly half a trillion dollars worth of market cap in that chart, with Salesforce leading the way at $193 billion, followed by multiple other unicorns including Asana, Tableau (acquired by Salesforce), and Workday. Salesforce is a good example of how it works: people were keeping track of their sales leads in Excel spreadsheets, which works but isn’t ideal, so Benioff and Co decided to build dedicated CRM software that does a lot of specific things a user can’t easily do in a spreadsheet. CRM software is easy to grok because it’s essentially one database-looking thing to another, but practically any software that is built to handle data that isn’t super long text (which is unbundling Google Docs) is unbundling Excel. That’s almost every B2B software you know and love. Tunguz didn’t even try to include a graphic like Simmonds’ because the list of use cases Excel can handle pretty well is nearly infinite. We expect that more will emerge as software continues to eat the world. But despite being nibbled at, Excel keeps getting stronger. Excel is Lindy. It’s not going anywhere. That resiliency has inspired the next generation of entrepreneurs who are building some of the most interesting companies in the market with tools that don’t mimic specific Excel use cases, but the way it’s built and the flexibility it gives users to build for themselves. Inspired by ExcelInspired by Excel software products let users flexibly build on top of them the way that Excel users do. Instead of picking off specific use cases like Excel Unbundlers, they take inspiration from how Excel is built. They, like Excel, aim to create powerful general purpose, highly flexible software targeted at a broad audience, including non-technical users. This HackerNews comment beautifully captures the difference between Unbundling of Excel (unitasker) and Inspired by Excel software:If there is a core product design lesson to learn from Excel, it’s that combining usability with flexibility is both incredibly difficult and incredibly rewarding.In an awe-inspiring talk, Rich Hickey, the creator of the Clojure programming language, draws a parallel between musical instruments and good software design. Hickey argues that musical instruments are quite limited for a reason - they are really good at producing what is actually a very limited range of sound. A saxophone, for example, can only play one note at time - unlike a piano or guitar.  Expanding on the reason for the limitation of an instrument like a saxophone, Hickey explains: “Nobody wants to play a choose-a-phone...I'll take a step back and say maybe some people do want to play choose-a-phone, but no one, I bet, wants to compose for a choose-a-phone ensemble.” Likewise, a design principle for developers is to make any one piece of software really good at one specific thing, deliberately constraining its capabilities to a specific domain. Excel is a truly remarkable exception to this rule - it is something of a choose-a-phone, and clearly hundreds of millions of people do want to compose for it.Modular synthesizer, a figurative “choose-a-phone”With the rise of No-Code and Low-Code products, a new generation of entrepreneurs is taking on the challenges of combining usability and flexibility for a non-technical audience, as Excel does. The space is attracting a ton of investment dollars, but it’s still viewed as something of a toy. That misses the point: no-code and low-code products put the creative power in the hands of the users, like Excel has, and create the conditions for an unpredictable explosion of new software usage. Take Airtable, the no-code and low-code software on top of which users can build everything from structured databases to full websites, which was recently valued at $2.5 billion. Airtable is a particularly interesting example because it’s both Unbundling Excel -- it is better for structured databases than Excel but doesn’t even attempt to make it easy to do calculations -- and Inspired by Excel -- it’s increasingly becoming a platform on top of which users and companies are building solutions the Airtable team couldn’t have imagined. (It may be low-end disrupting Salesforce, too.)Other no-code and low-code software like Figma, Roam, Webflow, Bubble, Zapier, and Notion are inspired by Excel’s approach without coming directly after its use cases. Even Looker and Amplitude, which aren’t generally grouped with the no-code/low-code movement, are more flexible than traditional analytics products and programmable by non-technical users. Shopify lets small businesses build full ecommerce stores by following templates or by mixing and matching thousands of Shopify-built and marketplace components. Like Excel, these products are simple enough that non-technical people can use them, but flexible enough that users will create with them in ways that the product’s creators can’t anticipate. Figma, ostensibly a no-code design tool that lets designers easily create and collaborate on anything from logos to full website mockups, is so flexible that in the beginning of the pandemic, a designer named Fiona created “WFH Town,” a shared virtual space in which anyone could build and hang out. Bubble is a no-code website builder that lets non-programmers build production ready web apps, including robust back-ends and databases. It was literally inspired by Excel -- a builder can create a Bubble app by making a spreadsheet and linking it to Bubble.Ben’s no stranger to this space. Composer, the startup he co-founded, is taking on the formidable task of trying to combine usability and flexibility, drawing on inspiration from Excel. Composer allows the end-user to build custom, automated investment strategies, all without writing a line of code. Composer is flexible enough that it is intended to allow the user to create strategies that the founding team never anticipated. Before Composer, a strategy creator would need to be fluent in Python or a similar language to harness this degree of flexibility, severely limiting the number of people who could implement their ideas. At the same time, the team is constantly refining the usability of the product based on countless hours of customer research, leaning on the strengths of their product designer, Mikael, and cognitive scientist, Anja. Zapier is a combinatorial multiplier that connects thousands of tools, like a series of codeless APIs, allowing for meta workflows across apps. With Zapier, any of the infinite things that an Excel user can create in a spreadsheet might trigger some action in Figma, Composer, or Weblow, or vice versa. When the original Project Odyssey team set out to build Excel in 1985, they wanted to make it easy for users to perform calculations and create graphs. They could never have predicted the myriad ways over 750 million people would bend and expand the product. They just knew that the more flexible and usable they made it, the more possibilities they would create. Similarly, this new batch of Inspired by Excel products will likely have unintended and magnificent consequences on the way that people create, build, calculate, and communicate for decades to come. Based simply on the exponential nature of these products, the impact of Inspired by Excel will dwarf the already massive impact of Unbundling Excel by orders of magnitude. Excel Will Never DieExcel has survived and thrived through the Spreadsheet Wars, the mobile revolution, and Unbundling of Excel. Excel is the bonsai tree of software: the more non-core use cases pruned off by unitasker products, the healthier it gets. Now it’s entering a new generation of giving, one in which it’s not just giving off its useless appendages, but its very soul. Entrepreneurs are finally building based on the principles that have made Excel Lindy and allowed it to grow stronger and more loved for decades. Those entrepreneurs can learn important lessons from Excel: * Flexibility Matters. It’s impossible to know a priori everything a user will want to do. In order to evolve with users, product designers need to strike that delicate balance between usability and flexibility. * Backward Compatibility with Existing Models. By translating ways that humans are used to thinking and behaving into software, product designers can make learning curves for complex products more gradual and natural. * Product Architecture that gets better with more features. As more functionality and extensions are added to Excel, the better the product gets, because each new piece of functionality harmonizes with all the existing bits. This is as opposed to the many products that get worse with more features. * Build for Your Passionate Core. Part of the reason Excel will never die is because there are so many passionate Excel practitioners. Inspired by Excel products should be flexible enough for non-target users to use (I love using Figma although I’m terrible at it) but endlessly challenging and rewarding for the target group. As Inspired by Excel companies succeed and grow to multi-billion dollar valuations, there are only a handful of companies big enough to ingest them. We wouldn’t be surprised to see Microsoft begin to snatch up more companies in no-code, the space it ignited in 1985. If you squint, they’ve already started. Minecraft, which Microsoft acquired for $2.5 billion in 2014, is the closest thing to an Inspired by Excel product in all of gaming. People were confused by the logic even years after the acquisition, but no one understands the staying power of this kind of product better than Nadella’s crew. But no matter how many new companies try to capture Excel’s magic, no matter how many succeed, and no matter how many Microsoft acquires, we promise, Excel will never die. Thanks to Ben for writing this with me 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 2,105 newly Not Boring people who have joined us since last Monday! 🤯 If you aren’t subscribed, join 36,522 smart, curious folks by subscribing here:🎧 To get this essay straight in your ears: listen here or on Spotify.This week’s Not Boring is brought to you by… FutureFuture is the 1-on-1 remote personal training app I use to stay in shape despite my sedentary profession. I’ve been working with my coach, Alex, for over three months now. I missed a workout in that first month, but thanks to the accountability he provides, plus the fact that I have to share my stats with all of you, I haven’t missed one in the last two months! That said… I did lose the 2021 Challenge to Mario and Rishi. I owe them each a share of Roblox, but I’m actually cool with it. Future has kept me consistent with a baby and an unstructured schedule. Four expertly-designed workouts a week, every week. If you want to build a consistent, high-quality workout routine, or amp it up and get in the best shape of your life, get yourself a Future account and your very own professional Coach. Hi friends 👋 ,Happy Monday!One of my favorite parts about writing this newsletter is getting to meet incredibly smart people who are so much more knowledgable about their focus area than I could ever be. If I’m really lucky, those people happen to be writers, too, and I get to team up with them. Today, I’m lucky. Marc Rubinstein is a former financial sector-focused hedge fund manager who writes one of the best financial sector newsletters there is: Net Interest. Marc has written about everything from newer players like Ant Financial and Facebook’s Diem, to huge banks like Citi, to explainers on things that only industry insiders would know. You should subscribe now if you’re interested in … money. I’ve wanted to write about today’s topic for a long time, and Marc was the missing piece in my Jack Dorsey mental puzzle.Let’s get to it.Jack of Two TradesYou Don’t Know JackWhy is Jack Dorsey so much worse at being the CEO of Twitter than he is at being the CEO of Square? That was the question that kicked this whole thing off. After Marc Rubinstein wrote Hip to Be Square in December, I emailed him with that question. Marc is a former hedge fund manager who writes the brilliant newsletter Net Interest about all things finance and fintech. His fund participated in the Square IPO back in 2015. I understand Twitter, Marc understands Square. Together, we could crack this. The companies’ relative product velocity and stock prices make the contrast stark. Since its initial public market struggles, Square has been an absolute rocketship. If you had bought $SQ at the November 19, 2015 IPO price of $9, you would have been up 25x by the time that Marc wrote about the company on December 18, 2020. $TWTR, meanwhile, was up only 24% between its November 7, 2013 IPO and December 18. Jack’s Square had performed 100x better than Jack’s Twitter, despite two years less time in the public markets. The question was so obvious -- Jack was clearly a terrible CEO at Twitter and a great CEO at Square -- and we certainly weren’t the first people to ask it. Elliott Management launched an activist campaign in February 2020 that rested on “Jack is the CEO of two companies and he’s doing a bad job at this one” as one of its core tenets. But despite the obviousness of the question, it didn’t have an obvious answer. So we decided to team up, Marc contributing his knowledge on Square, me adding my perspective on Twitter, to see if there was some way to … square … the apparent contradiction. We agreed to publish after Square announced Q4 earnings in February. And then… Twitter got its groove back. It acquired Substack competitor Revue, launched Clubhouse competitor Spaces, reported strong earnings, and blew expectations out of the water with an ambitious and aggressive Analyst Day last week. Jack even acknowledged that the company has moved way too slowly, and set a goal to double the product cadence while doubling revenue by 2023. Since Marc and I first spoke on December 18th, Twitter is up 37%. The obvious question -- why is Jack such a great Square CEO and such a bad Twitter CEO -- became a lot less obvious. Some new, more illuminating ones emerged in its place, such as: “Assuming Jack runs the companies in largely the same way, why might they perform so differently?” The answer to that explains why it’s so much harder to actually run companies than it is to write about them and come up with fun product ideas. The differences in the way Jack runs his two companies have been (literally) litigated into the ground, but exploring the similarities, and what they say about both companies’ futures, is a more fascinating endeavor. Zooming out and looking ahead, Square and Twitter have a lot more in common than meets the eye. Today, we’ll unpack that, by covering:* Jackground* Back to Square One* Putting the Network Into Square* Old Twitter* Twitter’s New Groove* Back to the Original QuestionAnd look, we get why Jack’s dual roles make people uncomfortable. No one’s ever done it quite like him. JackgroundSome Twitter shareholders don’t love the fact that Jack Dorsey runs both Twitter and Square, for reasons ranging from time management to performance to conflict of interest. It’s not surprising that they’re concerned: very few people run two public companies. Steve Jobs did it. After he was ousted from Apple, Jack’s idol acquired Lucasfilm’s animation studio and renamed it Pixar. Jobs took the company public in 1995, returned to Apple as CEO in 1996, and ran both companies until Disney acquired Pixar in 2006. That was Steve Jobs, and even he, the Zeus of tech CEOs, got kidney stones from the stress of running two companies. Carlos Ghosn ran both Renault and Nissan after orchestrating the Renault-Nissan-Mitsubishi Alliance which tied the three companies through a cross-sharing agreement. The multi-CEO role made sense because of the close relationships between the companies, and Ghosn apparently had few interests outside of work besides watching soccer. (Today, Ghosn is an internationally-wanted fugitive, hiding out in Lebanon with an Interpol red notice on his head, after allegations by the Japanese government that