Not Boring by Packy McCormick

Welcome to the 517 newly Not Boring people who have joined us since last Monday! If you aren’t subscribed, join 31,873 smart, curious folks by subscribing here:🎧 To get this essay straight in your ears: listen on Spotify (in about 45 minutes).This week’s Not Boring is brought to you by… FutureTwo weeks ago, I told you about Future, the 1-on-1 remote personal training app I’m using to fight off the dad bod. I shared my workout stats publicly to give myself some extra accountability, and it worked: I haven’t missed a workout since that email. Lest I get too comfortable, last week, Future upped the intensity by introducing Challenges, a global competition to hit 21 workouts with your friends. I have a bet going with Future’s CEO Rishi and friend of Not Boring Mario - whoever gets there first gets a share of $RBLX from the losers.Join in on the Challenge and get your first 45 days of Future coaching free bysigning up with my personal Challenge link:Hi friends 👋 ,Happy Monday! Last week was not normal. Your mom is asking you to explain Reddit and Gamma Squeezes in the same sentence. The markets feel unstable in the most internet-y way possible. So this won’t be a normal newsletter. If you write a newsletter that covers tech and finance, you kinda have to write about Gamestop / WSB / Robinhood. That means that plenty of really smart people have written great analyses. See: Jill Carlson, Matt Levine, and Alex Danco for some thorough and thoughtful takes. But I haven’t yet seen the take that I want to read: that this was inevitable. Given how Robinhood built and incentivized itself, it would have taken a black swan event for the company not to end up in this situation at some point. And it’s only going to get crazier. Let me get this out of the way upfront: I am clearly conflicted here, on both sides. Public has sponsored Not Boring, the Not Boring Syndicate invested in Composer, I know people who I like and respect who have invested in Robinhood, and I trade some of my money in Robinhood.None of those facts change the way that I think about this situation. I have the paper trail to prove it. I’ve been expecting this for years! The Robinhood story is a story about risk and chaos. If you introduce more chaos into the system than you’re ready to handle, the chaos is gonna getcha. Let’s get to it. Robinhood Robinhooded RobinhoodDo not be deceived: God is not mocked, for whatever one sows, that will he also reap.Galatians 6:7.Financial Chaos is a LadderFinance isn’t about good or evil. It’s about risk management. Hedge funds aren’t evil, Wall Street banks aren’t evil, regulators aren’t evil, retail investors aren’t evil. That’s one of the beautiful things about finance. It’s not about value judgments. It’s about numbers.Robinhood isn’t evil, either, it just made a risky bet with tremendous upside potential, kind of like the bets that many Robinhood traders make every day. Robinhood bet that it could introduce tremendous amounts of risk into the financial system, push all of it onto its users and the market at large, and insulate itself from the consequences. And it would have gotten away with it too, if it weren’t for those meddling kids! In the good old days, circa a week ago, when Robinhood was still Robin Hood and st0nks only went up, there was a meme that circulated every so often about what would happen to the market when Robinhood went public and Robinhood traders could trade Robinhood shares on Robinhood. Woah. It reminded me of that scene in Being John Malkovich, the one in which John Malkovich goes through his own portal and ends up surrounded by other John Malkoviches who can only say, “Malkovich.”Robinhood Robinhood Robinhood. There was also a meme, less cartoon and more condescension, among more serious markets types about what would happen to Robinhood traders when they got too long on margin and the market finally turned against them. They’d Robinhood themselves into financial ruin. Robinhood, this idea went, made it too easy for unsophisticated investors to trade on margin (borrow money to buy stocks or options). That works really well when stocks go up, and really poorly when they go down. If you own a bunch of stocks on margin, and the price of those stocks drops, you get hit with a margin call, and need to put up more cash, or sell the stock. Margin calls can be a killer, forcing traders to unwind at exactly the wrong time and lose a ton of money.Robinhood knew that the people who traded on its platforms (I hesitate to call them customers, because “if you’re not paying, you’re the product”) might get hit with margin calls, or might wipe themselves out by trading options without fully understanding them, or do any number of things that could lead to huge losses. And they did. The most infamous and tragic example occurred in June, when 20-year-old Alex Kearns committed suicide after mistakenly thinking he owed over $730k due to margin trading. But Robinhood, and I hope you’ll pardon my French here, did. not. give. a. fuck. Until now, Robinhood has been able to push all of the risk it facilitates onto its users and to the market at large, and hide behind language about market democratization.  The markets, it turns out, do not give a fuck either. Numbers are numbers. Words are just words.The delicious irony of last week is that by encouraging so many of its customers to make risky trades on margin, Robinhood Robinhooded Robinhood. It took on too much risk itself, got hit with a margin call of its own, and was forced to reveal whose side it was really on - its own. Them’s the breaks. This was bound to happen, and it will happen again. Every move that Robinhood makes seems to increase entropy in the system by encouraging riskier and riskier behavior by retail traders. While it would have been impossible to predict exactly how this would go down, it was very easy to predict that something like it would. That’s the nature of chaos. Today, we’ll cover: * We’re All Idiots. Me included.And options trading is really hard. * How Robinhood Makes Money. Looking at Robinhood’s incentives.* Robinhood, WSB, and Entropy. A look at Robinhood’s history and chaos. * Robinhood Robinhooded Robinhood. What happened last week? * Where Do We Go From Here? Will Robinhood end up like Uber or Napster? Please don’t get me wrong here: I firmly believe that people should be allowed to manage their own money. That genie is out of the bottle, thanks in large part to Robinhood, and that’s a good thing overall. It’s just that, if you’re going to facilitate and profit from chaos, don’t be surprised when that chaos turns back on you.We’re All IdiotsLet me start out with a personal story that colors my views on all of this.I started my career at Bank of America Merrill Lynch in 2009. When you work at a financial institution, they put all sorts of restrictions on your ability to trade: you need to get approval to buy stock or options on a specific company, you have to hold for thirty days, etc… The intention of the rules is to protect the bank. Banks don’t want their employees trading on insider information, of which there is necessarily plentiful amounts floating around. But those rules also protected me. When I quit in the summer of 2013, I owned a portfolio of stocks that I wanted to own for a long time. Facebook at $19, Tesla at $29, Apple at a split-adjusted $15. I even owned 38 Bitcoin at ~$100 because they weren’t subject to the bank’s restrictions. The list goes on, but I’m getting nauseous just writing it out. Quitting meant no more restrictions. Time to make the real money. I logged into my Merrill Edge account and applied for access to options trading. I checked all the boxes -- good salary, professional experience with options, Series 7 and 63 licensed, recently employed by Merrill itself -- and there was still a bunch of friction, but I finally got approved to trade options.Want to guess how the story ends? I got my ass handed to me. I made all of the rookie mistakes, like buying short-dated Apple calls into earnings, as if I had an insight that the millions of traders who watch Apple every day missed. Apple beat earnings - woohoo! - and my calls went to zero. My premium got wiped out by the vol crush. I wasn’t trading; I was gambling. Thankfully, I wasn’t trading on margin, or things could have gotten out of hand quickly. I tell you all of this for a couple reasons: * No Judgment. I don’t look down on “Robinhood Traders.” I’ve been there. * Options Are Hard. I was relatively sophisticated on paper and still got crushed. * I Know How This Story Ends. Trading naked calls when they’re going up is the most fun thing in the world; when they’re going down, it’s the least fun thing in the world. And Robinhood is in the fun business. My views on Robinhood are not colored by some patronizing opinion that other people -- retail traders, Redditors, the WSB crew, whoever -- are some special class of idiot not capable of options trading. We are ALL idiots. Even the hedge funds who trade options don’t do it based on the opinions of some special class of genius. They do it based on systems that allow them to predictably hedge risk, hence the “hedge.” If you’ve heard about Gamma Squeeze for the first time this week, for example, it’s made possible because hedge funds hedge. Here’s what it means: * If someone is buying a call option, someone else is selling it. That person theoretically has uncapped downside risk, since a stock can theoretically go to infinity dollars. * To hedge that risk, institutional investors who sell call options also buy the underlying stock to offset the risk based on something called “Delta,” which describes how sensitive an option is to a change in the price of the underlying stock. (They also Delta hedge if they buy an option, since they don’t want to take directional risk).* If the Delta is .20, the price of the call is expected to move $0.20 for every $1 move in the underlying stock, so the option seller would need to buy 20 shares to hedge the risk on the contract (options contracts are 100 shares). * With me? Ok. Well as the price of the underlying stock changes, so does the Delta. The rate of change of the Delta is called the Gamma. Roughly, Delta measures speed, Gamma measures acceleration.* All else equal, Gamma increases the closer the price of the stock is to the strike price of the call option, which means that as you get closer to the strike, Delta increases more quickly and the call seller needs to buy more underlying, faster, to stay hedged. * That drives the price up faster, too, as more people buy the stock, which means call sellers need to buy even more underlying to remain hedged, and so on. That’s the Gamma Squeeze. Still with me? That’s just one thing that happens with options, and probably the sexiest because acceleration is sexy and it works with you if you own the call. But to really understand options, we need to understand more Greeks, too. * Theta deals with time - how the price of the option moves as it gets closer to expiration.* Vega deals with volatility - the more implied volatility, the more expensive the option. Vega explains the “vol crush” that wiped me out when I traded Apple calls. * Rho deals with interest rates - options prices are sensitive to interest rates, too!I’ll stop, but I hope my point is clear: this shit is complex. Given all of that complexity, Robinhood’s options interface mayyyy be a level of abstraction or two too high:Depending on how you look at it, that’s “democratizing options trading” or making it way too easy so Robinhood can make money. How Robinhood Makes Money“Show me the incentive and I’ll show you the outcome.” Robinhood is clearly incentivized to get its users to take on risk; last week’s outcome was inevitable. Robinhood designed its product to encourage and facilitate margin and options trading, because that’s how Robinhood gets paid. It makes money in five ways:  * Selling order flow to hedge funds (“payment for order flow” or “PFOF”). They typically make more by selling options order flow than equities order flow. * Selling Robinhood Gold subscriptions for $5/month. * Providing margin to customers at a 2.5% interest rate (down from 5% in December). * Lending out securities to counter parties who want to short it. * Earning interest on cash balances.Let’s cover PFOF first, because it’s one of the most controversial and misunderstood issues surrounding Robinhood. PFOF is not inherently bad, and most brokerages do it. Here are two fun bits of history, though: * Know who came up with the idea for PFOF? Bernie Madoff. Yup. * Citadel, the largest buyer of Robinhood’s flows, wrote a letter to the SEC in 2004 arguing that PFOF should be banned. lol.Additionally, Robinhood makes more money for selling its order flow than most brokerages. FinTech Today asked some experts why that is back in July, and the answer comes down to three things: * The type of trader on Robinhood: easy for funds to assume they’re all unsophisticated given the simplicity of the interface, whereas it’s harder to tell on other platforms. * What they trade: a ton of options, many with wide bid-ask spreads* How Robinhood charges: a % of the spread vs. a fixed fee for most brokerages. Benn Eifert put it succinctly: “The profitability of order flow determines its pricing power. The product is the user, and high volume of non-toxic (uninformed) order flow in high spread options trades is highly profitable.” Saying Robinhood traders are unsophisticated isn’t mean; it’s facts. The market puts a price on how bad the trading on each platform is, and it pays Robinhood more than anyone else. The fact is, value judgments aside, the company is clearly incentivized to get people to trade more often, to trade more options, and to trade on margin. The ideal trader on Robinhood, from a revenue perspective, is a Robinhood Gold subscriber who frequently trades options on margin. That also happens to be the riskiest kind of trading behavior for the individual traders themselves.When things go wrong, which they inevitably do, and someone criticizes Robinhood, the company hides behind the guise of democratizing access to the markets, saying something like: It’s a free market! They’re adults! Are you saying they aren’t entitled to the same wealth creation opportunities as the big fancy hedge funds just because they weren’t born rich? We’re on the side of the little guy! Whose side are YOU on anyway? Elite… This is Silicon Valley 101. It feels wrong, using slick and disingenuous marketing to obscure misaligned incentives, but all of the big tech companies do some version of this. As long as it operates within the legal and regulatory bounds, though, Robinhood is able, and even fiduciarily obligated, to do whatever it takes to maximize shareholder value. But, as last week showed, Robinhood is also subject to the savagery of the market. It can’t externalize all of the real risk it generates with words alone. Robinhood, WSB, and Entropy Theory In 2013, two Stanford grads, Baiju Bhatt and Vlad Tenev, founded Robinhood, based, so the story goes, on two simultaneous events: Occupy Wall Street and the rise of mobile. They set out to build a mobile commission-free trading app that “untethered the financial markets from the typical computer setup with multiple monitors.” Between 2013 and 2017, Robinhood was a typical Silicon Valley startup. It used technology to make trading easy, and introduced innovations like commission-free trading and fractional shares, which genuinely democratized access to investing. By 2017, Robinhood had raised a little under $70 million. In April 2017, it became a unicorn when it raised a $110 million Series C at a $1.3 billion valuation from DST after crossing the 2 million mark and growing its Robinhood Gold Subscription product. Between the C and D, Robinhood introduced two products that would help fuel its growth - commissions-free options and crypto trading. In December 2017, when they rolled out options, I predicted how this was going to end. In May 2018, it raised a $363 million Series D at a $5.6 billion valuation. More than 3x growth in valuation in eight months implies that options trading was working well for the company, but it also introduced a whole new level of risk, for users and for the company itself.Between the Series C in 2017 and the beginning of 2020, Robinhood grew steadily from 2 million to 10 million users. Then COVID hit, and things started to get really interesting. Robinhood added 3 million users in the first three months of the pandemic. By October, akram’s razor estimated it had 16 million users.Meanwhile, a small subreddit called WallStreetBets, also started in the early 2010s, was growing slowly and steadily, too. Up to this point in the story, WSB and “Robinhood Trader” were practically synonymous. The terms both meant something like “particularly risk-seeking retail YOLO trader.” WSB fed off of Robinhood, and Robinhood fed off of WSB. Robinhood’s growth mirrors WallStreetBets’ almost perfectly. With Robinhood as their perceived brokerage of choice, in the very beginning of the pandemic, the WSB crowd stopped just talking and started pumping stocks like Lumber Liquidators, using the seeds of the tactics, like buying up OTM calls, they would eventually bring to bear on $GME.All through 2020, I watched both Robinhood and WallStreetBets. I thought they were both part of a larger shift, not just a temporary blip. The thesis of Software is Eating the Markets, which I wrote in October, was that: Software is eating the markets. Flush with cash and empowered by new tech platforms that blur the lines between investment, experience, entertainment, and digital assets, a segment of consumer investors are shifting money from consumption to investment.Consumer investors expect different things from their investments than professionals do and value assets differently as a result. New technologies, regulations, social trends, and asset classes mean that this shift is here to stay, and could continue to gain momentum after COVID is gone. This time, maybe it really is different. Retail traders value different things than institutional investors, and the experience of investing in and rooting for companies together is a non-trivial piece of the equation. In June, in Business is the New Sports, I wrote: If current trends persist, and retail investors (you, me, and everyone else on Robinhood and Public) continue to move the markets, then stock prices will be impacted more by fandom than fundamentals than they ever have before.I started getting a little skeptical about Robinhood later that month, though. In The Will Ferrell Effect, I included Robinhood in a group of “Meme Startups,” writing: Robinhood’s failure to build critical infrastructure and support before it went viral caused the app to fail on the market’s most volatile days, and contributed to a young trader’s suicide.In July, The Margins’ Ranjan Roy wrote a post called Robinhood and How to Lose Money in which he argued that: * Robinhood had too little friction to encourage good trading* The company, while not intentionally evil, prioritized growth over all else* Robinhood traders were “the gravy,” the unsophisticated counterparties that Wall Street sales people relied on to trade more at worse prices. He also pointed out that because of Robinhood’s business model, it makes more money the more people trade, which again, is not inherently bad, but colors how you look at everything they do. Robinhood is designed in a way that increases entropy, or chaos, in the financial system. On July 20th, partially inspired by Robinhood, I wrote a piece called Entropy Theory, in which I argued that markets and industries get more chaotic all the time, and the companies that win are the ones who wrangle the entropy, not the ones who create it. On July 23rd, in my investment memo on Composer, which is admittedly biased but nonetheless honest, I applied it to Robinhood: I think that Robinhood might be Napster. It’s not wrangling entropy; it’s creating it. It uses game mechanics to get less sophisticated traders to trade more, and makes wacky things happen in the market.Since then, I watched (and tweeted) as the theory played out:* October 7th: I noticed that Robinhood rolled out recurring investments (they launched in May). There’s nothing unique or wrong about that, and dollar cost averaging is actually smart, but with recurring investments, they can sell funds a calendar of when their users are going to be buying which stocks, weeks and months in advance. * October 16th: Robinhood emailed users to tell them that they were increasing margin requirements due to election volatility the next day and that they would be hitting users with margin calls if they didn’t adjust by the end of the day. * December 11th: Robinhood rolled out a new feature allowing users to buy options on the day they expire. Buying options on expiry day is straight gambling.* December 16th: Robinhood was accused of “gamification” of trading by a Massachusetts regulator.Throughout the pandemic, Robinhood continued to up the ante and introduce more risk in the name of democratizing access to investing. All of it brings us, predictably and inevitably, to the events of last week. Robinhood Robinhooded RobinhoodOn Thursday, January 21st, I got a text from my friend who spends the most time on Reddit: The two posts he sent me have since been deleted (although the comments remain), but the gist was that someone in WSB had this theory that, since GameStop was so highly shorted, they could all start buying up shares and put on a squeeze. It was well-coordinated, with real sophistication masked by tendies, diamond hands, and rocket emojis. I was already working on my essay for last Monday, so I brushed it off and didn’t write about GameStop before anyone else because, remember, I am an idiot. Then on Friday, it started happening: The story became the story by Monday, when $GME broke $100 and the Wall Street Journal reported that Citadel and Steve Cohen’s Point72 were injecting $2.75 billion into Melvin Capital, the fund with the most short exposure to GameStop, to save it from insolvency.Remember Citadel from earlier? They’re the ones that Robinhood sells its order flow to, and maybe the biggest winner in this story. One of the largest, most sophisticated hedge funds in the world made out pretty well for a situation in which the little guys stuck it to the hedge funds:* Citadel generated a record $6.7 billion in revenue in 2020 on increased volatility.* It scooped up $2 billion worth of revenue shares in Melvin on the cheap. * The WSJ reported that 29% of all $GME trading last week went through Citadel, which means it was likely able to make a ton of money on the spread.This, too, is not evil. It’s just the way the game is played, and Citadel played brilliantly. It’s also the first crack in the narrative that retail traders are the big winners here and the hedge funds are feeling the pain. Sure, funds like Melvin that were short $GME are hurting, but generally, Wall Street banks and hedge funds profit from and adore volatility. And last week was volatile as hell, with the VIX, an index that tracks volatility, spiking 69% (nice) from $21.91 on Friday to $37.21 on Wednesday. On Thursday, without explanation, Robinhood halted trading in GameStop, AMC, Nokia, and ten other companies in WSB’s crosshairs. Halting trading stopped the momentum that was building in those companies, gave short funds a chance to get out, and cost Robinhood users money. People were PISSED. Democrats, Republicans, Chamath, Dave Portnoy, AOC, Ted Cruz. Everyone agreed. Robinhood was bad. Conspiracy theories abounded: Robinhood was protecting its real clients, the hedge funds. The SEC made Robinhood do it. The Illuminati was somehow involved. Robinhood was about to be insolvent. On Thursday evening, Robinhood CEO Vlad Tenev went on CNBC to try to put out the fire, and totally botched it:Instead of addressing the issues head-on, Tenev deflected, compared Robinhood to Clorox (too much demand lol!), and touted Robinhood’s #1 App Store ranking. People weren’t impressed.This morning around 2am est, in a bizarre turn, Elon Musk interviewed Tenev on Clubhouse. His answers were more detailed but equally unsatisfying. (FWIW, people have pointed out that /u/DeepFuckingValue, the Reddit user behind the $GME trade, looks exactly like Vlad Tenev with a headband, and they have never been seen in the same room...)Here’s the thing: Robinhood wasn’t the only company that halted trading in those names. The more traditional brokerages did too, as did companies like WeBull and Public that clear trades through Apex. There were legitimate reasons for Robinhood to halt trading in $GME and the twelve other stocks, relating to the way that trades are cleared. This thread is the best explanation I’ve found of the whole thing: It’s detailed and technical and you should read the whole thing if you want to really understand how it works, but the main takeaway is: by enabling so many people to trade on margin, Robinhood got hit with a margin call of its own. Robinhood Robinhooded Robinhood. It handled the margin call in two ways: * Raised Cash. Robinhood raised $1 billion from existing investors and drew on a $500 million line of credit in order to put up cash to meet liquidity requirements. * Halted Trading in Those 13 Stocks. To stop the risk from getting more out of hand, Robinhood (and other brokerages) blocked users from trading them. These were maybe the only moves that Robinhood could have made given the situation. Robinhood wasn’t protecting Citadel (Citadel was doing just fine!), Robinhood was protecting Robinhood. But even after the conspiracy theories were largely disproved, people were still mad at Robinhood. Chamath tweeted that he passed on Robinhood three times “because integrity compounds and assholes will fuck you” (he is SPAC’ing a competitor, SoFi). And an enterprising Redditor took out an airplane banner that read, simply, “Suck my nuts Robinhood.”Here’s why I think the wrath persisted: Robinhood encouraged reckless trading among its users with no regards for the consequences for years, all while saying the company was on their side. If a Robinhood trader gets blown up by margin, they’re wiped out. “Too bad, you’re an adult.” But when Robinhood was about to get wiped out by margin itself, it halted trading to protect itself at the expense of the users who held the stock. And it didn’t have the courage to address the situation head on. After claiming that it wanted to democratize trading, and that retail traders should have all the same rights as the institutional guys, it treated its users like idiots as soon as the going got tough. It created chaos, and then pushed the consequences onto its users. It reaped, users sowed. The company isn’t evil. It optimized for growth, and it was succeeding. But this whole experience exposed the company for what it is, and lost the us vs. them mystique that was the main thing driving its growth. So what happens next? Where Do We Go From Here? I don’t think Robinhood is going to shut down tomorrow. Some smart people actually think this is a net positive for the company. The “This is Fine” argument goes something like this: “No press is bad press.” Trading seems fun, if those guys are getting rich, I want to join in, and Robinhood seems like an easy way to do it. They might have a point. Robinhood is currently the #1 app in the App Store. It was downloaded 177,000 times on Thursday alone according to Apptopia. The other argument here is that Robinhood has nearly unlimited access to investors who want to give it money. To whit, Sheel Mohnot, the guy from the tweet above, received an email from someone raising a fund to buy Robinhood secondary (which doesn’t actually give the company liquidity but speaks to market appetite) at a $30.3 billion valuation, up 171% since September! Short-term, I think that’s right. Longer term, I’m not so sure. What makes Robinhood Robinhood is the company’s willingness to sow chaos to grow. Limit that, and the company is a lot less exciting to users and investors. And when users want to leave, there’s not much stopping them: the company didn’t have any real moats beyond counter-positioning and brand, both of which it tarnished in this process. So what happens to Robinhood long-term? There are a couple comps to look at: Uber and Napster. Uber. Uber grew more impressively than any atoms-based company in history by skirting regulations and relying on adoring customers to back them up. It worked for years. The company was on the verge of crushing, and potentially acquiring, Lyft when, in January 2017, the #DeleteUber movement struck. It lost its important customer love, gave its hobbling competitor a new life, and limped into the public markets in 2019 without the winner-take-all unit economics it was on the path to achieving. It struggled out of the gate as investors worried about its unit economics, but despite a pandemic that slowed down rides, the company is improving and its stock has bounced back. It’s now trading 22% above its IPO price.There are a couple of key differences between Uber and Robinhood: * Honesty. Uber has always been comfortable in its role as the growth-at-all-costs bad boy of Silicon Valley. #DeleteUber was a hit to the company’s reputation, and competitive advantage, but it didn’t shake the core of what made Uber Uber. * Moats. Uber has honest-to-goodness network effects and moats. It’s the leader in its space, and the product benefits as more riders and drivers use it. * Importance of Product. Uber handles peoples’ commutes; Robinhood handles their money. How about Napster?Napster In Entropy Theory, I wrote about the story of Napster: Napster increased the entropy of the music industry (creating entropy) and was shut down in 2001 under legal pressure. The music industry (victimized by entropy), wielding lawsuits in an attempt to go back to the way things were, fared no better. Whether via Napster, Limewire, or any other number of online music file sharing services, the genie was out of the bottle and the entropy had increased: people wanted to listen to what they wanted, when they wanted, online. You know how this story ends. The old way of doing things (CDs, pay-per-album) lost, but so too did the new chaotic force, Napster. A federal judge in San Francisco shut it down, saying that the company encourages “wholesale infringement.”  Spotify came in, wrangled the entropy that Napster created, and built what is now a nearly $60 billion business. So is Robinhood Uber or Napster? Robinhood will be fine in the short-term. There’s enough money floating around looking for growth that it should be able to remain solvent, and trading right now is incredibly fun. But I am very skeptical about Robinhood’s long-term prospects for a few reasons. The Genie is Out of the Bottle. Entropy constantly increases. Anyone who thought 2020 would be the wildest year they’ve ever lived through must be surprised at how January 2021 is going. This current environment is not an anomaly, but part of an unbreakable trend towards increasing entropy. If WallStreetBets is shut down, something else will pop up in its place. If Robinhood survives this liquidity crisis, there will be another, then another, then another. It will either have to add friction to its product, when frictionlessness is the main thing it has going for it, or get run over. Unless the regulators step in… Increased Regulation. …in which case, Robinhood is going to face regulatory pressure. The SEC has already said that it will “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.” The company has already run afoul of regulators, and its ability to stay jusssssst inside the lines will be threatened. Plus, under a Biden administration that is all about unity, contempt for Robinhood is the one thing that has actually unified the country. While Robinhood was viewed as a democratizing force and loved by users, it was protected. Now, there are a lot of people who would be happy to see it punished. But I’m not a lawyer or a politician; I just write a business newsletter. So for me, the biggest issue is…  No Moats and Anti-Goldilocks Product. Robinhood has no moats. Until this past week, its brand was a moat. And it counter-positioned against the incumbents well. And its UX is the smoothest in the game. But the brand took a huge hit last week, incumbents have actually matched it on zero commission trading, and last week exposed the dangers of a too-smooth trading UX. If you squint, the company may have scale economies or a cornered resource based on the fact that it built its own trading infrastructure and clearing tech, but the app crashes during high volume, volatile periods, the worst time for it to crash, and too many people trading the same stocks means potential margin calls and trading halts. Worse, it doesn’t serve any set of users perfectly well. It’s the anti-Goldilocks. For new investors, the real unsophisticated ones, the product has too few guardrails. It’s too easy to trade options and too easy to take on crushing amounts of margin. That works when the market is hot and trading is fun, but it’s going to be disastrous when the market turns. It’s not mean or patronizing to say this: some people are unsophisticated traders, just like I’m an unsophisticated doctor or lawyer or car mechanic, and they should probably be using an app in which it’s not so easy to lose everything. But even though we’re all idiots, some retail traders are genuinely sophisticated. Even hedge fund managers are retail traders in their personal accounts, and WallStreetBets has proven that there are stock market geniuses hidden in the unlikeliest of places. Robinhood isn’t powerful enough for those sophisticated retail investors. On Friday, the WSJ ran an interview with the guy behind all of this, the Redditor called /u/DeepFuckingValue, who, it turns out, is an ex-Mass Mutual marketer named Keith Gill. Right at the top, they ran a picture of the genius retail trader and WSB cult hero: He’s not on an app. He’s on a “typical computer setup with multiple monitors,” the same kind that Robinhood wanted to free us from in the first place. There are sophisticated retail traders everywhere. Robinhood isn’t for them, either. Ultimately, Robinhood’s fate is tied to the roaring market of which it is both a symptom, and to a lesser extent, a cause. If things turn south any time soon, its users will lose painful amounts of money, growth stage investors will wonder if it’s worth continuing to pour money into an undifferentiated product with no real moats at a $30 billion valuation, and it could get hit with a crippling margin call the next time something like GameStop happens. Maybe even today, during #silversqueeze.That will open the door for new financial products that wrangle the entropy Robinhood created. If st0nks continue to only go up, though, a lot of retail traders will make a lot of money on Robinhood, a lot of investors will be willing to pour money into the company itself, it could IPO, and it might have time to wrangle the entropy itself. Tendies for everyone. Thanks to Dan for editing! One more thing: WeWork might SPAC! Dror Poleg and I talked about the company on Friday: Good luck out there this week! See you on Thursday. 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 520 newly Not Boring people who have joined us since Monday! If you aren’t subscribed, join 31,634 smart, curious folks by subscribing here:🎧 Listen to my interview with Podz CEO Doug Imbruce on PodzHi friends 👋 ,Happy Thursday! Every week, I record an audio edition of Not Boring. Typically the morning of the newsletter, I wake up at 5:30am, head to the basement, record, edit, pick music for, and publish a version of the essay that I read out loud. I have a face for radio and a voice for Twitter, but I like doing the audio version because it lets me give you another way to consume these essays that I spend so much time on. Thing is, while anywhere between 30k - 100k people read each essay (thanks for sharing!), about 1,500 max listen to the audio version, despite the relative ease of consumption. A big part of the reason for the delta? Podcast discovery sucks. Today, I’m writing about Podz, a company whose product I believe has the potential to change that. This is the first time I’ve written a deep dive about a consumer social product - all of the rest have been fintech or investing-adjacent - because I assume that if you’re the kind of person who takes the time to read Not Boring once or twice a week, you want to learn new things. I think Podz is going to make it a lot easier to find new audio content on the subjects you want to learn about, and make it easier for the people who, like me, spend hours behind a microphone recording. Podz only ask out of this is that you try the Podz Beta:And fill out this survey with your feedback: To encourage you to give feedback, Doug has generously offered to donate $10 to the charity of my choice for every Not Boring reader who fills it out. I chose Alzheimer’s Foundation of America, because my grandmother suffered from Alzheimer’s, and to me, one of the best parts of audio is that it captures and preserves memory. I’m excited about this one. Let’s get to it. Podz & The Future of AudioGetting on Audio’s WavelengthI have heard the future of audio, and no, this isn’t another Clubhouse piece. I’m talking about Podz. Its solution, ten years in the making, has a legitimate shot at solving audio’s biggest challenge.It’s bizarre that the social audio opportunity is still up for grabs. Talking is the oldest form of communication, but while text-, photo-, and video-based consumer social each have both casual and quality winners, audio just joined the party in 2020. Clubhouse has taken the lead in casual social audio, but Podz is going after what I think may be the bigger prize: building the quality social audio feed that surfaces the best content we humans create with our voices.In April, I wrote one of my first Not Boring essays, Wackos and ZoomGlüts, in which I used an old episode of Hey Arnold to explain why, at the same time:* It was so hard for podcasts and virtual events to stand out, and * The buzziest startup around was one that combined podcasts and virtual events. I was talking, of course, about Clubhouse, the drop-in audio chat app that launched in March.It seemed crazy then. At the beginning of the quarantine, any brand, community, or family with a Zoom connection was hosting free events. Zoom fatigue set in fast and hard. Meanwhile, I wrote, “At a time when podcast listening is down by 25%, Amazon sold out of podcast mics. Production is increasing even while demand plummets.”No commute meant less time to listen to podcasts, but more time stuck inside and more uncertainty about job prospects meant more people wanted to try their hand at making podcasts, hence a podcast supply glut. Our earholes weren’t wide enough to let everything in. Clubhouse cut through the noise. By limiting invitations to a small group of tech Twitter illuminati, it manufactured exclusivity at a time when every other organization on earth was begging people to come to their free online event/happy hour/conversation/panel. “While everyone else is begging ‘please!,’” I wrote, “Clubhouse is telling them ‘no.’ It’s the one velvet rope in a world of two-for-one happy hours hawked by overeager promoters.”It worked. In May, Clubhouse announced a $12 million, a16z-led Series A that valued the company at $100 million. The company was still in beta, had a couple thousand users, and no revenue. Thinkpeople were flummoxed. But here we are, nine months and eight decades’ worth of quarantine later, and Clubhouse just raised a fresh $100 million Series B, once again led by a16z, this time valuing the business at $1 billion. This time, out of beta, with 2 million users, and plans for creator-focused revenue generation, people get it.Clubhouse’s success is remarkable, but it isn’t unique in the world of audio. In fact, after an early-pandemic dip, podcasts have come roaring back. Listening is up dramatically, all of the usual suspects are spending hundreds of millions on content, and more people are recording themselves talking than ever before. Despite that, spoken-word audio is in the early innings of digitalization and monetization:* Podcast ad revenue is projected to grow 10x faster than the next closest medium over the next five years, and even then, it will bring in less than 10% of what radio does. * A tiny minority of podcasters take home the vast majority of the listens and dollars.* Clubhouse and Twitter Spaces are pushing audio-only public conversations forward. * Companies like Otter and Descript are making it easier than ever to capture and transcribe all sorts of conversations. And still, spoken word audio discovery is an absolute disaster. It’s one of the things holding podcasts back. That’s what Podz is working to fix, and the product is magical. Podz uses machine learning to pull the best clips from podcasts and deliver them to listeners in personalized feeds. Whenever you hear “machine learning” or “AI,” you should be skeptical, and I was too, until Podz sent me three clips of my own podcast. It picked highlights better than I could myself, pulling out the thesis from each (here, here, and here). It was so good that I thought the team had done it manually and e-mailed the founder and CEO, Doug Imbruce to confirm:I think that Podz, which is launching its beta today, has the chance to be something special. Like the Clubhouse founders, the Podz team has been working on social products together for over a decade, and like Clubhouse, it’s building a product that stands out in a sea of audio. The first iteration of the product, like a TikTok feed for audio, solves a challenging podcast discovery problem. The underlying tech has the potential to transform audio consumption far beyond podcasts. Most of the sponsored posts I write focus mainly on the sponsor company, but Doug asked me to write up my views on audio more generally, and to help think through how Podz fits into the audio landscape. That fits with Podz’ (is there an s after the ’ if the word ends in z?) ethos. The team realizes it’s going after one of the few remaining large untapped opportunities in social, and that it needs to continually improve the product to capture the prize. In fact, Podz’ (going with it) big ask from all of you is to fill out a survey to help the team improve Podz. Download the Podz app here (iPhone only):Then complete the survey: Today’s deep dive won’t be like the others. We’re going to go deep down the earhole to cover: * The State of Audio in 2021.* Audio’s Challenges. * Casual and Quality Winners. * Podz and Human-Machine Pairs. * The Opportunitiez for Podz. Podz is the best solution I’ve seen to one of the hairiest, longest-standing challenges in tech: audio discovery. The State of Audio in 2021Note: to keep things simple, when we talk about audio, we’re talking about audio other than music unless otherwise stated. After a rough start, 2020 turned out to be a fantastic year for podcasts. Remember that chart from a couple minutes ago? The one where podcasts fell off a cliff? Turns out, that was a blip, a short pause in a line that otherwise climbed up and to the right. According to Chartable, podcast downloads of the 13,000 shows it tracks increased by 189% between January and the end of October. This isn’t a new trend. In May 2019, a16z, who’s, like, obsessed with audio… … wrote an in-depth report on the state of podcasting, called Investing in the Podcast Ecosystem in 2019. It’s a couple of years old now, but it’s worth reading for a deeper dive into podcasting’s history and landscape. In the report, a16z used data from Edison Research and Triton Digital to point out that, for the first time, more than half of Americans over the age of 12 had listened to a podcast. Edison and Triton’s 2020 Infinite Dial report showed that number continuing to grow. As of March 2020, 155 million Americans have ever listened to a podcast. 104 million people listened monthly and 68 million listened weekly, and those weekly listeners listened to an average of six podcasts for an average total of 6 hours 39 minutes per week. That sounds like a lot, but the average American listens to the radio for 11.9 hours and watches 28 hours of TV per week. Podcasts also severely lag radio and TV in terms of monetization, which speaks to the opportunity in front of the industry.The global radio advertising industry is a $35 billion industry. Based on the earnings of the top 10 radio stations in the US, spoken word radio stations (news/sports) account for 57% of revenues. Applying that same percentage to the overall market, spoken word audio advertising is a $20 billion market before applying any sophisticated data or targeting. Worldwide TV ad spend is five times larger than radio, coming in at $166 billion in 2019. By contrast, podcasting is still tiny. PWC estimates $812 million in podcast ad revenue globally for 2020, but projects that that number will grow at a 22% CAGR through 2024, at which point it expects the industry to generate $1.7 billion in ad revenue. Today, time and ad money spent on podcasts is smaller but faster-growing than radio and TV. One of the main reasons for podcasts’ growth has been that it’s just easier and better to listen to audio on-the-go.AirPods, and AirPods Pro, have been a game-changer for the industry. Sales have nearly 6x’ed since their first year on market in 2017, and if this growth keeps up, they will be Apple’s third-largest product line by revenue next year. AirPods, and high-quality wireless headphones more broadly, make it easy for anyone to listen to podcasts during whatever they’re doing. Unlike TV, which requires most of your attention, you can listen to podcasts while doing pretty much anything else -- working, working out, cooking, cleaning, falling asleep, commuting, or scrolling Twitter. The biggest tech and media companies recognize the opportunity in podcasting and have been aggressively buying up tech and content plays in the space. Spotify is leading the charge, but Amazon, Twitter, and Apple, on the tech side, and The New York Times, Sirius XM, and iHeartMedia on the media side, have acquired companies in the space over the past year. In Earshare: The Idiot’s Guide to Investing in Spotify, I wrote that Spotify, which had been lagging, would turn around when investors woke up to the moves they were making in podcasting, and the positive impact podcasts could have on margins. The day I sent the piece out, March 2nd, Spotify was trading at $139. On May 19th, its price spiked when it announced the Joe Rogan deal. Now, ten months later, it’s trading at $330, up 137%. Spotify’s market cap has increased by $35 billion since I wrote that. If half of that growth is related to podcasting, it means that Spotify has added 17x more market cap due to podcasting than the total ad revenue the industry is expected to generate globally this year. The market, like the acquirers, is betting on the future of audio. The supply side is exploding, too. When a16z released its report in 2019, it cited Podcast Insights’ report that there were over 700k podcasts. Two years later, Podcast Insights pegs that number at 1.75 million, and Spotify said that it hosts 1.9 million shows. Spotify’s recent acquisition, Anchor, a podcast creation platform, may have something to do with that. Spotify recently said that Anchor powers 80% of its new podcasts, and 70% of the total catalog. More than half of the podcasts on Spotify, 1 million out of 1.9 million, launched in 2020 alone.And that’s just podcasting. In under a year, Clubhouse has grown to 2 million monthly users who listen to live conversations in the app. Twitter acquired Squads and Breaker to help it build a Clubhouse competitor, Spaces, which is currently in limited beta. More live conversations mean more competition for earshare, but make it difficult to keep up. On paper, I’m the target Clubhouse/Spaces persona, but between writing and a baby, I spend almost no time participating.As more of our conversations move online -- into Clubhouse, Twitter Spaces, Zoom, Discord, Fortnite, Teamflow, and other digital environments -- the potential amount of recorded audio has exploded. Products like Otter, Fireflies, and Descript can capture and transcribe that audio, and make it editable and searchable. Anchor itself added a feature in April that allows people to turn Zooms, Meets, and other video chats into podcasts. On Invest Like the Best in 2019, Spotify CEO Daniel Ek said that Spotify releases many of its meetings and townhalls as internal podcasts. Given the ease of listening highlighted above, other companies might follow suit. All told, after a bumpy start, 2020 turned out to be audio’s best year yet. But the explosion in new content creates new challenges. Audio’s ChallengesPodcast discovery sucks. It always has, and doubling the number of podcasts only exacerbated the problem. If you’re old, like me, you’ll remember what the internet was like before Google. You either needed to know exactly which website you wanted to visit and its domain, or you relied on portals like AOL or Yahoo! to tell you which websites you should check out based on some rough categorizations. That’s where podcasting is today. Maybe a friend told you about a new podcast and you can search for it directly in your favorite podcast player. Or, you can check out Apple Podcasts’ top lists to find one of the thousands of murder podcasts. But there’s no great way to discover and sample new podcasts, no recommendation engines that tell you what you might like based on what you’ve listened to before, and no easy way for any of the million new podcasts to get discovered. That’s a pain point anyone who’s tried to find a good new podcast can identify with, and the numbers back it up. Axios published a piece on Monday, The podcast business is booming, but few are making money, in which they included this chart: The top 1% of podcasts get 35k or more downloads per episode, but even the top 20% only get 1k downloads. The median is 124. You can’t make money on 124 downloads. The article quotes Agnes Kozera, co-founder of Podcorn, a podcast sponsorships marketplace, who points out that, "By default, it is more difficult for podcasters to break out and go viral because the podcast ecosystem doesn’t have a platform with characteristics of a community like YouTube, Instagram or TikTok.” When I look at the podcasting industry, and the audio landscape more broadly, I see entropy (I know you scientists out there are going to tell me my definition of entropy isn’t quite right, but bear with me). In Entropy Theory, I wrote: Entropy Theory explains industry evolution as a story of ever-increasing chaos and suggests that the most successful businesses are those that use the latest technology to wrangle that chaos, until entropic forces unleash the next set of opportunities.New technologies enable new forms of chaos. Recording a podcast is as easy as clicking “record” in Zoom, editing in Descript, and publishing with Anchor. Clubhouse and Spaces mean that literally anyone with a phone can get an audience to listen to them about turning $10 into $10 million, in real time. That means an explosion in the supply of audio content, which means an explosion in audio industry entropy.I was texting with a couple of friends last week, when they came up with the solution: Congrats guys. You invented Podz. Podz: Wrangling Audio EntropyPodz is building an Audio Entropy Wrangler. It uses machine learning to identify the best audio clips, starting with podcasts, and builds personalized audio newsfeeds based on listener preferences. They’re “making existing material more accessible” by letting listeners “browse quickly until they settle on what they really want.” Pure gold. When my friend Mario Gabriele first introduced me to Podz’ CEO, Doug Imbruce, we talked about what he was building and why, and it sounded cool. It wasn’t until Doug sent me Podz clips from my recordings that it really clicked. So before going deeper on Podz, give a couple of them a listen to see what I mean: * We're Never Going Back* Fairmint & the Democratization of Upside* APIs All the Way Down* Antara Health: Natively Integrated Healthcare* Masterworks: Demystifying & Democratizing Art* The Value Chain of the Open MetaverseMy essays are like 5k-9k words, and Podz found the thesis (or as close as I come to one) in each of them! I was honestly shocked when they first sent me the clips. Getting to that point wasn’t easy. It involved hiring a team of audio editors and journalists to train the algorithm on what makes a good clip using over 100k hours of podcast content, and before that, a decade’s worth of time spent building in consumer social. The Podz team has been obsessed with using machine learning to build better social products since 2010. In the early days of the iPhone, CEO Doug Imbruce and team launched Qwiki, a search product that automatically assembled video "answers" to search results (watch the demo). In 2011, Qwiki won TechCrunch Disrupt, beating out a little company called Cloudflare ($NET, Market Cap: $23 billion), before evolving into a way to automatically transform iPhone photo libraries into videos.Imbruce fielded acquisition offers from a who’s who including Apple, Google, and Dreamworks, before deciding to sell to Yahoo! in 2013. Some of the team stayed at Yahoo!, others went off to places like Airbnb, but in 2017, they decided to get the band back together. After playing with a few ideas related to photos and video, the team realized that while the photo space was incredibly crowded, no one had really innovated on podcast consumption, and that using their chops in automatically selecting the best media could be applied to solve the problem. In January 2020, Imbruce and three co-founders -- Rasmus Zwickson (Head of Design), Seye Ojumu (CTO), and Greg Page (iOS) officially incorporated Podz. By August, a team of freelance journalists hand-clipped over 100k hours of audio from over 5,000 automated sources, and in October, Podz filed a patent on “Audio segment recommendation” covering the algorithm developed based on the team’s inputs. In December, the Podz beta quietly went live in the Apple App Store and I listened to my Podz clips for the first time. If that’s what they built in a year, the future of audio is bright. I’m particularly excited about what Podz is building because I love audio as a format. I’ve been listening to podcasts since Bill Simmons soundtracked my long hours in investment banking in 2009, and today, podcasts are a main input for my writing. As Patrick O’Shaughnessy (the host of my most-cited podcast, Invest Like the Best) wrote in the launch post for Colossus:In sixty minutes, you can capture what might take years to capture in a book. Everyone gets writer’s block, but no one gets talker's block.The flip side, though, is that until now, it’s been really hard to uncover all of that wisdom. Instead of trying to navigate Spotify or Apple’s podcast discovery, I lean on a few podcasts -- Invest Like the Best, Twenty Minute VC, Afrobility, Animal Spirits, Panic With Friends, and a few others -- over and over again. These podcasts are excellent. There’s a reason I keep coming back to them. I trust that they’re going to have the best guests or the best insights into the stories and companies I care most about. But with the exception of Afrobility, these are podcasts that everyone else listens to, too. It’s the Axios podcast distribution chart brought to life. The magic of Podz is that it takes advantage of this double human-in-the-loop system to deliver quality and novelty: * First, podcast hosts serve as curators, filtering all the noise to find the best guests or angles on a given topic. * Then, Podz algorithm, trained by human journalists and audio editors, sorts through all the content out there to find the very best parts, even in places you wouldn’t expect. For example, we’ve talked about Professor Galloway’s shaky history of stock picks here, but when I asked Doug to send me the highest-scoring podcast clip of the week, this is what it came up with: I don’t normally listen to the Prof, but he makes a strong case for truth.Solving podcast discovery is something that people have been talking about (and some of us who love podcasts have been praying for) for a very long time, and somehow, it’s only gotten worse. If Podz is successful, it will revolutionize audio by making it easier to discover new talent, and new nuggets from familiar talent. It will wrangle audio entropy and turn the supply glut into a goldmine.It’s a product built to bring in-depth, high-quality, long form audio content to the forefront in a world of short attention spans. That’s Podz’ first opportunity: to become the quality winner in social audio. Casual and Quality WinnersIn consumer social, there are two types of winners: casual and quality. Casual winners are low-lift on both the creation and consumption side. They allow for infinite scrolling and a lean-back experience for consumers. Messiness is expected and accepted. Quality winners require more effort from creators and, often, more engagement from consumers. Consumers expect more polished output.Each category has its casual winner and its quality winners: There are more examples within each categories, but these are the leaders, and examining how they relate to each other explains a lot about the different approaches to building social products.* Photo. Instagram was all about filters that helped make anyone’s photos look professionally shot. Snapchat counter-positioned itself as the place for ephemeral, silly photos for friends’ eyes only. * Video. YouTube has actually evolved from casual to quality. Versus traditional TV, it was casual, but it’s become the next generations broadcast-quality TV. It takes a lot of work to make a high-quality YouTube video. TikTok is for short clips that are easy to create and consume. It’s possible to get lost in the algorithmically driven feed for weeks. * Text. As I know all too well, it takes like five seconds to fire off a tweet, and dozens of hours to write a Substack post. As you know all too well, it’s easy and passive to doom/joyscroll Twitter, but reading a Not Boring essay is an investment. Which brings us to audio. Prior to Clubhouse, audio was largely impenetrable for consumer social companies. To the extent that Clubhouse can be crowned the winner -- Twitter Spaces and a wave of new audio chat products are vying for the spot -- it is very much the casual winner. Drop into Clubhouse at any time, and you’ll be able to hear off-the-cuff conversations across a wide range of topics. You might even be able to raise your hand and participate. That makes it even easier than ever to create audio content, and it’s worked for Clubhouse. There’s still room for the quality winner in audio, and that’s the space that Podz aims to win. By creating a personalized audio feed that algorithmically rewards the highest-quality audio, it hopes to reward the long-tail of audio creators who put in the work to produce the best conversations, and to elevate the quality of the content we consume. It also has plans to release creator tools that use Podz’ technology to help creators produce better content. I’m fascinated to see whether, like other new social media, Podz alters the content that’s created and how we consume and interact with audio. * Will people start producing shorter-form audio, put even more effort into delivering clear takeaways, or encourage more audio creation, knowing that Podz can help surface the best bits? * Will Podz help unseat murder serials on the Top Podcast Charts? * Will audio finally be able to go viral like text, photo, and video? Those questions just scratch the surface, though, by dealing with audio as we think about it today. The most exciting opportunity ahead of Podz is to change how people use audio. The Opportunities for PodzThe core of Podz’ product is the ability to ingest large amounts of audio and uncover the best parts. To pull the signal from the noise, as it were. Currently, Podz algorithm is trained on inputs from professionals. Over time, it will continue to improve as it learns what listeners most resonate with across categories. It will get smarter at understanding what I like, and deliver me content that it knows I will appreciate, like an audio version of TikTok’s “For You” algorithm. That will create Podz’ Flywheel: strong recommendations attract more listeners, which creates better, more personalized recommendations, which allows more creators to get discovered in more niches, which attracts more creators, which attracts more listeners and so on. In TikTok and the Sorting Hat, Eugene Wei called this type of product - based more on your interest graph than your social graph an “entertainment network.” Entertainment networks, unencumbered by what your friends happen to like, allow precise personalization and more opportunities for new, unknown creators to break out. That’s what Podz hopes to bring to audio.As Podz’ ability to pull out insights from audio improves, things start getting really wild. It’s not just about podcasts then, and it’s not even just about what we think about as audio content today. It becomes about what could be delivered most impactfully via short audio clips. Here are a few ideas: Spotify Stories. Spotify has spent about a billion dollars to become the leading podcast creation and consumption company in the world, but while its music discovery and recommendation algorithms are divine, its podcast discovery is still terrible. It recently launched a test of Spotify Stories (because I think it’s a rule that tech companies need to have Stories), but its Stories feature looks like everyone else’s.It’s literally just Instagram stories in Spotify. Instead, Spotify should partner with Podz to launch Spotify Stories that feature personalized audio clips and those recommended by friends. Clubhouse Partnership. One of the killer features of clubhouse is its real-time nature. You get to be in the room when VCs battle San Francisco’s DA, or when Naval explains crypto, or when any number of people tell you how to become billionaires. The downside is that there is so much content that it would be impossible to keep up with all of the conversations you’re interested, even without a job and a baby. Clubhouse should partner with Podz to give Hosts the option to record conversations and give the audience a short clip of the highlight moment.Twitter Spaces Tweet to Share. Twitter Spaces is a particularly compelling Clubhouse challenger because distribution is baked in. Clubhouse took off on Twitter via screenshots; Spaces should build native distribution features that leverages Twitter’s unique strengths. According to Chris Cantino, Spaces actually lets you bring in tweets and other media to Spaces conversations… Podz would help that flow go bi-directional, by allowing hosts to tweet audio clips in real-time and attract larger audiences to the conversations.New York Times In 10 Minutes. The New York Times podcast, The Daily, is the most popular podcast in the world because it summarizes one thing happening in the world each day into a digestible story. What if The Times took it one step further, turned all of its articles into audio editions, and worked with Podz to pull the takeaway out of each? Listeners could subscribe to the 5, 10, 15, or 30 minute digests each day, or personalized mixes about the topics they care most about. Meeting Highlights. As more meetings move to Zoom and other digital formats, it’s possible to capture the conversation and build up a library of meeting or townhall highlights. That would help leaders communicate and make employees feel engaged, with no extra effort. I can’t see doug going B2B SaaS any time soon, but the option is on the table! That last example is less glamorous than consumer social, but it, along with the others, points to the enormous potential of audio beyond its current use case. Audio is a high-fidelity way to communicate and to consume information whose full capabilities have been hidden by poor discoverability. Podz is changing that, starting with discovery, then through better creation tools, and then, by opening up its patented technology to pick the key takeaways out of any conversation. As both a passionate audio consumer, and a fledgling audio creator, Podz makes my ears perk up. So come help Podz build the future of high-quality audio with me. Download Podz to start training the algorithm on your audio preferences and build your personalized audio newsfeed:Fill out the survey to improve the product and donate $10 to Alzheimer’s research: And follow @ListenToPodz on Instagram andTwitter to stay up-to-date on all things Podz.Thanks to Doug and Jen at Podz for being so much fun to work with on this!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 439 newly Not Boring people who have joined us since last Monday! If you aren’t subscribed, join 31,356 smart, curious folks by subscribing here:Today’s Not Boring is brought to you by… I first heard of OpenPhone when I asked Twitter for their favorite work software. OpenPhone was in a small group that received multiple mentions. So I dug and learned that OpenPhone is the easiest way to have a business phone number. It’s a YC grad, just raised a $14 million Series A, and is used by companies from Deloitte to Not Boring Favorite, Ramp.I decided to give it a try, and now I have my very own Not Boring number that I can use to text with all of you. Try it out. Text me at 1-917-818-0620.OpenPhone is even better for teams, so I spoke to someone who runs one, Jonathon Barkl, the CEO at AirGarage. He told me that his team uses OpenPhone to replace Google Voice, give everyone a business phone number, and automate workflows. Actually, you know what, I recorded the call in one click with OpenPhone, so you can listen to Jonathon tell you in his own words:Listen to Jonathon Barkl explain how AirGarage uses OpenPhoneTo get your team set up with a powerful and delightful business phone in an app, sign up here: (P.S. This is OpenPhone’s first paid marketing EVER. Show them some love!) Happy Monday! Today is an essay that I’m both excited and nervous about. Excited because some of the most fascinating work in tech is being done rebuilding the underlying structure of the internet and the economy, and I’ve wanted an excuse to dive in. We’re going deep on Web3, NFTs, and the Metaverse. It’s all more mind-blowing and more legit than I expected coming into this piece. Nervous because, like APIs All the Way Down, I am airdropping into a couple of different worlds in which thousands of people smarter than me have spent years building, investing, and exploring. I’m trying to explain topics that are so much deeper than I could cover in even a year. In doing so, I am definitely going to get some things wrong, or explain in the most surface-y way something that hides tons of complexity, but I hope that in getting those things wrong, it will help people building and evangelizing Web3 to understand where the holes in the communication are. This is a risk - I’m fully ready and willing to get dunked on (read Building in DeFi Sucks). In fact, if you’re building in this space, I’d love for you to give feedback or poke holes publicly, like Lillian Li did when I wrote about Alibaba.Here’s the tweet about this essay, do your thing: [INSERT LINK TO TWEET]I’ve been a Metaverse bull for a while, and I’m now finally understanding the huge potential of decentralization. My goal today is to translate to a broader audience, and flesh out some of the business models and value chains underlying the future. Let’s get to it.  The Value Chain of the Open MetaverseThis Metaverse is going to be far more pervasive and powerful than anything else. If one central company gains control of this, they will become more powerful than any government and be a god on Earth.Tim Sweeney, CEO, Epic GamesBeeple’s MillionsBetween December 11th and December 13th, an artist named Mike Winkelmann, who goes by Beeple, sold his works directly to collectors via online auction house Nifty Gateway. The welcome bidders received upon entering the site was the first sign that this wasn’t going to be like something Sotheby’s or Christie’s would put on: hahahah, ok so we're going balls deep on this motherfucker.Then, there was the structure: * Three works were priced at $969 each and left open for five minutes. Anyone who wanted to purchase one or more, could. * One work priced at $1 each, and only 100 were made available. They sold out within seconds. * Twenty-one works were sold one at a time, normal auction rules, highest bidder wins. * At the end, the artist auctioned off “THE COMPLETE MF COLLECTION,” including all twenty-five works sold prior. Finally, and most notably, there was the art itself. Beeple’s Everydays collection was composed of digital art backed by non-fungible tokens (NFTs) used to prove the validity, ownership, and scarcity of digital items or experiences.  Oh, and over the course of those three days, Beeple earned $3.5 million. Where Web3 Meets the MetaverseBeeple’s auction is one of many wisps that have started to come together recently that have piqued my interest in Web3, NFTs, DeFi, and whether and how they’ll interact with the Metaverse. I have been excited about the potential of the Metaverse for a while. I’ve written about it here, and here, and here. I think that Web3, a decentralized evolution of the internet. might hold the key, and that NFTs are a bridge between Web3 and the virtual economy of the Metaverse. I know some of this sounds out there. I’m more bullish on the Metaverse and the blockchain conceptually than most non-crypto startup people. Relative to the more finance-y folks here, my views are downright techno-utopian. And yet, whenever I heard that the Metaverse would become a multi-trillion-dollar economy, or that Web3 is the new internet, Bitcoin will hit $100k, DeFi will obsolete fintech, and decentralization is our best bet in the battle against big scary corporations… I didn’t quite get it. The vocabulary around Web3, like that of many early movements, is very idealistic. It’s all about using technology to create trustless systems, wrest power from corporations, and give it back to the people. I think that vocabulary is why I haven’t taken it seriously as a real alternative to the status quo. But I have gone deep down the rabbit hole, and I think I get it now. I can see how the decentralized web might make the leap from passionate early adopters to the mainstream, that there are real economic advantages to a decentralized internet, and that Web3 architectures will play a crucial role in a robust Metaverse.What has been missing for me is a clear use case, like NFTs, and an understanding of the business models and value chains underlying a lot of these concepts. Yes, there’s idealism, but there’s also a sense of building a new economy in which the value accrues to the people who create the value. That’s capitalism, baby. Today, I’m going to do my best to unpack it. Web3 and the Metaverse are two separate ideas that may or may not intersect. I think the future is much more exciting if they do. To understand why, we’ll start by understanding Web3, dive into NFTs, then move onto the Metaverse, and then look at what could happen when these ideas converge. * What is Web3 and Why is it Important?* Non-Fungible Tokens and Digital Ownership.* NFTs in the Wild.  * The Size of the Metaverse Prize.* The Open Versus Closed Metaverse.* Crucible and The Direct-to Avatar Economy. * The Value Chain of the Open Metaverse. You’re going to be hearing a lot more about Web3 (including DeFi), NFTs, and the Metaverse, and if you dismiss it, you could be left behind. So join me down the rabbit hole. It’s going to get weird. Ready Reader One? What is Web3 and Why is it Important? I’m going to make a gross generalization about you based only on the knowledge that you read Not Boring: you’ve heard the terms Metaverse, Web3, and NFT, but you wouldn’t bet money on your ability to define them, and you don’t know how and where they intersect. That’s what we’re here for. To start to unpack it, we need to define Web3. It’s the foundational concept here. Web3 is a return to the vision of the early internet, with built-in superpowers. Decrypt, a media platform covering the decentralized web, kicks off its Web3 explainer with this description: “the next major iteration of the Internet, which promises to wrest control from the centralized corporations that today dominate the web.”While that explanation might build fervor among early adopters and builders, it doesn’t do Web3 any favors with a wider audience. It says what Web3 is against, not what it’s for. The best way to describe the positive attributes of Web3 is to take a quick trip through internet history, with Tony Sheng and Chris Dixon as our guides. The early internet in the 1980s through the early 2000s, Web 1.0, was decentralized. It was built on top of a series of open protocols that anyone could build directly on top of, like HTTP for websites, SMTP for email, SMS for messaging, IRC for chat, and FTP for file transfer. The benefit was that these protocols were generally agreed upon and not subject to change; I could build a website on HTTP and if people had my website address, they could go directly to my site, not intermediated by anyone else. As Dixon said, “This meant that people or organizations could grow their internet presence knowing the rules of the game wouldn’t change later on.” It was a direct relationship between creator and consumer. There were some major challenges, though: * Stateless. Web 1.0 protocols were stateless, meaning that they didn’t capture state, or user data. “Capturing user data” has negative connotations today, but stateless protocols meant that website owners didn’t even know whether I’d visited a site before, and couldn’t tailor experiences accordingly. * Too Technical. You needed to be technical to build a presence on Web 1.0, which meant that regular people were left out. * Missing Protocols. Web 1.0 didn’t have standard protocols for many of the things that power the internet today: payments, search, apps, social media, commerce, credit, and more.* Protocols Didn’t Make Money! Imagine developing HTTP, seeing trillions of dollars worth of value being built on top of it, and not being able to participate in the upside aside from some speaking fees, consulting gigs, and book sales. Oof. Web 2.0 (mid-2000s to present) emerged as entrepreneurs recognized the holes in Web 1.0 and built products to fill them in, and capture the value in the process. These companies didn’t just capture state, they aggregated it, building up huge troves of valuable user data. They made it so that anyone could participate and build a presence -- think about how easy it is to set up a Facebook page versus coding a website. They wrapped existing protocols in frictionless user interfaces and created de facto products where no protocols existed. Sheng describes the transition:State aggregators became the dominant players of the internet and one surprising result of Internet 2.0 is that many of the original open protocols have been replaced by state aggregators. Internet 2.0 also showed us the power of networks. In the absence of open protocols, state aggregators acted as protocols for new areas. Web 2.0 is fucking awesome. I’m writing this newsletter to you because of Web 2.0. The probability of me figuring out how to write to all of you directly on top of SMTP is exactly 0.00%, and many of you found Not Boring through state aggregators like Twitter. But there are challenges, too. Twitter, for example, could decide to shut down my account whenever it wants to, and I can’t take any of my followers with me. It did so to the President of the United States (my take: there was no good solution, they chose the best among bad options). In a less charged example, Facebook famously allowed brands and publishers to build up audiences on a seemingly free platform, and then changed the rules, forcing them to pay to reach their own audiences. Dixon describes the transition as an S-curve. In the beginning, centralized platforms do anything they can to attract users, developers, and businesses in order to build up multi-sided network effects. Once they’ve built those network effects, though, and they know that users, developers, and businesses are locked in, they switch from “attract” to “extract.” The easiest way to grow revenue is to start charging businesses and developers to reach customers, and to serve customers ads or products based on the data they’ve accumulated. To be clear, I don’t think there’s anything inherently evil in this. I could leave Twitter if I felt that I was getting screwed, and indeed, many people deleted Facebook after the Cambridge Analytica scandal and after many incidents since then. It’s a market. The way the internet is currently architected allows for companies to capture value, and they do. Web3, then, isn’t as much an idealistic repudiation of Web 2.0 (although that’s a good marketing tool) as much as it is a natural evolution of the market made possible by new technology. Web3 is the next version of the internet, built on top of crypto-economic networks, like Bitcoin and Ethereum. According to Dixon, “Cryptonetworks combine the best features of the first two internet eras: community-governed, decentralized networks with capabilities that will eventually exceed those of the most advanced centralized services.” At the heart of Web3 is the idea of consensus protocols and standards with money baked in. I think about it like a series of open source APIs that anyone can use to build according to an agreed upon set of rules, that gain financial value over time which is shared with everyone who contributes to the API. Instead of building siloed products, Web3 is built for interoperability. This is a key concept, keep it in mind. Decentralized Finance (“DeFi”), which, as the name implies, is attempting to build a new financial system without central financial institutions, is one of the most promising layers being built on Web3. A common analogy for the way DeFi products are built is with “money legos.” In a 2019 post, Building with Money Legos, DeFi company Totle wrote:There are roughly 200 projects listed on DeFi Prime alone, each with their own unique features and infrastructure. This means that if you picked any 3 out of the roughly 200 listed tools, you’d have 1,313,400 different combinations to choose from to build a new financial product.That mirrors one of the benefits of APIs that I wrote about, namely:There is also a competitive advantage to be gained from how you leverage APIs to build your company and product. Using a bunch of APIs that are really flexible, and figuring out good ways to connect them, leads to a combinatorial explosion of potential workflows. API-first companies turn software into like customizable building blocks.There’s a reason for the similarity. Web3, too, uses APIs for software to talk to each other. The main differences between Web 2.0 and Web3 are Levels 0-2, and the implications of the architecture on where the value accrues within the system. While some people love the privacy that Web3 offers, or the fact that “the man” will no longer own your data, that gets it backwards in my opinion. It’s not about who doesn’t own your data, but who does: you. That’s what crypto folks call “Self-Sovereign Identity.” Despite the large sums of money made by the people who own Bitcoin, Ethereum, and other altcoins, I’ve always viewed the Web3 movement as anti-capitalist. That couldn’t be further from the truth. The movement is really about doing one of the most capitalist things there is: cutting out the middleman. It means that instead of value accruing to the Aggregators, there can be a more direct connection between suppliers and consumers. It’s not about taking money out of the system, it’s about moving the money around to the people who create and the people who consume, and to the people who maintain and improve the network itself. And it’s about attaching each user’s data and money directly to them (Self-Sovereign Identity), creating a public record that they own what they own (blockchain), and letting them take it with them, and profit from it, wherever they go on the web (Interoperability). Part of the magic is that money is built directly into Web3 protocols. Bitcoin and Ethereum, the two main protocols on which Web3 is built, both have mechanisms for rewarding contributors baked directly into the code. If the same were true for Web 1.0, Tim Berners-Lee would be worth a hell of a lot more than $10 million.New, directly-exchangeable internet money unlocks entirely new business models. That’s what excites me most about Web3: the new business models it enables and the new value chains that emerge when the middleman is removed. New projects are being built on top of open protocols that hope to transform finance (DeFi), commerce (dCommerce), and each of the things that we currently do on Web 2.0. All plan to replace the middleman with algorithms and let users own their data. By supercharging the protocols themselves, they enable a peer-to-peer internet in line with the original vision of the web. The world is starting to take notice (or at least, Twitter is). According to audience intelligence platform Pulsar, “DeFi” was mentioned on social media 8.8 million times in the past year (up 571% YoY), and in August, passed mentions of “Blockchain” for the first time.That’s a good sign - when the use cases start getting more buzz than the underlying technology. It means that reality is starting to catch up to the potential. Still! While all of this makes sense on paper, the interfaces are often still clunky and unapproachable to the non-technical. That’s why Coinbase, a centralized exchange, is still the most valuable crypto company. Cryptocurrencies are fun and valuable and I’m incredibly excited about DeFi’s potential, but I hadn’t seen a convincing killer app used by regular people until I discovered the resurgence of NFTs.  