he underreported his salary and grossly misused company funds, so...) Elon Musk leads both public Tesla and might-as-well-be-public $74 billion SpaceX. He’s a hard charging mega-genius who does more at each of those companies than most CEOs do at one, and it’s impossible to argue with his performance. And then there’s Jack. Jack is laid back, travels often, already worked from home one day a week pre-COVID, told Forbes that he “spend[s] 90% of my time with people who don’t report to me, which allows for serendipity, because I’m walking around the office all the time,” and was pushed out of Twitter, when he ran just that one company, in part because he would leave the office early to take fashion design classes. Ev Williams famously gave him an ultimatum in the early days: “You can either be a dressmaker or the CEO of Twitter.” In 2019, he made waves by saying that he wanted to move to Africa. His resume does not scream workaholic. As Twitter’s public market performance dragged between 2013 and 2020, shareholders became increasingly vocal and litigious. In December 2019, Scott Galloway called for his ouster. In March 2020, Elliott Management and Silver Lake took seats on the board as part of an activist campaign that called for Jack’s head. Just last week, a shareholder sued Jack and Twitter’s board, claiming that Jack breached his fiduciary duty by giving advertisers access to users’ private data, often to the great benefit of Square, Jack’s ownership in which is worth nearly 8x as much as his Twitter holdings. (Square shareholders don’t seem to mind. Winning takes care of everything.) Jack would argue that hours worked != quality of work. On Rich Kleiman’s The Boardroom: Out of Office podcast, Dorsey said that he would, “Rather optimize for making every hour meaningful, or every minute meaningful, than I would maximizing the number of hours or minutes I’m working on a thing.” He called the idea that you need to work twenty hours and sleep four because you read that Elon Musk does, “bullshit,” and detailed a morning routine that includes meditation and an 80 minute walk to work while listening to podcasts, plus an intermittent fasting routine that has him skip breakfast and lunch. He told Kleiman he works at Twitter in the morning and Square in the afternoon and evening, before making dinner and winding down. Jack’s publicly-stated philosophy is that by focusing on fewer decisions with more attention, he’s able to make better decisions when they matter most. Plus, he doesn’t even believe that he should be making most of the decisions, opting instead to put more power in the hands of the people around him. On a February 2019 Twitter earnings call, he said: I think my job as a CEO whether it be at one company or two is very simple. I need to build optionality for the organization, and that is optionality within leadership. So the way I think about it is I want to make sure that we're building leaders around me that I could imagine carrying the company forward. Hearing that at the time, when Twitter was trading 32% below its IPO price after five years as a public company, it must have sounded like, to steal a phrase from Jack, bullshit. Twitter employees have complained that it’s hard to know who to go to for a final call when Jack’s MIA.But now, two years later, with Twitter’s stock price up 157% since that quote, and after an Analyst Day at which the company announced a bold new plan and an inspired product vision, it’s worth considering whether Jack’s self-removal from the weeds really does allow his companies to make better strategic decisions. As I wrote in How Twitter Got Its Groove Back, “Whether accidentally or through an ultra-attuned third eye and a Zen-like ability to withstand half a decade’s worth of criticism, he’s put Twitter in a surprisingly strong strategic position.” In other words, maybe Jack is running Twitter a lot more like he’s run Square than meets the eye. Back to Square One Square never started out imagining that one day its product would feature in hip-hop lyrics. It started out a whole lot more boring than that: as a dongle that retailers could plug into their phones to swipe credit cards. Jim McKelvey had the idea in his glass making studio in St Louis, Missouri. A customer came in with her eye on an orange-yellow, double-twist glass spout for her bathroom. The spout had been gathering dust on McKelvey’s shelf for several years, so when the customer pointed to it, he was keen to make a quick sale. Unfortunately, he wasn’t able to take her credit card, so the deal fell through. After she’d left, he looked down at his phone and wondered – given what else it could do – why that device couldn’t process credit cards.McKelvey had known Jack Dorsey since Jack was sixteen. Jack’s mum, Marcia, ran a coffee shop that McKelvey would frequent. When he wasn’t glass blowing, he was managing a digital publishing business and, through Marcia, he roped Jack in as an intern. They kept in touch and in 2008 McKelvey called Jack to kick around some ideas for a new venture. Jack had just been ousted from Twitter, so they agreed to pair up and pursue the dongle idea. Jack and Jim’s Big Idea was less the technology inside the dongle – which they didn’t even patent – and more that there was a huge untapped market out there of merchants too small for the traditional payments industry to target. The key was to keep costs down, which they could do by aggregating the huge volume of small transactions that these small merchants booked. At the time, there were 30 million businesses in America doing less than $100,000 of annual sales; 24 million of them didn’t accept credit cards – that was the pair’s market opportunity.They called their company Squirrel – until they spotted someone else had taken the name (that someone being Apple). So Jack did what he’d done at Twitter. Today, Twitch is the world’s leading live streaming platform for gamers. But it was the original name of Twitter, in homage to the motion people make when their phones buzz with a new message. The name didn’t resonate with the team so they opened up a dictionary to find something close. From Twitch to Twitter. And from Squirrel to Square. Over the next few years, Square would make itself invaluable to its customers. Drawing inspiration from Apple, it combined hardware and software into an integrated system. The dongle itself was given away for free and merchants would pay a very simple fee linked to transaction volume. The integrated systems allowed Square to add new features that entrenched its position with customers – features like working capital, invoicing, and payroll, all to help merchants run and grow their businesses.None of this was especially networky though. Just because one merchant has a dongle doesn’t mean the merchant next door needs to get a dongle. Sure, the sleek white square may have looked cool enough for people to want one, but the social dynamics underpinning that weren’t intrinsic to the business model. In addition, Square was giving up a lot of its economics. In payments, there’s a trade-off between being part of an open network and being a closed network. The open network, operating on the rails of card associations like Visa and Mastercard, allows a cardholder flexibility to use their card almost anywhere. But participants have to share the economics. In Square’s case, merchants pay a rate of ~3% on transactions, but Square has to distribute ~2% out to others in the network, leaving only ~1% for itself. In a closed network, the operator maintains their own ledger and can move money from the cardholder side to the merchant side freely, retaining all the economics for itself. Square’s first attempt to bridge this gap was with Square Wallet. The wallet gave consumers payment functionality which they could use at participating merchants. Square would be able to keep both the consumer side of the transaction and the merchant side within its own walls. It wasn’t a success. Perhaps it was too early, perhaps merchant adoption wasn’t ubiquitous enough, perhaps Square didn’t invest sufficiently in consumer acquisition. Whatever the reason, it was closed down. Its replacement, Square Order, didn’t fare too well, either. That was fine. With a stable merchant business as its base, Square hasn’t been afraid to experiment on new businesses that have the potential to both stand alone and ultimately bridge the gap. One such experiment that did stick was Cash App. Putting the Network into Square Introduced as Square Cash in 2013, Cash App was devised during a hackathon as a way to make peer-to-peer payments – splitting the check at a restaurant, sharing the cost of an Airbnb, that kind of thing. By the end of 2016, Cash App had 3 million monthly average users; today, it has more than 36 million. Unlike the merchant side of the business, the consumer Cash App side exhibits very clear network effects. If your friend has it, and you want them to pay you back, you need it too. Square seeded these effects with viral marketing campaigns and money giveaways, using Twitter as a particularly effective acquisition tool. ARK Invest shows how Cash App’s monthly active users correlates with its Twitter follower count. The strategy kept customer acquisition costs exceptionally low: last year, they were less than $5 per customer. In addition to viral marketing, the company reprised the playbook that fueled growth so effectively on the merchant side. That playbook has three elements: make the product free and simple to use, target an underserved customer base, and layer in adjacent services.In this case, the underserved customer base is the underbanked segment of the population, for whom Cash App provides an alternative to a bank account. Although the earliest Cash App adopters came for the network – the ability to pay their friends – more recent adopters have come for the utility of a functioning bank account substitute. That’s especially been the case over the period of the pandemic where Cash App has been used to receive stimulus funds. Layering in adjacent services is the key to unlocking economics in what is at core a free product. Over the past few years, Cash App has added lots of new products: rewards (Boost), stock trading, Bitcoin, direct deposits, business accounts, and Cash Card. The contribution these products make is broadening. While only one of them made more than $100 million in gross profit in 2019, four of them surpassed that in 2020.But the model isn’t simply about cross-selling; it’s about engagement, too. Cash App benefits from the compounding effect of growing its customer base while also increasing engagement and monetization per customer. Around a quarter of Cash App monthly active customers engage on a daily basis. That’s not as high as Twitter, but for financial services, it’s pretty good. In the fourth quarter, the average gross profit per customer reached $41. Customers who use multiple products generate 3-4 times higher gross profit than the average. Cash Card is the most popular – one in four Cash App customers use it – but Bitcoin is catching up, at one in ten. The compounding comes from the higher rates of engagement customers with multiple products produce. Those who use the Boost rewards feature, for example, spend two times more on their Cash Card than other customers. Acquire, engage, sell. It’s a simple but highly effective model. This year, Square is going to turbocharge that model:* They plan to do $800 to $900 million of incremental investment.* They continue to look for new ways to connect product lines within Cash App.* And they are getting closer to being able to mesh the consumer facing Cash App side of the business with the merchant facing seller side.Cash App began 2020 contributing just over a quarter of the group’s combined gross profit, but it left 2020 contributing nearly a half. As it hits scale there will be opportunities to close up pieces of the network, picking up where Square Wallet failed. Jack said on his recent earnings call, “We’ve done a lot of internal connections between the two ecosystems, and now we’re focused on more of the customer-facing connections.” No doubt we’ll hear about it on Twitter when it happens. Old Twitter Square users came for the utility as Square added in a network. Twitter users came for the network as Twitter searched for its utility.Square’s dual-tracked growth strategy has gone something like this: focus on the core customer -- the small merchant -- and add features to the core product in order to retain and grow with them, experiment with new ways of building a networked product in parallel in lightweight ways that don’t mess with the main product, and ultimately combine the two to create a closed network.Twitter, on the other hand, started with the network, and all of the inherent messiness that large networks of humans imply, and tried to build, monetize, and experiment with it while keeping it from breaking and figuring out its utility. Oh, and it’s done it all under a revolving door of leaders with different priorities and varying vision horizons. As a result, Twitter and Square’s product development paths have looked something like this: For most of Twitter’s history, it felt like it was being pulled too fast, like it was playing catchup and paying for its past sins. In engineering, they call those past sins “technical debt.” Before Twitter, there was Odeo, an audio blogging platform founded by Noah Glass and backed by Ev Williams. Jack was just a blue-haired Odeo engineer then. When Apple released Podcasts in 2006, the team decided Odeo was dead on arrival, and scrambled for ideas. Jack brought Noah and Ev the idea for public status messages, based on a similar feature LiveJournal (RIP) had just rolled out, and after a two-week sprint, Twitter was born. After a slow first year, Twitter caught fire when it won Best Startup at SXSW in 2007 and attracted celebrities like Ashton Kutcher and Justin Bieber, who raced CNN to become the first account with 1 million followers (Kutcher won). Twitter got bigger, faster than anyone on the team imagined, and as it caught fire, its infrastructure -- mainly built during that two-week sprint -- was burning down. Twitter’s “fail whale” was a familiar sight to any of the platform’s early users. In 2008, concerned that Jack was too preoccupied by extracurricular pursuits like fashion design classes, Ev Williams and the board removed him as CEO and put Ev in charge. He lasted two years, until the board fired him and replaced him with his friend and Twitter COO, Dick Costolo, in 2010. People bemoan the fact that Twitter was neck-and-neck with Facebook in 2010 and blew it, and point to that as yet another reason that Jack needs to go. But a lot of the blame can rightly be placed on Costolo’s shoulders. Under Costolo, Twitter professionalized, and it did some great things: it started making money, via Promoted Tweets and Promoted Trends, brought on Adam Bain to run revenue, and went public in 2013. But it also made bad moves that put Twitter in the predicament it was in coming into 2020, including: * Shut out third-party developers* Launched Twitter Music for iPhone* Slowed user growth and engagement* Made a bunch of acquisitions, including Tweetdeck, MoPub, TapCommerce, Niche, and Vine, which it famously shut down in 2016Importantly, it made the mistake that professional, non-founder CEOs are often criticized for: focusing too much on short-term revenue optimization at the expense of long-term strategy. When the company failed to even optimize revenue in the short-term, missing quarterly targets throughout 2015, Costolo was out, and Jack was back in, at least temporarily. At the time, Jack was already running Square, and accepted the Twitter CEO position on an interim basis. Interim has turned into more than five years at the helm. When Jack took over, he inherited the equivalent of a baseball team that gutted its farm system to go all-in on winning now and lost. In Q4 2015, Jack’s first