Non-Fungible Tokens and Digital Ownership As origin stories for new economies go, NFTs’ takes the cake.Three years before Beeple’s Everydays auction, in November 2017, a small Canadian venture studio called Axiom Zen set the blockchain on fire when they released a series of digital trading cards with pictures of cats on them. CryptoKitties were a relative flash in the pan that will have an enormous long standing impact. Besides being (arguably) cute, allowing for breeding (combining two CrytpoKitties to create new ones with unique characteristics tied to their parents), and spawning over $30 million worth of secondary market transactions for CryptoKitty breeds, their legacy is as the first digital asset to use the ERC721 asset standard for NFTs. Let me back up. Non-Fungible Tokens (NFTs) are cryptographic tokens that prove authenticity, ownership, and scarcity of digital assets. That is a massive unlock for the digital economy.As more of our lives move online, the ability to own scarce digital items is only becoming more important, and the NFT-based digital asset market will increasingly mirror the luxury market. An authentic Birkin bag is able to fetch prices hundreds of times higher than the exact same bag in knock-off form because owning the real thing says something about the person who owns it. The same is true for digital items, fashion-related and otherwise. One of the beautiful things about the internet is that you can produce something once and distribute it infinite times. No more printing physical books or CDs; users can just download the eBook to their Kindle or stream the song via Spotify. Each copy of the book or song is fungible. I don’t care which digital version of Old Town Road I stream, I just want to hear the song. The same is true for money, which was created for its fungibility. Instead of worrying about how many shells to trade for how many bags of rice to get how many pounds of meat, people could just sell their shells for money, and then use that money to buy meat. $1 is $1 is $1. Although technically Bitcoin hashes are traceable and therefore unique, the value use case of Bitcoin is fungible. I don’t care which Bitcoin I get. They’re all the same. So too with tokens on the Ethereum blockchain that represent digital currencies. I don’t care which ETH, BAT, UNI, or SUSHI I have, just that I have the right amount. These tokens are all built based on the same standard, ERC20, that defines a bunch of important information like the total supply, how to transfer tokens, and how transactions are approved. ERC20 tokens can represent almost anything worth tracking with an Ethereum Smart Contract: money, reputation points on a Web3 social media platform, skills of a character in a video game, an ounce of gold. In November, Sari Azout and I wrote about Fairmint, which lets companies give equity to their stakeholders via a Continuous Agreement for Future Equity (CAFE). CAFEs are ERC20-compatible digital securities. What everything I just listed has in common is that they’re all fungible: I don’t care which share I own in the company or which reputation point I have. But if Web3 and digital worlds are going to replicate the physical world, and some of the best parts of Web 2.0, they need a way to prove ownership of unique and scarce digital assets. Currently, for example, I can buy a skin (or outfit) on Fortnite, and maybe it’s the only version of that skin that Epic sells. That’s non-fungible, but it’s mediated by Epic. They could decide that they’re going to make more of the same skin (which, incidentally, they did with a Skull Trooper skin that they had originally only given to early players), that they’re discontinuing that skin, and certainly, that you can’t take that skin with you to other virtual worlds, like World of Warcraft.Any digital asset faces these same challenges: if it’s easily copyable, I have no way of proving that I have the real thing without an intermediary, and if it’s mediated by a third-party, it’s subject to change. NFTs solve that problem by leveraging the blockchain to prove ownership and authenticity of rare digital items. Built on the ERC721 standard, NFTs treat each item they represent as scarce, unique, and authentic. An NFT serves as a digital certificate of authenticity, backed by math, on a public ledger, that incontrovertibly proves that the holder owns a one-of-a-kind digital (and sometimes physical) asset.NFTs have exploded in popularity since October. According to Pulsar, “NFT” was mentioned nearly 2 million times on social media in the past year, up 840% YoY, faster even than DeFi.The surge was likely propelled by the rise in the price of Bitcoin and Ethereum, which turned thousands of crypto enthusiasts into millionaires, but it was also driven by Beeple. In late October, Beeple auctioned off an NFT that would change based on who won the US Presidential Election. If Biden won, the winner would own an NFT depicting people walking by a big, fat version of a passed out and donged Trump, on whom a Twitter bird lands and chirps a clown face. If Trump won, the NFT would transform into a muscular Trump walking through flames.Anyone can view the digital works. All three states: Election, Biden Win, and Trump Win, are viewable in this thread. But just like a real work of art, the value is in owning the verifiably real thing, not a print. As a result, the winning bidder, The Museum of Crypto Art, paid $66,666.60.Then, in December, NFT interest spiked again when Beeple auctioned off his Everyday collection for $3.5 million. All told, the value of NFTs increased massively at the end of 2020. When OpenSea released its Non-Fungible Token Bible in January 2020, average monthly NFT volume was $2-3 million. By December, dapp tracked $10.15 million worth of sales over the previous 30 days. It’s still a small market, but it’s growing fast, and the technology has huge implications. Three projects showcase the growing role, and potential, of NFTs: NBA TopShot, $WHALE, and DIGITALAX. NFTs In the WildThere is a wave of new products and projects being built that leverage NFTs. When we wrote about Fairmint, for example, we highlighted Foundation, which bills itself as “Culture’s Stock Exchange” and allows people to buy and trade NFTs.Today, I want to highlight three more, because each represents a step forward, on different fronts, for NFTs: * NBA Top Shot: Through an official partnership with the NBA, Top Shot combines sports cards and NFTs, bringing each to a wider audience. * $WHALE: The “first social currency backed by high-value assets.”* DIGITALAX: Creating a Digital Fashion OS through an NFT-based supply chain.NBA TopShotAfter the overwhelming (literally) success of CryptoKitties, the Axiom Zen team: * Set up a company called Dapper Labs, * Raised $12 million from investors including Samsung, a16z, USV, and a roster of NBA players, * Launched a blockchain for Open Worlds called Flow, to avoid the congestion issues they had on Ethereum, and * Announced partnerships with the NBA, UFC, Samsung, Warner Music Group, and even Dr. Seuss. The team launched NBA Top Shot in partnership with the NBA. They sell packs of the best highlights in limited numbers, backed by NFTs, and then allow owners to trade the individual highlights from their pack. This Zion Williamson block, for example, is asking $39,000! (Ed. Note: I picked this example at random on Friday, and yesterday, it became the most expensive Top Shot of all-time when the #1/50 edition traded for $100k. NFT life comes at you fast.)The most expensive sale yet happened just last week, when a LeBron James dunk sold for $71,455. That’s real money! (Again, keeping this to show the speed of this market.)The main takeaways from NBA Top Shot transcend the highlight numbers. What’s most interesting to me is that it’s a prime example of an NFT-based platform partnering with a mainstream organization and bringing NFTs to the masses. To do that, they’ve abstracted away the crypto -- they don’t mention “NFTs” or “crypto” on the homepage -- and instead focus on what crypto allows them to do: offer limited edition, verified, digital assets to collectors. $WHALEAfter some success in non-crypto ventures and early Bitcoin and Ethereum investments, the man known only as WhaleShark started buying up NFTs in gaming, art, and real estate in 2019. He spent over $1 million, and then in May 2020, decided to put all of his NFTs in a Vault and use it to collateralize a new social token, $WHALE. Unlike many crypto tokens, whose value is backed by math and belief, $WHALE is the first and most prominent example of a cryptocurrency backed by NFTs, whose price should appreciate based on the value of the NFTs in the Vault. WhaleShark continues to buy more NFTs and put them in the vault, and NFTs’ value is increasing more broadly, and as a result, that $1 million has turned into a token with a fully diluted market cap of $58 million, fractionally owned by the community via $WHALE tokens. You can check out WhaleShark’s Vault on OpenSea to see the full portfolio. DIGITALAXDIGITALAX is creating a Digital Fashion Operating System by reimagining the supply chain in a digital world with NFT-based scarcity. DIGITALAX 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 company created The DOF Sheet, a “Periodic Table of Digital Fashion Elements,” which assigns prices to an ever-expanding range of inputs. The Child NFTs are based on another, newer standard called ERC1155, used for semi-fungible tokens that represent a category of things without concern for exactly which one is used. For example, all of the turquoise patterns in the bottom right of the table would be backed by the same ERC1155 tokens. Some inputs, raw materials like diamonds and gold, are tied to, and fluctuate with, real-world prices. Others, like patterns, are algorithmically priced based on their complexity and usage. Taken together, all of the inputs add up to a base price for the piece of digital fashion, helping to solve a challenge in fairly pricing digital goods. NBA Top Shot, $WHALE, and DIGITALAX are just three of the many use cases being explored in the NFT space. They represent the beginning stages in making digital items behave more like physical ones. In another, more famous post, The next big thing will start out looking like a toy, Chris Dixon wrote: The reason big new things sneak by incumbents is that the next big thing always starts out being dismissed as a “toy.” Disruptive technologies are dismissed as toys because when they are first launched they “undershoot” user needs.NFTs are in the toy stage today. CryptoKitties obviously started there, and TopShop, Beeple’s art, and other digital collectibles still feel toy-like. DIGITALAX feels more like a glimpse into NFTs as a business model, and yet more projects are on the way that combine DeFi and NFTs to build new business models and value chains. Importantly, NFTs don’t just prove authenticity and ownership. They also give interoperability and portability to rare digital assets, allowing their owners to take their NFT-backed digital items with them across the open web, to wherever will host them. That’s as good a bridge as any to jump into the Metaverse. The Size of the Metaverse PrizeProponents of the Metaverse predict that it will be a multi-trillion-dollar digital economy that replaces the internet with shared virtual worlds. If the internet is 2D and siloed, the Metaverse is 3D and interoperable, like if video games and the physical world had a baby. In some ways, the seeds of the Metaverse are already here. We meet on Zoom, work in Teamflow, talk on Clubhouse, tweet on Twitter, shop on Amazon, and game in Fortnite. Today, though, all of these pieces are disconnected, like walking around a city and changing outfits and ID every time you enter a new building. Web3 and NFTs might hold the keys to stitching together the back-end of the Metaverse by building connective tissue and interoperability into the system.Just as it was for Web3 and NFTs, 2020 was a coming out party for the front-end of the Metaverse, namely virtual worlds and video games. The natural evolution of virtual worlds mixed with COVID to create a cocktail of new use cases, increased interest, and higher valuations. Of course, there are the concerts. As someone writing about the Metaverse, I’m (smart) contractually obligated to mention a couple of events. First, in 2019, Marshmello held the first ever live concert in Fortnite. 10 million people attended. Then, in April 2020, Travis Scott kicked it up a notch and broke Marshmello’s record, when 27.7 million unique attendees viewed his five Astronomical concerts in Fortnite a total of 45 million times.You knew about those two. But did you know that in July, Tomorrowland, the popular EDM festival, moved online due to COVID and sold over 1 million tickets at €20 per piece, bringing in over $20 million in revenue with a much lower cost structure (and less liability) than the in-person experience? Instead of hosting the festival inside one of the game worlds, Tomorrowland built its own interactive experience using Epic’s Unreal Engine. Since they built the capabilities and the world anyway, Tomorrowland launched a year-round virtual venue/world called Noaz. In November, Lil Nas X performed four shows over one weekend in Roblox that were viewed over 33 million times. As a result of the popularity of new, Metaverse-y use cases, and eye-popping usage and revenue stats, investors woke up to video games’ potential beyond just gaming. In September, Unity, the company behind one of the two main game engines, the Unity Engine, went public. We covered it in the S-1 Club, and as a group, were most excited by the fact that the Unity Engine, along with Epic’s Unreal Engine, may be the rails for the Metaverse’s virtual worlds. Investors were excited too. The company expected to price its shares between $34-42, ultimately priced at $52, and ended its first day of trading at $68, double its initial target. Since then, it more than doubled again, and now boasts a $41.7 billion market cap. Roblox, the gaming platform that lets users play, build, and monetize games, also planned to IPO in 2021. They delayed their IPO in December, not because they were worried about demand, but because they weren’t sure just how high they could price their shares! In early January, Altimeter and Dragoneer led a $520 million round that valued the company at $29.5 billion. Roblox is expected to go public via a direct listing in February, and I wouldn’t be surprised to see that valuation double if the market stays hot. Source: CrunchbaseEpic, probably the leading contender in the Metaverse race due to the popularity of Fortnite and the Unreal Engine’s position as the most robust engine for 3D experiences, hasn’t announced plans to go public. The company raised $1.8 billion at a $17.3 billion valuation in August, right before investor interest in the space really started heating up. At the time, the company was projected to do $5 billion in revenue with $1 billion in EBITDA for 2020. What would it fetch in the public markets today? $50 billion? $100 billion? While Epic, Unity, and Roblox all sport strong and growing usage and revenue numbers, those valuations imply that investors are starting to put a value on the call option that is the Metaverse. The stakes couldn’t be higher. Proto-Metaverse experiences are increasing in popularity and profitability by the day, and it looks increasingly likely that virtual worlds will indeed capture trillions of dollars in value. The question is: will they be interoperable and open, or closed and siloed? The Open Versus Closed MetaversePut another way, will the Metaverse look more like Web 2.0 or Web3? The central premise of Ready Player One, the Ernest Cline book-turned-movie, is the fight for ownership of the OASIS. The OASIS is the book’s version of the Metaverse, a virtual reality world built and owned by Gregarious Simulation Systems and its founder, James Halliday. When Halliday dies, he sets off an easter egg hunt, the winner of which will assume control of the OASIS.The fact that any one person or company can control the OASIS (read: Metaverse) means that Ready Player One depicts a “closed” Metaverse, a virtual world controlled by one or a handful of companies. Which brings us back to that Tim Sweeney quote: A closed Metaverse is controlled by one or more large companies and lacks interoperability between platforms. Think of it like a 3D Web 2.0 with some new protocols. This is what happens if Facebook wins with Oculus and other Facebook Reality Labs projects, for example. If that happens, expect more of what happens today, on an unimaginable scale. Sweeney and many others hope it never comes to that. They’re advocates for an Open Metaverse. The Open Metaverse is one built from the connection and interoperability of a series of different platforms, worlds, sites, stores, experiences and more. It’s a Web3 version of the Metaverse, in which players could travel from Fortnite to Roblox to Oculus, bringing all of their data, skins, NFTs, and digital currency with them seamlessly.In a July 2020 interview with GameMakers’ Joe Kim, Sweeney, who runs one of the few companies with a legitimate claim to being able to build a closed Metaverse, said, “I think the Metaverse as an open platform could ultimately be an order of magnitude larger than any one company, including Epic, built entirely on our own as our own proprietary piping.”That doesn’t mean that large companies won’t exist or profit on the Metaverse. As Matthew Ball wrote in The Metaverse: Some believe the definition (and success) of a Metaverse requires it to be a heavily decentralized platform built mostly upon community-based standards and protocols (like the open web) and an “open source” Metaverse OS or platform (this doesn’t mean there won’t be dominant closed platforms in the Metaverse)... [But] it’s hard to imagine any of the major technology companies being “pushed out” by the Metaverse and/or lacking a major role.That said, some FAAMG might support an Open Metaverse. Microsoft recently admitted it was on “the wrong side of history” with respect to Open Source at the turn of the century, and has been much more open to Open Source under Satya Nadella. They might be a dark horse candidate to provide corporate muscle to the Open Metaverse movement. And as Ball pointed out, Amazon just wants people to buy things and Apple just wants to make the devices (App Store scuffles aside). There might not be as much resistance to an Open Metaverse as it might seem.Ball presciently wrote that piece in January 2020, before COVID, increased Metaverse chatter, and the surge of interest in DeFi, NFTs, or Web3 more broadly, and was more skeptical of the Open Metaverse then than I am now. He teased a sequel coming soon, and I’ll be curious to see whether he’s moved closer to the Open side. It seems as if that’s the way things have shifted over the past year. In its January 2021 post, Enter the Metaverse, Foundation (a Web3 company, so caveat emptor) takes the openness of the Metaverse for granted, defining it this way: I come out on the side of the Open Metaverse, one that looks more like Web3 than Web 2.0. The biggest thing for me is portability and interoperability of digital items and personal data. As NFTs have shown, there is a market for digital items whose value isn’t mediated by a central platform, and that users can showcase in whichever virtual space they choose to inhabit. In fact, a December 2020 study found that 63% of gamers would spend more on virtual goods with real-world value, which is what NFTs enable. As virtual experiences become more immersive and our identities are more closely tied to our online personas -- either because these experiences attract older users, or because younger users to whom they are native come of age and drive the economy -- the virtual economy will become more robust. The trend towards buying skins, digital real estate, and art will continue, morph, and expand, people will want to take what they own wherever they go within the virtual world, and the Direct-to-Avatar (D2A) economy will emerge. Crucible and The Direct-to-Avatar EconomyTo us olds, and I’m including myself here, it seems crazy that people are willing to spend large sums of money on outfits for their video game avatars. In 2018, over $1 billion of Fortnite’s $2.4 billion in revenue came from the sale of skins (outfits) or emotes (dance moves). In 2019, League of Legends generated $1.5 billion in revenue from skins. Kids are asking their parents for Robux (Roblox credits) and V-Bucks (Fortnite credits) instead of cash or toys.Currently, the value of skins and other virtual items is largely contained within each individual game. In 2019, Louis Vuitton began selling skins in League of Legends, but that skin can’t move with its owner to other games yet.Crucible is trying to change that. Its co-founder & CEO, Ryan Gill, told me that he thinks the watershed moment for the Metaverse will occur when there's an event that takes place simultaneously across multiple AAA platforms, where players can walk from one to the other as the same avatar, wearing the same skin. Imagine buying an NFT skin from Prada, wearing it to a concert in Fortnite, and then popping into a different version of the same concert in Roblox maintaining the same identity. Already, smaller developers are making this possible. Last week, Cryptovoxels, Somnium Space, and Decentraland announced that they’re working to let users portal between worlds. For the Open Metaverse to thrive, that’s what Crucible is working to make possible more broadly. It’s building the Emergence SDK, a “drop-in asset for popular game engines and web frameworks that provides easy, familiar access to Web3's Digital Trust Layer,” compatible with both the Unreal and Unity engines.  Crucible hopes to be the Web3 “interface moment” for the Open Metaverse. Just as Web 1.0 had AOL, the Emergence SDK will make it easy for anyone to interact with the Open Metaverse, smoothing over its rough and complex edges while keeping the benefits intact. Crucible is developing a D2A market network with three core stakeholders: developers, gamers, and brands. That’s really fucking hard. It means needing to get buy-in from all three groups in order to succeed. If it can pull off the challenge, though, the potential is enormous.  For Developers. When a developer uses the Emergence SDK, they’ll be able to plug in Web3 capabilities without worrying about the complexity of building Web3 technology. That allows them to verify identity, reduce friction, and offer more digital items for sale in-game as the industry moves increasingly more toward user-generated models.For Brands and Creators. Instead of partnering with each game or virtual world separately - which is less scaleable for both parties - brands and creators can sell skins, NFTs, and other digital assets directly through Crucible’s market network. That theoretically allows them to reach a larger audience of people willing to pay more because of the portability of the asset. If I can wear my Prada outfit to a Fortnite concert and a Beeple auction, it’s worth more to me. For Players. It starts with identity. Crucible currently works with Sovrin and Evernym’s Verity to power a self-sovereign identity. That means that players can log in using their Crucible agent once, verify their real-world identity, and then create any number of personas or anonymous avatars that are tied back to their core identity, each of which can be used across any game or virtual world that uses the Emergence SDK. Players can also tie their skins, NFTs, and other digital items to their core identity in their Crucible agent, and take it all with them into any virtual space - along with their friends, data, and entire digital lives.If the Metaverse looks more similar to Web3 than Web 2.0, a player’s Crucible agent will hold their digital identities and everything that they own in the virtual world, which means that the Metaverse begins to look more like the real world. It would be crazy if one store let me wear a t-shirt that I own, but the one next to it told me I needed to put on a different one to come in. That’s how virtual worlds operate today, and it’s the problem Crucible is working on. If it’s successful, it will help to power a Direct-to-Avatar Economy. “Just as Direct-to-Consumer dematerialized the supply chain by 40% and enabled new business models to flourish,” Gill says, “Direct-to-Avatar will, dematerialize the rest of the supply chain, allowing brands and creators to sell direct to Avatar.” He expects D2A to reach at least $1 trillion in the next decade. The wisps are there. The top free-to-play games, like Fortnite and League of Legends, already sell billions of dollars worth of skins. And now, it’s expanding beyond gaming to what Gill calls “designer skins”. A designer might sell a one-of-a-kind NFT dress on DIGITALAX and sell it through a Nifty Gateway auction to someone who stores it in their Crucible agent and can wear it in any virtual world they choose. Or a basketball fan might watch a Sixers game in NBA World, buy a Ben Simmons 3-pointer highlight via Top Shot, and take it with him to show off in his own Ben Simmons museum in Minecraft. That creates a whole new value chain, one in which much of the supply chain drops off, demand increases, and value accrues to the creator and the owner. The Value Chain of the Open MetaverseTrying to describe the value chain of the Metaverse is kind of like trying to describe the value chain of the … world … today, without the benefit of knowing exactly how or when the Metaverse will manifest. But looking at this one example - Direct-to-Avatar, built on Web3 tech - gives a glimpse at how radically the value chain might change in an Open Metaverse. As a quick refresher, Michael Porter’s Value Chain insight is that:“Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product."In Shopify and The Hard Thing About Easy Things, I broke down the Direct-to-Consumer value chain this way: In Netflix and the Conservation of Attractive Profits, Ben Thompson wrote: Breaking up a formerly integrated system — commoditizing and modularizing it — destroys incumbent value while simultaneously allowing a new entrant to integrate a different part of the value chain and thus capture new value.So knowing that, what happens to the DTC value chain in a world of Direct-to-Avatar? I think it looks something like this: By dematerializing the supply chain and selling directly to the end user, as represented by the Avatar, the D2A value chain removes entire steps - manufacturing, logistics, and support - and integrates R&D, Retail, and Marketing: * R&D becomes production, as renderings and previsualizations, potentially using materials and prices from DIGITALAX’s DOF Sheet, merge with the final product. * Retail. In the place of Shopify stores, designers might host their own fashion shows or auctions in virtual worlds built with the Unreal Engine. * Marketing. Limited edition drops, the word of which spreads through Discord servers, might replace marketing through traditional digital channels like Facebook and Google.In this value chain, the profits don’t accrue to the aggregators, like they do in DTC. There’s no “40% of all VC money goes to Google and Facebook” here if it works. The creators will earn the profits, as will the owners of scarce digital assets, the value of which may increase over time, supported by robust, decentralized exchanges. Even more compelling, new Web3 and Metaverse value chains leave room for more individuals to own that sweet, sweet “earn money while you sleep” revenue. In Alex Danco’s excellent recent piece, The Michael Scott Theory of Social Class, he writes that: Losers [meaning people who lose the economic game, not being mean] are the people who are set in roles or stations in life where the output of their effort is wholly realized by someone else. As they learn throughout their careers, their skill or engagement might lead to incremental career progress, but no real leverage of any kind.Breaking out of the “Loser” band by making your creations and money work for you, even while you sleep is the promise of the Creator Economy, Web3, and an Open Metaverse. Already, Roblox paid out an estimated $250 million to mostly young-adult developers in 2020. Web3 and an Open Metaverse make that dream possible for even more people. It’s possible to imagine a world in which a whole economy of creators make patterns and new materials for DIGITALAX’s digital fashion, and get paid every time a new skin using their work is sold. Or that by truly owning their own data, people can get paid to view ads, to submit their data to medical studies, and more. One of the features of Web3 companies is that there are often mechanisms to turn users into owners; people may be able to generate real wealth just by using products they’re excited about. If done correctly, the Metaverse becomes more than the escape from a bleak reality that it is in Ready Player One, but a new way to earn a middle class income while pursuing your passions with ever-growing and more profitable niches of your people, around the globe. This is not the reality today. Web3 is very early and many don’t believe it will deliver on its promise. The interfaces of decentralized apps are still hard to decipher for most people, myself included. As I was writing this, as if by magic, venture capitalist Jill Carlson tweeted this:The list goes on. The Metaverse is only here in wisps. There’s a big difference between Beeple making $3.5 million and the millions of digital artists who barely make anything. And the Metaverse, if it does come to fruition, still may be controlled by Zuck. The reasons the future described here may never become reality are endless. That said, I hope you leave this piece with an understanding of what might be possible, an appreciation for the fact that this movement is every bit as capitalist as it is idealistic, and a desire to keep learning, and hopefully, start creating.Thanks to Ryan for input and feedback, and to Dan and Puja for editing! And thank you to Pulsar Platform, the Official Audience Intelligence Platform of Not Boring, for the buzz data. I’ll be back on Thursday with some more. Enjoy the week until then! 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 665 newly Not Boring people who have joined us since Monday! If you aren’t subscribed, join 31,114 smart, curious folks by subscribing here:Hi friends 👋 ,Happy Thursday! It’s been a good week. Let’s keep that momentum going! Sponsored deep dives have become one of my favorite parts of writing Not Boring, and not just because they mean that this newsletter is a financially viable way to make a living (although that part is great!). What I enjoy most is that they give me access to the people building companies that are re-shaping the industries that you and I are interested in. I’m able to write in more depth on these topics with their guidance than I can alone. I know I seem very fancy and cultured, but I didn’t know nearly as much about the art market as you might expect. Obviously, being paid to write something means that there’s a potential conflict of interest. Earning and keeping your trust is the only thing that keeps this newsletter going and growing, and I’m confident I haven’t written a single thing in a sponsored post that I wouldn’t have written anyway, but I want to give you a peek into my process. You can read how I think about it here:I told you that I’d let you know how I’m being paid for each sponsored deep dive — CPM (paid a certain rate no matter what) or CPA (paid for each person who signs up for the product). Since I’m writing about an investment product, and this isn’t advice, I’m being paid on CPM. Today, I’m writing about a company that I’ve written about before. It’s a leader in one of the spaces that fascinates me most: alternative investing. Software is eating the markets, and democratizing previously opaque and inaccessible markets. Maybe no asset class fits the bill better than blue-chip art. Let’s get to it. Masterworks: Demystifying & Democratizing ArtThe Case of The Missing $450 Million MundiIn November 2017, Leonardo da Vinci’s Salvator Mundi became the most expensive piece of art ever when it sold at Christie’s for $450 million. The buyer, at first anonymous, turned out to be Saudi Prince Bader bin Abdullah bin Mohammed bin Farhan al-Saud, who was, in turn, allegedly serving as a proxy for Saudi Crown Prince Mohammed bin Salman (MBS). When the painting’s planned exhibit at the Louvre Abu Dhabi was delayed indefinitely, it set off wild conspiracy theories involving the Saudis, Russians, and the Trump campaign. According to Vox: Narativ published a theory that placed Salvator Mundi at the center of an international money laundering scheme implicating the royal families of Saudi Arabia and Abu Dhabi, along with Donald Trump’s 2016 presidential campaign staff, the Israeli intelligence firm Psy-Group, and the Russian potash fertilizer magnate Dmitry Rybolovlev, the painting’s previous owner.Rybolovlev, the Narativ post claimed, put the painting up for auction knowing that the Saudis and the Emiratis would bid for it, artificially inflating its value. Narativ posits the funds from the sale were then funneled to Psy-Group, which, according to a report by the Daily Beast, had ties to the Trump campaign.That theory has been debunked -- if you’re going to launder money, why do it via the highest-profile art sale in history? -- but it highlights how blue-chip, or investment grade, art has historically been: * Limited to the wealthiest of the wealthy * Shrouded in opacity bordering on mysteryThree years later, half a world away from the United Arab Emirates, another art transaction proved just how much those two things have changed. I hate to brag, and it feels a bit gauche to talk about this publicly, but we’re all friends here so I’ll tell you: I, like MBS, am kind of an art collector. I own Agnes Martin’s Untitled #1, Lucio Fontana’s Concetto Spaziale, and, yes, a Basquiat, Loin, which the artist painted in his pivotal year, 1982. Well, I own a small piece of each, at least, which I bought via the subject and sponsor of today’s essay: Masterworks. Meet MasterworksMasterworks, founded in 2017, is the first company to make it possible for everyone to invest in blue-chip art, from Monet to Warhol. It’s a part of the class of startups taking advantage of regulatory and technological advances to bring investing in alternative asset classes to the masses. There’s Fundrise for real estate, and Rally Rd. for collectibles, AngelList for venture capital, and Republic for equity crowdfunding. I wrote about this group in Software is Eating the Markets, saying of Masterworks: Masterworks takes art collecting digital and makes it accessible to regular investors. Investors can buy shares in works by Andy Warhol, Jean-Michel Basquiat, Keith Haring, Picasso, Banksy, and Monet. Even a digital portfolio of blue-chip art is more tangible than a bond, is something buyers can brag about to friends, and provides an excuse to learn art history, and returns from blue-chip art have doubled the S&P 500’s over the past twenty years.Art is the archetypal alternative asset class in a world in which rates remain low and software eats the markets. It provides social status, entertainment, education, and a digital asset that’s beautiful to look at and to display. Plus, unlike, say, Bitcoin, which uses math to create scarcity, each classic piece of artwork is truly one-of-a-kind.  It’s also compelling enough to own that it should attract some retail investment dollars away from stocks and help investors create more diversified and less correlated investment portfolios. In fact, using Masterworks’ data, Citi found that art has a minuscule 0.01 correlation factor with the S&P. Blue-chip art should be an aesthetically pleasing part of most diversified, long-term investment portfolios, and indeed, art has long been a mainstay in the portfolios of the ultra-wealthy. But until very recently, art investing has been out of reach for the average investor. With art, maybe more than any other asset class, the best investments are often the most expensive, and investing in art, until now, meant buying the whole damn piece. Masterworks is changing that, and making rare art attainable for regular people. I, for example, write a free newsletter and I own a Basquiat. So with Masterworks’ help, today, I’ll serve as your curator and guide through the wonderful world of blue-chip art. * Masterworks’ Price Database. Masterworks built the most complete repeat-sale pair database, which underpins everything it does.* Art as an Asset Class. Strong returns, low volatility, low correlation, and declining supply.* Digitizing and Democratizing Art Investing. Masterworks gives anyone the opportunity to purchase shares in blue-chip art.