as returned CEO, Twitter experienced the first quarter in its history of declining Monthly Active User (MAU) growth. The Twitter Jack came back to had a Frankenstein infrastructure and an ad product that was nearly impossible to use on a self-serve basis, meaning that the majority of its ad revenue came from large brands’ awareness budgets as opposed to more measurable and faster-to-sale direct response advertising. And Twitter, in its rush to grow MAUs and go global, had started to become the cesspool that it’s criticized as being today. In the piece that Professor Galloway wrote on February 5th, Overhauling Twitter, he included a Twitter stock chart as part of his arsenal of arguments that Jack needs to go. He argued that Trump’s presidency saved the platform, and I called him out for using a large version of Trump’s head to paper over nine months of flat growth post-election. I missed something obvious, though… Most of the 63% decline in Twitter’s stock price that he highlights came before Jack was reinstated as CEO! The Prof is using Costolo’s performance to argue that Jack isn’t fit to be CEO. (And Twitter, of course, is up 36% in under a month since the Prof hit publish haha.) Certainly, Jack has not acted quickly over the five years since he retook Twitter’s top spot. He, too, got distracted by flashy external things, like the rights to the NFL’s Thursday Night Football. He didn’t fix Twitter’s ad products soon enough. But if you were going to fire Jack for his underperformance, where on the graph above do you do it? In his first year as CEO? During the run up the company had in his second year? You could make the case that you could have fired Jack between 2017 and 2019. But Jack should be safe now. Because if you look at the past two years and Twitter’s recent announcements, the question isn’t “Why is Jack worse at being Twitter’s CEO than Square’s?”, it’s “Doesn’t it kind of look like Jack is making some Square-like moves at Twitter?” Twitter’s New Groove Part of the key to Square’s staying power, the reason it was able to stay alive long enough to iterate its way to Cash App, was that it was building off a stable base. Square’s merchant (or “Seller”) business grew solidly, like B2B products can, with a clear, if unspectacular, business model from day one. That’s something that Twitter never had. So in 2019, after a sluggish first few years in his second tenure, Jack decided to start fresh and rebuild Twitter’s ad infrastructure from the ground up. When the pandemic hit, it redoubled its focus on its revenue products. It also spent a ton of time and attention on what it calls “health,” reducing toxicity in the Twitter conversation, and on surviving the 2020 US Presidential election. That is unsexy work that takes time to show up in the numbers. Would a full-time, focused, hard-charging CEO have fixed the infrastructure earlier? Maybe. Or they may have put more emphasis on ad sales and MAU growth, created new formats on top of existing infrastructure, and tried to fight their way out of the hole. In the uncharitable interpretation, Jack’s laissez-faire, part-time CEOship cost Twitter years of valuable development time. In the charitable interpretation, Jack’s meditative approach was exactly what the company needed in order to pause, reset, rebuild, reprioritize, and unleash a wave of creativity. In either case, it’s hard to interpret what’s going on at Twitter today as anything but positive. Of course, there are the numbers. Twitter reported earnings the day after I wrote How Twitter Got Its Groove Back, and everything continues to move in the right direction. More importantly, with its infrastructure rebuilt, Twitter is setting its sights on the future, where Jack operates, like Square can. It’s finally doing all of the things that armchair analysts like me, who don’t have to worry about paying down technical debt, have been saying it should do for a while. In How Twitter Got Its Groove Back, I covered Twitter’s push into newsletters (with the acquisition of Revue) and audio chat (with Spaces). They’re savvy moves given Twitter’s position as the top-of-funnel for the Creator Economy, and in any other year of Twitter’s history, they would have been enough to satisfy Twitter and keep it busy. But this is the new Twitter.On Thursday, Twitter held its Analyst Day. Jack kicked off the event by confronting the three main reasons people don’t believe in the company: “we're slow, we're not innovative, and we're not trusted.”* We’re Slow. Jack agreed that the company has been slow, because it’s been working itself out of technical debt for years. * We’re Not Innovative. Jack tied lack of innovation to slowness -- “If we can't ship code faster, we can't experiment and iterate, and every launch comes with massive expectation and cost.” He also highlighted that innovation isn’t always flashy; they made the decision to deprioritize everything except making the core timeline experience better, and the results have shown up in the increase in monetizable Daily Active Users (mDAUs). As someone who joined Twitter in 2009 but only became an addict in 2019, I can attest to the fact that it’s working. * We’re Not Trusted. Again, Jack agreed. He committed to more transparency (already evident in the way the company is building Spaces in public), giving people better moderation tools, enabling a marketplace approach to relevance algorithms, and funding its open source media standard called Bluesky. While all three criticisms are important, speed and innovation are the most directly relevant to the Square comparison, and Twitter wasted no time proving they were serious. When Jack handed over the mic, his team made two new major product announcements, within a month of Revue and Spaces. That feels a lot more Square-like than Old Twitter-like. Twitter’s Head of Consumer Product, Kayvon Beykpour, announced Communities, and its Chief Design Officer, Dantley Davis, Announced Super Follows. Super Follows, which let Creators charge followers a monthly rate for more access, are exciting, not just because they’re new and shiny, and not just because they validate my prediction for Twitter’s subscription products (one that allows top Creators to monetize and takes a cut) versus the Prof’s (make people with large followings pay a monthly subscription fee). Super Follows are an opportunity for Twitter to go from an open network that leaks value to everyone else, to a closed one, and to combine the two ecosystems they’ve been building and create an internal economy… kind of like Square. What is Twitter Building?Remember the playbook that Square runs on both the merchant and Cash App sides of the business? That actually looks a whole lot like what Twitter is doing. Make the Product Free and Simple to Use. Twitter has always been free, but it hasn’t always been simple to use. The fact that over a billion people have created a Twitter account and there are only 192 million mDAUs speaks to that. Twitter is working to fix that challenge by focusing on Topics, which make it easier for people to get value out of Twitter immediately without a curated follow list.Target an Underserved Customer Base. Twitter spent 15 years trying to figure out who and what it’s for. Given its flurry of recent moves, it feels like it’s finally figured out its core customer base: Creators. This group has actually been underserved for a long time in terms of its ability to get distribution, the most valuable asset for any creator. Small businesses have Facebook, big brands have nearly every channel imaginable, video creators have YouTube and TikTok, hot people have Instagram, but writers, podcasters, analysts, comedians, and other more intellectual creators haven’t had a reliable growth or monetization channel. Now they have Twitter. Layer in Adjacent Services. With the infrastructure rebuild under its belt, Twitter (finally) began layering in adjacent services at a Square-like pace, introducing Revue, Spaces, Super Follow, and Communities in the first two months of 2021. With a stated goal of doubling its development velocity by 2023, we suspect this is just the beginning. The ecosystem that Twitter is building looks a lot more like Square’s than other social networks’, too. Square built up two ecosystems -- merchants and Cash App -- and is working to connect them. Twitter has two ecosystems, too. They were merged from the beginning, which created a lot of the messiness -- the experience for a Creator is so much different than that of a consumer -- but makes the future promising if indeed they’ve figured it out. Twitter’s merchant equivalent are the Creators on the platform. Until now, Twitter has been an open network and Creators haven’t had a way to monetize directly, so they’ve built audience on Twitter and made money off-platform. Its consumers are Cash App, the millions of individuals bound together by a network and an internal currency -- likes and retweets -- that they spend on Creators. With Twitter’s recent moves, it’s moving to close the network and let Creators build audience and a business in one app.Given Jack’s experience at Square, we wouldn’t be surprised to see Twitter roll out its own internal currency (whether itself or via partnership with Square). In a way, it already has one -- likes and retweets. We would imagine that Twitter will come up with innovative ways to turn attention into currency. We would certainly be willing to give someone free Super Follow access if they brought us 100 relevant followers, for example. Since Twitter controls the entire ecosystem, it can experiment with value exchanges in ways that other platforms can (See: Facebook’s Diem).Over time, we will see Twitter, like Square, add more products into the combined ecosystem. eCommerce is a no-brainer move at some point, as are improvements to the DM and Bookmarking experience. Twitter could even charge Creators for those improved products with money they’re already making in the app from Super Follows to save on transaction fees. With the addition of Super Follows, Twitter is in a new spot: the lead. It will be the first major US social network with subscriptions, a way for Creators on the platform to make money directly from consumers on the platform. It will go from being the leakiest platform to the one that has the potential to capture the most value within its walls. It feels weird to be optimistic about Twitter’s roadmap, but now that Old Twitter is finally New Twitter, fifteen years in and five years after Jack’s return, Twitter users and investors can finally look at Jack’s Square tenure as a good indicator of what’s to come instead of as a distraction.Back to the Original QuestionSo why is Jack so much worse at being the CEO of Twitter than he is at being the CEO of Square? Well, we don’t think he is. Jack came into Square with a clean slate and his early Twitter experience under his belt, and he built something fresh, from scratch, with the thoughtfulness and infrastructure in place to scale and experiment. It got some things wrong, moved on, and iterated into Cash App, which has breathed new life into the company. Combining the merchant business and Cash App may give Square the holy grail of financial products: a low customer acquisition cost, closed network with an increasing number of opportunities for engagement and monetization. Jack came back into a Twitter that was a broken, hobbled together mess on the engineering, business, and product side. The company has had to deal with regulation and being hauled in front of Congress, while Square has been able to avoid regulatory clashes (so far). Maybe a full-time CEO would have fixed all of that more quickly, but five years later, Jack is where he was a few years ago at Square: a core product that’s humming, strong infrastructure, and an appetite for innovation. Twitter Jack still has a lot to prove. Twitter’s ad products are showing promise, but the revenue they generate is still relatively small. The company has announced cool products, but some don’t even have scheduled launch dates. That said, the narrative and momentum are back on Jack’s side. It’s going to be hard to push him out when things are going well, and with time, velocity, and the attention of the world’s most valuable users, Twitter, for once, has the deck stacked in its favor. The future is bright.It’s a stretch to say that Jack planned this all along. Too many things had to fall into place in just the right way. And giving Jack too much credit might be too much founder-hero-worshipping; it’s clear that the people below Jack at both Twitter and Square are the ones doing a lot of the hard work to make all of this happen. But as it stands, Jack currently runs two companies with combined market caps of $165 billion and a clear path to $500 billion in combined market cap within five years. He’s built two companies that have had a bigger impact on giving the Power to the Person than nearly any other -- Square by “blurring the lines between B2C and B2B” and giving small businesses a growing suite of ecommerce and financial tools, Twitter by being the place that the Creator Economy goes to build (and now monetize) an audience.Now that Twitter investors feel less slighted by the time Jack spends at Square, maybe there’s even the potential for the two companies to work more closely together, to combine the two ecosystems they’ve built to make it easy for Square’s small businesses to reach customers on Twitter, and for Twitter users to pay their favorite Creators with Cash App. Jack designed his system such that he can stay above the fray and plan what’s next while his deputies do the hard, day-to-day work. Some might call that laziness, some might complain about his trips to French Polynesia or his plans to move to Africa, but… it’s working. Twitter and Square have more optionality today than nearly any other companies on earth, just the way Jack wanted all along.Thanks to Marc for teaming up on this and dropping Square knowledge and 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 SUNDAY 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 1,125 newly Not Boring people who have joined us since last Monday! If you aren’t subscribed, join 34,427 smart, curious folks by subscribing here:🎧 To get this essay straight in your ears: listen here or on Spotify.Today’s Not Boring is brought to you by… MasterworksWhat’s the one thing in every hedge fund titan’s portfolio that you’re probably not investing in?A-R-T. In fact, 84% of ultra-high-net-worth individuals collect art according to a 2019 Deloitte survey. It makes sense—contemporary art returned 13.6% per year over the last 25 years vs. 8.9% for the S&P 500. And with the total art market expected to balloon from $1.7T to $2.6T by 2026, it’s no wonder that the price of paintings have skyrocketed. One New York startup is at the center of it all: Masterworks. They’ve fractionalized multimillion-dollar masterpieces by KAWS, Basquiat, Banksy, and more—and you can be a part of it. If you're tired of meme stocks and are looking for an elite, non-correlated asset class, check out Masterworks today. I went deep on Masterworks in January, have invested in four of their paintings, and am looking to add more. The best part? I've partnered with Masterworks to let Not Boring subscribers skip their 27,000 person waitlist. So do yourself a favor and sign up today.*See important informationHi friends 👋 ,Happy Monday! Hope everyone’s thawing out after last week’s winter weather. In late January, I wrote about NFTs in my essay on The Value Chain of the Open Metaverse. I told you about projects like NBA TopShot and $WHALE. Since then, both of those have exploded. $WHALE has more than doubled. But as I’ve mentioned before, I’m kind of an idiot, so of course, I didn’t buy either. I missed the run. I’ve followed with interest, though, and while certain asset prices are clearly inflated, we’re nowhere close to reaching NFTs’ true potential. Art is a start, but NFTs may be one of the most powerful primitives created in a long time. Today’s post is an exploration of the long-term potential of the short-term explosion of interest in NFTs, and in the Passion Economy. And there’s good news for all of us (assuming you’re a human): it’s a great time to be a person. Let’s get to it. Power to the PersonIf you’ve spent much time on the internet recently you might have noticed something: it’s gotten really fast-paced and really fun. It just keeps getting faster and funner. Bitcoin, Clubhouse, NFTs, unicorn startups galore, the Creator Economy. Each feels simultaneously like a potential fad and a nascent revolution.From the eye of the storm, it’s hard to tell exactly what it means. Will digital artists continue to mint millions from NFTs? Will Creator Economy startups continue to raise early stage rounds at dizzying valuations? Will consumer social apps need top-tier influencer founders to cut through the noise? I have no idea, and instead of singling out any company or NFT, a thought exercise seems more appropriate, based on three ideas that keep coming to mind: * A main Not Boring theme that Genies don’t go quietly back into bottles.* Chris Dixon’s famous line that “the next big thing will start out looking like a toy.”* Ben Thompson’s idea that media businesses are the first to adapt to new paradigms because of their relative simplicity, and others follow later.Taken together, what I see happening is this: The Creator Economy and NFTs are massive human potential unlocks. Even if certain assets are in a short-term bubble, we are on an inexorable march towards individuals mattering more than institutions. We’re on the precipice of a creative explosion, fueled by putting power, and the ability to generate wealth, in the hands of the people. Armed with powerful technical and financial tools, individuals will be able to launch and scale increasingly complex projects and businesses. Within two decades, we will have multiple trillion-plus dollar publicly traded entities with just one full-time employee, the founder. That sounds bold, but it’s kind of already happened: as of last week, Bitcoin, which has no employees, crossed the $1 trillion mark.I think that the Passion Economy broadly will continue to expand beyond media and entertainment and that we’ll see more and more companies -- some small, some big; some permanent, some temporary -- that do all of the things that companies do today, with one person. That doesn’t mean we’ll all be sitting in our basements, alone, growing rich and unhappy; to the contrary, I think we’ll see the continued rise of collectives and communities, some lifelong and some project-specific and fleeting. Some of us might even choose to work together. Why does it matter that one person will be able to launch companies that rival corporations in scope, scale, and innovation? Because currently, Passion Economy businesses are tied to the creator. Creators, even well-paid ones, are still more labor than capital. If I get hit by a bus tomorrow, the content stops, and Not Boring stops making money. We’re after products can outlive their founders and continue to produce wealth after they’re gone. People follow people, not companies, but companies have long had the advantage because of all of the coordination it takes to build scaled products. As a result, they capture a disproportionate share of the profits. Even Creator Economy platforms like Substack and TikTok treat creators themselves as commoditized supply. While people are making great livings through their work, which is a great step, I think the confluence of the Passion Economy, DeFi, and NFTs will mean that the creators themselves will capture the lions’ share of the profits. I’m excited to see more individuals commoditize platforms, instead of the other way around.We haven’t scratched the surface of the implications of giving the power to the person. Today, we’ll scratch. * Creators’ Crazy Month* The Creator Toolkit* Coase and the Nature of the Firm* The New Nature of the Firm* The Age of Individual InfluenceIt’s a great time to be a person. Creators’ Crazy MonthIt’s been quite a year for the Passion Economy. Back in October 2019, pre-COVID, Li Jin wrote The Passion Economy and the Future of Work. In it, Li highlights that “Users can now build audiences at scale and turn their passions into livelihoods, whether that’s playing video games or producing video content.” Note: We’ll use Passion Economy and Creator Economy interchangeably, but Creator Economy is technically a subset of the Passion Economy that’s more focused on media and entertainment.The piece was one of those magical self-fulfilling ones that both names a trend and supercharges it. By naming it, Li gave people license to go out and build, both as individual creators and as companies formed to build the tools to grow the movement. COVID helped, too, with more people stuck at home and facing uncertain job prospects. This newsletter is part of the Passion Economy, and it probably wouldn’t exist without COVID. The Passion Economy just keeps picking up momentum, and it’s reaching a fever pitch. While TikTok, YouTube, and Instagram keep exploding, new entrants are joining the party with breathtaking speed. In the past month alone:* Clubhouse raised its Series B at a $1 billion valuation and announced plans to let creators monetize directly from the audience through tips, tickets, or subscriptions. * Creator finance platform Stir raised its Series A at $100 million (a16z led both Clubhouse and Stir).* Substack announced that there are over 500,000 paid subscriptions on the platform, and that the top ten writers collectively make over $15 million. * Twitter acquired newsletter platform Revue. * YouTuber David Dobrik launched his photo app, Dispo, and it went so viral so quickly that it’s in talks to raise at its own $100 million valuation. (Read Divinations on Dispo).* LinkedIn (LinkedIn!!) is building a service called Marketplaces to compete with Fiverr and Upwork to connect freelancers and hirers. * Li unveiled her own $13 million early stage venture fund, Atelier Ventures, to invest in the Passion Economy (and instead of announcing in a major publication, she dropped the news in an interview in Lenny’s Newsletter).  That’s just the past month, and the list goes on. Given my intersection as both a creator and an investor, I probably get a pitch for a new Passion Economy company at least once a day. In a little over a year, the Passion Economy has gone from an unnamed je ne sais quoi to one of the hottest early stage investment categories.Beneath the flashy headlines, regular people are starting to make great livings as part of the Creator Economy, both those who choose to go solo and those who decide to let the market set the price for their talents. The globalization of the talent marketplace means that more people are making more money doing what they do best. My sister told me that because of global demand from companies that have accepted that remote is here to stay, the salary for top Nigerian engineers has increased by 2-3x in the past month. My friend Dror Poleg would suggest that that’s just the beginning -- he writes about the 10x Class, “a whole new layer of professionals that earn incomes that are a level below the biggest earners in their field, but still much higher than what the average employee could earn in the pre-internet era” because of demand for their niche skill in the global marketplace. He thinks of it as gig workers in reverse -- where the clients are commoditized and the individuals are the secret sauce. Power to the person. And all of that is just in the mainstream, Web 2.0 Passion Economy. If you expand the definition to include Web3, things get even more insane. On Thursday, digital artist Mad Dog Jones broke an NFT record by selling $4 million worth of tokenized animations of his Tokyo artwork in 9 minutes on Nifty Gateway. Thousand-person companies would kill for sales like that. More broadly, the NFT and crypto space has been on an absolute heater. Dapper Labs, the company behind NBA TopShot, which I wrote about in The Value Chain of the Open Metaverse, is rumored to be raising $250 million at a valuation north of $2 billion. Bitcoin broke $50k for the first time on Wednesday, and there are now over 100k addresses that hold over $1 million worth of Bitcoin. Bitcoin isn’t traditionally grouped with the Passion Economy, but a combination of ownership and fandom has rewarded hundreds of thousands of people with net worths higher than the US median of $121k, and given them career leverage they likely wouldn’t have otherwise had. Power to the person.It seems crazy out there, bubbly, like 2000 or at least 2017 (the last crypto craze) all over again, and we haven’t even talked about Unisocks yet. These are actual, limited edition socks, backed by the $SOCKS token. The current price is $72,242.77. Or this Non-Fungible Pepe that sold on OpenSea for 110.58 ETH ($216k USD). Or the Logan Paul NFT drop that has generated over $3.4 million in one day. There are so many more examples. Every time I opened up Twitter this weekend, I saw a new NFT making over $1 million in like an hour. NFTs have gone mainstream, and creators are making bank.We have YouTube stars launching $100 million photo apps and $3.4 million NFT sales, $2 billion NFT companies, $72k socks, and the world’s largest companies starting to get involved. It’s almost impossible to tell what is real and what is going to blow up. But something is clearly happening. We are in the early stages of the Creator Economy and NFTs. They look like toys. Currently, the main beneficiaries of the Passion Economy and NFTs are traditional Creators - artists, writers, entertainers. It’s easy to dismiss the confluence of these threads as a COVID-and-Bitocin-induced bubble waiting to pop. But a much bigger shift is underfoot.The Creator ToolkitToday, NFTs almost exclusively back digital art and fashion, and the most popular creator tools are focused on media, art, education, and entertainment. Even the ones that go beyond that are too prescriptive to build trillion-plus dollar solo public companies with. But away from the splashy headline numbers, new tools mean new opportunities for millions of people.Many of the Creator Economy companies that have received the most funding and attention are purpose-built for a specific medium, the Creator Economy equivalent of Vertical SaaS. * TikTok is for short-form mobile video. * YouTube is for longer-form video.* Twitch is for streaming (mainly) video games. * Instagram is for photos.* Substack and Revue are for newsletters.* OnlyFans is for (mainly) adult content.* Teachable and Wes and Gagan’s Startup are for online courses.* Clubhouse is for audio conversations.  There are also more horizontal companies that support creation or monetization: * Descript is for audio and video editing. * Patreon and Buy Me a Coffee are for subscriptions and tipping. * Stripe is for payments. * Stir lets creators manage their finances and collaborations. * Linktree and Beacons give creators one central home for all of their channels. Together, these companies focus on helping creators create, grow, manage, and monetize their audiences. That’s incredibly important. As we’ll discuss, solo builders’ main weapon is their ability to build relationships at scale and distribute their products. But it’s also just the beginning. Ben Thompson has said that media companies are the first to adapt to a new paradigm shift because of the relative simplicity of their products. They require very little coordination among parties, just the ability to capture and distribute one person’s thoughts, images, or dance moves.Take Not Boring, for example. Starting this business meant signing up for Substack, writing in Google Docs, making (beautiful) graphics in Figma, incorporating with Stripe Atlas, setting up a bank account with Mercury, recording and editing podcasts on Descript, releasing them on Anchor, and being loud on Twitter. That’s it. It’s a ton of work, but it’s not complex. The same can be said for Addison Rae’s TikTok following or Harry Stebbings’ podcast empire. Obviously, from there, it can get more complex. Addison and Harry both monetize in all sorts of interesting ways. But the basics are simple. Other Passion Economy companies, which Nikhil Basu Trivedi (NBT) calls Business-in-a-Box (“BiaB”) companies, let people build small businesses beyond media and entertainment. These include some of the media businesses mentioned above, but expand into the physical world with daycare, grocery shopping, and even trucking. The idea behind these companies is that people don’t need to be gig workers for someone else; they can build their own businesses within a category. Why work for Instacart when you can be your own boss with dumpling?These businesses offer incredible freedom, ownership, and flexibility to a new class of digital-first small business owners, and many people have used them to create financial independence or even generational wealth for themselves and their families. Teachable founder Ankur Nagpal tweeted that the top 10 creators on Teachable have collectively made over $100 million! That’s real money, orders of magnitude more than teachers typically make. Individuals are opting out of the traditional path and building something of their own. But for every creator making millions, the platforms on which they operate make billions. That’s fair, that’s how the economy works.  What we’re after in this thought exercise, though, aren’t full-fledged businesses-in-a-box solutions, but a new set of primitives that individuals can mix and match and build on top of to create new products and massive businesses. We want to see individuals compete with the platforms themselves, create entirely new innovations, and fundamentally alter the nature of the firm. Coase and the Nature of the FirmIn 1937, economist Ronald Coase wrote a relatively short paper that would ultimately win him the Nobel Prize: The Nature of the Firm. That paper remains fundamental to the way we think about why firms, or companies, exist, when they should or should not, and how big they should be.In the paper, Coase wrestled with the apparent contradiction between the idea that free markets, or economic systems, should be able to direct resources to the right places without central planning, by using the price mechanism alone. Supply and demand curves and all that. The prevailing economic theory pre-Coase said that because markets are efficient, it should always be cheaper to contract out work than to build a firm. But that was very clearly not happening in practice. Why then, Coase wondered, do firms exist instead of a multitude of self-employed people who contract with each other on an as-needed basis? What causes an entrepreneur to start hiring people instead of contracting?Coase uncovered two competing forces: transaction costs lead to the creation of the firm, and overhead and bureaucracy costs limit the firm’s size. Transaction costs like search and information costs, bargaining costs, and keeping and enforcing trade secrets meant that the cost of obtaining a good or service is higher than just the price. That’s why entrepreneurs hire people: employing a trusted CMO, for example, meant that the entrepreneur didn’t need to start each marketing campaign with a recruiting process, information dumps, and goal-setting, and didn’t need to worry that the marketer would bring all of her company’s information and goals to a competitor at the end of the campaign. Overhead and bureaucracy costs include wasted organizational time -- think of all of recurring meetings you have on your calendar -- and the propensity for an overwhelmed manager to make mistakes in resource allocation.Those two sets of costs are in a constant, dynamic tension and determine the ideal size for a firm at a given time. So if we’re thinking through how to get a firm size back down to one, and to let the free market do it’s thing, what we’re looking for is a dramatic decrease in transaction costs, a dramatic increase in overhead and bureaucracy costs, or both combined. The New Nature of the FirmThe limit to the size of the firm is set where its costs of organizing a transaction become equal to the cost of carrying it out through the market.