* Investing on Masterworks. It took me 15 seconds to invest in a piece of art. I’ll show you. * Art Market Tailwinds. Blue-chip art is a classic investment, and one that should be particularly well-suited for the world today. * Build Your Portfolio. Once you’ve read today’s essay, you’ll get your Art Connoisseur Diploma and can skip the waitlist to start investing on Masterworks.If you’ve always wanted to invest in art and just want to get to it, you can sign up to start investing on Masterworks right now. Not Boring readers can jump the waitlist at this link:If you want to sound smart and cultured at your next socially distanced dinner party, put on your top hat and monocle and come explore the wonderful world of art with me. Masterworks’ Price DatabaseTo understand the art market, we need to start with Masterworks’ Price Database. Much of the data we’re going to use throughout this essay, and Masterworks’ own buying process, is based on the Database. Normally, I would look for data from a diverse set of sources, and I did for this essay as well, but the fact is Masterworks’ data is the most complete picture there is. Even leading investment banks like Citi rely on Masterworks’ data. So what is it and why’d they build it? The art market has historically been opaque. If you’re one of the small handful of people in the know, that’s a feature. If you’re putting up your own money to bring art investing to the masses, like Masterworks is, that’s a bug. Since Masterworks takes principal risk by purchasing works of art itself, and qualifies each offering with the SEC, it needs hard numbers. But hard numbers only existed scattered across old paper auction catalogs, which meant that it was impossible to get a sense for each artist and work’s historical performance. So Masterworks built the world’s most comprehensive repeat-sale pair database in order to understand how the market performs broadly, and by artist and work. Masterworks’ research team built the Price Database by compiling over 3 million datapoints from over 300,000 auction transactions going back to 1960, often by painstakingly going back through paper auction catalogs by hand. By putting all of that data in one place, and plotting sale prices for paintings that have sold at least twice, they’re able to understand how artists and their specific works perform over time.This 1982 Untitled piece by Basquiat, for example, has returned 5,286x since its first public auction purchase in 1987 after selling for $110.5 million in 2017, a record for an American artist. The Price Database is a really fun consumer-facing tool, and the best way for someone who’s more numbers-driven than beauty-driven, like yours truly, to learn about art. Here’s what a search for Monet’s history looks like: You should go play around with it by searching your favorite artists. Compare Banksy to Monet to Murakami. Read the descriptions of the artists and their work at the top of each page, and then compare paintings by Returns or Sale Price to start to understand which pieces collectors value most.You’ll notice, though, while you’re exploring, that not every artist or work is in the database. To ensure accuracy and consistency, and to generate a return metric, Masterworks doesn’t include paintings that haven’t been sold at auction at least twice. For example, when I read about Salvator Mundi, I obviously searched Leonardo da Vinci, but came up empty-handed. I thought there was an error, so I reached out to Jason Papodopoulos, who runs data science at Masterworks to ask about the omission. His answer was more fascinating than I could have hoped for, and I’ll repost it here in full: Regarding da Vinci, we have not identified any da Vinci auction results except Salvator Mundi, meaning not even works that have been sold once. We have, however, identified multiple works by followers or artists of his circle. His works never come at auction, and when they do, you see what happens.In the case of Salvator Mundi (see: Christie’s ), its Provenance (list of prior ownership) does mention 2 public sales. One may think that this makes the work a repeat-sale pair. However, a major factor in the Old Masters market is attribution and authentication. In the past, the work was attributed to Giovanni Antonio Boltraffio, and was sold for £45. After research, specialists concluded that it was actually a da Vinci. Hence, the assumption that you can calculate the return of a work because an artwork doesn't change is challenged in such cases. Under our research framework, we do not include works that faced issues with attribution and/or authentication. This is one of the reasons why we are also not involved in the Old Masters market.There’s so much in that answer. No da Vinci painting has ever changed hands twice in a public auction, and Salvator Mundi is the only known da Vinci to sell at auction. That explains why it was the most expensive sale of all-time. The only other time the work went up for sale at auction, it was actually under another artist’s name, which allowed it to slip under the radar and sell for £45. Once da Vinci was confirmed as the artist, the price shot up over 7 million times!The answer also shows the rigorous approach Masterworks takes to its price database. It’s more than just a fun and educational tool for exploration; that’s a byproduct. More importantly, it underpins the transformation of the art market from a wealthy collectors’ playground to an investable asset class. Art as an Asset ClassArt is a $1.7 trillion asset class that most of us don’t think of as an asset class. It’s also one of the oldest. Before Patrick Drahi (a billionaire art collector, of course) took it private last year for $3.7 billion, auction house Sotheby’s was the oldest company on the NYSE.$68 billion worth of art changed hands in 2019, but unless your friends are particularly artsy or particularly wealthy, you probably don’t know the people attached to many of those hands. I polled my Twitter followers this week, and only 13% allocate to art. I asked those who do own art to reply with the percentage of their portfolio they allocate to it, and very few replied… because investing in art is synonymous with being really rich, and no one wants to come out and say, “I’m really rich.” In fact, the first reply to the tweet was, “I’m not rich.”It’s a shame that art, like many of the best performing asset classes, has been unattainable to all but the wealthiest of the wealthy. Particularly at a time when people are piling into Bitcoin and gold to hedge against inflation with rates at all-time lows, blue-chip art is a smart piece of a diversified portfolio. According to Citi, “Art could gain increasing recognition as an investment asset class over time given its rate of return and lack of correlation with major asset classes.”On Panic With Friends, Masterworks founder and CEO Scott Lynn told Howard Lindzon:We fundamentally believe in this world where just like people have allocations to real estate, they should have some allocation to art. It’s a similar asset class, performance we think is arguably better… We’ve definitely seen more investors on the platform that are just doing it purely based on historical returns and the risk profiles that we publish, and are frankly less focused on the individual art itself. They’re just viewing it as a diversifier to enhance returns on their existing portfolio.That quote gets at three of the four main reasons that art makes sense in an average long-term investor’s portfolio: * Blue-chip art has historically generated equal or better returns than public equities, * With relatively low volatility, * The lowest correlation to equities of any asset class, and * Scarcity driven by declining supply. Let’s look at each. Strong ReturnsBlue-chip art breaks down into four main categories: Contemporary, Post-War, Impressionist, and Modern. Contemporary, the best-performing and the main category on Masterworks, has performed well against equities for decades.Using Masterworks’ data, Citi’s Private Bank showed that the broad art market has, “Risen at an annualized rate of 5.3% since 1985, similar to the return of developed investment grade fixed income (6.5%) and high yield fixed income (8.1%).”Looking at just the past twenty-five years, Masterworks’ Contemporary Art Index has outperformed the S&P, generating 13.6% annualized returns compared to the S&P 500 Total Return at 8.9%. That sounds like a relatively small difference, but it means that $100 invested in Contemporary Art in 1995 would be worth $2,423 today while the same amount invested in the S&P 500 would be worth $842. That’s nearly 3x outperformance. Since blue-chip Contemporary art has traditionally been available only to the ultra-wealthy, art has contributed to widening the wealth gap even relative to the roughly half of the US population that owns equities. Low VolatilityContemporary art is also less risky than equities, or even housing or gold, as measured by loss frequency and depth over three-year investment horizons. Since 1995, Contemporary Art has lost money only 4% of the time over three-year periods. When it does lose money, it has lower drawdowns. The maximum annualized loss over three years for Contemporary Art is (0.5%) versus (16.4%) for global equities. The worst year in recent history was 2016, when art prices declined 10-15% due to capital controls in China and Brexit. Part of that stability is due to who owns art: the ultra-wealthy are less likely to need to sell art when prices drop, so they just don’t sell. Since the market doesn’t open every day, like the market for equities or gold, it makes sense that the drawdowns wouldn’t be as deep. If you owned practically any stock in late February, performance would have looked brutal if you measured performance from March, but would have looked fine if you’d closed your eyes until April. Even still, for those who are able to allocate a small portion of their portfolio to art with the understanding that they’re going to hold for multiple years, history says that there’s less of a chance of losing large sums of money. Low CorrelationIn 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.People calculate diversification in a portfolio using a measure called the “correlation coefficient,” which quantifies how two assets move in relation to each other on a scale of -1 to 1. A correlation of -1 means that they move in exactly opposite ways: Asset A goes up by $1, Asset B goes down by $1. A correlation of 1 means that they move in lock-step. In 2019, Citi partnered with Masterworks to measure art’s correlation to ten other asset classes.Citi concluded that: Perhaps art’s most attractive investment quality over the long run has been its diversification potential. Strikingly, the broad art market’s highest correlation with any other asset class was 0.34, which was with cash. It has showed low or even negative correlations with many others, including the fixed income asset classes, whose return profile was similar. Adding art market exposure to a portfolio of other assets, therefore, would have helped improve diversification over time.On The Pomp Podcast, Masterworks CEO Lynn said that if anything, art is most correlated to the concentration of wealth in ultra high net worth individuals’ (UHNWI) hands. It’s also negatively correlated with real interest rates. Those are two correlations that are perfect for the present moment. Historically, adding art to your portfolio would have improved risk-adjusted returns by increasing diversification, and current conditions seem to support art’s performance more than usual. ScarcityArt’s fourth investment characteristic is perhaps its most unique: the supply of works from blue-chip artists decreases over time. The pool of blue-chip artists is small -- according to Artprice, 62% of the $68 billion in 2019 transactions were of the top 100 artists -- and shrinking.All else equal, lower supply means higher prices. Bitcoin fanatics are enamored of the fact that there is a mathematical limit to the number of Bitcoin that will ever exist. Plus, as the New York Times recently pointed out, as Bitcoin holders lose their wallets or forget their passwords, supply decreases, making the existing supply, theoretically, more valuable.Art is kind of like Bitcoin in this respect.Take da Vinci. As Jason pointed out, despite the fact that da Vinci created many works of art in his lifetime, there has only ever been one da Vinci sold at auction. There are a couple of reasons: * Artists Die. This is obvious, but once an artist passes away, there can never be any other works created by that artist (with the possible exception of Tupac). * Museum Donations and Lost Works. Collectors often donate their collections to museums, taking those pieces off the market for good. Nearly all of da Vinci’s major extant works belong to museums around the world, from the Uffizi in Florence to the Louvre in Paris. Many others are simply lost. According to the TEFAF Art Patronage Report, Ultra High Net Worth Individuals donated $19.5 billion worth of art to institutions in 2018 alone, cutting the available supply by 1%. While some of these donations come from a place of genuine charity, many are doing it for financial reasons. Artsy points out that donating art is a high-profile way to get tax write-offs against capital gains. After a 2020 in which capital gains for UHNWIs were so high, expect to see more donations.  Because of death and donation, when you buy a de Vinci (or a Basquiat, Monet, or the work of any other deceased blue-chip artist), you can be sure that the supply will remain flat or decrease over time. Risks to Investing in ArtThose four features -- strong returns, low volatility, low correlation, and scarcity -- suggest that blue-chip art makes sense in most people’s portfolios. It’s not without risks, though. Citi highlights a few key risks that investors should be aware of: * While broad-based indices like the Masterworks.io Total Art Index may be a good representation of the art markets as a whole, investors can’t easily gain that kind of exposure. Portfolio performance is based on what you own. * There’s no established tracking product for art. You can’t buy the equivalent of SPY, the S&P tracking stock, for art. * Art is less liquid than equities or fixed income and more similar to real estate, and requires longer transaction times and higher transaction costs than other asset classes. Additionally, Artsy’s Martin Gammon writes about the “Dark Matter” of private collections that remain underwater off-the-record, as owners don’t sell losers. That may lead to sample selection bias in which only the paintings that have appreciated show up in the repeat-sales numbers. This 2013 art economics paper provides a good analysis on the size of that effect. Citi cites one last property of art that’s riskier than equities, too:  Gaining exposure to the art market requires the purchase of physical artwork, with the ‘blue-chip’ segment of the market typically exceeding multi-million dollar price points.Masterworks is changing that. Masterworks: Digitizing and Democratizing Art InvestingUntil now, art hasn’t really been investible the same way that stocks, bonds, gold, or even real estate are. Buying art has traditionally meant buying a whole piece of art. That’s like saying the only way to invest in the stock market is to buy an entire company. Sure, you can buy more affordable art, like a print or a piece from a local artist. I’ve bought that kind of art before. But that kind of art is not a good investment. The best risk-adjusted returns are in blue-chip art by artists whose names you’d recognize even if you weren’t that into art. Picasso. Basquiat. Warhol. Haring. Until now, buying blue-chip art, the kind that exhibits all of the qualities I wrote about above, cost millions of dollars. It was something that regular people never even considered. There’s a reason that so many heist movies are about stealing blue-chip art: some convoluted and complicated scheme was probably the only way that most of us had to acquire it.Enter Masterworks. Masterworks is the first platform for buying and selling shares representing an investment in iconic artworks. Founded in 2017, Masterworks takes advantage of SEC Regulation A to securitize works of art and sell shares to regular investors. Here’s how it works: Find the Best ArtistsMasterworks employs a team of researchers (the crack staff that worked to digitize sixty years worth of physical art auction catalogs to create the Masterworks Price Database), who use proprietary data and models to identify which artist markets have the best momentum. They look at a combination of quantitative and qualitative factors like: * Which artists have a significant enough track record at auction to have meaningful pricing data - less data, riskier artist* Whether there’s a global collector base interested in the artist* The cultural relevance of an artist * How many museums and public collections support an artistTake it from the Masterworks team (and take notes, these are the best in the biz):Last year, the team identified 40-50 artists it was interested in buying. Masterworks Target Artists have outperformed even their blue-chip Post-War & Contemporary peers since 1996.Purchase the Best ArtMasterworks’ acquisition team drills down on the things that drive the price of specific works within target artists’ portfolios: * Recognizability. How recognizable is a piece as being by a certain artist. A Marilyn Reversal from Warhol will be worth more than a sketch of a cat, because the former is obviously a Warhol. * Medium. Many artists express themselves across a variety of media, but paintings will typically perform better than sketches or photos. * Size Matters. Typically, the bigger the better. A lot of people who buy art are doing so to show it off, and a larger painting makes a louder statement.* Year of Creation. Artists go through good periods and bad. Basquiat painted Loin, the one I own shares in, in his best year, 1982. That’s the same year he painted Untitled, the skull painting that sold for $110 million. They then set out to locate the best examples of those paintings currently available at the best prices. They do so armed with Masterworks’ Price Database, offering a more complete comp set than any on the market. Once the acquisitions team identifies the work, they use Masterworks’ own balance sheet to acquire the painting. Securitize the Art Lynn originally came up for the idea of Masterworks during the ICO craze, when people were using crypto to sell shares in all sorts of things, most of them no more than air. He quickly realized that to democratize art legitimately, he needed to work within the regulatory frameworks. Luckily, under the JOBS Act, regulation moved closer towards giving regular people access to investments previously available to only the wealthiest. Regulation A+, part of the JOBS ACT, is the main piece of regulation that makes Fundrise, Rally Rd., AngelList, and Republic possible. So in accordance with Reg A+, Masterworks creates a separate LLC for each work that it purchases, registers it with the SEC, and releases an Offering Circular (like a company issues an  S-1 before going public). It then sells shares in the LLC, which give each holder ownership of a piece of the LLC that owns the asset. The fact that it’s regulated offers investors protection. It can’t mislead, and it can’t run away with the paintings. Even its salespeople are regulated by FINRA, the same body that regulates financial institutions. After issuing the Offering Circular, Masterworks launches the offering on its website. That’s where we come in. Investing on MasterworksOn Masterworks, anyone can become an art investor. Once you sign up for Masterworks (and skip the 25,000-person waitlist with the Not Boring link), you’ll schedule a call with someone from the Masterworks team who will get a sense for your goals and risk appetite, and answer any questions you have about purchasing shares on Masterworks. From there, buying a share in a piece of art on Masterworks is really easy. In the middle of writing this, I got an email from Masterworks: “Invest Now: Fontana (15.3% historical appreciation).” I clicked to learn more, got an overview of the painting, and read Masterworks’ thesis. If I wanted to, I could read the full Offering Circular, the Reg A equivalent of an S-1 for art. Then, just to show you how fast the process is, I recorded a gif of myself going from Overview to purchase. Within the 15 second gif limit (after doing my research, of course), I bought shares in a work of blue-chip art. How cool is that? Each share in a primary offering costs $20, and I can buy as many or as few as I’d like from the available supply. Once I own shares in paintings, there are two ways I can make money:* Masterworks Sells. Masterworks plans to hold paintings for 3-10 years, monitor the market, and sell when the artist or comparable works are performing well. At that point, Masterworks takes its fees - like a hedge, PE, or VC fund, it takes 1.5% annual management fees and 20% carry.This isn’t just theoretical. In October 2020, Masterworks sold Banksy’s Mona Lisa for $1.5 million after offering the painting to Masterworks investors the prior October at $1,039,000. Mona Lisa was the second work that Masterworks offered and the first painting it sold, netting investors a 32% Net Annualized Return.* Secondary Market Trading. In 2020, Masterworks launched a secondary market in which buyers and sellers of shares of art offered on Masterworks can trade with each other. That means that if you missed an offering, you can buy shares from someone who owns them, and if you own shares and don’t want to hold until Masterworks sells, you can get liquidity from other members. Currently, Masterworks members are offering shares in works by Monet, KAWS, Banksy, Cecily Brown, George Condo, and Warhol, at prices set by the people offering them. Among the current offers, markups to the original $20 purchase price range from 1% to 8.75x for earlier offerings, including the first work sold on Masterworks -- Andy Warhol’s 1 Colored Marilyn (Reversal Series) -- and Banksy’s Monkey Poison.Beware: buying art on Masterworks is a little bit addictive. I’ve bought shares in each new offering since signing up late last year. It’s an addiction I’m comfortable with, though, because I think the art market is set to benefit from the convergence of some major trends. Art Market Tailwinds The art market, which has already outperformed other asset classes, has some serious tailwinds behind it that are set to expand the demand pool, while the supply of investment grade art, as we now, as new art scholars, know, declines. First, there are the macroeconomic factors. Interest rates are at all-time lows and likely to remain there for a while, UHNWIs hold more wealth than ever before, and there are trillions of dollars seeking anything that will give them safe returns above the rate of inflation. Art, historically, has fit that bill. Second, if Masterworks is successful in democratizing access to art at scale, both by allowing regular people to invest and by helping institutions view art as an investible asset class, it will expand the amount of dollars seeking the same supply of blue-chip art. Imagine if only the world’s billionaires could buy stocks -- not even hedge funds, or banks, or endowments, let alone retail investors -- and then all of a sudden, everyone could buy stocks. The rush in won’t be as violent as that would be, but a similar dynamic should play out on a slower, smaller scale. Third, art is the perfect asset for the type of investing that is becoming increasingly popular, the type that I wrote about in Software is Eating the Markets. While Masterworks highlights art as a useful slice of an intelligent portfolio, I think it’s more than that. It has each of the characteristics that retail investors care about when they buy an asset. Social Status. Owning art has always been a status game. While buying shares in a work of art doesn’t confer quite the same status boost that buying a whole multi-million dollar painting does, there is still an aura around art that makes those who own and understand it seem sophisticated and cultured. Online or in-person, knowing the difference between Monet and Rembrandt or KAWS and Kusama says something about you. Education. One of the things that I enjoy most about investing is that it forces me to learn. I never took an art history class in college; it seemed too subjective, too complex to just casually understand. But attach a price to something and allow it to move with the market? I’m in. Even just buying shares in a few paintings on Masterworks taught me more about art than I ever thought I would care to learn. Did you know, for example, that Impressionist artists’ paintings only appreciate in line with the rate of inflation, partially because their style has gone out of... style?Entertainment. It’s hard to imagine tens of thousands of people getting excited about something as otherwise dry as a company releasing a spreadsheet full of numbers every three months without owning stocks. Art is naturally entertaining -- millions of people who don’t own art go to galleries and museums every year -- but owning shares in certain artists’ works means that every auction and new exhibit involving that artist is an event worth following. Digital Asset. Right now, this is the least developed of the four, but I think there’s a ton of potential here. I’m spitballing (read: this isn’t coming from the Masterworks team), but I could see Masterworks giving each investor on the platform their own public-facing gallery showcasing the pieces in which they own shares. They could even offer digital art backed by Non-Fungible Tokens to each investor in a work, giving them ownership of a digital asset tied to the physical one.Ultimately, in a world in which alternative assets are gaining tremendous popularity, art’s unique characteristics make it the perfect asset for a new generation of investors. Those three factors -- macroeconomics, democratization, and Software Eating the Markets -- should combine to drive up the price of the very best art, and with its data and expertise, Masterworks will be the first to know. Build Your Art CollectionCongratulations! You’re an art connoisseur now. Next time you’re playing trivia, you can answer “What was the most expensive work of art ever sold?” with confidence, and give the wild backstory. You know all about art as an asset class, down to its correlation with the S&P. You understand what makes art valuable, and which pieces by which artists have gained the most value over time. And now, unlike any other time in the past century, you’re able to invest in blue-chip art without putting up millions of dollars to purchase an entire painting. So put your newfound knowledge to use. Go to the Masterworks Price Database and explore. Search your favorite artist to understand how their works have appreciated over time. Compare Banksy to Basquiat. And please, take your top hat and monocle off. You can finally be an art investor without being a snob. As a Not Boring reader, you can skip the waitlist and start investing in rare art now.Important note: this is not investment advice. Please do your own research before considering investing in art or any other asset class mentioned in this piece.Thanks to Dan and Puja for editing, and Michael and Scott for partnering with me! That’s all for this week! We’ll be back next week with two topics I’m giddy to explore.Have a good life, we’ll talk to you soon,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 611 newly Not Boring people who have joined us since Monday! If you aren’t subscribed, join 30,449 smart, curious folks by subscribing here:🎧 To get the audio edition of Not Boring as soon as it hits your ear, subscribe on Spotify.🎧 Listen to my interview with Teamflow founder, Florent Crivello, here.This week’s Not Boring is brought to you by…Four Sigmatic is a wellness company that is well-known for its incredibly delicious Mushroom Coffee. Try starting your day with their Ground Mushroom Coffee with Lion’s Mane instead of regular coffee. They make real, organic, Fair-Trade, single-origin coffee, with Lion’s Mane mushroom for productivity, and Chaga for immune support. If you’ve been reading Not Boring for a couple of months, you know I’m a big believer in the magic of mushrooms. I first tried Four Sigmatic when I heard them on the Tim Ferriss Podcast a few years ago, and can confirm that the Mushroom Coffee doesn’t give me jitters or a mid-day crash. Try it with a 10% discount using code “Not Boring” or just by clicking this link:Hi friends 👋 ,Happy Wednesday! In November, I wrote that We’re Never Going Backto the office 9-5, Monday-Friday. After I wrote the article, Dan Doyon introduced me to Flo Crivello, long one of my favorite tech and strategy writers and now the CEO of Teamflow.Flo responded to the email with two pages about why, while he liked the piece, I wasn’t nearly optimistic enough. I rarely get that feedback; if anything, I get too excited about the topics and companies I write about. But Flo has a vision for what the world will look like when remote work is even better than working in-person, and he built Teamflow to make that vision a reality.When Flo and I spoke, I knew I wanted to invest — the company hits so many of the themes I write about — and he agreed to open up some room in his 3x oversubscribed seed round for the Not Boring Syndicate. We decided that, since Teamflow (then called Huddle) was in stealth, we’d raise the round quietly within the syndicate, and then send the memo explaining why we invested once the product was ready for showtime.That day has come. Actually, it came last week, and we were ready to hit send on Thursday until the events at the Capitol captured everyone’s attention and delayed the Product Hunt Launch. Help make this launch day better than the first by supporting Teamflow on PH:So today, I’m excited to share why I’m so bullish on the Virtual HQ product Flo and team are building. Plus, you can hear for yourself. In a Not Boring first, I interviewed Flo for the Not Boring Podcast to talk about why he built Teamflow, his hiring process, and how he combines strategy and execution. I believe Teamflow has the potential to be a generational company, and one that in five years, is synonymous with productive, collaborative, and happy remote work. Or as we’ll call it then: work.Let’s get to it. Teamflow: Not Boring MemoWhen Salesforce acquired Slack, I got really happy at first, and then a little sad. I was happy for the vindication but needed to find  a new favorite that checked as many boxes as Slack did for me. Enter Teamflow, a Virtual Workplace startup for hybrid and remote teams that just came out of stealth last Wednesday. I’m not the only one who’s excited about Teamflow: in December, the Not Boring Syndicate filled a $250,000 allocation in a matter of hours (new record) and the company raised a 3x oversubscribed $3.9 million seed round from a roster of top early stage investors including Menlo Ventures, Elad Gil, Ron Conway’s SV Angel, Balaji Srinivasan and others. It’s no surprise that investors are so bullish. The founder, Florent Crivello is one of my favorite business writers, a former early engineer and PM for Uber, and a founder I’d bet on eight days a week. If you’ve been reading Not Boring for a while, you should recognize the name. Plus, he’s attacking a trillion dollar market with which I am all too familiar: the office workplace. As I wrote about in We’re Never Going Back, remote work will unlock the enormous potential previously constrained by geography, give employees more choice and leverage, and bring about second-and-third-order effects that will reshape the world. But it’s not inevitable. To unlock the full potential of remote work will take relentless effort from talented and passionate entrepreneurs like Flo and buy-in from early adopters like us. Today, Readwise founder and Teamflow co-investor Dan Doyon and I are going to make the case for remote work, and for Teamflow as both the product and the business that will make working online better than working in an office. We’ll cover:* Meet Teamflow. The product offers a glimpse at what remote work should feel like, and a potential meta-layer for work and collaboration tools. And it’s still just in beta.* We Might Be Going Back. A remote-first world is now more likely than ever, but it’s not as inevitable as we very online folk might think. It’s up to early adopters like us to help power through the valley of mismatch (one of my favorite Florent essays).* Flo & Team Teamflow. Teamflow is a bet on Florent Crivello and the all-star cast he’s bringing together, from all over the world. That’s a bet I’m excited to make. * Virality & Moats. Teamflow combines Zoom’s virality with Slack’s moats.Pardon my French (Flo is Parisian, btw), but it is so fucking cool to see so many ideas I find important come together in one product. If Teamflow is successful, it won’t just ride the remote work wave, it will lead it, making work better, wherever your team is.The best way to experience Teamflow is to try it yourself. You can signup today, and by joining with the Not Boring Link, Flo will move you up the waitlist: While you  wait, let me do the next best thing: tell you about it using pictures and words. Meet TeamflowTeamflow is what remote work should feel like. It’s a virtual HQ where teams can work, meet, and hang out together. It combines video, open spaces, meeting rooms, and tools like docs, whiteboards, video, and images to create a space that feels so much better than a Zoom. See for yourself. From 9:30-10:30am est, I’ll be hanging out in the Not Boring Teamflow HQ.  Because Teamflow is spatial, it lets users do things that they can’t in Slack, Zoom, or a Google Doc. You can move your Bubbles around the space, pop into conversations with co-workers, or enter closed spaces to have private conversations or meetings. You only hear people who are nearby. You can even click on co-workers to teleport to them. Just like a physical office, Teamflow lets you leave artifacts in a space -- the Marketing Room, for example, might have a doc with notes on your new campaign, images on the wall, and a whiteboard with the brainstorm from the last meeting. A Zoom room is like an office that the cleaning crew totally empties out at the end of each meeting. A Teamflow HQ persists. Working in Teamflow brings back the casual face-to-face interactions we miss when we’re not in the office, without bringing back the commute. Despite not having a “team,” I use Teamflow to create a focused work environment with the things I need for the task at hand. Here’s me watching an interview Flo gave to prepare to interview him. I have my whiteboard, a scratchpad, my very own desk, and a YouTube video up in an iFrame. Today, there are just a few simple tools integrated, but over time, Teamflow plans to integrate all of the products that teams use to work. The team is currently working on a chat tool à la Slack. Soon, you’ll be able to design in Figma, work on presentations in Pitch, pair code, close the books, and do all of the things companies do today, together, in Teamflow. Teamflow brings collaboration and communication into one place. In The Arc of Collaboration, Kevin Kwok wrote about the “meta-coordination layer” for work:There is a need for a layer across all the applications. A layer for things that should be shared across the apps as well collaborative functionality across them.There is some mix of presence, collaboration, coordination, and identity that should be ubiquitous across whatever apps are being used. A layer more attached to the people doing work and what they’re trying to accomplish—than which specific app they’re in.That sounds an awful lot like what Flo and the team are building at Teamflow. In Slack: The Bulls Are Typing…, I wrote that such a product could be a Slack killer. I believe that even more after seeing Teamflow: since it adds a spatial layer to collaboration software, which multiplies the number of potential apps that can be embedded into Teamflow versus Slack. After I wrote about Slack, Salesforce acquired it for $27.7 billion, both validating the size of Teamflow’s opportunity and making it less likely that Slack develops the meta-coordination layer itself. Have you tried using Salesforce? That leaves a huge opening for Teamflow, and I actually think that $27.7 billion undersells the opportunity. Slack was born in an office-first world. Teamflow is born in a remote-first era, and remote is poised to become the next big platform shift for enterprises. While Slack’s promise was killing email, if Teamflow is successful, it might take down an even more despised foe: the scheduled meeting. No unnecessary meetings. All your work tools in one place. No commute. Serendipity.  While the benefits of remote work are potentially immense, a post-COVID remote-first world isn’t guaranteed. It will take products like Teamflow, and people like us to join the movement. We Might Be Going Back.. Unless We Do SomethingAnyone who has been fortunate enough to get to work from home over the past year has gotten a taste of the benefits (and some downsides, but just know that your kids will eventually go back to school).  Today, the benefits of remote work are mainly non-work-related: no commute, more time with family, freedom to travel, etc… The work part is still sub-par, though, because we’re using tools designed for an office-first world. Teamflow is more than an enterprise SaaS product; it’s on a mission to accelerate the transition by making remote work more enjoyable and productive than the physical thing. Flo believes it’s the highest impact return-for-effort he can possibly achieve, because remote work can: * Give everyone 54 minutes a day back in commute time. * Unlock opportunity for everyone. * Create the biggest labor market in the world with hundreds of millions of people.* Make it 10x easier to find a job or hire people.* Make people happier at work.Teamflow is redesigning what work can be like when physical limitations are removed. The opportunity if they get it right is massive: CEBR estimates a $2.3 trillion (with a T) potential impact to GDP from remote — just in the US. I assumed, as I wrote in We’re Never Going Back, that since we’ve experienced the positives, a remote-first future is inevitable. My friend, and co-author of this essay, Dan Doyon, agrees that remote can and should be the default mode going forward, but he doesn’t think it’s a given.Dan's professional profile is somewhat illegible. On one hand, he's spent 15 years in institutional private equity focused on office real estate and currently runs a forward-thinking company in the sector. On the other hand, he's lived nomadically for the past 5 years and built one of my favorite consumer software products, Readwise. As a result of that bizarre mashup, he's thought more about both the future of office and remote work than most will in a lifetime. After I hit send on the original piece, Dan did two things: * Introduced me to Flo, who he said was building the best virtual HQ product he’s used.