-- Ronald CoaseThanks to new tools and technologies, we are nearing the point at which the costs of carrying out a transaction through the market are getting so low that firms are less necessary.Recall that Coase highlights three main types of transaction costs: search and information costs, bargaining costs, and keeping and enforcing trade secrets. We are on the verge of driving those costs low enough to let market mechanics rule the day in practice and not just in economics textbooks. There are three main drivers: * Better Software Primitives* Cryptographic Stigmergy (lol, I’ll explain) and DeFi* NFTsThose three categories are the building blocks of the expanding Solo Corporation Toolkit. Better Software PrimitivesThe promise of modern business software is that it allows companies to do more, better, with fewer people than was previously possible. Take API-first businesses, for example. In APIs All the Way Down, I wrote: When a company chooses to plug in a third-party API, it’s essentially deciding to hire that entire company to handle a whole function within its business. Imagine copying in some code and getting the Collison brothers to run your Finance team.An increasing number of the things that firms hired whole teams of people to do are now achievable with a few lines of code. This table from Canvas Ventures’ Grace Isford (to which I’ve added a few new ones) captures the breadth of functions now possible via APIs. APIs dramatically reduce transaction costs. Assuming you have a clear understanding of what you need from an API, that you go with their standard pricing, and that you trust them to keep your data secure, plugging in APIs eliminate each of the categories of transaction costs that Coase highlights. In addition to APIs, well-funded startups and public companies are building increasingly sophisticated tools with increasingly simple interfaces, making it possible for one person to do in minutes what previously would have taken teams of people months to do. As a stark example, think about the rooms full of typists replaced by a combination of Google Docs or Descript. Copy AI can even write professional quality marketing copy using rough human input. For less technical people, no-code tools, like Webflow, Zapier, Bubble, Airtable, and countless new entrants enable drag-and-drop building of increasingly complex products. Even large companies with full teams of engineers are beginning to use no-or-low-code tools for certain tasks. I am dramatically oversimplifying how easy it is to use, let alone combine, all of these tools. It’s taken me weeks to build a website on Webflow, and I still don’t know how to do simple addition in Airtable. We’re not there yet. I’m also skipping huge categories.My broader point, though, is that while innovation over the past decade has felt stagnant, a lot of work has been done on the building blocks that will allow fewer (and eventually just one) people to build more complex products and businesses with powerful software and machine learning. These primitives will continue to improve, too, and new products will be built that makes it easier to combine and manage all of them, decreasing the overhead and bureaucracy costs of building a company with software. Instead of AI replacing humans, I’m a big believer that it will give individuals superpowers that let them compete with large companies. As this software becomes more frictionless, the overhead and bureaucracy costs of meetings and management will become more obvious and unnecessary. At the same time, the blockchain is opening up new possibilities for lowering transaction costs when humans do interact with each other to build something outside the traditional structure of a firm. Cryptographic Stigmergy and DeFiIn the eighty years since Coase wrote his paper, price and planning have stood as the two ways to organize economic activity. In his paper The Return of  ‘The Nature of  he Firm’: The Role of  the Blockchain, independent scholar Prateek Gohra argues for a third, decidedly less catchy entrant: cryptographic stigmergy. What does that mean? Stigmergy is the idea that a large group of individuals can interact through identifiable  changes in their environment; when that environment is reliably reified in a blockchain, we have cryptographic stigmergy.Clearer now? No? OK. Gohra is saying that the blockchain offers a third option for organizing economic activity, somewhere between a pure price mechanism and a centrally-planned firm. I summarized further, and then I deleted it, because it’s really dry. Instead, let’s turn to DeFi + Creators = 🚀 by Tal Shachar and Jonathan Glick, which gets at the same idea in a less “economics paper” way. The two argue that:By reducing transaction costs, improving information asymmetries and better aligning incentives, decentralized finance (DeFi) will unlock the creator economy. In turn, popular creators and social influencers will push crypto deeper into the mainstream. The effects of this combination will be far-reaching and unpredictable.The essay focuses on the idea that any product launch that doesn’t include influencers is likely to fail, but that cash and equity don’t properly align the incentives between influencers and companies. Introducing DeFi, they argue, will properly reward creators and influencers for the value that they provide to a project. That’s an interesting idea, but it relies on the limited definition of Creator that we use today. Where it gets really compelling is when they say: As the market for creators grows, many workers might become more like project nomads than full-time employees. Swarms of talent, community and capital already flock from project to project, and this has been true about open source for decades. Perhaps over time, as these projects become better funded and proven successful, the corporate world itself will be ‘eaten’ or at least transformed by this capital-charged collab culture. Companies and projects might become more like clouds, larger than ever before but with vaguer outlines, eroding the boundaries between employees, consultants, customers and investors.DeFi, through cryptographic stigmergy, allows talent and contributors to flow as easily from project-to-project as money does today. This is part of the idea behind Fairmint, which Sari Azout and I wrote about in November. Better align financial incentives, and you can attract the right people to your project at the right time. This reduces transaction costs and lets project leaders and workers get market price, and is an important step on the path towards the Solo Corporation, one with just one full-time employee orbited by a constellation of people and tools that float in and out as needed. If DeFi and cryptographic stigmergy are the forces that allow Creators to snap people and capital into place when needed, lowering search, information, and bargaining costs, then NFTs are the ones that handle trade secrets, and allow Creators to share and remix IP seamlessly.NFTsNFTs, or non-fungible tokens, are cryptographic tokens that prove authenticity, ownership, and scarcity of digital assets. If you want to go deeper down the rabbit hole, you should check out The Value Chain of the Open Metaverse, which I wrote in January, or Jesse Walden’s NFTs Make the Internet Ownable.They are the ultimate manifestation of “the next big thing will start out looking like a toy.” The NFT projects attracting the most attention currently really do look like digital toys. NBA TopShot lets people own highlights of NBA games. Logan Paul is giving away Pokemon cards. @optimist is taking over my twitter feed with what can best be described as a gif of cabbage. Beeple’s multi-million dollar digital art collection features a disturbing number of illustrations of a naked Donald Trump. While provable ownership of digital art and fashion is a total game changer in its own right, and should have huge implications for the Metaverse, this first application masks a ton of powerful applications beyond the worlds of art and entertainment. NFTs and smart contracts have the potential to change the way that we manage Intellectual Property (“IP”). In The Value Chain of the Open Metaverse, I wrote about a digital fashion company called DIGITALAX that “is based on a parent-child structure, in which the Parent NFT - the final piece - is composed of child NFTs representing all of the materials, patterns, and colors that go into the construction of the garment.” The NFTs that are all over your Twitter feed today are based on the ERC721 asset standard -- one token for one final item -- but DIGITALAX also uses the ERC1155 standard, used for semi-fungible tokens that represent a category of things without concern for exactly which one is used. In DIGITALAX’s case, a final digital dress might be backed by an ERC721 token, but different color patterns or materials would be backed by ERC1155 tokens, which would reward their creators every time the pattern or material is used.This same concept could be applied to all sorts of things for which we rely on the blunt instrument of intellectual property law today, giving digital assets’ original creators financial upside whenever their work is used instead of the right to sue, and giving new creators the ability to use a wider range of off-the-shelf inputs in their products. Here are a few concrete examples: * Music. ERC721-backed songs made up of ERC1155-backed choruses, verses, beats, and hooks, which can be used to make literal remixes that reward the original creators automatically. * Research. Today, the success of a research paper is measured by the number and quality of citations. What if, instead, the research paper was backed by an NFT that made it free to use for other academic research, but that paid the researcher out any time it was used for commercial purposes. * Code. Instead of pure open source code, what if code blocks were backed by NFTs that allowed remixing and improvement, but paid out the code’s original author whenever it was used in new, commercial code. * Stock Images. Photos or illustrations used in website design or marketing materials could pay the original creator. The possibilities are endless, but making IP more flexible and remixable unleashes benefits far beyond owning a clip of your favorite NBA star’s best dunk. NFTs can help build the Creator Economy’s Middle Class by rewarding original creators every time their work is used, freeing their earning power from labor, and can lower transaction costs for Solo Corporations who want to freely use the best inputs available to build trillion-plus dollar public companies. Taken together, better software primitives, cryptographic stigmergy and DeFi, and NFTs have the ability to completely redefine and expand what being a Creator means. But no matter which definition you’re using -- from YouTube star to newsletter writer to Creator Jeff Bezos -- the one thing that remains crucially important is the influence of the individual. The Age of Individual InfluenceThe reason that the Creator Economy is a thing in the first place is simple: people like people. Over the weekend, I had one of my most viral tweets ever: It sounds like a high kid thing to say, but it gets at a larger point, which Rodrigo Sanchez-Rios pointed out in the replies: “People follow people, not companies.”At the same price and quality, we would much rather buy a loaf of bread from the baker next door than from the multinational conglomerate. We’d (I hope!) rather get business analysis from our favorite Substack writer than from an article by a faceless person in Harvard Business Review. We support companies whose CEOs we know, trust, and are inspired by more than those led by faceless and generic professional CEOs. In Business is the New Sports, all the way back in June, I wrote, “CEOs’ direct connections with fans humanize them and their businesses in a way that wasn’t possible before. It makes us more likely to root for them.” Since then, Elon Musk has memed himself into the richest person in the world by building a ravenously loyal base of Elon Musk, and by extension, Tesla, supporters.The only thing better than rooting for companies whose CEOs we admire is rooting for individuals who are themselves the company. In DeFi + Creators = 🚀, Shachar and Glick put it well: Like creator fandom today, every ‘company’ or project will become more like a tribe, driven and defined by the stories and symbols linking its members together, led by those who best weave its narrative.In a world of abundance, we want to follow the people we trust. The Creator Economy to date has unleashed a wave of people who are world-class storytellers, authentic, and relatable. The next step is for us to not just turn to these people for entertainment and education, but for an ever-larger number of things that we want to accomplish and achieve. As the costs to launch full-scale businesses come down, supported by new software and crypto tools, individuals with influence will amass increasing power. Today, this is happening across Substack, TikTok, YouTube, podcasts, Twitter, Teachable, Twitch, Clubhouse, and a growing number of Creator Economy platforms. It’s already beginning to happen in finance, too. NBT wrote about this idea in The Rise of the Solo Capitalists in July. Instead of working for large VC funds, individuals like Lachy Groom, Josh Buckley, Elad Gil, Shana Fisher, and now Li Jin, are raising their own funds, backed by their own identities, and beating out established funds to win some of the most competitive deals in venture. Everyone read Elad Gil’s High Growth Handbook or Li’s pieces on the Passion Economy, and they want to have those people, not some company with a faceless blog, on their cap table. The Not Boring Syndicate is a (very small) testament to the fact that companies want to work with people who can help tell their stories.The same transformation is happening to public markets investing, as well. SPACs are a manifestation of the idea that individual sponsors hold as much sway as investment banks. Public and CommonStock allow people to follow other people whose investing acumen they trust, and Composer (NB portfolio company) is going to take that a step further, by making it easy to subscribe to your favorite individual investors’ strategies. Across media, entertainment, education, ecommerce, and now finance, the power is shifting to individuals. One person, backed by improving tools and their own personal influence, can genuinely compete with established institutions for eyeballs and dollars. Converting individual influence and existing social channels into sales gives Solo Corporations a huge advantage in customer acquisition, particularly when trusted creators form collectives and experiment with new ways of sharing upside with each other and with supporters. While the idea of a trillion-dollar public Solo Corporation seems crazy from where we sit today, it’s inevitable. Genies don’t go back in bottles. And although the Creator Economy and NFTs seem innocuous and unthreatening to established companies today, they portend the next big thing. It may happen in the next decade, it may take until 2071, but it’s the way the world is heading.All of that said, just because it will be possible doesn’t mean that everybody is going to go start Solo Corporations. For one, it’s really hard. In The Innovators, Walter Isaacson is adamant about the fact that throughout history, many people have tried to innovate alone and failed. I’m personally a huge believer in Scenius, the idea that the right groups in the right places at the right times are the ones that create world-changing innovation. Certainly, stigmergy and community can solve some of this; the crypto community is strong, and many within it are like teammates, even if none of them are employed by a company or co-founders.Plus, working with the right team, when everything is humming, is incredibly fun, and co-founders that complement each others’ skillsets are a powerful force. There’s a reason that Y Combinator strongly prefers companies with co-founders. Most likely, we’ll see a trillion-plus dollar public company with two-or-three full time partners before we see the public Solo Corporation. A team comprised of a technical genius, a brilliant designer, and a master storyteller would be a hard thing to beat. Maybe that’s the magic of Dispo.But whether very small teams with enormous impacts, or genuine Solo Corporations, the important thing is that the choice will be ours. Power to the person.Thanks to Dror, Ben, and Dan for editing! Thanks 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 898 newly Not Boring people who have joined us since last Thursday! If you aren’t subscribed, join 33,771 smart, curious folks by subscribing here:Hi friends 👋 ,Happy Thursday! Today, we’re doing a Sponsored Deep Dive on a company that I’ve been waiting for all my investing life without knowing it: AltoIRA.Instead of me reading the essay, we’re going to hear the Alto story straight from the mouth of its founder and CEO, Eric Satz. Listen by hitting play above, or on Spotify or Apple Podcasts. NBD but Sponsored Deep Dives are kinda famous now, after Ben Thompson said on his Dithering podcast yesterday:There’s another guy that has a newsletter, the name escapes me [ed note: it me], and he will write about the startups and he’s actually paid by the startups to do a big profile of them, and they give him access to what their business is doing and their plans and things like that. But he’s very upfront about it, he’s clear that he’s getting paid to do it. And I think that’s fine, as long as he’s super transparent about the fact that money’s changing hands here, but in exchange, he does get lots of interesting information in the way the company thinks about the business and their opportunity that I don’t get because I’m just someone sitting on the outside relying on earnings calls. That’s a highlight of my professional life, despite my name escaping him. Ben Thompson is, of course, one of my business analysis idols, and the quote shows why. He captured exactly what I’m going for with these Sponsored Deep Dives: the win-win-win. * I get to write about companies that fascinate me with more access than I’d get as a full outsider or even a journalist, and make money so I can keep doing this.* The sponsor gets an outside perspective on their business, and the chance to share their story with the smartest group of people on the internet.* You get a behind-the scenes look at startups that are shaking things up, and a new product that can be useful (and typically help you make money).If you want to learn more about the process behind the deep dives: read here. I will always tell you how I’m getting paid - CPM or CPA; today is a combination of the two. Today’s sponsor, Alto, is one of those “I can’t believe they’re actually paying me to write this” companies, because not only am I personally fascinated by the space they play in, I also got smarter about my retirement savings in this research process than in the entire rest of my life combined. Plus, Alto’s CRO Tara Fung is an actual, long-time Not Boring reader! IRAs aren’t as boring as I thought. Let’s get to it. AltoIRA: The World’s Least Boring IRAIRAs, But Not BoringLet me get a confession out of the way upfront: for most of my adult life, I thought that retirement accounts were so boring. Individual Retirement Accounts (IRAs), 401ks, pensions… I knew I had to max my contribution every year, and it hurt, because I assumed that the only option was to have the money sit in a mutual fund and earn average returns. I have friends (and a wife) who get real joy from figuring out whether a traditional IRA makes more sense for them than a Roth, but honestly, I zoned out whenever those conversations started. My apologies to 59-and-a-half year old Packy. But in November, my friend Nikhil tweeted a screenshot memo about his investment in AltoIRA, and I took note. AltoIRA is a self-directed IRA for alternative investments. Instead of blindly putting money into index funds and letting it sit there until you retire (or, uhhh, die), AltoIRA lets you invest your retirement savings in startups, art, crypto, real estate, and more, as easily as you’d expect from a modern technology company. It gives regular investors access to the type of diversification that the pros use to construct their portfolios, with the compounding benefits of deferred taxation. It’s a product I didn’t even know was possible, but have been waiting for all my life. Alternative asset investment startups like Masterworks, Fundrise, Pipe, Rally Rd., AngelList, and Republic are among my favorite subjects to write about. The fact that regulation and technology are working hand-in-hand to let anyone build the types of portfolios wealthier, more sophisticated investors long have is an incredible thing. AltoIRA gives people access to a meta-trick the ultra-wealthy use: investing in alternatives from your retirement account, with the same tax advantages as the passive IRA you’re used to. Accredited investors can even invest in Not Boring Syndicate deals in their IRA, through a direct partnership between Alto and AngelList. If you think I’m going to keep my entire IRA generating average returns in Wealthfront when AltoIRA exists, you haven’t been reading Not Boring very closely. I’m in the middle of transferring 20% of my IRA into Alto as we speak. Today, I’ll tell you why: * Retirement Accounts, Taxes, and Alternative Assets. I’ll try to convince you that I was wrong, and retirement accounts actually aren’t boring, particularly with alternatives. * Meet AltoIRA. What is AltoIRA and how does it work? * Why Now? The intersection of regulatory, market, and technological trends make now the ideal moment in time to build what Alto is building. * Alto Everywhere. Soon, investing with your IRA will be as easy as investing with your bank account.If you can’t wait to get started, you can sign up for AltoIRA using the special Not Boring link here:But we’re here to learn, too, about why the combination of IRAs and alternative investments is so powerful. So put on your party pants and come explore the world of retirement accounts with me. Retirement Accounts, Taxes, and Alternative AssetsLet’s start with why I was wrong not to care about optimizing my retirement accounts: there is so much money in retirement accounts, and the benefits of doing it right over time are massive.In the United States, there are 150 million retirement accounts that hold over $33 trillion in assets. Excluding home equity, retirement accounts comprise 70% of the average American household’s investable assets.This is by (very old) design. In the US, pensions started as early as the country, with lifetime incomes for military service, but the structure we have in place today largely comes from 1913. That year, the states ratified the 16th Amendment, giving the Federal government the right to impose a federal income tax. At first, pensions were taxable, but the Revenue Act of 1921 exempted retirement accounts from a person’s taxable income. Since then, the system has evolved, but the purpose (shield retirement revenue from taxes) remains the same. Today, there are five main types of retirement accounts: * IRAs: Account that individuals can use to save for retirement with tax advantages. There are two main types -- Traditional IRA and Roth IRA -- as well as others like SEP IRA and SIMPLE IRA. Traditional IRAs are funded with pre-tax dollars and grow tax-deferred, while Roth IRAs are funded with post-tax dollars and withdrawals are tax-free. * 401(k)s: Also known as “defined contribution,” accounts that companies offer to employees. Employees can fund accounts pre-tax through automatic payroll withholding, and companies often match up to a certain % of employee contributions. Like IRAs, there are Traditional and Roth, with the same funding and tax implications. * Public Pensions: Also known as “defined benefit” because they guarantee a set payment in the retirement for the rest of the beneficiary’s life. These are government-funded.* Private Pensions: Like public pensions, but company funded. * Annuity Reserves: Mainly issued by insurance companies, annuities let someone pay in while they’re working in exchange for defined payouts after they retire. For the rest of this piece, we’ll focus on IRAs: they’re the largest category, with $11.3 trillion in assets, and expected to be the fastest-growing as people switch jobs more frequently and pursue employment in the gig and passion economies, and as baby boomers retire. Why do people keep such an enormous percentage of their investable assets in IRAs? Taxes. People hate paying taxes, and will do anything to avoid them, even if it means keeping money tucked away until retirement. For tax-inefficient investments (i.e. not opportunity zone real estate investments or muni bonds) or potentially high-return investments, like venture and crypto, an IRA lets you grow your investments tax-deferred, and may avoid capital gains altogether. Historically, though, individuals have done what I’ve done: set it, forget it, and let Fidelity or Vanguard or Voya or Wealthfront or whoever invest in public market equities and bonds via mutual funds and ETFs. As a result, a huge percentage  of retirement funds are controlled by a tiny number of balance sheets. Only 2-5% of individuals’ retirement portfolios are in alternative assets like real estate, startups, crypto, credit, and art. That seems OK, until you realize that it’s not at all how the pros do it. Professional retirement investors put an average of 25% of their portfolios in alternative assets, and the Yale Endowment, which is famous for pioneering the Endowment Model of portfolio management, puts up to half of its portfolio into alternatives. The idea that professionals invest more aggressively into alternatives than individuals should be familiar if you’ve been reading Not Boring for a while, as should the reason they do it. In Fundrise & The Magic of Diversification, I boiled Bridgewater founder Ray Dalio’s seminal paper, Engineering Targeted Risks and Returns, down to the following sentence: Allocating money across a diversified portfolio has historically generated better risk-adjusted returns than concentrating in just stocks, bonds, or even the traditional 60/40 split.I cited that idea in my piece on art investing platform Masterworks, too, to explain why allocating a portion of your portfolio to art, which has historically had an incredibly low correlation to equities, is a smart way to boost risk-adjusted returns. Diversification is central to understanding the magic of alternative investments generally; taxes are central to understanding why non-taxable funds with long time horizons, like retirement plans and endowments, get better returns from alternative investments than taxable funds.To understand why, let’s look at two $100k portfolios, one taxable and one tax-deferred, that invests in alternative assets over 30 years and make a new investment that doubles every five years, assuming a long-term capital gains tax of 15%. For the first decade, after the first two liquidity events -- think a portfolio of startup investments, most of which fail and one of which returns 2x the portfolio every five years -- things look pretty even. But at each turn, a 15% capital gains tax is getting removed from the investable amount in the taxable portfolio, whereas the IRA portfolio can keep doubling its money. After 30 years, with the exact same investments, the IRA is worth $2.4 million, or 60%, more than the taxable portfolio! It’s not just pension funds and endowments that understand and leverage this financial alchemy. Smart individual investors do, too. PayPal co-founder and Affirm founder Max Levchin made an early investment in Yelp through his Roth IRA that netted him nearly $100 million in tax-free gains (assuming he doesn’t cash out until he’s 60). Peter Thiel made a portion of his early Facebook investment through his Roth, potentially generating almost $1 billion in tax-free gains.Levchin and Thiel are two of a handful of people in the country that use self-directed IRAs to shield gains from taxes. In 2014, the Government Accountability Office (“GAO” or “narcs”) wrote a report called Individual Retirement Accounts: IRS Could Bolster Enforcement on Multimillion Dollar Accounts, but More Direction is Needed From Congress. Catchy. In the report, the GAO highlighted a small number of people with IRA balances over $5 million dollars and argued that the government was losing out on millions of dollars in tax revenue because these people were able to accumulate larger IRAs than the government anticipated. How were they doing it? Using their IRAs to invest in early-stage, private tech companies at low valuations and avoiding or deferring capital gains taxes on successful investments. At the time of the report, there were only 9,137 people in the entire country with IRA balances over $5 million. There’s nothing legally holding regular investors back from using Self-Directed IRAs like the ultra-wealthy, but to date, they’ve been largely underused. Of the $33 trillion in retirement assets, only about $50 billion, or 0.15%, are self-directed, for three main reasons: * Inaccessible. Vanguard, Fidelity, Schwab and the other retirement giants don’t allow self-directed alternative investments; you need to open a Self-Directed IRA with a specialized custodian. * Complex and Painful. Have you ever tried doing something as simple as moving your retirement account from one provider to another? It’s slow, manual, and confusing. Now multiply that by 1,000 and you’ll get a sense for what trying to invest through an incumbent Self-Directed IRA custodian is like. * Expensive. Self-Directed IRAs are built on very outdated systems, have high cost structures, and pass those costs onto customers, making investing out of them prohibitively expensive unless you’re writing very large checks. AltoIRA is fixing that, and making the same strategies used by the 0.03% available to everyone. It wants to shift the balance of retirement investing from a tiny number of gigantic balance sheets to a gigantic number of tiny balance sheets. Meet AltoIRA AltoIRA came about, as many startups do, from personal frustration. When Eric Satz, a serial entrepreneur and investor, tried to make an investment through an old school Self Directed IRA custodian and spent eight weeks going back and forth on documents, with fees that changed the deeper he went. This is what Eric’s experience, and most Self-Directed IRA experiences, looked like:Eric hates inefficiency and the bullshit pricing that comes with it, so he set out to build a product that made the process as easy as it should be in this millennium. The result is AltoIRA, the easiest way to invest in alternative assets with your IRA and generate tax-advantaged returns. It uses software to eliminate the complexity and high costs of traditional self-directed custodians, and makes it easy to open, fund, and invest out of your account, seamlessly, online. When AltoIRA is successful, it will be as easy to invest out of your IRA as it is to invest out of your bank account. I opened my own AltoIRA account last week, and it took three minutes. The only painful part was figuring out my account number on my ADP/Voya 401K account in order to initiate the transfer (turns out, it was my social security number, which I found out after clicking around the website for 45 minutes and waiting on hold for another 20). If you want to start fresh instead of transferring an existing account, you can directly contribute up to $6k per year in a couple of clicks. Once your account is funded, you can use AltoIRA to invest in a wide range of alternative assets, from startups (via partnerships and direct integrations with AngelList, Republic, and WeFunder) to art (via Masterworks) to farmland (via FarmTogether) to growth stage private companies (via EquityZen) to real estate (via Diversyfund) and more. If Alto doesn’t have a partnership set up with a particular platform, you can ask them to set one up, or invest one-off in off-platform deals (ie., deals you find and bring on your own), like buying an investment property or investing in a startup that’s not offering shares through an online platform. One of the things I like most about Alto is that since 70% of peoples’ investable assets are tied up in retirement accounts, even people who have a lot saved up might not have the cash on hand to invest in alternatives. Alto eliminates the trade-off between maxing out your retirement savings and investing in assets that might make your retirement a lot more comfortable. To that end, Alto also offers a Crypto IRA, which lets you buy over 30 cryptocurrencies through your Self-Directed IRA, through an integration with the Coinbase exchange. Plus, buying and selling crypto can be an absolute tax nightmare, because even using Bitcoin to buy Ethereum, or any coin to buy another, counts as a taxable sale. If you’re active, those add up, causing high costs and reporting headaches. By investing through an IRA, you can avoid those headaches. Alto makes money by charging 1% annually on the account balance to cover custody, insurance, and cold storage costs, and a 1.5% fee for each transaction. Alto is able to deliver a Self Directed IRA product at a much lower cost than incumbents because it’s built from the ground up on new technology, including direct integrations with alternative investment platforms, which gives it a lower cost structure than incumbents. As a result, Alto doesn’t charge based on the size of your account or investments; it charges an annual flat fee and flat per-investment fees. There are two account types (in addition to Crypto): * Pro. Bring your own deals, and invest through Alto’s platform partners, for $250 per year and $10-$75 per private investment.