* Helped me appreciate an important nuance: remote work is not necessarily inevitable. Despite the obvious societal benefits of a remote-first world, he thinks We're Never Going Back should have been more accurately titled We Might Be Going Back, and that it’s imperative that we collectively do something about it. Now is our window of opportunity. Dan argues that while we have known about the benefits of remote work, both societally and for employers and employees, for half a century, we’ve been stuck in an inadequate equilibrium for decades. What makes an equilibrium inadequate, a fruit that seems to hang tantalizingly low and yet somehow our civilization isn’t plucking, is when there’s a better stable state and we haven’t reached it.We know that remote gives us two weeks per year back in commute times, that it is more inclusive, both geographically and demographically, that it gives employers access to better talent, and even that it’s good for the environment. But there are powerful forces in favor of in-office work:* Office landlords who would really like this whole work-from-home-thing to be temporary* Ex-Yahoo! CEO Marissa Meyer who claim that “to become the absolute best place to work, communication and collaboration will be important, so we need to be working side-by-side. That is why it is critical that we are all present in our offices.” * The simple inertia of doing things the way we’ve always been done. Until now, they’ve been winning. Remote work grew at only an 8% CAGR between 2005-2014 based on data from the American Community Survey administered by the Census Bureau.Having worked in the space for a while, Dan knows that the office isn’t going to go down without a fight, so he’s issuing a call-to-action: If you care about living in a world in which the air is cleaner, cities are livelier, families are closer, women and minorities are enabled, and people are happier, then the next time a traditional corporation, worker, or commercial real estate bagholder tells you that real magic only happens inside the office, take a stand.There is a movement forming. Tens of millions of people have experienced the benefits of remote work first-hand. Now, inertia is on remote’s side. Teamflow and other remote-first software and tools are going to make an until-now hacked-together experience purposeful and delightful. But the war is not won, and remote is not inevitable. Any good movement needs the best, brightest, and hungriest to lead. Via Teamflow, remote work has Flo Crivello.Flo & Team TeamflowFlo envisions a world in which we eliminate the “drawbacks” of remote work (as compared to office work) and enhance its benefits. People will have more time to do the things they love, find the perfect job for them, collaborate more efficiently, and have fun while doing it. If you just think “Zoom” when you think about remote work, it seems like an impossible task. But software is eating the world; it will eat the office, too. Luckily for proponents of remote work, and for all of us who want remote work to work better, when Flo wants to make something happen, he doesn’t fuck around. When he was 16, living in the country in France, he and his dad got into an argument about Flo’s desire to study computer science. They couldn’t come to an agreement, so Flo moved to Paris, where he lived, essentially homeless, in a 120 sqft apartment with eight people for two years. It was an unimaginably risky move that paid off. Flo went to school for, and got his master’s in, computer science, while working as a software engineer and then founding his own web and mobile consulting agency in Paris. After school, Flo moved to SF, where he spent two years as an iOS engineer, before moving to Uber.Uber is a company known for hiring entrepreneurial people and giving them autonomy to build, and even among that crowd, Flo stood out. After two years as an engineer working on the Driver App, he co-founded Uber Works, the “Uber for Staffing Agencies,” and grew it to $6 million in ARR and twenty employees within nine months. For a reprise, he launched gig charging for Uber’s Jump division, and saved the company more $20 million per year with a team of thirty people within a year. After leaving Uber, as he was thinking about what to do next, Flo’s three ideas were: a drone delivery startup, a flying car, and Teamflow. He’s not afraid of problems that others might find impossible. Plus, he’s building a dream team to make sure Teamflow has an even bigger impact than drones or flying cars would have. He spent two months’ worth of thirteen-hour days interviewing hundreds of engineers and designers to find the absolute best. When I spoke to him, he admitted that he’s probably the least talented person on the team. He likes it like that. Teamflow has 2 of the 15 core contributors to Pixi.js (one of them ex-core contributor), the world's biggest 2D WebGL Library. They’re in the top 100 worldwide in their field. All six people on the team are absolutely killer.They’ll need to be. Teamflow is one of the pioneers in the COVID-fueled remote work acceleration. Pioneers, the saying goes, take arrows in their backs. And certainly, as TechCrunch pointed out, there are competitors, and there will be more. Teamflow’s Strategy: Virality & Moats Every single time I write about moats, I turn to Flo’s 2018 summary of Hamilton Helmer’s 7 Powers, Mind the Moat. Flo has been my unwitting, unofficial guide through the world of how businesses build and sustain a competitive advantage for a couple of years. It’s not a surprise, then, that he’s building a business that, on paper, has one of the best business models I’ve seen. Teamflow combines Zoom’s virality with Slack’s moats. In May, I wrote about the perceived trade-off between the two in While Zoom Zooms, Slack Digs Moats. My argument was that while Zoom benefited from ease of adoption in the short-run, it was making a deal with the devil since the customers it acquired could just as easily leave. Easy come, easy go. On the flip side, Slack’s moats made it impossible for it to grow as quickly as Zoom — think about the work that goes into joining a Zoom versus setting a team up on Slack — but those moats also mean that customers stick around and expand with Slack for a long time. Flo realized that that trade-off is a false dichotomy. To be sure, Teamflow is built to be viral: every time a user invites a teammate or someone outside the org to a meeting in Teamflow, they get someone else to experience the product for themselves. Like Zoom, all it takes is a link, and you’re in. Even better, since Teamflow lives in the browser and doesn’t require an app install, it’s potentially more viral, since less friction should lead to better conversion and more virality.Unlike Zoom, though, once teams start using Teamflow, it will be very difficult to leave. In that sense, it’s more like Slack. In the parlance of 7 Powers, Teamflow benefits from high switching costs: to use a new product, the entire team would need to switch, and they would lose a lot of the data, integrations, and customizations they’ve built into Teamflow. Counter-intuitively, it might actually be harder to move out of a virtual office than a physical one. Teamflow also benefits from network effects: the more people who use Teamflow, the more useful it is to each user, because Teamflow is all about getting teams together in the same place. Over time, as Teamflow integrates more apps and products, it may benefit from platform network effects as well. If all of the users are in Teamflow, developers will build for Teamflow, which will attract more users, and so on.  The unlock here, the way that Teamflow has both virality and moats, is that virality should be inter-org, and moats should be intra-org. In other words, new people should be exposed to the product through viral mechanics (like getting invited to a meeting) and see enough benefits in that first encounter that they put in the work to invite their own team and customize their workspace. It’s early, but the theory seems to be playing out in the numbers: Teamflow has over two thousand companies on the waitlist, and all cohorts of beta users have spent more time in Teamflow each successive week. Of course, the remote work opportunity isn’t a secret, and a business model this attractive is bound to invite competition. One advantage that Teamflow has on that front is that it’s the first-to-market with a Virtual HQ product that’s really built for work. Other products that I wrote about in We’re Never Going Back look incredibly promising, but are more focused on the social aspect of work. The dynamics of a business protected by network effects and switching costs powers depends on capturing the market in its "take-off" period. First-mover advantage is critical.That’s one of the reasons Flo wanted to get out growing crew of smart, curious Not Boring people involved. We can help make remote work a reality, and give Teamflow a fast start. Join Teamflow What we’ve all experienced together over the past year is remote work in the same way that pop ups and banner ads were a business model for the early internet. Projecting out the internet economy back then as “more and more pop ups and banner ads,” it would have been easy to deeply underestimate both the size of the opportunity and the quality of the online experience.  Remote work thus far has been like those early ads: a lossy approximation of the offline model, hastily brought online. Despite that, we’ve seen benefits already: no commute, more time for focused work, more time with family. The list goes on. Imagine what remote work will feel like when we adopt the next generation of products, those designed expressly for a remote-first world and taking advantage of the digital world’s unique opportunities. I believe that Teamflow is one of the companies that will lead this wave of work products. It can become a generational company, led by a founder who will not quit until he makes remote work so much better that it just becomes “work.”By reading this, you’re one of the first to know about Teamflow. Your team can get ahead of the curve, work better, and begin enjoying the remote work experience, together. And you can be a part of making remote work a permanent reality, helping to usher in unimaginable societal and economic benefits and creative potential. So how can you join the mission? First and foremost, start using Teamflow. Teamflow starts at $15/person/mo, or about 2% of the cost of a physical office. By signing up with the Not Boring link, you can move up the waitlist: You can also help others learn about Teamflow by upvoting it on ProductHunt and commenting with your thoughts:And when you’ve done both of those things, come join me in Teamflow: I’m incredibly excited to be an investor, user, and evangelist for Teamflow. I want to keep working from home, ten steps away from Puja and our baby, un my sweatpants. I hope you’ll join me, Flo, and Dan on the journey.Thanks to Flo for partnering with Not Boring, and to Dan Doyon for co-syndicating the investment and co-writing this post.That’s all for this week. I’ll talk to you on Monday. 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 551 newly Not Boring people who have joined us since last Monday! If you aren’t subscribed, join 29,828 smart, curious folks by subscribing here:This week’s Not Boring is brought to you by…ExitUp is a weekly newsletter that delivers a curated list of fresh job openings across PE, VC, strategy/biz ops, finance, marketing, and product management right to your inbox. You'll also get useful insights to help you navigate your job search so that when the time comes, you'll be ready to nail the interview. Just this week, ExitUp featured dream jobs at WorkLife Ventures, Twitter, Niantic, Impossible Foods, and more. Go put what you read about in Not Boring to work. Subscribe for free today, and find your exit opportunity with ExitUp.BABA Black SheepWe Don’t Know (Where) Jack (Is)I can’t stop buying Chinese tech conglomerates. After writing about Tencent in August (here and here), I’ve slowly built it into my second largest holding. Every time it drops on news that the US or Chinese government said or did something, I buy. Now, its main rival, Alibaba, is embroiled in a situation so wild that if it happened in the US, to Jeff Bezos or Elon Musk, it’s all we’d be talking about. Its stock is down 25% from October highs. My mouth is starting to water. In case you missed it, here’s what went down: On October 24th, days away from the IPO of his fintech giant Ant Group, Alibaba founder and ex-CEO and Chairman, Jack Ma told an audience of China’s financitariat: Banks today still hold a pawnshop mentality…. It is impossible for the pawnshop mentality to support the financial demand of global development over the next 30 years. We must leverage our technological capabilities today and build a credit system based on big data, to get rid of the pawnshop mentality.We can’t use yesterday’s methods to regulate the future.To western ears, those sound like the boastful and ultimately harmless words of a passionate entrepreneur. But in China, where the Chinese Communist Party (“CCP”) has long run the banking system and doesn’t take kindly to challenges, those were fighting words. And in China, the CCP doesn’t lose fights. Jack’s remarks set off a chain of events that derailed Ant Group’s planned November 5th $37 billion IPO, which would have valued the Alibaba spin-off, of which the company still owns 33%, north of $300 billion. * November 2nd: China’s central bank and securities regulators called Jack and two Ant Group executives to a meeting. * On the same day, regulators announced that they were considering regulating Ant’s lending arm, its main growth engine, more like a bank and less like a tech company.* November 3rd: the Shanghai and Hong Kong Stock Exchanges suspended the offerings at President Xi Jinping’s command.* December 23rd: Chinese regulators opened an antitrust probe into whether Alibaba had engaged in monopolistic practices. Alibaba’s stock (BABA) tumbled 13%. * December 27th: Regulators told Ant to return to its payments roots and come up with a plan to pare down its lending, insurance, and wealth management business.And as of today, 79 days after that explosive speech, no one has seen China’s third-richest man in public. Jack Ma is missing. Rumors have flown around the internet in recent days as to Jack’s whereabouts. For a minute, people feared he might be in jail or dead. Then sources close to Jack said he was just “laying low.” A video of a Jack doppelganger went viral, saying that he’d been found repairing an AC unit:  Pardon my Mandarin, but this is fucking crazy. The founder and CEO of the world’s largest eCommerce business by Gross Merchandise Volume (GMV) and one of China’s Big Three just… disappeared. In China, Alibaba is like Amazon, Google, DoorDash, YouTube, Slack, Square, and Farfetch all rolled into one, plus some. Most people in the west still know Alibaba for its original and eponymous Alibaba.com, the B2B marketplace where wholesalers can find 1,000 ballpoint pens for $0.10 each. Chances are, when you buy something on Amazon, that product started on Alibaba, which has quietly powered the drop-shipping and third-party seller economy by letting anyone buy from foreign manufacturers and ship to the world. But the legacy business makes up less than 5% of the company’s total revenue today. Its main sites, domestic B2C marketplaces Taobao and Tmall, are so massive that on 2020’s Singles’ Day, China’s version Black Friday/Cyber Monday, it did 7x the GMV that Amazon did on Prime Day. If a western brand wants to sell to China’s 1 billion+ consumers, it needs to go through Tmall. Like Tencent, Alibaba has its hand in everything, often because if foreign businesses want to do business in China, they need to go through one of its two biggest companies. In recent years, Alibaba has expanded beyond eCommerce. It owns, among other things: * Youku: the Chinese version of YouTube and Hulu rolled into one. * Alibaba Pictures: a film production studio and investor that financed two Mission: Impossible movies, Fallout and Rogue Nation.* Startup Investments: Alibaba still owns 2.3% of Lyft, and even invested in Quibi 🙈* DingTalk: The Chinese equivalent of Slack.* Cainiao: a logistics platform with ambitions to sit at the center of the world’s logistics.* Ant Group: a 33% stake in China’s biggest fintech company. Jack Ma and Alibaba have arguably done more than any single company to grow the Chinese middle class and improve the quality of life for the average Chinese person. But since Jack (characteristically) opened his mouth in October, Alibaba is a black sheep. Look, I have no idea where Jack is or when he might come back. I have no idea what the government is going to do with Ant Group or whether it is going to break up Alibaba. But it doesn’t seem like anyone else does, either. As a result, this is what BABA’s stock chart looks like since October 24th. After trading in line with other Chinese internet stocks throughout the year, BABA tanked in November after the government pulled the Ant IPO. It kept dropping as the government announced an antitrust probe, as the US signaled it might include Alibaba on a list of banned companies, and, of course, as people realized Ma went MiA. BABA is down 25.5% from its October 27th high of $317. It’s lost $219 billion, or an entire Pinduoduo, in market cap. In a matter of months, it’s become the tech megacap equivalent of a deep value stock. As it stands, the world’s tenth largest company by market cap is either mouthwateringly cheap or wildly risky. I don’t know which it is -- prognosticating on the actions of the CCP is above my pay grade -- and nor does anyone else. But it’s going to create an opportunity either way, and we need to be prepared. So today, we’re going to learn about Alibaba. * The Story of Magic Jack and Alibaba* The Strategic Tao of Jack* What is Alibaba Today?* Alibaba vs. Amazon* Ant IPO Debacle.* Investing in China* What to Do About BABAWhen I wrote about Tencent in August, I wrote that “Tencent is the most important company that many Americans know the least about.” Alibaba’s story is more well-known, partially for the same reason that the company is in trouble right now: unlike Tencent’s Pony Ma, Jack Ma speaks English, and he’s never been shy to wield his words. The Story of Magic Jack and Alibaba Note: I’ve used Porter Erisman’s documentary Crocodile in the Yangtze, Duncan Clark’s book Alibaba: The House That Jack Ma Built, and the Acquired podcast on Alibaba to piece together Alibaba’s history. Jack Ma and Alibaba created eCommerce in China, the largest market in the world, from nothing, against all odds. He succeeded through surprisingly good luck, a tireless work ethic, and what author Duncan Clark called “a unique Chinese combination of blarney and chutzpah... ‘Jack Magic.’” Jack Ma was born Ma Yun in Hangzhou, China in 1964, just two years before Mao Zedong’s Cultural Revolution. The Cultural Revolution was a movement to “preserve Chinese Communism by purging remnants of capitalist and traditional elements from Chinese society.” That seems like bad timing for a future entrepreneur to be born. But two things happened early in Jack’s life that set him down the path towards international business.  First, when Jack was eight, Richard Nixon visited China in an effort to open the Communist country up to the world. On the trip, Nixon visited Jack’s home city with camera crews in tow, showing off its beauty and attracting western tourists to what was then a Tier 2 city. Jack fell in love with English. Every day, for nine years, he biked to the hotel at which Nixon had stayed, the Shangri-La Hotel Hangzhou, to chat up tourists and offer them tours of the city in order to better learn the language. It worked. While he was so bad at math that he failed the college entrance exams twice, he finally passed on the third try with scores good enough to get into the mediocre Hangzhou Teachers College. Upon graduating, and after famously being the only person of twenty-four applicants not hired to work at a new KFC in town, he secured a job as an English teacher making $12 per hour. Second, in 1978, when Jack was fourteen, President Deng Xiaoping brought about a series of market-based economic reforms in China that not only legalized, but encouraged, entrepreneurship. Recall that Pony Ma also benefited from Xiaoping’s policies: he grew up in Shenzhen, a special economic zone established as part of the new “reform and opening policy.” Those two things combined to put Jack in a surprisingly fortuitous position: an entrepreneurially-minded English speaker coming of age at a time when China began encouraging entrepreneurship and opened up to the west. Jack took advantage of his good fortune, but it took him a little while to find his footing in business. In 1994, fulfilling a promise to himself to start a company before turning 30, Jack started the Hangzhou Hope Translation Agency. The Agency was only moderately successful, but through it, nearby Tonglu County found Jack and enlisted him to go to the States to resolve a highway deal gone bad. There are various accounts of what happened in America, and it’s one of very few subjects about which Jack isn’t willing to talk, but the gist is this: * The American business partner turned out to be a con man, and he held Jack hostage, either in a mansion in Malibu or a penthouse in Las Vegas, to keep him quiet. * Somehow, Jack escaped. * He made it to Seattle, where he stayed with a friend who worked at an internet company. * That friend showed Jack the internet for the first time. * Jack looked up “beer,” and found American beer, and German beer, but no Chinese beer… no Chinese anything for that matter. * Jack asked his friend to set up a website for the Hope Translation Agency. * Within two hours, he got five inbound requests: three from the US, one from China, and one from Japan. * He was hooked on the internet, and went home resolved to start an internet business. When Jack got back to Hangzhou, he set up China Pages, which built and listed sites for Chinese businesses. Thanks to the Internet Archive’s Wayback Machine, the site has been preserved for posterity: ChinaPages caught the attention of a state-sponsored communications company, which threatened to “compete” it out of business, and then bought a controlling stake for $140k. Jack lost control, left, and took a job working for the government. While the government job was painfully slow and boring for a restless entrepreneur like Jack, two things happened there that played a role in Alibaba’s development and trajectory: * ChinaMarket. Jack and a team he recruited from ChinaPages built ChinaMarket.com.cn, a government run B2B message board which let users post supply or demand requests and enter into “confidential business negotiations in encrypted Business ChatRooms.” * Jerry Yang. When Yahoo! founder Jerry Yang came to China in late 1997, the government needed someone who worked for the government, understood the internet, and spoke English to tour him around. Jack Ma was the perfect fit. ChinaMarket was dragged down by bureaucracy -- each submission had to go through layers of government approval -- but it gave Jack the seed of an idea. He quit and left Beijing for Hangzhou. In early 1999, just as the internet bubble was picking up steam, Jack and seventeen co-founders (!!) created Alibaba.com. Alibaba, so named because it would “Open Sesame” China to foreign buyers, built a site that allowed small Chinese manufacturers to tell buyers around the world that they were open for business. That February, he called a meeting in his Lakeside Gardens apartment with the full team. Ever-confident, he had the meeting filmed, giving us a glimpse into Jack’s prescience and early leadership: In May, Jack met Joe Tsai (if you’re an NBA fan, that name should sound familiar: he owns the Brooklyn Nets), and convinced him (and his wife) to leave his $700k per year private equity job in Hong Kong to come join his ragtag crew in Hangzhou. Joe immediately got to work trying to raise money for the business. He set Alibaba up as a Variable Interest Entity in the Cayman Islands, which would allow it to take money from foreign investors, and organized a trip for the two to Silicon Valley. The trip was unsuccessful, but right around that time, China.com IPO’d at a $1 billion valuation, and the China rush was on. When they got home, Joe called up an old friend, Shirley Lin, who was leading Goldman’s tech investments in Asia. They negotiated a deal for Goldman to acquire a majority stake in Alibaba for $5 million. Jack pushed back at a 50/50 split, and Lin agreed, but the Goldman investment committee decided it didn’t want all that risk 🤦🏻‍♂️. Goldman kept 33% and syndicated out 17% to GGV, Venture TDF, Fidelity Growth Partners, Investor AB (Joe’s old employer), and Transpac. (Goldman would sell its stake in 2004, after Lin left the company, for $22 million. The 6x return isn’t bad, until you calculate that 33% of Alibaba is worth $210 billion today! 🤦🏻‍♂️ The lesson: never sell!)Money in the bank, Alibaba got back to building, signing up more than forty thousand users by the end of the year largely by keeping the site free. At the time, the site was little more than a directory and message board, as captured by the Wayback Machine: The fight for talent in a hot China tech market was fierce, but Alibaba had an advantage: Hangzhou. Being in a Tier 2 city gave Alibaba access to cheap talent with few other options and cheap real estate (they signed a 200k sf office lease for $80k per year, or $0.40/sf, in 2000). In a bit of foreshadowing, Jack highlighted another benefit: Even though the infrastructure is not as good as in Shanghai, it’s better to be as far away from the central government as possible.Money became even less of an issue for Alibaba just a couple of months later, when, in January 2000, SoftBank led a $20 million investment for 30% of Alibaba. As I wrote in Masa Madness, Masayoshi Son led the deal himself after listening to Jack speak for just five minutes. At the time, Jack said, “We didn't talk about revenues; we didn't even talk about a business model. We just talked about a shared vision. Both of us make quick decisions.”Reflecting back at Alibaba’s 2014 IPO, the notoriously eccentric Son said, “It was the look in his eye, it was an ‘animal smell.’ … I invested based on my sense of smell.” His nose was on point: when Alibaba IPO’d, the investment was worth $60 billion, a 3,000x return. That investment is responsible for SoftBank’s Vision Fund, fwiw. The cash came in just as the dot com bubble was about to burst, and allowed Alibaba to keep building. It surpassed 300,000 members in the summer of 2000. In July, Forbes made Jack the first Chinese business person on the cover in fifty years, and in August, The Economist profiled Jack in a piece called The Jack Who Would Be King.Despite member growth and press, though, Alibaba wasn’t making any money. It was becoming bloated, with engineering offices in Silicon Valley. So Jack brought in a former GE exec, Savio Kwan, who killed the US office and figured out how to start making money. Since the Chinese market was so nascent, the Alibaba team realized it couldn’t just copy the US business model of charging businesses to list and taking a cut of transactions. Instead, Alibaba gave away the product and transactions for free and charged sellers for better placement. It worked. For the first time, in early 2002, Alibaba turned a profit. From Crocodile in the Yangtze:The company was PUMPED: Just when things were looking up, though, Alibaba would face two of its biggest challenges yet.The Strategic Tao of JackDuring a global pandemic due to a respiratory illness that originated in China, Alibaba faced a crisis that put the future of the company in jeopardy. No, no, not COVID. SARS. In May 2003, an Alibaba employee named Kitty Song contracted SARS, forcing the company into a two-week quarantine, during which 400 employees brought computers home to keep the company running.  While it was scary and challenging in the short-term, SARS actually helped Alibaba grow. Does this paragraph from Alibaba: The House That Jack Built sound familiar?Although it sickened thousands and killed almost eight hundred people, the outbreak had a curiously beneficial impact on the Chinese Internet sector, including Alibaba. SARS validated digital mobile telephony and the Internet, and so came to represent the turning point when the Internet emerged as a truly mass medium in China.Around the same time, eBay, the darling of the American internet, came to China, dealing Jack his strongest competitor yet. The four year battle is worth diving into, because it sheds light on how Alibaba thinks about growing and capturing share in nascent, competitive markets, and is a lesson in Counter-Positioning, customer centricity, and Jack Ma’s unique brand of strategic Tao. It’s also one of the greatest business stories in recent history. It’s hard to remember this now, but once upon a time, eBay was one of the most powerful companies on the internet. After going public in 1998, at a $2 billion valuation, the company rode the dot com bubble to a $30 billion valuation in March 2000. That attracted copycats in China, the most promising of which was called EachNet. Founded by HBS grad Shao Yibo (“Bo”), EachNet raised $20.5 million in October 2000 after the crash. In the fall of 2001, eBay CEO Meg Whitman came to China to meet with Bo, and in March 2002, the companies announced that eBay was buying a 33% stake in EachNet for $30 million. While Alibaba’s B2B business and eBay and EachNet’s B2C businesses don’t seem directly competitive on paper, Jack realized that, “In China, there are so many small businesses that people don’t make a clear distinction between business and consumer.” To prepare for battle, Jack raised a fresh $80 million from SoftBank. Then, during the SARS lockdown, a seven-person team from Alibaba headed to the Lakeside Gardens apartment to work on a top-secret skunkworks project. They worked around the clock to create Taobao, which means “treasure hunt,” Alibaba’s C2C marketplace. In May 2003, they quietly launched the site, and it picked up so much early traction that Alibaba employees, unaware of the project, emailed Jack to alert him that there was a new competitor in town. In June, the real competitor, eBay, announced that it was acquiring the rest of EachNet for $150 million. eBay, under pressure from shareholders to grow, needed China. CEO Meg Whitman, also an HBS grad, said, "Share of e-commerce in China is likely to be the defining measure of success on the net." Then, on July 10th, Jack decided it was time to launch Taobao publicly. The company held an event announcing that they were behind Taobao, and employees were ecstatic. Jack announced that Taobao was a consumer marketplace customized for China, and that it would be completely free for three years. Alibaba, via Taobao, was going to war with eBay. The odds were stacked against Alibaba, but Jack put on a masterclass in guerilla warfare, focusing on three things: Counter-Positioning, customer centricity, and his own special strategic Tao. In doing so, Jack proved that he’s one of the greatest Worldbuilders in business history.Customer Centricity“We’re a customer-first company” is such a cliche and common phrase among startups at this point that it’s become meaningless. But customers are truly at the heart of Alibaba, explicitly above employees and investors in its company values. That checks out in the decisions the company has made. Specifically in the fight against eBay, it was Jack’s understanding of the similarities between small business customers and consumers that made him realize that Alibaba needed Taobao to compete directly with eBay. Additionally, understanding that customers needed a way to pay for things online in order to build trust and remove friction from an otherwise uncertain process, the team built an escrow service, AliPay, that would become a multi-hundred-billion dollar giant that we will return to later.And that customer awareness also led Jack to decide to keep the product free for three years, because he knew that he couldn’t both convince customers to try something new and charge them at the same time, investors be damned. Counter-PositioningThe decision not to charge for Taobao for three years is a brilliant example of counter-positioning. My favorite of the 7 Powers, counter-positioning is “the practice of developing your business model such that incumbents have conflicting incentives preventing them to compete effectively.” Jack realized that eBay was under intense pressure from shareholders to start making money in China, and that although free was the right model and eBay had deeper pockets, it would not be able to follow Alibaba’s lead. At the launch event, he announced that Taobao would be free for three years, and he was right: instead of eliminating its fees, eBay vocally defended its paid model, which sowed the seeds of its eventual defeat. Strategic Tao of JackCompetition is the greatest joy. When you compete with others, and find that it brings you more and more agony, there must be something wrong with your competition strategy. -- Jack MaJack Ma grew up reading martial arts novels and studying Mao, so when eBay came to his doorstep looking for war, he knew what to do. Alibaba would have to pull eBay into guerilla warfare. According to Crocodile in the Yangtze, directed by a former Alibaba exec, the company’s battle plan went something like this: * Declare war on eBay to get free press and piggyback off the larger company’s ad budget* Don’t make personal attacks on Meg Whitman or play the nationalism card* Do argue that eBay’s business model didn’t fit in the Chinese market * Take the battle to eBay’s turf by organizing a US press tour, turning up the heat on the bigger, public company * Stay locally focused: Taobao built a cute product with animated characters to appeal to younger Chinese shoppers who would fuel its growth, while eBay tried to fit its China site into the same architecture and brand that it used globally. After three years of battle, while eBay was outwardly confident about China, inwardly, it gave up. In 2005, Meg Whitman called Jack in to discuss investing in Alibaba. He turned her down: she didn’t actually want to grow the market or help small businesses, she just wanted to capture as much of the existing market as she could. Instead, Jack turned to the man he had once guided around the Great Wall: Jerry Yang. Yahoo! invested $1 billion for 40% of Yahoo! in one of the greatest investments of all time. With cash in the bank, Alibaba pledged to keep Taobao free for three more years. Almost immediately, eBay responded by saying to the press, “Free is not a business model.” Jack, as captured in the documentary, was giddy that his foe responded so quickly. He told the camera: Business is fun. Competition is fun. Don’t take it too seriously. They took it too seriously in China. eBay’s days are numbered. If we have no enemy in our hearts, we will be invincible. The most important thing is about increasing our transaction volume and user base.He was right. In 2006, eBay announced that it was retreating from the Chinese market. Jack Ma: WorldbuilderJack Ma was a Worldbuilder, that rare and special leader who is able to see a non-obvious future and will it into being. Specifically, Jack: * Predicted that internet commerce in China was going to be orders of magnitude larger than it was in 2003, and that it didn’t matter who was leading then, but who would be leading in ten years.* Used a free offering and payment product to build up both sides of the network, growing the market before worrying about monetizing it. * Timestamped the whole thing on camera, laying out a vision that has largely come true over the next seventeen years. As Alibaba faces its next seventeen years of challenges, including growing and leading the nascent cloud and logistics markets, the same strategies Alibaba used to win eCommerce will once again prove useful.Jack Ma stepped down as CEO of Alibaba in 2013, and retired from the Chairman role in late 2020, but the company is still infused with the culture he built and the strategic focus he put in place. What is Alibaba Today?In 2007, fresh off its victory over eBay, Alibaba.com went public, raising $1.5 billion. In a rare move, Alibaba Group, the parent company that also owned the fast-growing-but-unprofitable Taobao and the promising payments platform AliPay, stayed private. Then, in 2014, Alibaba Group brought Alibaba.com private and took the whole thing public on the NYSE, raising $25 billion in the largest IPO of all time. Since going public at $68 (the first trade actually priced at $92), BABA grew 4.7x to its October 27th peak. Since regulators took a special interest in Ant and Alibaba in late October, the stock has fallen 25% while Chinese internet ETF KWEB rose 14%.   The question is: when the dust settles, is Alibaba’s value closer to the its 2014 IPO-day close of $240 billion or its recent high of $858 billion? It’s a big, meaty question, so let’s break it down by looking at the businesses that make up Alibaba to back into the uncertainty discount. Alibaba’s BusinessesThe easiest way to think about Alibaba, and certainly the most common analogy, is like a Chinese Amazon. Like Amazon, its main revenue drivers are ecommerce and cloud. While the comparison is easy, from a business model perspective, it also happens to be wrong. First things first, while Amazon is an asset-heavy business, taking inventory and managing logistics, Alibaba operates asset-light marketplaces, and monetizes mainly via “Customer Management Services,” or tools, ads, and better placement. Second, while Amazon has long run eCommerce at thin margins and generated high margins from AWS, Alibaba runs eCommerce at high margins (35% in the most recent quarter) and loses money on Alibaba Cloud (-1% in the most recent quarter). Should that change, as the company predicts it will this fiscal year, that’s a big opportunity for BABA’s bottom line. Finally, Alibaba, through its seemingly sprawling roster of companies, is building the most complete possible data set on its customers: what they buy, who their friends are, where they travel, and more. Lillian Li breaks down the strategy nicely here: To better understand what BABA is building let’s look at the business lines. In the quarter ended September 2020: * 67% of Alibaba’s revenue came from retail commerce (Taobao, Tmall, AliExpress, Lazada, and a host of smaller properties) * 10% came from Alibaba Cloud, the company’s answer to AWS. * Alibaba, the original wholesale business, made up just 4% of revenue. * The remaining 19% of revenue came from logistics (5%), local consumer services (6%), digital media & entertainment (5%), innovation initiatives & others (3%). While I’ve always associated Alibaba with the B2C wholesale platform, retail commerce drives the business. Retail Commerce More people shop on Alibaba’s properties than any other platform in the world. Over 1 billion people shopped on Alibaba’s sites in FY2020.Alibaba’s retail commerce platforms fall into two categories: China and international. International retail commerce is relatively simple, so let’s do that first. It’s all about Lazada and AliExpress. * Alibaba owns a majority stake in Lazada, a leading eCommerce brand in Southeast Asia, having plowed more than $4 billion into the company starting in 2016. Ironically, given its experience fighting eBay on its home turf, Alibaba has struggled to grow Lazada as fast as it grows its China properties, and has resorted to shaking up management and sending in Alibaba execs to try to right the ship. Tencent-backed Sea Limited’s Shopee is beating Lazada in important markets like Vietnam, Malaysia, and Indonesia. * AliExpress, on which international shoppers can buy retail from China at ridiculously low prices, is wild. It’s like shopping in a local market, online, with all of the randomness that entails. In just one random screenshot I took, I spy a knock-off theragun, custom photo prints, $3.43 “Classic Romantic Shiny Full White” jewelry, and a whole lot of tablecloths. AliExpress can take weeks to deliver, and may or may not ever arrive, but you can’t beat the prices! AliExpress and Lazada made up just 5% of revenue, or $1.2 billion, in Q2 2021, and is growing in line with the overall business at 30%. The real cash cow for Alibaba is China Commerce Retail.In China, in addition to a host of smaller, more targeted retail sites, the two main platforms, with 742 million active customers, are Taobao and Tmall: * Taobao, launched in 2003, is Alibaba’s domestic B2C and C2C platform, catering to individuals and small merchants as sellers. In line with Alibaba’s small business-friendly ethos, Taobao still doesn’t charge transaction fees, and instead monetizes through ads and other services designed to help them boost sales.  * Tmall, launched in 2008, is a B2C platform focused on selling domestic and international brands to China’s growing middle class. If foreign brands want to reach Chinese consumers, they have to go through Tmall. As a result, Tmall monetizes by charging merchants a deposit, an annual fee, and commission fees on each transaction. Fun fact: in 2009, Jack seized on the Chinese Singles’ Day holiday by offering “Double 11” deals on Tmall, and drove $340 million on the site. From its origins on Tmall, Singles’ Day has grown into the most important day for eCommerce in the world, with Alibaba’s properties driving $74 billion in GMV in 2020 through virtual events. While there’s a perception that Chinese customers spend less, the company reported that 190 million people spent over $1,000 through Alibaba in FY2020. For comparison, Amazon has 126 million Prime Members at last count, and Prime members spend $1,400 per year on average. Alibaba has its own membership program, 88VIP, and members spend 9x as much as the average Alibaba retail customer. Alibaba’s model is different than traditional eCommerce models in the United States (although by offering advertising, logistics, and a third-party marketplace, Amazon is getting closer). Despite not charging transaction fees on Taobao, Alibaba is able to take a huge cut of the revenue generated on its platforms by offering all of the services that a merchant might need to run their business. As the company lays out in its most recent investor presentation, Alibaba’s subsidiaries offer inventory & logistics, distribution, marketing, R&D and IT, financing, and other operating services to merchants. They can run nearly the entire small business P&L. By the time merchants are done paying Alibaba to handle everything besides manufacturing for them, they’re left with $4 in profits for every $100 in revenue. That’s an incredibly powerful model. Not only does Alibaba take $96 of every $100 dollars, they build in incredibly high switching costs. Why sell somewhere else when Alibaba handles every single piece of your business for you? Acquired’s David Rosenthal described Alibaba’s business model as, “Amazon with the capital intensity aspects of Google.” The model is working. In Q2 2021, it generated $14.7 billion in revenue, 62% of Alibaba’s total, and Core Commerce as a whole was Alibaba’s most profitable segment at 35% Adjusted EBITDA Margins. Wholesale CommerceAlibaba’s original business, B2B wholesale commerce, is just a small piece of what it does today, generating $1.1 billion in Q2 2021 revenue, 4% of Alibaba’s total. Half of that revenue comes from China (1688.com), and half comes from abroad (Alibaba.com). Simply, Alibaba connects manufacturers with wholesale buyers. Let’s say I wanted to start selling custom Not Boring notebooks. There’s a lot of content here, and maybe you want to take some notes. Before Alibaba, I would have had to find the number for a manufacturer, call them up, and negotiate prices, often across language barriers. Today, I can go to Alibaba.com, search for “customizable notebooks,” and find thousands of options from manufacturers in nine countries. I need to fill a minimum order size -- 1,000 notebooks for the top sponsored result -- and can get discounts if I buy more. Then, all that’s left for me is to receive the order, set up an online storefront, and start selling. Fascinatingly, while competitors on paper, Alibaba actually powers much of Amazon’s third-party business via its wholesaling. On the most recent episode of Founder’s Field Guide, Thrasio CEO Carlos Cashman told Patrick O’Shaughnessy: Alibaba likely powers a large percentage of Amazon’s third-party marketplace, but like Taobao, though, it doesn’t charge transaction fees, and makes money by selling better exposure or unlimited product listings to merchants. In FY2020, Alibaba did over $3 billion in wholesale commerce revenue, and it’s on pace to do more than $4 billion in FY2021 as eCommerce grows around the world, quietly powered by Alibaba. Alibaba CloudAlibaba launched its second biggest and second fastest-growing business line, Alibaba Cloud, in 2009. It was the company’s first attempt to extend its mission, “To make it easy to do business anywhere,” beyond eCommerce. It was only natural. Jack Ma’s Chinese name literally means Cloud Horse. Like Amazon, Alibaba first used its cloud product internally, to support its own properties. In November 2010, it handled 2.4 billion pageviews in one day on Taobao’s first Singles’ Day. Today, Alibaba is the fifth largest cloud provider in the world, and far and away the largest cloud provider in China. It has over 3x the market share of Tencent, the next closest competitor. Alibaba seems to be running the same strategy that it ran for its eCommerce businesses. In a nascent and rapidly growing market, getting and staying out front means more than turning a profit. Eleven years into Cloud, Alibaba is still losing money. In Q2, it lost $23 million on $2.2 billion in revenue, but that revenue grew 60% year over and the company expects to turn a profit this year. In a 2018 interview, Alibaba CEO Daniel Zhang told CNBC that cloud computing would become Alibaba’s main business in the future. He reiterated that sentiment in September, saying that cloud “is the kind of opportunity that only comes once in a generation,” and that the world is in “a nascent stage of the global cloud era.”With that kind of opportunity ahead of it, it’s not surprising that the company has focused its efforts thus far on market share. Turning on the profit engines from the leading position should serve BABA well for years to come. LogisticsUnlike Amazon, Alibaba doesn’t operate its own logistics network. Instead, it co-founded a platform, Cainiao, in 2013. The subsidiary is, “an open platform that allows for collaboration with 3,000 logistics partners and 3 million couriers—including the top 15 delivery firms inside China and 100 operating internationally.” It currently allows shippers to send a 1kg package anywhere in China in 24 hours for 30 cents, and makes these cute automated delivery vehicles. Today, Cainiao is more important strategically than financially. While anyone can use Cainiao to deliver packages, the process is faster, easier, and more seamless for those who sell on an Alibaba eCommerce platform and take payment via AliPay, strengthening Alibaba’s switching costs. It generated $1.2 billion in Q2 2021 but lost money. In the future, Alibaba expects Cainiao to become the operating system for global logistics, and a profit center for the company. Consumer Services, Media & Entertainment, and InnovationIn the near-term, the success of the eCommerce and cloud businesses will determine Alibaba’s success. But while Cloud is growing and improving its margins, eCommerce is growing more slowly, and margins are compressing ever so slightly as the company faces more competition from Tencent-backed JD.com and new entrants like Pinduoduo. To fulfill Jack’s 102-year vision of making it easy to do business anywhere, the company is investing its significant cash pile ($63 billion as of last quarter) into new lines of business. Specifically, it’s building or acquiring startups under three categories: Local Consumer Services, Digital Media & Entertainment, and Innovation Initiatives. Innovation initiatives, including Maps, smart speaker Tmall Genie, AliOS, and DingTalk make up just 1% of revenue combined, but Local Consumer Services and Digital Media & Entertainment make up a growing piece of Alibaba’s future plans. Let’s take a look at one business in each. Local Consumer Services: ele.meIn 2018, Alibaba acquired local delivery startup ele.me for $9.5 billion. You can think of it like DoorDash for China: the company started out by offering a food delivery platform, but is quickly adding capabilities in Online-to-Offline (O2O), or “new retail.” The company competes directly with Meituan-Dianping, the market leader. Meituan is the undisputed leader in food delivery, but China Tech Blog points out that there’s a new battle underway in O2O that is anyone’s game.  The prize here is massive: Meituan currently has a $234 billion market cap, and Tencent’s 20.1% stake in the business is currently its most valuable holding among a portfolio of phenomenal investments. Local consumer services is a proxy war for the two giants, with Tencent pushing Meituan through WeChat, and Alibaba pushing ele.me through AliPay. While Meituan’s lead seems insurmountable, O2O seems to better play into Alibaba’s retail commerce strength than food does. Alibaba did $1.4 billion in local consumer services revenue, led by ele.me, in Q2 2021, representing 6% of the company’s business. Digital Media & Entertainment: YoukuIn 2016, Alibaba bought streaming video platform Youku for $5.4 billion. The platform, often referred to as the “YouTube of China,” is the third most popular video streaming site in the country, after Tencent Video and Baidu’s iQiyi, according to Pandaily. It also faces competition for screentime from ByteDance and Bilibili, which sport $140 billion and $41 billion valuations, respectively.Youku is part of Alibaba’s growing digital media portfolio, which includes Alibaba Pictures (which backed two Mission: Impossible), Tmall TV, ticketing platform Damai, and Alibaba Music. In Q2 2021, this segment lost $105 million on revenues of $1.2 billion. As shopping moves more interactive and video-based, Alibaba will need to keep investing in this area and figure it out if it’s going to compete with the next generation of eCommerce startups. InvestmentsOn top of all of its own business lines, Alibaba also makes investments in startups and public companies around the world. In Reliance’s Next Act, for example, I wrote that the company is one of the leading investors in Indian unicorns. Given India and China’s soured relations, and the company’s own failures, India is closed to the company for now.  In the public markets, Alibaba owns a 2.3% stake in Lyft, and recently made post-IPO investments in luxury fashion platform Farfetch and Chinese Twitch, Bilibili. While Alibaba’s portfolio is over 200 companies strong, it’s not as impressive or important to the business’ future as Tencent’s. That said, there is likely upside surprise waiting in Alibaba’s portfolio of eCommerce and China investments, two categories that performed particularly well in 2020. With all of Alibaba’s businesses a little more clear, it’s time to turn back to Amazon, and that uncertainty discount. Alibaba vs. AmazonI just said that from a business model perspective, it’s wrong to compare Alibaba to Amazon. But it’s still the most useful comp we have for BABA. So how does Alibaba compare to Amazon? It’s hard to compare the two companies apples-to-apples from a revenue perspective because the business models are so different, but let’s take a deeper look. * Alibaba does nearly 3x the GMV that Amazon does and generated nearly twice the profit in FY2020. * While Alibaba grew revenue faster from FY2019 to FY2020, Amazon grew faster YoY in the most recent quarter, at 37% compared to 30% for BABA. * Alibaba grew net income more than twice as fast as its American counterpart in FY2020.* Both have nearly exactly the same amount of cash on their balance sheets: Amazon had $68 billion as of last quarter, and Alibaba had $63 billion. * And while AWS is a big profit driver for Amazon, Alibaba is doing what Alibaba (and Amazon) has always done: playing the long game and losing money upfront to grow the market and capture profits down the line.  Back to that Alibaba discount: how much less are investors paying for Alibaba than Amazon because of the hair on the company? This week, we’ll get a chance to see how the credit markets feel about Alibaba given everything that’s gone on when the company raises $5-8 billion in debt. A successful raise in the credit markets might help restore confidence in the equity markets, but for now, the equity markets seem shook. Looking at the two companies’ P/E ratios is an imprecise way to measure the discount, particularly since Amazon famously forgoes profits today for profits tomorrow. But then again, so does Alibaba, so let’s go with it. AMZN trades at 3.7x the P/E of BABA today. As of BABA’s peak pre-crash on October 27th, AMZN was trading at 2.8x the P/E of BABA. In other words, BABA traded at a 65% discount to AMZN pre-crackdown, and trades at a 73% discount today, and it arguably has a better business model, more complete customer data, and more growth prospects than Bezos and crew. And that’s not even taking into account Alibaba’s 33% stake in Ant Group. Ant IPO Debacle As of late October, Alibaba’s 33% stake in Ant Group was on the verge of becoming worth more than $100 billion dollars in the public markets. The business that started as AliPay in 2003 was set to go public in a $37 billion IPO, surpassing Alibaba’s record as the largest ever, when Jack Ma opened his mouth and pissed off the wrong banking regulators. In November, the Shanghai and Hong Kong Exchanges canceled the IPO. Regulators threatened making Ant behave more like a bank, which would mean taking on more risk, capping consumer lending, and threatening its tech multiples. In December, they told Ant to focus on its core payments business. The question is: after all of that, what is Alibaba’s 33% stake in Ant worth now? In its seventeen years, AliPay has grown from a simple escrow service that helped people buy things on Taobao into Ant Group, a financial behemoth unlike any the world has ever seen. This graphic from the company’s prospectus, shows the breadth of offerings: If Tencent used chat as its wedge into making WeChat China’s SuperApp, Ant Group used payments to try to overtake its rival and claim the SuperApp throne. In Ant Group: A Financial Infestation, Mario Gabriele and Lillian Li describe Ant’s strategy. Across Digital Payments, InsureTech, CreditTech, and InvestmentTech, Ant does three things: * Uses Data as a Superpower. Ant leveraged payments and transaction data into an unparalleled understanding of its customers, which it uses to inform credit and insurance underwriting, and which gives it the elusive actual data network effects.  * Acts as Its Own First and Best Customer. Like Amazon, it builds its own products first to prove out the concept, test, and learn, and then uses the tech to build a platform on which others build. Theoretically, being a tech platform instead of a lender should have helped Ant avoid being regulated as a financial institution.* Aggregates Demand. By owning over one billion customer relationships, Ant was able to convince banks, mutual funds, and insurers to join the platform and use their own balance sheets to service customers. Per Mario and Lillian’s analysis, Ant was on pace to do $21.6 billion in revenue in 2020, with net profit rates hitting 30% halfway through 2020. They also highlighted that between 2019 and 2020, the main source of revenue flipped, from Payments in 2019 to Credit in 2020.  Those kind of numbers make for a compelling IPO, and in The Ant That Poked the Dragon, Rishi Taparia set the stage as it looked in late October:  Ant Group is a financial services behemoth and the largest privately-held company in the world. It has over a billion users and 80 million merchants using its services across 200 countries. The platform processes over $18 trillion a year in payment transactions, making it bigger than Visa and Mastercard combined. The lending arm has lent over $300B to both consumers and SMBs. A big business ready for a big IPO.Ant was scheduled to go public on November 5th, 2020; the $37 billion offering was to be the largest in history. The company was projected to have a market cap of over $300 billion, making them more valuable than most global banks. The demand for IPO shares was so high brokerages were holding lotteries to determine who would have the “once-in-a-lifetime opportunity” to buy in. And then, as we covered at the beginning, Jack opened his mouth, Chinese banking regulators stepped in, and shit hit the fan. On paper, what they were most concerned about was the fact that Ant was acting like a lender but regulated like a technology company. Ant claimed that it served as a platform, connecting lenders with borrowers and sprinkling in a little bit of algorithmic underwriting. The regulators weren’t so sure, and wondered whether Ant shouldn’t be treated like any other lender. That would mean two things: * Putting a cap on how much it could lend to consumers.* Requiring Ant to hold more cash on its balance sheet, and take risk instead of just matching borrowers with lenders. According to the Financial Times, that would have had huge implications for Ant’s valuation. The market didn’t have a chance to weigh in on what the regulations would mean for Ant’s business. On November 3rd, the IPO was blocked by the Hong Kong and Shanghai stock markets based on a direct order from President Xi. Then, after two months of uncertainty and fear that the government would force Ant to break up, in late December, the People’s Bank of China told Ant Group to return to its roots as a payment provider and “rectify” its insurance, wealth management, and lending services, key growth and profit drivers for the business. That leaves Alibaba investors with more questions than answers. What does “rectify” mean, for one. In the worst case scenario, Ant focuses exclusively on payments, which account for 36% of its revenue. That could potentially slash the company’s valuation by two-thirds, and Alibaba’s stake with it. Suddenly, what investors thought was a $100 billion position would be worth closer to $35 billion. Even in the best case scenario, with regulators watching the company and threatening restrictions, and with the black eye of a pulled IPO under its belt, it’s hard to see Ant achieving a valuation north of $300 billion. Now, BABA investors are up in the air, with a pretty wide range for the value of its Ant stake: from $30 billion, or about 5% of Alibaba’s EV, to $90 billion, or 15%. Given the $219 billion drop in BABA’s market cap, the ultimate value of the Ant Group shares might be less important than how the relationship between the company and regulators progresses. That’s the challenge with investing in China. Investing in ChinaThe same day the state announced potentially tighter regulations, state-controlled media company Xinhua posted a seemingly innocuous (and really fun-sounding) article titled, “Don't Talk Casually, Don't Do Things Casually, and People Should Not Be Casual.” In it, under the line “Everything has its costs, if you do not have the capital, please do not do whatever you want,” the publication included this painting of a horse in the clouds (Jack’s name, Ma Yun, means “Cloud Horse”): That’s horse-head-on-your-pillow type shit, and serves as a reminder that with the CCP in charge, investing in Chinese companies is not at all like investing in American ones. Despite the uncertainty, and perhaps even partially because of the discount that it provides, investing in China is tempting. There’s the sheer size. At 1.393 billion people, China has the world’s largest population. According to McKinsey, the population is becoming much wealthier, with the Affluent and Upper Middle Class’ share of urban households expected to grow from 17% in 2012 to 63% in 2022, with the two groups’ private consumption growing at a roughly 20% CAGR over the decade. Then there’s the internet penetration. In 2019, Chinese eCommerce sales grew 16.5% to $1.5 trillion, compared to $601.7 billion in the US, and that’s before the global pandemic that accelerated eCommerce penetration. And there’s still room to grow. While 90% of Americans are online, China’s internet population of 854 people represents only 61.2% of the total population. Finally, there’s the innovation. Companies like ByteDance (TikTok’s parent company),  Pinduoduo, and Bilibili have exploded into the western consciousness this year for their innovative business models. Chinese entrepreneurs no longer have the reputation they once did as copycats. As a result, despite Alibaba’s struggles, the KraneShares CSI China Internet ETF, which tracks leading Chinese internet companies, has outperformed the NASDAQ over the past year. And China’s run may just be getting started. Bridgewater, the $160 billion hedge fund founded by Ray Dalio, said in February 2020 that a group of seven “Asia Bloc” countries, led by China, are set to grow much faster than the US and Europe, and that the group will own a majority of the global stock market by 2035. After Chinese regulators pulled the Ant IPO, Dalio, who calls himself “a chronic bull on China,” actually defended the government’s moves, citing a risk that innovation can get too loose. He also sees China evolving into the role of the world’s reserve currency since the US has created so much debt and printed so much money. That view on debt may be why he supports curbing Ant’s lending practices. While Dalio is on the far right of the China bullishness spectrum, his view that westerners not owning Chinese stocks is too risky makes sense. As westerners, we’re naturally overweight American companies (for our jobs and the things we buy) and government. Adding China to the mix, if nothing else, is a hedge. What to Do About BABAIf Dalio is right, and the government’s actions were actually rational and justified, and if Alibaba and the government come to a rational agreement, BABA is wildly undervalued. It’s the leading eCommerce company in an internet economy that is one of the largest and fastest-growing in the world, and owns a third of that market’s largest payments company. Alibaba trades at a 72% discount to Amazon, and serves a market that is growing faster. It is running its patient, long-term playbook with Alibaba Cloud, and expects to start turning a profit on that business this year. It quietly powers a drop-shipping economy that has exploded during Coronavirus, and is likely to continue to accelerate as more influencers, who have audiences but no manufacturing expertise, build robust businesses around themselves. Alibaba has some of the world’s strongest moats and important category leaders:* The world’s largest retailer by GMV. * China’s largest cloud provider. * A contender in the local O2O delivery wars. * The most ambitious logistics platform in the world.* The most complete understanding of the Chinese consumer. Certainly, Alibaba faces genuine risks aside from the government. New, innovative eCommerce models threaten to upend what Alibaba has built. Pinduoduo, for example, is growing much faster than Alibaba is, and acquiring hard-to-reach rural customers with its vertically integrated social commerce model. ByteDance owns the world’s most powerful consumer attention algorithm, and could sell things to customers before they even think to go to Taobao or Tmall. New forms of interactive commerce will pop up to challenge Alibaba’s way of doing things, just like Jack challenged the old way of doing things. Core commerce margins will continue to compress in the face of competition, making it imperative that Alibaba figure out how to make Cloud and other new businesses profitable. And Jack is no longer there to lead the company through its next strategic crisis. Those are all real risks that any company faces, and that Jack would embrace. “Competition is the greatest joy.” But there is a whole lot more than those normal risks baked into Alibaba’s discount. My totally uneducated view is that Alibaba will come out of this with a slap on the wrist, and not a steeper, more existentially-threatening punishment. The ecosystem and network effects it’s built are so strong, and its positive impact on the Chinese economy so great, that breaking it up or worse is too risky a move. No one could move quickly enough to rebuild its ecosystem that the growth and quality of life of the average Chinese citizen wouldn’t suffer in its absence. I have no idea whether, despite that, the government will still move to limit Alibaba (I have said all along, though, that the Trump Administration’s ban threats were empty), but at these prices, that’s a risk I’m willing to take. Nothing in this essay is an endorsement of the Chinese government’s actions in this specific case, and certainly not more broadly. I am not qualified to comment there, except to say that with everything going on in the US right now, I’m glad to live in a country in which private citizens can silence our leaders more easily than leaders can silence private citizens. But having spent so much time researching and following Tencent and Alibaba, I am incredibly bullish on the entrepreneurial spirit and talent in the country. Chinese entrepreneurs are not the government. Both Pony and Jack Ma started out with nothing but crazy ideas, and built two of the ten most valuable companies in the world. Their creations -- Tencent and Alibaba -- are two companies that I am going to keep buying. If the market wants to give me a 73% discount to take on a little government risk, I’ll take it all day. Maybe I’m a little crazy, but so is Jack, and it’s worked well for him (I hope… Jack, if you’re reading this, just reply and let me know you’re OK). Important Note: This is not investment advice. I am not a registered investment adviser. Everything in this essay is for learning and laughs only. I have a small position in BABA that I put on in the course of this research.Thanks to Dan for editing, and to Dev helping me type it up.We’ll be back on Wednesday, a Not Boring first. Keep your eyes peeled!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 2,417 newly Not Boring people who have joined us since the last 2020 email! If you aren’t subscribed, join 29,252 smart, curious folks by subscribing here:This week’s Not Boring is brought to you by… Pipe is building an entirely new asset class based on recurring revenue contracts. It’s not equity and it’s not a loan. Pipe lets businesses raise money today by selling their monthly or quarterly subscription cash flows directly through its platform, without needing to raise more dilutive venture capital.Since I wrote about Pipe in October, the company has been busy. Now, you can sign up and run through a self-serve walkthrough to see what it’s like trading your subscription revenue. For any recurring revenue business, checking how much your recurring revenues are worth on Pipe is a no-brainer. Sign up and find out how much cash Pipe can send you today. Hi friends 👋 ,Happy Monday! I hope you all had a great holiday, and that it’s not too rough getting back into the flow of things this morning. Every year, on New Year’s Day, I take some time to reflect back on the previous year and set some goals for the year ahead. This time last year, I was in the middle of starting an in-person community business and writing this newsletter’s predecessor as a fun side thing. I set a goal to hit 1,000 subscribers by the end of 2020. Here we are on the first Monday of 2021, and there are more than 29,000 of us here, and all of my professional focus and goals are centered on this thing. One of the goals I wrote down is to keep improving the content, pushing myself, and trying new things. In that spirit, why not kick off the year with something I didn’t do at all last year: a bear case. Let’s get to it. Bill-A-BearIt was the fifth email in a long back-and-forth with a sponsor that changed me, made me bearish on a company not named “Quibi” for once. Here’s how it went down: a company sponsored Not Boring. They wanted to pay me, asked me to invoice them on bill.com. Wham, bam, thank you sir. But they kept trying to pay me and they kept getting notifications that it didn’t work. I kept trying to fix it on my end, even upgraded to a paid plan, kept telling them that it was fixed. “Should work now!” “Nope. Maybe you should contact customer support.” “OK got it, all squared away. Try again!” “It didn’t work.” Finally, on the fifth try, we got it, but not before a strange and unusual feeling set in: I was officially bearish on bill.com.It’s not in my nature to be bearish. When I set out to write a takedown of SoftBank, I came away kind of loving Masa. As I wrote last time, I’m a natural born optimist. I have a really hard time seeing the downside. But every time I have to log into bill.com, a little bear growls loudly on my right shoulder, drowning out the typically ever-present angel on my left. Finally, the growling got loud enough that I decided to look at the numbers. Surely, if I felt this way, others did too. That must be reflected in the stock price, right? Wrong. Bill’s stock price nearly quadrupled last year, and the numbers don’t support the move. Bill is a bottom-quartile BVP Emerging Cloud Index company trading like a top quartile one. Its revenue growth is slowing, its revenue multiple: dizzying, its free cash flow: negative. It faces competition from powerful incumbents, fintech darlings like Stripe and Square, and new startups like Settle. And did I mention its product? It feels like something a Salesforce Product Manager would dream up if Salesforce enacted Google-like 20% projects. (Ed. note: I learned, after writing this sentence, that indeed, bill.com’s first two engineers came from Salesforce and the company bought the domain from Marc Benioff. If it walks like a Salesforce and quacks like a Salesforce, or something.)Now look, I don’t want to pick on bill.com. The company’s 618 employees are trying their best, and they’ve built a company worth over $11 billion. I, as a reminder, write a free newsletter. It brings me no joy to pop the Bill bubble. But having a bad experience with bill.com was lucky. It forced me to sharpen my bear claws heading into a year during which sharp bear claws will come in handy.  While 2020 was a year for unbridled tech optimism, I think 2021 is going to be a year for discerning tech optimism. There’s going to be a flight to quality within tech. Market leaders with strong growth, big margins, profitability, and best-in-class products will continue to earn strong multiples, but laggards with outdated products and relatively unattractive numbers will underperform, regardless of sub-sector or market cap. This whole bear thing is new to me, so we’ll take it one step at a time:* What is bill.com? A just-the-facts look at Bill’s product, business model, and distribution.* The Bill Bear Case. Bill.com touts the highest revenue multiple in the entire BVP Cloud Index, and it has neither the numbers nor the product to back it up. * The Love-Hate Relationship with Work Software. People hate old, locked-in enterprise software, and love the new breed of product-first, consumerized B2B SaaS. Bill.com’s product fits with the old guard, but it hasn’t had as much time as them to dig moats.* Killing a Baby Dictator. Bill.com is still small enough for competitors to defeat before it’s too late. As always, this is not investment advice. I’m definitely not suggesting that you short a tech momentum stock in this market. The Keynes quote that, “The markets can remain irrational longer than you can remain solvent” rings truer every day. What is bill.com? Bill.com is founder René Lacerte’s second bite at the apple. In 1999, Lacerte, a fourth generation entrepreneur, left his job at Intuit to build PayCycle and replace manual payroll with software. It looked like this: In 2004, five years into the journey and faced with slowing growth, PayCycle’s board removed Lacerte from the CEO role. (PayCycle later sold to Lacerte’s old employer, Intuit, for $170 million in 2009.) After being fired from the CEO role, Lacerte served as CFO for a year before leaving the company to work on his next thing.Lacerte’s next thing, which he founded in 2006, was originally called “CashView.” When Salesforce CEO Marc Benioff heard about it, he called Lacerte and offered him, for the low low price of $200k, a domain that he happened to own: bill.com. Bill.com’s mission was and is to “make it simple to connect and do business.” It attempts to do that through cloud-based Accounts Receivable (AR) and Accounts Payable (AP) software for SMBs. If it sounds unsexy, that’s because it is, but it’s also important. In any business, particularly SMBs, cash is king. A company can improve its cash position without doing a dollar more in sales or cutting any costs by stretching out payables and pulling in receivables. There’s even a formula for it: the Cash Conversion Cycle formula. Bill’s promise is that by giving customers better tools and data, companies will receive money more quickly and pay out more slowly, shortening the CCC and putting more money in the bank at any given time. The prize for helping companies simplify AR and AP and improve the cash conversion cycle is large: there are 6 million small or medium businesses (SMBs), those with revenues under $100 million, in the United States, and 75-90% of those businesses still pay for things with checks. Over the next decade, most of that volume will move online. The question is: how do you capture it? In tech, there’s a never-ending battle between product (the actual software) and distribution (how a company sells to customers). Bill.com is a distribution play. Lacerte ran essentially the same playbook at PayCycle and bill.com:* Replace a paper-based finance workflow with software.* Distribute through partnerships with accounting firms and others who own the relationships with SMB clients. * Try to create network effects and switching costs and hold on for dear life.Because PayCycle and bill.com competed with physically writing out paychecks and invoices, they had a low product quality bar to jump over. So they built something functional and tried to get it in the hands of as many people as possible as quickly as possible in a race to create network effects. The focus on distribution over product shows. Even bullish articles about the company, like a16z’s When Distribution Trumps Product, concede that “while the company’s UI leaves much to be desired, its core product—sending payments and getting paid—works efficiently.”I have some thoughts on the UI, but we’ll get to that in a bit. For now, let’s stick to the facts: the product, distribution, and business model.Product So what does bill.com do? Simply, it lets small businesses pay vendors, and lets vendors invoice small businesses and get paid. According to the company’s November 2020 Investor Presentation, it takes a process that looks like this:...and transforms it into something clean and easy, like this: The graphic shows the Accounts Payable perspective. Instead of the finance team receiving a paper invoice, emailing a business lead for approval, writing and mailing a physical check, and manually recording the transaction in the company’s accounting software, they just get a digital invoice, click approve, click pay, and they’re done. Simple! My experience with the product is on the Accounts Receivable side. When a company sponsors Not Boring, I create an invoice on bill.com, write a message, hit send, and then sit back while I wait for the company to pay. Simple! Theoretically, it’s all simple and easy. By connecting small businesses with their customers and vendors, bill.com wants to make it easy to pay and get paid, lower cash conversion cycles for its customers, and help SMBs thrive. DistributionBill.com puts most of its eggs in the distribution basket. It’s the weapon with which it’s chosen to go to war against the status quo and new competitors. That distribution comes through four main channels: In When Distribution Trumps Product, a16z’s Seema Amble writes about the five ways that bill.com fuels network-driven growth, which map to the four channels:* Minimize Friction (Direct to SMB). Bill.com’s online platform removed a ton of friction from the traditional paper and mail process.* Require Low Commitment, Deliver High Value (Direct to SMB). It’s free to start using bill.com, so it can prove value before charging subscription and transaction fees.* Compel Growth Through Design Choices (Direct to SMB). If a customer sends a vendor an invoice, the vendor needs to set up an account to pay online. Similarly, a vendor can invite a payee to create an account to receive payment. This should create virality. * Identify Adjacent Growth Channels (Accounting Firms & Accounting Software Providers) Bill.com sells into accounting firms (of which 4,000 use bill.com), who then get their clients to use bill.com. “More than 50 percent of Bill.com’s customers and 45 percent of revenue are derived from its accountant partners.”* Tackle Larger Distribution Nodes (Financial Institution Partners). Bill.com works with six of the ten largest US banks, who use bill.com to power better AR/AP solutions for their business banking clients. Partnerships like these are only possible with the scale of customers that bill.com built up via Direct to SMB and Accounting partnerships. Today, 103k customers use bill.com to accept payments from a network of 2.5 million suppliers. This is Bill’s network effect: as more customers and suppliers use bill.com, the experience becomes better for every new company and supplier that joins, because they should be able to easily find and pay each other seamlessly. Then there’s the switching costs: I’ve actually tried to stop using bill.com twice, and both times, I was brought back into the fold when a sponsor told me, “Sorry, we have to use bill.com here and it would be easier to pay you if you invoiced us there.” Nothing like the threat of not getting paid to keep you from switching. Business ModelBill.com’s business model is straightforward. It makes money in three ways: * Subscription (53% of revenue). Monthly plans start as low as $39/mo/user.  * Transactions (33% of revenue). Bill collects fees for every transaction completed through the platform. * Float (13% of revenue). Bill earns interest while payments are clearing. In my experience, that takes about a week each time. The business model is strong on paper: it combines the predictability of monthly recurring revenue with the upside of transaction fees. It grows as it adds new customers, as its customers add more users, and as they make or accept more payments through the platform. In the 12 months ended September 2020, it brought in $169 million in revenue, 86% of which came from subscription and transaction fees (float tanked as interest rates did). 86% of that core revenue came from existing customers, thanks to a strong 121% dollar-based net retention rate, a good sign that the company is able to lock in customers and grow with them. The network effects and switching costs seem to be working. The numbers show a core business that’s solid if not spectacular. Analysts cite potential upside from new products like virtual card issuance, cross-border transactions, and instant transfer. The 121% dollar-based net retention rate is a good signal that the distribution → network effect lock-in strategy is working.The market seems to like what it sees. Bill.com went public on December 12, 2019 at a $1.6 billion market cap on Q1 2020 revenues of $35.2 million and net losses of $5.7 million. A little over a year later, on Q1 2021 revenues of $46.2 million (31% higher) and net losses of $12.9 million (56% higher), BILL is trading at an $11.1 billion market cap (7x higher)! Something’s off. I don’t think anyone on Wall Street has ever actually had to use bill.com… The Bill Bear CaseOn paper, bill.com’s strategy is elegant. Through smart distribution, it’s overcome a mediocre product and built a real network effect and switching costs. It worked in the 1990’s, why can’t it work now? Well, in 2021, BILL is a bubble begging to be popped. As if to invite the dot com bubble comparison openly, it even has “.com” in its name. Who does that anymore?! BILL is overvalued, and not just in the “oh lol 2020 got a little out of hand” sense. Bill.com is overvalued even relative to all of the other SaaS or fintech stocks that exploded in 2020, and unlike most of them, the product sucks, making its future much dimmer. Ultimately, the bear case boils down to two things: * The Numbers. This one is so straightforward that I thought I was missing something. Compared to all of its comps, bill.com is too expensive. Normally, I’d squint my way past that and imagine a world in which it grows into the valuation, if it weren’t for… * The Product. Bill.com’s user experience is terrible. I know, I know, AR and AP are really hard. But at an $11 billion market cap in the year of our lord 2020, a good tech company’s job is to abstract away all of that complexity. Bill.com makes it clear that it’s hard. That makes me very skeptical that bill.com will be able to put up numbers that justify that valuation any time soon. I’ll say upfront here that most analysts who cover the stock are bullish. According to SeekingAlpha, of thirteen sell-side ratings, seven are very bullish, two are bullish, and four are neutral. They get paid to do this for a living, and you should track down their reports for a balanced perspective. I don’t buy it. Bill.com has already outrun their bullish average $125 targets and the multiples are too damn high! The Numbers Bill.com is wildly overvalued because it benefited from some uniquely 2020 tailwinds: namely, the surge in fintech broadly and investors’ ravenous hunger for lower-market cap tech companies. In FY 2017, bill.com generated $64 million in revenue, growing to $108 million in FY 2018 and $157 million in FY 2019. That’s good (if slowing) growth, but it’s nothing compared to the stock price’s rise. Bill.com shot up 258% in 2020 (and that after a drop; it was up 297% when I started researching this piece). With returns like that, I thought I must be missing something. The numbers must be great, despite my negative personal experience. So I checked the BVP Nasdaq Emerging Cloud Index to see how Bill.com’s metrics stacked up, sorted by EV/Annualized Revenue, and… My god. At 56.4x, BILL is trading at the highest revenue multiple (LTM or Forward) of any of the 54 companies in the index. It also sports the seventh worst efficiency (21%), slightly below average revenue growth (31%), exactly average gross margins (74%), and the fifth worst LTM FCF Margins (-11%). Despite all of that, its YTD returns are the sixth best in the group. (While we’re at it, I have a bone to pick with investors who dinged Slack for 49% YoY growth and bid up BILL at 31%.)I felt like Kevin McCallister in Home Alone.Even crazier, that outperformance came despite the fact that while COVID accelerated growth in many of the companies in the BVP Index, it hurt or fatally wounded many of bill.com’s SMB customers. As a result, bill.com’s revenue growth slowed while other fintech companies’ soared. Let’s compare it to Square, another fintech focused on SMBs, for example:  * Both stocks performed about the same in 2020, with BILL coming out slightly ahead of SQ at 258.7% vs. 241.0%. Unlike BILL, SQ has the numbers to back it up.* Between Q3 2019 and Q3 2020, Square’s revenue grew an astounding 140%. Square’s revenue is weird, because when people buy Bitcoin on Cash App, it books the full amount as revenue, so to be charitable to bill.com, let’s look at gross profits. * Square grew gross profits 59% YoY to $794 million in Q3 2020, accelerating from 41% growth in the same period the previous year. Bill.com’s gross profit, meanwhile, grew 31% YoY, a sharp deceleration from the 62% growth it saw over the same period the year before. * Square was profitable last quarter, with $36.5 million in net income. Bill.com was twice as unprofitable as it was the same quarter the previous year, with $12.9 million in net losses. Bill.com is growing more slowly than Square (and that growth is decelerating) off a much smaller base. Its product is worse. It doesn’t have the talent density or design focus that Square does. It serves a much smaller customer base, putting it at a distribution disadvantage. It doesn’t have a growth engine like Cash App waiting in the wings. It doesn’t have a $50 million Bitcoin investment that’s doubled since October. It’s losing money. And yet, while BILL’s EV/Annualized Revenue is 54.6x, Square’s EV / Annualized Gross Profit is 30.9x. That’s crazy. Here’s what I think is happening, and believe me, I know this sounds stupid, but I think it’s also true: investors wanted to buy fintech stocks, saw that BILL only had a market cap of like $4 billion versus SQ at $50 billion earlier in the year, and figured that BILL had a lot more room to run. $1 trillion divided by $4 billion is 250, and $1 trillion divided by $50 billion is only 20, ipso facto, more upside. Or something like that. To believe that bill.com has a shot at growing into its inflated valuation any time soon, you need to believe that it’s going to re-accelerate growth and that it’s going to keep growing for a long time. I’m, uhhh, skeptical, because bill.com’s product doesn’t feel like a product built in or for this decade, and it’s going to face competitors whose products do. The ProductBill.com is the worst software I use to run Not Boring. It takes something that should be joyful -- getting paid! -- and makes it dreadful. That presents an opening for product-first competitors to cut off bill.com’s growth and pick off customers. The idea for bill.com’s product sounds simple -- send and receive invoices and payments online -- and the product looks clean enough on the surface, but in my experience, there are a host of little things that add up to a poor product experience. * Poor Communication. When a sponsor pays me, there’s no communication or notification. The money just kind of floats in the ether. To find out where it is, I need to contact them through the “Message Center.”* Confusing UI. Often, a sponsor will pay me outside of bill.com, and the invoice sits there, marked as unpaid and overdue. It took me half an hour of clicking around to figure out how to mark the invoice “Paid.”* Issues with Multiple Bank Accounts. One of my bank accounts was approved, another wasn’t, or something, and when I tried to switch, without warning, I was no longer able to receive payments. * Poor Onboarding and Late Verification. Instead of verifying my identity upfront, I got a message in my Message Center asking me to upload my driver’s license and incorporation docs after I’d already completed a few transactions and was in the middle of another one, delaying payment. This could have been solved by a walkthrough at signup, a very normal feature in modern software. * Hard to Connect Directly with Vendor. Unless you have the right email address upfront when you create a vendor account, good luck figuring out how to connect to the right vendor.There are more, but you get the point. To be clear, none of these issues is insurmountable, and if I worked in AP I’m sure I’d spend the time to get really good at bill.com, but in 2021, the counterintuitiveness of the product is striking. Modern software, even B2B SaaS, is supposed to be intuitive. Magical little details that work better than expected are the norm. That’s the promise of the consumerization of enterprise SaaS: finally, work products that we love as much as the products we choose to use as consumers. Today, a great product experience is table stakes. Or as Composer founder Ben Rollert put it so succinctly: Product is just something that can’t be off, whereas distribution can be figured out. If there aren’t core product chops or an appreciation of it, a startup is basically fucked. So even if distribution is as important in the end, or even more important, it isn’t as much of a precondition.While bill.com has chosen a distribution-first strategy typical of early B2B SaaS products, its competitors are building product-first, backed by strong distribution. For bill.com to ever have a shot at growing into its valuation, it will somehow need to fend off those competitors.A couple of potential threats, namely Square and Stripe, are particularly dangerous for Bill.com because they’re product-first companies that have added powerful distribution to their arsenals. On a 2018 podcast I’ve quoted a couple of times, Patrick Collison told Tim Ferriss: If they [startups] can create a product that is so much better than the status quo that they start to get organic traction, once you attach a real sales and marketing engine to that, it’s going to be really frickin hard for a big company to effectively compete because this organizational transformation to being good at software is just profoundly hard.Neither Stripe nor Square focuses heavily on invoicing yet, and neither have built products with the full capabilities of bill.com’s, but both do offer invoicing products and bring an army of existing customers to bear, and can use their own distribution to come after bill.com. * Square had 350,000 active sellers using its Invoices product in Q1 2019, more than 3x bill.com’s, and has shown an ability and desire to offer a variety of products and integrations to help small businesses grow. If invoicing is really a market big enough to support an $11 billion company, I have no doubt Square will make a bigger push into Bill’s territory. * Stripe wants to build the economic infrastructure for the internet, and has millions of customers, all of whom could choose to use Stripe Billing for invoicing instead of bill.com to keep their finances in one place. Even a photographer we just worked with sent us a Stripe invoice. It was lovely and simple. Plus, via API, Stripe could give all of Shopify’s merchants white-labeled invoicing, all within their Shopify account.And it’s not just the fintech sueprstars. On a recent episode of The Twenty Minute VC, host Harry Stebbings asked Avlok Kohli, the CEO of AngelList Ventures, what his favorite recent investment was. Without hesitating, he chose a bill.com competitor, Settle.A lot of entrepreneurs will agree with Harry, and many will innovate on bill.com. It has an $11 billion market cap with a product that my friend Dror Poleg compared to “a government website from the 1990s” and of which one of Not Boring’s sponsors told me:That is catnip to product-focused entrepreneurs. Stripe, Square, Settle, and a wave of new entrants are going to come after bill.com’s slice of the pie or adjacent ones, potentially threatening bill.com’s already-slowing growth prospects. They’ll be the latest in a long line of entrepreneurs attracted by the Siren Call of building a better version of shitty incumbent B2B software.The Love-Hate Relationship with Work SoftwareThere’s a risk to the bill.com bear case: the market loves the companies behind the B2B products people hate using.Last week, I asked Twitter for the worst software they have to use for work: I got a lot of answers. People feel strongly about the shit they’re forced to use at work every day. Out of hundreds of answers, a few leaders emerged. Salesforce is the most-hated single product, but nothing holds a candle to Microsoft’s combined suite - Dynamics, 365, PowerPoint, Outlook, Windows 95, Teams, and myriad other gems got nearly 5x the votes of the next company. Powered by Jira and Confluence, that silver medal goes to Atlassian.But here’s the thing. Over the past five years, the companies that make the most hated work software have performed really well… The best performer and second-most-hated, Atlassian (TEAM) is up a whopping 753%. On average, the group is up 231.6%, compared with 82.6% for the S&P 500 and 157.4% for the Nasdaq. The only negative performer on the list, IBM, is only there because it bought Lotus Notes, and people still hate Lotus Notes. If you bought an equally-weighted basket of the companies that make the software that business users hate the most five years ago (and added when newly public companies IPO’d), you would have outperformed the S&P by 4x and the Nasdaq by half! That’s a good hedge fund. How is that possible? There are a few reasons. First things first, to beat the naysayers to it, this data is incredibly messy and imprecise. My twitter universe is not a representative sample. Some of these companies are massive and also make products that people love. Microsoft users hate Windows, Teams, and Dynamics, but they love Excel. Slack is near the top of both the most-hated and most-loved lists. People love Google search and G Suite, even if some don’t like Hangouts. Secondly, even being included on the list multiple times means that a lot of people use the product. Over a billion people use Microsoft Office; some are bound to hate it. On the flip side, I suspect that bill.com got just two votes because it only has 103k customers. It received no “most-loved” votes. A bigger reason, though, is that most of the companies on this list are old. The average age of companies on the list is 34. They built moats during an era in which purchasing decisions were made centrally and the end-users, the employees, were just forced to use software that wasn’t very good. Back then, the B2B playbook worked:* Replace a manual process with software that was good enough but not great* Use large and expensive sales forces and partnerships to sell into IT departments * Build moats -- mainly network effects and switching costs -- to lock companies in.The historical winners in B2B software famously and unabashedly focused on distribution over product. * Oracle famously sold vaporware to companies and governments knowing that the contracts and switching costs would lock customers in long enough that they would be able to actually build something. Listen to this Grubstaker’s podcast to get a sense for Larry Ellison’s priorities.* Microsoft’s big break came via a 1980 distribution deal with IBM, in which it included a clause that allowed it to retain the rights to sell its operating system to other companies. The company leaned on its distribution and bundling so heavily that it lost a 1998 antitrust case for pushing its own products through Windows at the expense of competitors and customers. It recently flexed its distribution muscle to push an inferior Teams product at the expense of Slack. * Salesforce is so locked in that companies buy other, more modern software to make it easier to interact with Salesforce. I’ve seen multiple pitches for companies promising to build better workflows on top of Salesforce recently. * SAP’s switching costs are so high that Hamilton Helmer used the company as the example for switching costs in his book on moats, 7 Powers. As Flo Crivello summarizes it, SAP’s switching costs mean, “Switching to another solution can be a months-long effort costing several millions of dollars, and much more in missed profits if done wrong.”This is what SAP’s software looks like, for the uninitiated.It takes some mighty powerful switching costs to keep people using something like that. Those companies have decades of moat-building to protect them against plucky startups. Today, though, the product versus distribution debate presents a false dichotomy. A product has to be thoughtfully-designed, and increasingly, distribution is built into the product itself. I also asked Twitter for their favorite work software, and the winners are mainly from this new breed (Excel is a rare beast): For the most part, they’re product-first companies with distribution baked into the product, and later turbocharged by strong sales teams. * Notion is designed for both private and public use. Every time someone exposes a portion of their Notion as a public-facing website, for example, the product spreads. * Slack built Slack Connect to help the product spread from company to company. * Figma’s whole product is designed with growth loops in mind. (If you haven’t, you should read Kevin Kwok’s Why Figma Wins now.)While most of the companies on the list are still private and don’t report numbers, customer love seems to correspond to venture funding, which should be at least a rough proxy for company performance: * In April, both Notion and Figma hit $2 billion valuations. * Airtable raised $185 million at a $2.5 billion valuation in September.* ClickUp raised $100 million at a $1 billion valuation in December. * Roam raised a seed round at a $200 million valuation in September.  * On the public side, Slack was the fastest SaaS company ever to hit $100 million in revenue, and recently sold to Salesforce (SAD!) for $27.7 billion. * We all know what happened to Zoom’s stock in 2020 (just in case: it rose 395%). Product-first with built-in distribution is the new model. Customers love it. Investors love it. A distribution-first company like bill.com would never even get off the ground in 2021. We’re past that. That brings us to the concluding question: is it locked in enough at this point that it’s going to stick around forever like Microsoft, Salesforce, and Oracle, or do competitors still have a chance to take it down? Killing a Baby DictatorThere’s a question that ethicists like to pose over a couple of drinks: if you could go back in time and kill a dictator / terrorist / murderer when they were still a baby, would you do it? We can’t go back and kill SAP, Salesforce, or Microsoft. The switching costs are too high, the moats are too deep, and companies are too locked in. Those companies’ customers will have to die out for their products to die out. But it’s not too late to stop bill.com. I think what ultimately offends me so much about Bill’s product experience is that it’s the first time I’ve encountered a new work product that wasn’t well-designed in a long time. I expect Salesforce to suck. It’s been around for a while, since before the software we use at work was supposed to be good, and it’s too late to do anything but build better interfaces on top. Salesforce got big enough, fast enough that we’re stuck with it. But bill.com has a 2006-vintage product with slow enough growth that most potential customers are just finding out about it in 2020. It only has 103k customers in a market that it says is 6 million potential customers strong. For anyone, like me and the 5.9 million other target customers just discovering bill.com from today onward, the product experience is jarring. It’s like walking into a Mercedes dealership today and having the salesperson pass off an obviously used 2006 E-Class as the newest model. Bill.com has left a wide opening for new entrants to come in and build better AR/AP software that makes getting paid fun and helps companies better manage their cash conversion cycles. To knock off bill.com, Square, Stripe, Settle, or a new, product-first competitor will need to: * Build a seamless product to feature parity with bill.com on the things that matter to customers. * Build distribution into the product workflows. * Build up enough customer demand to attract enough vendors and partners onto the platform that Bill’s switching costs and network effects are rendered obsolete.  With those companies’ product cadence and 5.9 million customers ripe for the picking, many of whom have moved online during the pandemic, I like their odds. When they do, they’ll limit Bill’s upside and make it impossible for the company to grow into its impossibly high valuation. Even after a wild run in 2020, I’m still incredibly bullish on tech companies. Product-first companies with built-in distribution will create the next generation of $100 billion+ market cap giants. Bet on those companies, even if their market caps are much higher than bill.com’s.As for bill.com? I’m not shorting, because shorting anything in a market like this is asking to burn money, and there’s always the risk that one of the old guard sees a younger version of itself in bill.com’s product and buys it. Instead, I’m considering selling long-dated OTM calls. Heads, bill.com tanks or stays flat, I win. Tails, bill.com rockets another 50%, and I lose some money, but I can only imagine how well the other companies in my portfolio would be doing. It’s a small hedge on my very overweight tech portfolio. Plus, if the trade works out, it will be the easiest time I’ve ever had getting paid via bill.com… Thanks to Dan and Puja for editing. Important Note: This is not investment advice. I am not a registered investment adviser. Everything in this essay is for learning and laughs only. I do not have a position in BILL, but may consider putting one on.On Thursday, I’ll be back to being unabashedly bullish with a Not Boring Investment Memo and a Not Boring Podcast first… 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 1,383 newly Not Boring people who have joined us since last Monday! If you aren’t subscribed, join 26,835 smart, curious folks by subscribing here!This week’s Not Boring is brought to you by… FUSE in an inventory planning solution for the digital age. They help brands efficiently use their working capital by reducing inventory overspend by 70% and stock outs by 10%, freeing up millions of dollars to launch new products and grow their businesses.Their forecast accurately predicts your demand across all sales channels, marries it to your supply chain data, and tells you how much inventory to order. With FUSE, customers like Snowe Home and True Botanicals spend less time on manual data updates so they can spend more time on strategic initiatives. Inventory is like porridge. You won't want too much. You don't want too little. You want just the right amount. Don't burn your mouth with reckless inventory orders. Kiss your spreadsheets goodbye and start planning in the cloud. I’ve been a fan of FUSE for a while, because fun fact: FUSE was my brother and Not Boring editor Dan’s first job out of college. So I can happily say you should schedule a demo: Hi friends 👋 ,Happy Monday! This is the last Not Boring of 2020. It’s a look back on some of the things that have happened in tech and the markets this year, and a look ahead at what impact it all might have. Looking back at 2020 personally, I am so grateful that I get to write to all of you as my full-time job. In a normal year, it never would have happened. I can’t help but think the best is yet to come.Let’s get to it. The Best Is Yet To ComeI’ve always been an optimist. It’s how I’m wired. My brain has a very hard time visualizing the downsides, and a very easy time visualizing the upsides. So when COVID hit, and millions were losing their jobs, and I made the call to kill the company I had spent six months trying to start, I saw the potential bright spots. In April’s Schumpeter’s Gale, I wrote that the mass startup layoffs would: Unlock talent and be the best thing that could have happened to many of the people on those lists [of people laid off and looking for new jobs].Many people were stuck in “bullshit jobs” at bloated companies that they couldn’t or wouldn’t leave because of inertia or comfort or because too much of their identity was tied up in it. COVID was a reset. It made the decision for them, and freed them up to go start a company, do a job where they were truly valuable, or pursue a passion. It was hard, but ultimately good. In case that wasn’t sunny enough, in May’s Conjuring Scenius, I wrote: When it is all said and done, I believe that historians will look back at the Coronavirus pandemic as the greatest catalyst for progress and creativity in human history.I believed that COVID would unlock creativity and progress and unlock a global form of communal genius by: * Serving as a global catalyzing event for the internet generation, our WWII.* Uniting people around a common mission and shared experience. * Demanding new tools, processes, and social norms for online collaboration.That’s mostly come true. Eleven months after the first COVID case in the US, we have: * Multiple approved vaccines* Legitimate companies hiring people from around the globe* A generation used to learning online * Increased digital adoption and new channels for previously-offline businesses* New ways of collaborating that previously seemed impossibleWe’re more resilient, more anti-fragile than before. Many of the people on the April startup layoff lists have found new jobs at more future-proof companies or are working for themselves, building businesses, communities, and projects that no one can fire them from. Those who still have a day job now have the time to pursue that side thing they’ve been wanting to pursue, and appreciate the power of self-reliance more than ever before. And for the types of companies that we talk about here at Not Boring, tech companies large and small, things have never been better. Today, to close out the year, let’s look back at what’s happened and ahead to what it might mean for the future. It’s going to be a bit looser than a normal Not Boring, more letter than essay, but I want to cover three, interrelated themes that, together, make me bullish on tech, company creation, and work: * The Markets Are Eating Up Technology. More demand for tech stocks means more innovation, more quickly. SPACs may be a good thing and IPOs unleash investment in the next generation.* Cloud Companies. Entrepreneurs can build new types of highly-differentiated companies with global talent and increasingly useful software at their fingertips. * The Passion Economy Writ Large. As software does more grunt work and employment becomes more liquid, people will pursue their passions. That will make them even more resilient the next time a crisis hits. Despite a pandemic that has taken 1.7 million lives, an election that confirmed deep divisions in the United States, and a market that feels a little frothy, I can’t help but think that the next decade is going to be even better than the last. The Markets Are Eating Up TechnologyFor more, read: Software is Eating the MarketsI’m even more optimistic today than I was in April and May, because we haven’t just accelerated the adoption of tech, we’ve accelerated the acceleration. 2020 has been a great year to be a techno-optimist. Interest rates are at all-time lows, the Fed is printing money, investors are looking for yield, and tech businesses have become fundamentally stronger as everything stampeded online. DoorDash is a flashing example: its contribution margins improved from -20% in 2019 to positive 23% in 2020. Every single public company that I’ve written bullishly on is up since I wrote about it, and three have more than doubled. That’s luck as much as anything. As of this week, the NASDAQ is up 85.93% from its March lows. In 1999, the go-go days of the tech bubble, it increased by just a hair less: 85.59%. There’s never been a better time to write bullish essays on tech companies than from March (when I started doing it) until now. When I made the mistake of tweeting that 1999 v. 2020 NASDAQ performance stat, people read it as a “this is a bubble” tweet and pointed out that interest rates were much higher in 1999, the dollar is cheaper today, and that stocks aren’t actually expensive right now when looking at Equity Risk Premium, or the spread between the risk-free rate and equity yields:I agree! I have no idea what the market will do next year, but I don’t think this is a bubble (outside of a few names). I’m willing to bet that over the next five to ten years, owning today’s leading tech companies and investing in the next generation will outperform cash or indices. To be bearish would be to underestimate exponential acceleration. The “COVID accelerated x trend by 5-10 years” thing that everyone says is too static. It undersells what five to ten years mean these days. If you believe Ray Kurzweil (do people still believe Kurzweil?) or ARK Invest’s Cathie Wood (hard to argue with Cathie Wood), technology improves at accelerating rates. By pulling certain trends like eCommerce, remote work, online education, and crypto forward by 5-10 years, COVID actually accelerated growth and productivity exponentially, and set a new, higher base off of which even faster-accelerating technology will be built. ARK’s theses are largely based on Wright’s law, which states that costs decline as more units are produced, which generates more demand, driving costs down further. It’s exponential improvement. Tim Urban expresses the same general idea without the formula: Kurzweil, Wood, and Urban would agree: it’s much easier for people to think linearly than exponentially, which causes them to undershoot the future.  Improvements beget improvements. More units drive down costs. Better technology creates better technology. And more money pouring into tech stocks creates better tech companies.Even after a decade-long bull run, 2020 was somehow tech’s best year since 1999. In the short-term, that’s great for people who own tech stocks. In the medium-term, that’s great for innovation. Take IPOs as one measure of demand for riskier tech stocks. After a sluggish 2019 for tech IPOs, every member of the 2019 IPO Class is up this year. On average, the group is up 247%. That opened the window for a new wave of public companies. It’s been a busy year for Mario Gabriele and the S-1 Club. Pexip, Vroom, Lemonade, Rackspace, Unity, Snowflake, Palantir, Asana, Airbnb, DoorDash, and Affirm were among 24 venture-backed companies that went public in 2020. Snowflake, Airbnb, and DoorDash blew their underwriters’ price targets out of the water. Palantir and Unity thrived in their first months as public companies. On the whole, IPOs are outperforming the S&P 500 by 8x YTD. The SPAC window opened, too. Last year, if you’d asked the average person on the street what a SPAC was, they’d stare at you blankly. Now, they’d list ten they own and ask you to please back away from their Ferrari. While serious people deride SPACs as Robinhood-trader catnip, the newly-popular financing method serves a purpose. SPACs inject capital into projects previously deemed too risky for the public markets, and lowers the cost of capital for innovation.SPACs aren’t new. They slowly built up steam prior to 2020. From 2010 through 2019, the number of SPACs grew at a 27% CAGR, from seven in 2010 to 59 last year. But this year, they broke out. In 2020, the number of SPAC IPOs quadrupled. And it’s not just the volume. SPACs have come out of the shady backwaters of finance and into the mainstream: big names like Bill Ackman and Chamath Palihapitiya are leaders among a growing list of reputable SPAC sponsors, and legitimate companies like DraftKings, Virgin Galactic, and Opendoor chose to access the public markets via SPAC merger instead of IPO. (Somehow, despite all the activity my ideal SPAC target, Juul, has not been SPAC’d (Post_Market agrees). That may change - Axios just reported that SoftBank is filing to raise $500-600mm via SPAC today to acquire a company they haven’t previously invested in … like Juul?)Shares of all three companies have … lifted off … since the mergers were announced. DraftKings is leading the pack, up 403% YTD, followed by Opendoor at 259% and Virgin Galactic at 106%. Those companies’ success legitimized the SPAC process, and opened up the floodgates on both the supply (new SPACs) and demand (investor dollars) sides. With the floodgates open, a host of companies have joined in the party, most notably and controversially, EV companies. Like Virgin Galactic, EV companies like Nikola, Lordstown, Fisker, and Hylion are essentially pre-revenue public companies. Nikola may be a downright fraud. And yet, people have dumped money into their shares. Certainly, part of the rationale is that people want to catch the next Tesla early, but I think a big piece of it is that people want these products to exist. We want to travel to space and we want to drive futuristic cars and trucks without harming the environment. We’re willing to put our money where our mouth is. If it feels a little bubbly, well, that’s how innovation happens. A 2018 paper, Two Centuries of Innovation and Stock Market Bubbles, shows a strong relationship between bubbles and innovation. The paper covers inventions from the steam engine train (1825) to the smartphone (2000). Here’s how it works:  * New technologies comes to market, * People get over-excited and pour money into the companies that commercialized them,* The influx of cash accelerates the speed of development and adoption of new technologies,* Even when the bubble ends, the companies that commercialized innovation outperform the market.Demand for shares of companies taking risks on new technologies is reflexive: more money creates better technology which creates more demand for the stock, and so on. Believing in the product and wanting it to exist actually helps bring it into existence. Additionally, big, splashy liquidity events and soaring prices pull the next generation of innovation forward, indirectly and directly. Indirectly, they inspire the next generation of entrepreneurs to take their shot. So many multi-billion dollar companies have been founded within the past decade that creating the next one seems feasible. Directly, they’ve created thousands of tech millionaires who want to invest in the next generation of unicorns. They’ve seen that it’s possible and that the outcomes can be huge. If their idiot bosses could do it, some young, hungry genius can definitely do it. As one small proof point: in the past few weeks, a wave of people from recently-public tech companies have joined the Not Boring Syndicate and started putting their winnings to work to fund the next generation. This is how Silicon Valley has worked for the past half century, and the model that every new tech ecosystem tries to emulate: success begets investment begets success begets investment.With more than 250 live and announced SPACs, and an insatiable demand for IPOs of strong tech companies, there will be exit opportunities galore for companies that create enough traction and buzz. After a decade of increasing time between founding and IPO, I think we’ll see that timeline compress. That will only further accelerate the acceleration, as new millionaires and billionaires invest in the next generation. It’s not just the money, though, that’s accelerating innovation. Entrepreneurs can now spin up teams comprised of the right people from around the globe and software that’s purpose-built to handle whole, non-core functions. Cloud CompaniesFor more, read:We’re Never Going Back, APIs All the Way DownGeography has always been a rate limiting factor on progress. Now, after ten months of remote interaction, and with a wave of new, remote-first collaboration tools coming to market, it no longer will be. That is going to be an absolutely enormous unlock.  “When it is all said and done, I believe that historians will look back at the Coronavirus pandemic as the greatest catalyst for progress and creativity in human history.”Many of the most progress-rich periods in history were brought into existence by small groups of people in random places around the globe, like Edinburgh during the Scottish Enlightenment, Florence during the Renaissance, or Silicon Valley over the past half-century. Brain Eno called those flashes of communal genius “scenius.” Throughout history, scenius has been limited by whoever happened to live in, or could afford to move to, a given place in a given time. Pre-COVID, even with billions of people online, we didn’t have the tools or norms necessary to capture the ineffable magic of IRL digitally. Now we do. We’ve lived through a global remote-first dress rehearsal, and while it’s been bumpy, it’s going to get better. I’m convinced that this next generation of entrepreneurs will create the most fascinating companies that we’ve ever seen, and do it faster than before, based on the simple fact that they have more potential inputs, in terms of tools and talent that they’ve ever had before. Take Hopin, for example. The virtual events platform, founded in June 2019, is truly remote-first. It hires top talent from anywhere in the world, onboards and manages them in a process built for remote, organizes work around the things that need to get done, and creates its own, remote-first culture-building traditions. In the last 13 months, the company has raised $174 million, and it’s already worth $2.1 billion. On the 20VC podcast, founder Johnny Boufarhat told Harry Stebbings that the company has been able to scale much faster because it’s remote, and that it was easier to start with a clean-slate as a remote-first company than to try to adapt an in-person company to online. The new wave of companies being founded today are all starting remote-first. They have a whole new arsenal at their fingertips. To be sure, to take advantage of the opportunity will require that founders be Entropy Wranglers, bringing new order to the new chaos.  Today, companies can hire a developer in India (via Pesto), a designer in Sweden (paid via Panther), and a CFO in New York (supported by Ramp). They’ll work together in a Huddle HQ, and spin up new office space as easily as they open a new Google Doc. They can raise money via AngelList Syndicates, Republic Crowdfunding, or directly from stakeholders via Fairmint CAFE’s. Or better yet, keep their equity and get paid for their recurring revenue upfront with Pipe. They can use Stripe to handle payments, Twilio to handle messaging, Shopify to set up a storefront, Marketerhire to hire a part-time marketer, FUSE to manage inventory, Barrel to build their digital identify, MainStreet to scan for free money. Soon, they might even be able to plug in GPT-3 to write copy or handle low-level tickets. There are some naked plugs for Not Boring sponsors and portfolio companies here, but these are the companies I’m most excited about, because they do all of the things businesses shouldn’t need to worry about. Cloud companies will be able to focus on building the thing that differentiates them, the thing that their unique combination of talent from around the globe enables them to do differently and better than anywhere else. They’ll go from idea to IPO more quickly, and provide capital and guidance to the next generation of entrepreneurs, anywhere in the world. At the same time, employment will become more liquid. If software can handle a bunch of the time-consuming grunt work, and face-time is made obsolete, why not let employees provide their uniquely human input for 10 or 20 hours per week on a permanent basis, and for multiple companies? Or just give employees their life back? They’ll save an hour per day commuting, and hours throughout the day not running to meetings across town, or waiting for the conference room. They could spend more time locally, with friends, family, and communities. They might even be able to work on starting their own thing, however small, on the side. The Passion Economy Writ LargeWhen Li Jin wrote about the Passion Economy in October 2019, she couldn’t have had any idea how prescient she was. With the benefit of six more months, in April, I wrote that one path for people laid off from “bullshit jobs” would be:Passion Economy Businesses: COVID has shown many people the importance of having a skill that they can monetize directly with their followers and audiences. I suspect that we will see a proliferation of one-or-two person creative businesses like newsletters, podcasts, courses, design, and coaching. We will also see these business models evolve.Back then, I had no idea that this is what I was going to be doing full-time. I thought, if I were lucky, it could be a side hustle that paid the rent and made me sharper. Somehow, eight months later, I’m a full-time newsletter writer doing something that I genuinely love and having more fun than I ever thought I could for something I got paid for. And it’s not just me. 2020 has been all about people building something, however small, for themselves. Over the weekend, I teamed up with Pulsar to look at the companies and trends that have generated the most buzz on Twitter this year. Aside from Zoom, the companies whose share of conversation have grown the most this year all have one thing in common: they power the Passion Economy. Teenagers are becoming millionaires on TikTok. Grownups get paid to stream themselves playing video games on Twitch. This year, Roblox paid out over $250 million to 345,000 people who created games on their platform. Shopify merchants generated $5.1 billion over Black Friday Cyber Monday alone, and Etsy lets craftspeople reach a global audience with unique items. Communities are being built on Discord and governed by social money. Sari just turned a well-organized version of her brain into $30k in one day.And on Substack, I get to write to you every week, tell the stories of the companies shaping the future, have an ongoing conversation with some of the smartest people I’ve ever met, and invest in the next generation of companies that will one day IPO (or even SPAC!). This trend is just getting started. Creator platforms, when done right, are fantastic businesses. All of the companies in the chart above spread virally as creators on the platform promote their own work. It’s $0 CAC marketing. And the companies have the results, and valuations, to back it up. * Substack is worth somewhere near $100 million. * OnlyFans just raised at a $1.2 billion valuation. * Discord just raised at a $7 billion valuation. * Roblox and TikTok are preparing to IPO. * Etsy and Shopify are public companies with market caps of $24 billion and $142 billion, respectivelyRight now, there are hundreds of entrepreneurs building the next wave of creator platforms, opening up more opportunities for people to do their own thing while making a great living. Not Boring Portfolio company Composer, for example, will one day let anyone start their own mini hedge fund, bringing us full circle. We’ll be able to make a living investing in the companies building the next generation of innovative products. The wheel will spin more quickly.As more people build their own audiences, distribution, and products, we’ll become even more resilient the next time a crisis hits. Our identities might not be so tied up in our jobs. We’ll have a way to pay rent without waiting for the government to agree. We’ll have autonomy and control. This is the way the world was heading in early February, but it would have taken a lot longer to get where we are today. Now, after a wild, tragic, scary, inspiring 2020, there’s more money supporting innovation than ever before, entirely new ways to build companies, and more opportunity -- and necessity -- for people to follow their passions than ever before. So apologies if this whole letter comes off as cheesy, pollyanna-ish, or naive, that’s just how my brain works. I’m unabashedly optimistic.Look at us. We survived 2020. The best is yet to come. Thanks to Dan and Puja for editing, this time and all year. You’re the best. Perfect Strangers is a COVID-19 crisis response non-profit that's delivered nearly 200,000 meals to homebound and vulnerable individuals across the country in partnership with local government emergency response and disaster relief efforts over the last 7 months.With the holidays in full swing, continuing to support those sheltering-in-place remains critical. Sign up to volunteer, donate, or partner to support during this second wave! If interested in learning more about getting involved or other ways of supporting, reach out to Perfect Strangers founder, Mimi Aboubaker, at mimi@weareperfectstrangers.org. That’s it for Not Boring in 2020!So what’s next? First, sleep. I’m taking a little time off for the holidays, with one goal: get a real, long, nap in. Beyond that, every New Year’s Day, I lock myself in a room, reflect on everything that’s happened in the past year and set goals for the next one. Here’s last year’s… a lot has changed. I’m particularly looking forward to this year’s session. There’s a lot to do. Thanks for helping make this year the best of my life. I can’t wait to see what’s next. Happy Holidays,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 1,497 newly Not Boring people who have joined us since last Thursday! If you aren’t subscribed, join 26,100 smart, curious folks by subscribing here!This week’s Not Boring is brought to you by… Ramp is the corporate card that actually saves your business money. Sign up and deploy in fifteen minutes, earn 1.5% cash back, let Ramp proactively find your business savings, and get everything that Expensify does… for free. Hi friends 👋 ,Happy Thursday! This is the last Thursday email I’m sending this year.  