* Starter. If you just want to invest through Alto’s platform partners, like AngelList, Republic, and Masterworks, you can pay $100 annually and $10-$50 per investment. Since I’ll mostly be using AltoIRA to invest in startups via the Not Boring Syndicate, I went with the Starter plan. If you want to take control of your IRA, diversify your investments, and generate tax-advantaged returns, try it out by setting up an AltoIRA account now: Once you explore it, you’ll wonder why no one’s built this before. Why Now?One of the questions venture capitalists love asking the most is, “Why now?” What regulatory, market, or technological changes make it such that this idea couldn’t have worked in the past, but can now. It’s a question I asked Eric multiple times about Alto, because this seems like an idea that should have existed before; turns out, now is the right time across all three factors. Regulatory. The government is making moves to democratize alternative investments. As I’ve written about before, Reg A+, passed as part of the 2012 JOBS Act, let companies raise up to $50 million per year from non-accredited investors. Reg D 506(c), also part of the JOBS Act, allows private placements of any size to be generally solicited. This is the regulation that lets people with Rolling Funds and traditional funds on AngelList talk about them publicly (👀). Reg CF, passed in 2015, let online platforms solicit just over $1 million in crowdfunded equity investments with less onerous requirements than Reg A+. In 2020, the SEC raised the Reg A+ limit from $50 to $75 million and the Reg CF limit from $1 million to $5 million, and also took steps to broaden the definition of accredited investors. Instead of being solely based on income or wealth, an investor can become accredited based on professional history or by obtaining certifications. This means that more people will be able to invest more money than ever before in alternative assets, an obvious tailwind for Alto.Market. As a result of Reg A+ and Reg CF, a wave of new alternative investment platforms have sprung up over the past few years, including companies we’ve covered here, like Masterworks for art, Fundrise for real estate, Republic for startup equity crowdfunding, Rally Rd. for collectibles, and more. These companies provide easily accessible central hubs for various types of alternative investments, which makes it relatively easy for Alto to form a small number of partnerships to access thousands of deals instead of handling each investment one-off.Technology. Alto interfaces with partners through a series of APIs, both the partners’ and Alto’s. On the partner side, for example, Alto works with Coinbase’s exchange API to facilitate seamless crypto investing all on the Alto platform. Alto also builds its own APIs that partners can plug in to add “Invest with Alto” as a payment option at checkout, making investing from your IRA as easy as investing from your bank account, right within the flows through which you normally invest.   It no longer makes sense for individual investment portfolios to be limited to just public equities and bonds. I’ve written about it before and I’ll write it until I’m blue in the face; we are finally at a point at which regular people can invest like the ultra-wealthy have for decades, and I support anything that makes it easier for people to do so, responsibly. Given the tax benefits over time, this is doubly true for retirement accounts. That’s why I’m so bullish that now is AltoIRA’s time. Alto EverywhereAlto is just getting started. It spent the first eighteen months of its life heads-down, building, and getting things right (you don’t want to make mistakes in fintech). After letting in its first Alto IRA accounts in May 2018 and its first Crypto IRA accounts in early 2020, and growing steadily, Alto more than doubled funded accounts and tripled total assets under custody between September 2020 and today. Its time has come.  The crypto boom helped -- Alto is the easiest way to invest your IRA in crypto, and a bunch of smart people realized that right in time to catch Bitcoin’s run-up. Despite the strong early growth, though, it is still comically early in Alto’s quest towards its ultimate vision: Alto everywhere. For the first three years, it was focused on building something better than a traditional self-directed IRA; now, it wants to make investing out of your IRA as easy as investing with your bank. I asked Eric how he’ll know he’s achieved what he set out to, and he told me he’s looking for two things: * “Whoever the CEO of Southwest Airlines is calls me and says, ‘How do you treat your customers so well?’”* “BlackRock wakes up one day and says, ‘What the fuck just happened? How did we miss that?’” Those two together represent what it’s going to take to get there -- treating customers absurdly well in an industry in which they’ve historically been treated with hostility (as I can attest from my experiences with Wealthfront and Voya/ADP) -- and what the world will look like when they do -- when the world’s largest investment managers realize how much the balance of power has shifted from their tiny number of massive balance sheets to our millions of tiny balance sheets.When I asked Nikhil how big he thought Alto could get, he said: I increasingly think about Alto as the enabling platform or layer for alternative investing. Like PayPal, it will enable you to pay in a bunch of places, but it’s also a consumer destination site. It can become the payment mechanism for investing in alternatives, and a macro bet on the rise and democratization of alternatives.Today, you can invest from your IRA directly into twenty platforms, at the click of a button. One day, you’ll be able to invest from any retirement account into any alternative asset, seamlessly, from Alto or directly in your investing app of choice. Personally, I’m excited to see the “Invest with IRA” button pop up on all of the alternative investing platforms I love, and to bring a bunch of people in the Not Boring Syndicate on to the platform so that we can reap the tax advantages of investing in startups through our retirement accounts. (True story: as I was writing this, Carlos Collantes, one of the Not Boring LPs, messaged me about an investment and said, unprompted, “Alto already has our funds on the way.” I asked him how he liked Alto, and he said, “The experience with Alto has been flawless. It is awesome that I can use the (for a long time) untouchable money in the 401k to shape the near future.” You can’t make this stuff up, folks.)If you’re like me, you’ve read this far and you’re thinking, “Cool, I’m just going to move it all to Alto.” That’s probably not the move. I showed real restraint, and am doing 20% of my retirement account, which Eric said is in range with accepted wisdom on alternatives, and with what the average professional retirement investor does. Obviously, as with anything, before making investments, do your own research! If you want to invest like the pros and self-direct some of your retirement account into alternatives, sign up for AltoIRA at the Not Boring landing page today: Thanks 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 744 newly Not Boring people who have joined us since last Monday! If you aren’t subscribed, join 33,302 smart, curious folks by subscribing here:Hi friends 👋 ,Happy Monday! If you’re in the US, I hope you’re enjoying some time off for President’s Day. I like mixing it up ever so slightly on holidays. On our last US holiday, MLK Day, I wrote a longer-than-usual Not Boring Investment Memo on Antara. Today, I’m going to go the opposite way, and try to write the shortest post I’ve written in a long time.Specifically, here’s the challenge I set for myself: explain what’s happening in the private and public tech markets in a novel way in only the space Substack gives me (no “Continue Reading” button).As you know if you’ve been reading this, it’s a lot easier for me to write long than write short, so this was a fun exercise. I’d love to hear your feedback on the format: text my OpenPhone number at 1-917-818-0620.But first, a word from our sponsor… Today’s Not Boring is brought to you by… FutureFuture is the 1-on-1 remote personal training app I’m relying on to get and stay in shape. I’ve been using Future since December, and I’m hooked. My coach, Alex, and I talk every day about the workouts, adjustments, how my creaky knee feels, and how I can improve my diet. A couple of weeks ago, Future introduced Challenges, a competition to see who can complete the most workouts in 45 days. I’m battling Future CEO Rishi Mandal and fellow newsletterer Mario Gabriele, and I’m currently in last (see above, though I snuck one in this AM and am at 15). Losers owe the winner a share of Roblox, and I don’t like losing; time to pick up the pace.If you’ve been looking to get healthier, shed a couple pounds, or get in the best shape of your life, join us on Future and get your own expert coach to guide and push you. Use the link below to Challenge me and get your first $45 days free:Let’s get to it. Dreams All The Way UpIt Feels Like a Bubble, But It’s NotTech is not in a bubble, even if it feels like it is. Compared to the biggest tech companies, the best startups and smaller public companies may actually be undervalued despite record high valuations. In his classic A Random Walk Down Wall Street, Burton Malkiel wrote, “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” Were the Princeton economist writing an updated version today, he might say, “A blindfolded monkey throwing darts at Robinhood could select a tech stock that would have doubled over the past year.”And it’s not just public tech stocks. Private market tech company valuations have soared too, with companies raising seed rounds at $20 million pre-revenue, Series A’s at valuations in the hundreds of millions, and Series B’s worth a billion. Robinhood faced an existential crisis two weeks ago, and then raised $3.4 billion in less time than it takes me to invoice a sponsor with bill.com. It’s as if every venture capitalist has become Masayoshi Son. It feels like frothiness that would make a barista jealous. But what if I told you that startups aren’t overvalued today? They’ve actually been undervalued for the past decade and are just catching up. Let’s turn it over to Sir Roger Bannister to explain. The Four-Minute Mile and the Market In the late 1860’s, when the mile record stood at 4:36, runners around the world started seriously attempting to break the four minute barrier. Three different Walters in a row traded the record, bringing it down below 4:20 by the mid 1880’s. Between 1942 - 1945, two Swedes, Gundar Hägg and Arne Andersson, traded the record four times, driving it down from 4:06.2 to 4:01.4, a nearly 5-second improvement in just three years. And then, nothing. The record stood, unimproved, for the next nine years, until Roger Bannister stepped up to the starting line at Iffley Road sports ground in Oxford. Bannister took two seconds off the record, completing his mile in 3:59.4 and becoming the first person in history to break the four-minute mile. His record stood for 46 days. John Landy smashed it with a 3:58.0. A year later, three runners broke the 4-minute mile in the same race, and today, over 1,500 people have run a competitive mile in under four minutes. Hicham El Guerrouj holds the world record with a 3:43.13 that he ran in 1999.The moral of the story here is that there wasn’t necessarily anything physical keeping humans from breaking four minutes; it was mental. When people saw it could be done, they just kind of … did it. Bannister, through extraordinary performance, eliminated a mental barrier, and afterwards, other great but not all-time exceptional runners followed his lead. In the public markets in the 2010s, the $1 trillion market cap was the four-minute mile. As someone who owned Apple stock and options earlier in the decade, I can tell you how frustrating it was that the stock seemed to trade at a discount (sub-10x P/E ratio) simply because it was so big, despite insane profitability and growth. $1 trillion felt like a restraining wall.Then, on August 2, 2018, an extraordinary company broke another mental barrier, when Apple became the first US company to crack the $1 trillion market cap mark. What happened next wasn’t quite the immediate flood that Bannister unleashed, but within 16 months, by January 2020, three more companies -- Microsoft, then Amazon, then Google -- had broken $1 trillion. FAAMG had been undervalued across the board. Since Apple couldn’t break $1 trillion for psychological reasons, and it was clear that the other four weren’t as valuable as Apple, they had to be worth some discount to Apple’s artificially low market cap. Note: FAAMG is a weird acronym for the biggest tech companies -- FB, AAPL, AMZN, MSFT, GOOG. They’re a good proxy for how big the market thinks tech companies can get.Apple took the governor off, and today, after a wild, tech-friendly pandemic and zero interest rate policy (ZIRP) drove stocks higher, the FAAMG market caps are:* Apple: $2.273 trillion* Microsoft: $1.848 trillion* Amazon: $1.651 trillion* Google: $1.415 trillion* Facebook: $770 billionIf certain parts of the market feel bubbly, these companies don’t. They’re category-defining companies that continue to grow and innovate at a faster clip than megacaps ever have before, and they trade at very reasonable NTM EV/EBITDA multiples: * Apple: 22.0x* Microsoft: 24.8x* Amazon: 22.4x* Google: 15.4x* Facebook: 13.1x That’s not bubbly. Poking fun at the bubble talk, Michael Batnick tweeted this chart: That’s Amazon’s revenue, not its market cap. Insane. If Amazon keeps up that pace, $1.6 trillion will seem cheap within half a decade, which will make other numbers that seem big today seem smaller. The bar will keep getting higher. The market caps of the FAAMG companies are the most important numbers in the market, because consciously or not, investors are pegging their private and public tech company investments against them. Price / FAAMG RatioInstead of Price/Sales or Price/Earnings, high-potential tech companies are subconsciously being valued on Price / FAAMG, or a probability that those companies will become as big as today’s biggest, and it’s not crazy.(If I’m wrong, and we actually are in a bubble that’s about to pop, this is the statement that’s going to get me roasted.)Let me explain. Traditionally, companies are valued based on a multiple of their earnings or profits per share (Price/Earnings or P/E), or if they’re earlier in their journey and growing fast but still unprofitable, on a multiple of their revenue (Price / Sales or P/S), or a free cash flow multiple, or some other financial metric. But today, in both private and public markets, with P/E and P/S ratios at uselessly high levels, it seems like companies are being valued on a rough probability that they can become as big as the biggest companies, which are themselves more valuable than ever before. With the $1 trillion barrier broken, and $2 trillion taken down within a year, there’s no more psychological ceiling. That’s where the seemingly crazy prices are coming from.Now of course, this kind of valuation takes a healthy dose of optimism, and this market is ripe for dreaming, for reasons we’ve covered before: * Tech Strength. Tech companies are actually benefiting from COVID as more activity and commerce moves online. * More Cash and Envy. US personal savings rates doubled, from 7.3% to 14.1%, over the past year. People are seeing their friends get rich and want to put their savings to work.* The Fed. The Fed is printing money, and providing a backstop that makes risky assets less risky. * Rates are at all-time lows. That means money is cheap and investors are turning to equities (and alternative assets, including venture) for yield. It also means that… * Discount Rates are low. Discount rates are how investors figure out what future cash flows are worth today. We’re not there, but for illustrative purposes, a discount rate of 0% would mean that an investor values $1 billion generated in 2031 as much as $1 billion generated today. In a structurally risk-on environment, people aren’t looking for reasons not to invest, they’re looking for justifications to invest. They want to put their money to work and they don’t want to miss out on the next $100 billion, $1 trillion, or even $2 trillion company. I don’t think they’re wrong to think that way. In fact, relative to the biggest tech companies, the best startups and smaller cap tech companies are still undervalued compared to a decade ago. Here’s my logic: FAAMG stocks seem to be reasonably priced and good anchors off of which everything else is pegged. FAAMG (particularly Amazon and FB) market caps have actually grown faster than startup and non-FAAMG public tech valuations. Startup and non-FAAMG valuation growth is just starting to catch up to FAAMG growth over the past year. Startups and smaller cap tech companies are being valued based on a probability that they can become as big as the FAAMG companies (or the biggest companies in their verticals), and even at the same probability, they should be worth 5-15x as much as they were worth a decade ago, because the ceiling has risen that much.In other words, if you think that FAAMG are reasonably valued, and you think that the probability of newer companies coming in and eventually growing as big as the biggest tech companies is about the same as it was a decade ago, startups and smaller cap tech companies are actually fairly valued or even undervalued today.   To illustrate, let’s keep it simple and look just at startup data, using post-money valuation data on US startups from Pitchbook. Here’s a chart of the growth of startup valuations versus FAAMG over the past decade: Facebook (since its 2012 IPO) and Amazon have both smoked startup valuation growth at every stage, and only later stage valuations (Series E and beyond) have grown faster than Microsoft or Apple (Google has been a slow-grower, not even quadrupling). Looking at average US startup valuations versus both Apple and Amazon’s market caps paint an even clearer picture. Early stage startups (Seed, Series A, Series B) are actually worth less as a percentage of Apple’s market cap than they were a decade ago. Later stage companies have grown their valuations relative to Apple, especially in the past few years, but the average Series D valuation is still only one-tenth of one percent of Apple’s market cap. Startups at every single stage are worth less of Amazon, on average, than they were a decade ago. With lower discount rates over the past year, it makes sense that spreads would compress: startups’ hypothetical cash flows are further in the future than FAAMG’s, so the lower the discount rate, the more startup cash flows will be worth relative to FAAMG’s. As Will Fang put it when we were discussing this idea, “When the discount rate is near-zero, time value isn’t really a thing anymore, so it's not a matter of when company x can win, but if it will eventually.”It also makes sense that late stage is catching up more quickly than earlier stage. At the later stages, there’s a clearer picture of who will win and a clearer line of sight into what the winners’ cash flows might be than for earlier stage companies. There are also fewer later stage companies, and their averages aren’t dragged down by as many low-probability-of-success companies as earlier stage valuations. Averages are obviously imprecise but they paint a pretty clear picture here: you can abstract away a lot of complexity by thinking about startup valuations as the probability that they can grow as large as Facebook, Amazon, Apple, Microsoft, or Google. The higher the valuations of the biggest tech companies, the higher the potential valuations of any startup. Take Clubhouse, for example, which was recently valued at $1 billion before earning a dollar. Helllloooo bubble, amiright? Nope. $1 billion means investors are pricing in a 1/770 shot it can become the next Facebook, a 1/100 shot it’s the next Snap, or a ~1/50 shot it’s the next Twitter. Adding credence to the P/FAAMG methodology, FAAMG haven’t only proved that companies can get really big from a market cap perspective, but also that their eventual success isn’t clear from looking at the early financials. Facebook and Amazon’s financials looked silly early on -- Facebook not monetizing for a long time, Amazon intentionally keeping itself unprofitable -- but their strategies have been proven right in the long-term. Facebook was once a laughed-at $98 million Series A with no revenue, back in 2005 when $98 million was a lot, and look at it now.Lack of revenue or profits can’t be a disqualifying signal, as long as there’s a sensible plan to get there, eventually. PLUS, entrepreneurs now have the benefit of seeing both how those companies executed, and how they’ve talked about themselves, so they know the right things to do and say. Plus plus, the tools are better now, so it’s easier to get bigger, quicker than it was for any of the FAAMG companies. This also works within verticals; valuations can be viewed as the probability that they become as large as the largest company in the space. That explains why some verticals get hot when its biggest companies break out, like Stripe in fintech or API-first or SpaceX in space tech. Within a given stage, most companies will fetch a lower-than-average valuation, reflecting a lower-than-average probability that they will get massive, and a few will fetch much higher valuations, reflecting their higher probability. That makes sense, and explains the wide range of valuations within any given round. Some companies have a much higher probability of reaching FAAMG / best-in-class status than others. Case Studies: Stripe and ShopifyThe averages let us know we’re on the right track, but looking at specifics within all of that data drives the point home. One example is Twitter, which I wrote about last week. I hadn’t fleshed this idea out as fully, but wrote about the dumb idea that Twitter had a lot of room to run because other major tech companies, particularly Facebook, are worth more than 10x as much. The next day, it reported good earnings. The stock is up 26.6% since I hit send, because the narrative started to change, and investors started dreaming about its potential relative to Facebook’s. Time will tell if it gets there. Let’s take a look at two more: Stripe and Shopify. StripeStripe illustrates how valuation in this market is dreams all the way up, because its ceiling is impacted by the very biggest companies, and it, in turn, impacts the ceiling of API-first and fintech companies at earlier stages.Stripe is rumored to have raised at a $100 billion valuation recently, and rumors of secondary market transactions in the $125 - $150 billion price range abound. Most people I’ve spoken to about it don’t know what Stripe’s numbers look like; instead, they’re saying things like, “There’s a very good chance this is a $1 trillion+ company, the next FAAMG, so even if $150 billion feels expensive today, this could 8-15x.” Stripe is kind of in a league of its own, without a perfect comp among FAAMG. But it has that “this could become the biggest company in the world” mystique around it. The biggest company in the world, today, is Apple at $2.27 trillion. That’s a high ceiling. Even if it’s just Visa, with its $448 billion market cap, that’s a 3x. With Stripe as an anchor, API-first startups are raising at big valuations. In November 2020, Checkr, which is an API-first background check company, raised at a $2.2 billion post-money valuation. In January, Check, which is building a payroll-as-a-service API, just came out of stealth and raised a $35 million Series B (led by Stripe and Thrive), which likely values it somewhere near $300 million post-money. Those feel high for their rounds, but translate to a 1-in-45 chance that Checkr achieves what Stripe has to-date, and a 1-in-8 chance Check achieves what Checkr has, with some slight discount for time. Those seem like reasonable bets to make given that they’re two massive, perfect API-first use cases, of which there aren’t many, run by strong, experienced teams with great early traction. I’d rather invest in Checkr and Check than ten “cheaper” but worse API-first companies — you get what you pay for.Shopify and AmazonShopify’s relationship with Amazon is the textbook example of P/FAAMG valuation. Since going public in May 2015, Shopify’s stock is up over 5,000%. It’s currently trading at a 60x NTM EV / Revenue multiple and a 395.7x NTM PE ratio. Those are both very high numbers if you’re valuing Shopify based on the fundamentals, and indeed, Shopify has felt expensive at almost every point on its meteoric rise since late 2018. I made this chart back in May to describe what it’s felt like thinking about investing in SHOP: Since then, it’s up another 90%. Crazy, right? But what if you look at SHOP’s valuation as a probability that it will become as big as Amazon?Breaking apart SHOP’s valuation that way, there are two factors: how much has Amazon grown, and how much has the probability that Shopify becomes as big as Amazon changed? * Amazon Market Cap. Over the past five years, Amazon has grown its market cap 6.7x, from $245 billion to $1.65 trillion. * Probability SHOP Becomes AMZN. The implied probability that Shopify becomes Amazon, based on their relative market caps, has increased from 0.68% to 10.76%, not taking into account the fact that Amazon is likely to continue to get bigger as SHOP catches up. Let’s assume Amazon’s future growth and the discount rate come out in the wash, which is conservative, and we’re left with an ~11% chance that Shopify becomes as big as Amazon. If you believe that Amazon is fairly valued, and that an 11% chance of Shopify becoming Amazon is reasonable, then Shopify’s market cap isn’t as crazy as it seems from looking only at traditional valuation metrics.Onwards and UpwardsThere’s a trope going around that since companies are raising more, earlier, at higher valuations, investors need to sit out or sacrifice returns by ignoring price to get into the hottest deals. After digging into the numbers, I just don’t think it’s true. The ceiling for these companies, as represented by the market caps of the biggest tech companies, is 5-15x higher than it was a decade ago, and should FAAMG keep growing, that ceiling may be 5-15x higher in another decade.  As I’ve been thinking about this idea, the house from the Pixar movie Up keeps coming to mind. Startups and smaller cap tech companies are the old man’s house, FAAMG are the balloons, and Apple breaking the $1 trillion market cap threshold was the moment the house ripped away from its foundations and took flight. The balloons and the house keep floating higher, in lockstep. It makes sense for balloons to float, it feels weird for a house to float, but when you put the two together… the physics kinda work. That said, the averages obscure the specifics, and this is different from company to company and vertical to vertical. Some areas that feel expensive are actually probably cheap, held back by the psychological barriers of investing at prices that just feel too high, while other areas might be bubbles even if the prices are lower. Some balloons will undoubtedly pop. Take electric vehicles, a category in which there seems to be a new multi-billion dollar SPAC every day. The category will certainly grow, but the prices seem wild since they’re tied to the Tesla balloon. Tesla is a great company that may grow into its valuation, but at current multiples, it’s not as solid an anchor as FAAMG. Even if Tesla’s price proves to be right, some companies will win and some will lose, as always, but deals are pricing as if they’re all going to win. Nikola continuing to trade at an $8 billion market cap seems way out of whack -- bubbly. Or take Gamestop, which was trading on memes, or any number of penny stocks that rocket up 200% in a day. Those are microbubbles, and I’m not arguing that they fit into this framework. But bubbles like Nikola, Gamestop, and penny stocks seem to be contained mispricings of the probability of success, or downright speculation, as opposed to systemic overvaluation. There’s a very real chance that as FAAMG continues to grow, we don’t have a major market correction so much as micro-adjustments of each company’s probability of reaching the top. We’ll see more companies that raised at high valuations fail than ever before, but we’ll also see more companies reach the $100 billion and $1 trillion marks than ever before. Venture returns follow a power law, and that may become more extreme in the coming years.Then again, I might look back on this essay with shame in a few years. The market could cool off or pop, FAAMG could re-rate to the lower multiples typically enjoyed by the world’s largest companies, and both public and private tech company valuations could get slashed. I expect you to call me out if that happens. As for how to apply this? There’s not an easy framework to judge the probability that Company X becomes the next Amazon. This isn’t precise. It’s more of a sense check the next time you find yourself thinking, “It’s a bubble” or “It’s competitive out there so people are sacrificing returns to get into the hot deals or buy some growth.” Maybe there isn’t a trade-off between sitting out and being disciplined on price so much as a need for reframing what being disciplined on price means. The ceiling is higher than ever; it’s dreams all the way up. Thanks to Ben and Ronny for data help, and to Dan for editing.Thanks 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