Over the course of the year, I’ve found a nice rhythm: Mondays are for deep dives for big, public companies or pieces on general trends I’m noticing that I think are particularly impactful. Thursdays are for learning more about companies at a much earlier stage that are shaping and building into those trends. We do that in a couple of ways: * Not Boring Investment Memos. Public-facing investment memos on companies that the Not Boring Syndicate invests in, together, to demystify early stage fundraising.* Sponsored Deep Dives. Companies pay me to help tell their story (I got mouths to feed!). When I rolled out the Sponsored Deep Dive with MainStreet, I was a little trepidatious. Would people think I was a sellout or that my analysis is biased? But the response has been super positive. I think it’s because I’ll only ever write about companies whose products I believe in, that have interesting stories to tell and lessons to learn, and that I’d write about whether or not I was being paid (please don’t tell Ramp). I write too much as it is to waste time writing about boring companies. Sponsored deep dives actually give me, and Not Boring readers, direct access and a behind-the-scenes peek into the people and companies building the future. I couldn’t be more thrilled to close out the 2020 Thursdays -- which have become the startup-focused days -- on one of the most exciting startups out there: Ramp.When I started doing deep dives, I promised that I would tell you how I was being paid, right upfront. This one is a hybrid: Ramp is paying me an upfront fee, with upside if some of you sign up to make Ramp your company’s corporate card. (Which you totally should, btw.)Let’s get to it.Ramp: The Card-Sized Finance TeamMeet RampRamp makes a corporate card that wants to help companies spend less money. It’s playing in a crowded space, facing off against multi-billion dollar competitors, and actively trying to get customers to pay it less money. And somehow, it’s working. This morning, Ramp is announcing that it raised $30 million from D1 Capital, Coatue Management, and Founders Fund. It’s not surprising that investors are excited. Ramp is the fastest corporate card ever to $100 million in transaction volume.Employees love Ramp, too. Like previous deep dive subjects Pipe and MainStreet, Ramp made VC Guide’s Wishlist of companies for which 1,000+ surveyed founders would quit their jobs. A survey is one thing; the proof is in the hires. One of every three people on Ramp’s 60-person (and growing) team is a former founder. Ramp is a fintech and engineering all-star team aligned towards building the financial stack of the future and saving companies money. Turns out, companies like saving money. Ramp’s customer roster includes some of the fastest-growing companies in the world, because fast growth works both ways: the good things grow quickly, but the bad things do too. Ramp helps its customers eliminate wasteful spend that can get out of control, so they can focus on investing in growth.It’s how Ramp saves companies money, and its unintuitive product roadmap, that makes the company so fascinating. Ramp’s story is chock full of lessons for startups, investors, and casual business nerds alike. We’ll learn: * The Offer. Ramp is offering Not Boring companies $500 for signing up. We’ll cover that first so we can spend the rest of the essay analyzing. * Understanding Eric Glyman. Believing that a corporate card actually wants companies to spend less takes some mental gymnastics, unless you’ve met Ramp’s CEO. * Ramp’s Sweet Spot. It’s more tech than the corporate card companies, and more corporate card than the tech companies. * Corporate Card Counter-Positioning. Ramp’s early moat comes from counter-positioning against corporate cards designed to make companies spend more.* The Trojan Corporate Card. The corporate card isn’t the focus; it’s a necessary tool. * Killing Expensify and Concur. Today, Ramp released the expense management killer I’ve wanted to exist forever. * Ramp’s Vision. Ramp just wants to help companies build better businesses. The OfferLet’s start with the offer: Ramp is dead simple to set up and wants to give you money: * Deploy. Deploying Ramp at your company takes 15 minutes, and 98% of finance teams say it’s easy to set up. I’m worried about the other 2%, frankly. * Get Cash Back. Get 1.5% cashback on everything you buy, no complicated rewards. * Make $500. For being Not Boring, Ramp will give you $500 when you pay off your first $1k.If you work at a company, big or small, young or old, Ramp wants to help you save money. Ramp does all the hard stuff, so it’s really easy for you to get started. See for yourself: But if Ramp -- the company -- were actually dead simple, we wouldn’t be here talking about it today. C’mon. Ramp gets deep into the financial rails to build a suite of financial software around the card that saves companies time and money.  That sounds like good marketing copy, and it is, but it’s also the truth. Because Ramp isn’t a corporate card, really. It’s an engineering-driven fintech focused on improving the operating efficiency and long-term success of growing businesses. The corporate card is just how it gets close enough to the metal to make everything else it does seamless. Ramp is the only spend management platform and corporate card that can automate your accounting and lower your bills. Today, that shows up in four ways: * Control. Ramp lets you set policies, streamline approval processes, and issue cards that control spend for all of your vendors.* Visibility. Because Ramp issues corporate cards, it exposes your spend in real-time, and lets you see into the future by predicting spend on payments and subscriptions.* Automation. Ramp helps companies close their books 5x faster, and saves finance teams an average of 5.4 days per month. Check out the case studies on Red Antler, WayUp, and Clubhouse (the SaaS one). * Savings. Ramp gives you 1.5% cashback on every purchase, and analyzes transactions to proactively identify ways your company can cut expenses. Back in 2018, when Adam Neumann was flying corporate jets stuffed with weed across the globe, profligate spending was the thing to do. In 2020, it’s all about running capital efficient businesses. That doesn’t mean it’s gotten easier to spend smarter. With the shift to remote, chances are everybody on your team asked for new must-have software, expensed more lunches, bought new home-office furniture. Now that you’re closing your books for the year, you’re probably seeing how much all of those little things add up. Ramp is built to help you see, manage, and lower all of that spend, in real-time. If you just want to start saving in 15 minutes, sign up for Ramp right now. Once you’ve signed up, keep reading, because Ramp is a case study in taking the long view, counter-positioning, and how nice people can finish first. To Understand Ramp, You Need to Understand Eric GlymanIf the whole “we want companies to spend less even though we make less money if they do” thing sounds too good to be true, I hear you, but you haven’t met Eric Glyman. When Nick Abouzeid from MainStreet introduced me to Eric in September, we set up what was ostensibly a 30-minute sales call. After doing some light prep, I was a little intimidated. Eric: * Is the CEO and co-founder of a company that was in the middle of 15x 9-month growth. * Raised $25 million in February from top VCs for one of the top startups in NYC. * Sold his first startup with Ramp co-founder and CTO Karim Atiyeh, Paribus, to Capital One in 2016, months after graduating from Y Combinator.I: * Write a free newsletter, which had 14k subscribers at the time. I came prepared to talk business - in, out, let him get back to running his 50+ person company. Thirty minutes into the call, our fully allotted time, we were still talking about our personal lives. He was fully focused on me: how I got to the point of writing a newsletter full-time, what interested me, what I liked to do, and my family. I mentioned that Puja and I were about to have a son, and he beamed and asked more. He was genuinely curious and really, really nice.  I tell you all of this not because Eric is paying me, but to illustrate that Ramp is a different kind of corporate card company, run by a different kind of CEO. Ramp is the fastest corporate card ever to hit $100 million in transaction volume (it launched in March 2019), but when I asked Eric about the company’s sales process, it didn’t sound at all aggressive. He told me that it was all about understanding the problems that potential customers have and figuring out whether and how Ramp could help. He described it as more product development than sales. The kinds of things that founders say, except in this case, I believed him. Saving people money is core to Eric and Karim’s personal missions. Their first company, Paribus, automatically saved consumers money by scanning their emails for potential savings on the things they bought. Capital One acquired the company in 2016, and by the time Eric and Karim left, they were saving consumers over $100 million per year. But the mission wasn’t complete. They wanted to see if they could help companies save money, too. To make the mission a reality, Eric and Karim put together an astonishingly good team and investor roster. Team. Ramp’s team backs up VC Guide’s survey. Members of Ramp’s Engineering team finished at the top of their classes at MIT, Harvard and Stanford, were top ranked in the world at mathematics, and previously worked at places like Jane Street, Facebook AI Research, Google Research, and more. The Design team hails from the School of Visual Arts, Facebook and Ideo. Eric and Karim attracted top talent like Nik Koblov (former VP of Engineering at Affirm), Srinath Srinivasan (former Head of Credit Strategy at Goldman’s Marcus and Apple Card), and Miriam Mark (former VP of Sales at WeWork). As Ramp grows at breakneck speed, it’s hiring people from leading companies like Uber, Plaid, Namely, Fundera, Square, and Not Boring favorite, Slack. Investors. Today, Ramp announced a $30 million investment from D1 Capital, Coatue, and existing investors. D1 is an under-the-radar public/private market crossover fund with an impressive track record, and Ramp represents the earliest stage investment they’ve ever made. Miami-bound Keith Rabois, a fintech wizard with a phenomenal track record at PayPal, Square, and Opendoor, led the initial $25 million round in 2019 at Founders Fund, and sits on the company’s board. Prior Ramp investors include the founders and CEOs at companies like Warby Parker, Twitch, Away, Opendoor, Plaid and Rent the Runway.With all due respect to corporate cards, Ramp wasn’t able to attract all of these people to spend their time and money building another piece of plastic. Ramp’s Sweet SpotWhen I talked to people about Ramp, one of the main questions I got was: “Isn’t this just like Brex?” Oh oh oh, very glad you asked. Competitor corporate card companies are mainly sales and marketing-led. As I write this (literally, at 6:31pm est Wednesday night), Brex is sending out emails to potential customers offering them free iPads to sign up for an account and complete their first transaction (2020 quotas!). On the other hand, pure-play software products don’t own the transaction, so they physically can’t be as smooth, accurate, or instant as Ramp.Ramp exists in a sweet spot: it’s an engineering and product-driven company slash corporate card (and not the other way around). It’s so much more deeply integrated throughout the financial rails that it can do things that competitors like Amex and Brex just can’t (or don’t), like: * Text a cardholder the second a transaction occurs to enter a receipt, up limit via text, or anything else that a company might want to trigger 😯* Automatically match receipts in the moment or months later 😮* Categorize transactions based on data from the actual merchant, including wild things like matching transactions to contractors based on their LinkedIn page  😲* Approve or deny a transaction based on the company’s expense policy at the point-of-sale, before it ever goes through 🤯They’re all seemingly little things that add up to a magical experience that you just need to try to understand. For now, though, you can take it from the customers: here, here, here, here, or here: That’s a great place for Ramp to be. Starting with engineering and product, building delightful experiences, and then adding sales and marketing jet fuel is much easier to do than the opposite. As Patrick Collison, the CEO of another magical fintech startup, Stripe, told Tim Ferriss:If they [startups] can create a product that is so much better than the status quo that they start to get organic traction, once you attach a real sales and marketing engine to that, it’s going to be really frickin hard for a big company to effectively compete because this organizational transformation to being good at software is just profoundly hard.Here’s the jiu jitsu though. Even if Brex or Amex were somehow able to build a world-class engineering team and re-build the product to match Ramp’s from a technical perspective, their hands are tied. Ramp’s executed the strategy version of the Five Point Palm Exploding Heart Technique.  Corporate Card Counter-PositioningRamp’s competitors are like Bill in Kill Bill. If they take a step in Ramp’s direction, they’re dead. Here’s why. Ramp’s corporate card product itself is no frills -- just 1.5% cashback. Technically, it’s a charge card, not a credit card, which means that companies need to pay off their balance each month, and that Ramp makes no money on interest. It only makes money by charging a small interchange fee on every transaction, just like a typical card company. Unlike a typical corporate card, though, Ramp doesn’t give companies rewards for spending. No 5x on Ubers, 3x on gas, 2x on food. Just 1.5% cashback. Again, looks simple, but it’s actually brilliant counter-positioning.Counter-positioning is one of Hamilton Helmer’s 7 Powers. Flo Crivello describes it as “the practice of developing your business model such that incumbents have conflicting incentives preventing them to compete effectively.” It might be my favorite of the Seven. Corporate cards make money based on how much their customers spend. They’re incentivized to get businesses to spend more. As a result, most corporate cards offer rewards or points for spending more money. Amex, the 800-lb incumbent in the space, built a $96 billion market cap business by offering the best rewards program on the market. Startups like Brex, which is valued at $2.6 billion, and Divvy, which is worth an estimated $800 million, also lean heavily on rewards, like 7x points on Uber and Lyft. Ramp doesn’t offer rewards. It’s counter to the mission. Why incentivize companies for spending more when you want to help them spend less? Ramp’s positioning makes it impossible for competitors to compete directly without fundamentally altering their value prop to customers. The big vision for Ramp is to help customers build better businesses, and a big part of that is helping them waste less money. Corporate cards get commoditized over time, as do rewards programs (check out Brex’s and Divvy’s, they’re twins). Building the full finance stack and making the lives of the people who make the spending decisions easier, though, is a much stronger position to be in. But making the call to sacrifice short-term revenue in the service of a much bigger long-term goal is difficult and non-obvious. This is why Ramp excites me so much as a business. Like so many of my very favorite companies, it’s led by a Worldbuilder. As I wrote in Two Ways to Predict the Future, a Worldbuilder: * Predicts something non-obvious about the way the world is moving before others see it and before the market is ready for their ultimate vision.* Timestamps their vision, whether in public announcements or confidential documents. * Creates a wedge into the market and leverages it into a much larger opportunity.In Ramp’s case:* Predict. Eric and Karim predicted that software would be able to help businesses save money like it did for consumers, and that software should do a lot of the work that the finance team hates doing (and that people often hate the finance team for doing).* Timestamp. Ramp has been public about the fact that it’s building a software company, not a corporate card company. They’re even letting me write this piece all about their strategy. Thanks to counter-positioning, it can be public about its ambitions and competitors can’t do anything about it. * Wedge. Ramp’s corporate card is its wedge into a much larger opportunity.The Corporate Card Trojan HorseIf you want to build software that helps companies save money, the corporate card is a smart place to start. By involving itself directly in transactions, Ramp is able to see and control spend in real-time, and build software products that non-corporate card companies just can’t. The corporate card, then, is a Trojan Horse directly into a company’s finances. From there, it’s building more software to attack all the pain points that finance teams feel. For a group of people who control trillions of dollars in annual spend, CFOs have been comically underserved, but that’s changing. As a16z wrote in April, “Software innovation is finally reaching the finance suite. This innovation ... [allows] CFOs to focus instead on the strategic side of their role.” Ramp is at the forefront of that innovation, and the opportunity is massive and untapped. Anaplan, which sells planning software, is the go-to example of CFO-suite SaaS. Its market cap has nearly tripled to $9.9 billion since going public two years ago. CFOs want to spend on themselves, for once! And Anaplan does a fraction of what Ramp will be able to. Today, twenty months in, Ramp already helps with better Issuing, Tracking, and Reconciliation. * Issuing. Like other corporate card companies, Ramp helps finance teams issue physical and virtual cards, set individual spending limits, and streamline approvals. Unlike other corporate card companies, Ramp lets finance teams include advanced controls like category restrictions, review requests through software like Slack, and control what specific vendors can charge.* Tracking. Because it sits in the transaction flow, Ramp can give finance teams real-time visibility at a birds-eye level or transaction-by-transaction. It also predicts future spend based on the data that it has and the subscriptions it knows a company pays for. As businesses spend more on SaaS and APIs, the ability to predict and manage that spend is more important than ever. * Reconciliation. Ramp’s software enforces expense policies automatically, telling users which expenses need a receipt and which don’t, and lets them submit via text in real-time. It also lets finance teams set rules to automate things like expense categorization and receipt collection. Together, these tools mean that Ramp customers save their finance teams an average of 5.4 days of work per month and relieves them from having to be the monsters who chase you down to submit that last receipt every month. That’s an incalculable benefit to finance’s relationship with the rest of the company, and lets them focus on being more strategic. What is calculable is the savings. By identifying wasteful or duplicate spend, and flagging when a company spends more on certain software than other Ramp customers, Ramp saves its companies an average of 4% on expenses, or $100k, every year. For now, Ramp doesn’t take a cut of that spend, but it’s easy to imagine that it could in the future, aligning incentives with its customers. As a reminder, Ramp has been in business for 20 months. It’s already: * Launched a corporate card that’s handled over $100 million in transaction volume. * Built a vendor management system that identifies wasteful spend and saves companies money. * Helped ameliorate the tension between finance and the rest of the company by automating and streamlining expense management.And it’s just getting started. Today, it’s also announcing a new product that will kill one of the most hated apps every employee has to deal with. Killing Expensify and ConcurI’ve been praying for an Expensify killer for a long time. When I was a little kid, I often wished that God would just come down and tell me what my favorite song, movie, and food would be, so I could just skip everything else and focus on the good stuff. Today, between Spotify and Netflix recommendations, we’re kiiiiinda there on the first two, and now DoorDash has enough money to make a dent in the third. Technology is a wonderful thing.As I got older, and the realities of being a grownup set in, I had a new wish for technology (which I now realized I had conflated with God as a little guy): can’t you just please make it easier to do my expenses? I swipe my card, that data is captured somewhere, but I somehow have to do like twelve things to get my $80 team outing squared away. WHY?!Well, technology was listening (as it’s wont to do these days). Ramp built a better solution. Already, Ramp let companies easily match and reconcile expenses generated on the Ramp card. Because Ramp can issue one-time-use, virtual cards, even employees without their own physical cards can pay for many of the things they buy via Ramp. But some expenses, like cash expenses, car depreciation, or incidentals, can’t be put on a card, so Ramp is rolling out Ramp Reimbursements so employees can submit out of pocket expenses and get paid in Ramp. That means that companies can now, finally, kill Expensify and Concur and save $10 per employee per month. Plus, for free, Ramp provides a better product. The reason has to do with this chart: It’s messy, but what it comes down to is that while Expensify and other non-card expense management systems need to guess blindly, using OCR and transaction outputs, Ramp adds its own transactional data to the mix and turns a complicated guessing problem into a simpler matching problem. As a result, Ramp can match even the hardest receipts, which means no more wave of “Could Not Read Receipt” notifications from Expensify and no more getting yelled at by Finance on the 7th of the month when my expense report is a little late. Sound good? Sign up for Ramp and get a better Expensify for free.Like a great SaaS or API product, though, what you get when you first sign up is just the tip of the iceberg. It’s constantly improving and adding functionality. And there’s a lot to add, because Ramp has big plans. Ramp’s VisionRamp’s vision is to help companies build better businesses with financial software. Step 1 is helping them save time and money with a better, software-powered corporate card and a suite of related software that helps automate the manual work that goes into setting spending controls, managing expenses, and tracking spend. Today, its software helps companies understand what they’re spending money on in real-time, eliminate duplicate spend, and negotiate better prices with vendors. Over time, though, Ramp can do things like protect its customers from price discrimination and automate negotiations with vendors, saving customers money while they sleep using software and the combined bargaining power of thousands of customers. That hints at the fact that Ramp is ultimately building towards Finance-Team-as-an-API. To be clear, Ramp won’t replace the finance team, it will just free them up to do the things they’d love to be doing if they weren’t telling people what they can and can’t spend on, collecting and cleaning messy data, and chasing people down to fill out their expense reports. Given the right tools, finance teams are invaluable strategic partners to a business. A lot of the work that they have to do is simply manual work that results from systems not talking to each other. By letting Ramp handle all of the work they don’t want to be doing anyway, the finance team is freed up to focus on work that adds value to the business and helps it grow. The benefit in saved time and angst could be even bigger than switching from hand-calculated spreadsheets to Excel. As Ramp takes on all forms of payments and automates more work, companies will be able to make smarter decisions, in real-time. Ramp will get smarter as it ingests more data, and it will get stronger in its ability to negotiate for its customers. It will be able to see what works for its best customers, and share best practices among all of them. It will actually give CFOs the comfort to give employees more freedom over what they buy. Like a great API, it will free the companies that use it to focus on their points of differentiation. Fewer businesses will fail and more will thrive.And who knows. Maybe, one day, people might even love their CFO.Know someone on a finance team who would love to be loved? ‘Tis the season! Share this link with them and they’ll get $500 and never have to track down a receipt again. Thanks to Dan and Puja for editing, and for Eric for working with me in the middle of so much big news for Ramp! Don’t know what to get those business nerds or aspiring entrepreneurs on your holiday list? Why not give them the gift of Not Boring? Best part… it’s free!Thanks for reading, and see you on Monday for the last Not Boring of 2020! 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 2,121 newly Not Boring people who have joined us since last Monday! If you aren’t subscribed, join 25,452 smart, curious folks by subscribing here!🎧 To get this essay straight in your ears: listen on Spotify.This week's Not Boring is brought to you by… I’m excited to introduce you to OnJuno, which officially launched their new personal checking account with the best startup commercial I’ve seen in a long time (check it out on their site). Join now to get a 2.15% bonus rate on your deposits and 5% cashback on your favorite brands. After keeping my money with a traditional bank my entire adult life, OnJuno’s gorgeous UX and responsive customer support is refreshing. That’s not how I expected to describe a checking account. If you’re tired of hidden fees and low-interest rates on boring and unintuitive banking products, try OnJuno. * Create an FDIC insured checking account in under 5 minutes* Earn 2.15% Bonus Rate & 5% Cashback on Amazon, Walmart, Netflix, and more* Withdraw your money anytime, with no penalties or hidden feesJoin now, it’s free. (Limited Spots available)Hi friends 👋 ,Happy Monday! It’s an exciting one over here at Not Boring HQ. There are now more than 25,000 of us here! That’s wild. On New Year’s Day, when there were only 309 people reading a newsletter called Per My Last E-mail, I wrote out some goals for the year. Obviously, a lot has changed since then. The place-based company I wanted to start is no longer, and I get to write Not Boring full-time. If this is all I did for a living and only 1,000 people subscribed, I’d be in trouble. But it still absolutely blows my mind that 25k of you read what I write, that companies are willing to pay me to tell you about their products, and that this is my job. I’m incredibly thankful to all of you. To celebrate, I decided to up the difficulty level a little bit this week. Anyone can make Stripe or the Metaverse sound exciting, but what about a company that we all love to hate, run by one of the least charismatic leaders in human history? Let’s get to it.Everybody Hates FacebookThe Devil We KnowLook, I don’t want to be writing this. You hate Facebook. I hate Facebook. Regulators hate Facebook. The only person who likes Facebook is that guy you went to high school with who posts Q Anon content and still wishes you happy birthday every year. Just look at the product. It’s a Frankenstein built from years of multivariate testing instead of product vision. The reasons to hate Facebook are as numerous and fast-growing as their Daily Active Users. I’ve railed in this very newsletter about how wasteful it is that startups spend an estimated 30-40% of the money they raise on Facebook, Google, and Amazon ads. Zuck is not particularly lovable. The New Big Blue is where so much Fake News goes viral. Social media is addictive. Facebook just copies competitors’ best features. Facebook knows everything about us. The list goes on and on. But here we are, writing about the reasons to be bullish on Facebook, for the same reason that so many businesses turn to Facebook: we don’t have any other choice if we want to grow. After a euphoric 2020, anything that even smells like a growth stock is up dramatically. I just picked eight names off the top of my head: Peloton, Etsy, Shopify, Virgin Galactic, Tesla, Square, Spotify, Snap. The worst performing, Spotify, is up 128% YTD. Airbnb and DoorDash doubled their IPO price targets before they started trading. Even my beloved, beleaguered Slack got acquired. A lot of people invested in tech need to think about where to park their gains from the past year. Something safe, but with upside. Something that will benefit from the continued transfer from offline to online, but that likely won’t crash if multiples come back to earth. Something that will at least outpace inflation. Something with international exposure. Something that’s been held back by reasons only semi-related to the company’s performance. Something like… Facebook. Some of you might be thinking: “Duh yes, Facebook is one of the most valuable companies in the world. I watched The Social Network and The Social Dilemma, too. I know that Facebook is rolling into eCommerce. I’ve seen all of Mark Zuckerberg’s Congressional hearings. I come to Not Boring for new stuff, not boring companies like Facebook.” Aha! Because of that, I think that we might all be sleeping on Facebook a little bit. I know I have. So many of the things that we view as negative about Facebook are positives if you put on your investor hat and hold your nose. * Monopolistic. While most acquisitions fail, Zuck and Sheryl have been so good at acquiring companies that the government is stepping in post-hoc to try to undo them.* Tax on the Internet. That same “40% of all venture dollars raised” stat that’s rough for eCommerce businesses is great for Facebook. eCommerce needs Facebook to grow. * WhatsApp Unmonetized. WhatsApp is the most popular messaging app in the world, and Facebook has barely started monetizing it. My god… * Zuck Has Too Much Power. If you think he’s an evil sociopath, that’s bad. But if you think he’s also a genius with a hard-to-grasp, long-term vision, that’s really good. * Copycat. While it feels gross, it doesn’t really matter that Facebook copies from a business perspective. It owns distribution.* Privacy Regulation. Paradoxically, the regulations meant to protect users from Facebook and Google just deepen Facebook and Google’s moats. This as much as anything is why I think regulators are stepping in to try to break up Facebook: all of the things that people dislike about Facebook are the same things that make it such an incredible business. Something just feels off about that. You know I love me a bearish narrative that I think might crack. While the stock hasn’t dragged quite like Slack pre-Salesforce, Spotify pre-Rogan, or Snap pre-2020 Partner Summit, the fact is that Facebook feels kind of gross, so we just kind of ignore it, maybe buy a little, and focus on younger, fresher, sexier companies. But what they’re building is... actually kind of exciting. Put your shoes back on and hear me out! It’s going to take some explaining, which I’ll do: * What is Facebook? There’s a lot going on. To understand everything that Facebook is planning, we need a good sense for what Facebook actually does today. * Facebook’s Business Model. Zuck built what is arguably the world’s best business model, and he has the margins to prove it. * Facebook’s Boring Stock Performance. While anything that even smells like eCommerce is exploding, Facebook, which collects a hefty tax on most eCommerce transactions, is underperforming the Nasdaq. That’s why we’re here today. * Digital Real Estate. With the decreased importance of offline real estate, Facebook’s online real estate is some of the most valuable in the world. * The Most Ambitious Backward Integration in History. Instead of just selling ads, Facebook is backward integrating into the transactions themselves. * Facebook’s New Reality. Facebook is pushing heavily into AR, VR, and spatial computing in an attempt to control the next big computing platform. * Putting it All Together. Facebook is an advertising juggernaut on pace to do more than $80 billion in revenue this year at 80+% gross margins, which has only become more critical for advertisers during the pandemic. Because it’s hated, you get all of that at a slight discount without accounting for Facebook’s wild bets on the future. Just to be extra clear: this is not a value judgement. Facebook may very well be evil. As I was writing this post, I hopped on to Twitter, and this is the first tweet that popped into my feed: But because we all think Facebook is evil, we don’t spend much time trying to understand the full scope of the business behind the products on which we spend 65 minutes per day. What is Facebook? Facebook is so omnipresent that the analysis of the company is all trees, no forest. When I started researching this piece, I realized that despite reading Stratechery daily and spending a lot of time on tech twitter, I don’t fully understand everything the company does and how it all fits together. So let’s all admit that we’ve lost track, hit reset, zoom out, and admire the forest. Nearly half of the world’s population uses one or more of Facebook’s four main social media properties - Facebook, Messenger, Instagram, and WhatsApp. Facebook is also building what it hopes is the next computing platform through Facebook Reality Labs, which houses Oculus, Portal, Spark AR, CTRL-labs, and more.The main Facebook product had 1.8 billion Daily Active Users (DAUs) and 2.7 billion Monthly Active Users in Q3 2020, while the “family” of products saw 2.5 billion Daily Active People (DAPs) and 3.2 billion Monthly Active People (MAPs). They don’t report weekly figures, or what I’d assume they’d call “WAPs.”Mark Zuckerberg founded Facebook in 2004 from his Harvard dorm room and IPO’d the company in May 2012 at a $104 billion market cap. The story is well-covered, but I’d be remiss if I didn’t mention one of my favorite quotes in recent cinematic history, from 2010’s The Social Network: “If you guys were the inventors of Facebook, you’d have invented Facebook.” To build out its current Family of social products, Zuckerberg made three big moves: * Acquired Instagram for a then-astonishing $1 billion in 2012, a month before IPO. (Read Sarah Frier’s excellent book, No Filter, for the full story.)* Acquired WhatsApp in 2014 for an even-more-eye-popping $19 billion in 2014.* Spun out Messenger from the core product in 2014.(Facebook also tried to acquire Snapchat in both 2013 and 2016, but CEO Evan Spiegel turned them down both times.) Facebook has used social acquisitions both offensively and defensively: * Instagram. Investors’ biggest concern going into its IPO was its weakness on mobile. Facebook acquired the mobile-first Instagram to fill that gap (in addition to what Wharton Magazine called “the most epic tech pivot of the decade” to make Facebook itself a mobile product.)* WhatsApp. Just as Facebook was making messaging a core service, WhatsApp was eating Messenger’s lunch in terms of engagement, and growing much faster.* Snap. While the acquisition failed, the logic behind the attempt was clear. Facebook struggled to attract young users who were turned off by their moms’ presence. Snapchat is excellent at acquiring and retaining young users. Last week, the FTC and 46 states announced that they are suing Facebook to unwind the Instagram and WhatsApp acquisitions post-hoc, even after the FTC investigated and allowed the Instagram acquisition back in 2012. The FTC highlights emails in which Zuckerberg discusses “neutralizing potential competitors,” which sounds pretty anticompetitive, but they likely wouldn’t have brought the lawsuit if the acquisitions hadn’t been so darn successful. * Instagram. The Acquired podcast called the Instagram acquisition the greatest acquisition of all time, reasoning that, at the $20 billion in 2019 revenue Bloomberg reported it did, the $1 billion acquisition is worth $153 billion of Facebook’s market cap. * WhatsApp. WhatsApp is the most popular messaging app in the world, and it’s not even close. WhatsApp has a reported 2 billion monthly active users, followed by Messenger with 1.3 billion, and Weixin/WeChat with 1.2 billion. All told, advertisers across the globe can reach nearly half of the world’s population via Facebook’s properties. Despite a massive base of 2.82 billion people, it grew MAPs 13.8% YoY. And that’s despite being banned in China, the world’s most populous country. If you remove China, Facebook reaches over half the world’s people. India is crucial to Facebook’s story: it has the most Facebook users (310 million) and most WhatsApp users (340 million) in the world, and Facebook recently invested $5.8 billion for 9.99% of Jio Platforms, Reliance’s telco which provides the 4G and 5G infrastructure powering India’s digital revolution. Back on the homefront, the company’s legal battle looms. I’m not an antitrust lawyer, so I have no idea whether the FTC’s attempt to break up Facebook will succeed. Prevailing wisdom seems to be that Facebook won’t be broken up, but that it will be limited in its ability to make future social acquisitions. That’s just fine. Facebook is in a pretty good spot with what it’s got.Facebook’s Business ModelThere are a lot of good business models on the internet, but Facebook’s might be the best of all. To understand why, it’s helpful to compare Facebook’s business with Google’s. Facebook makes money by aggregating consumer attention and data through its four main properties, and selling both to advertisers so that they can reach the right people with personalized ads. Like Google, Facebook generates the vast majority of its revenue (98.52% of its $70.7 billion in 2019 revenue) from selling ads. Facebook and Google are the only companies that Ben Thompson refers to as “Super-Aggregators”: This, then, is a super-aggregator: zero transaction costs not just in terms of user acquisition, but also supply acquisition, and most importantly, revenue acquisition, and Google and Facebook are the ultimate examples.In other words, Facebook has almost zero marginal costs -- they don’t pay to get me to use their products, I go there to see my friends’ content (which Facebook also doesn’t pay for), and advertisers self-serve through Facebook Business Suite without talking to an expensive sales person. While Google is intent-based -- I search for shoes and Google serves me ads for companies that make shoes -- Facebook is interest-based -- I am a 24-35-year-old male with feet who likes running, so companies that sell running shoes can reach me and others like me across Facebook’s properties (and on other sites via its Audience Network). Google can show me different variations of something I want, Facebook can show me products I didn’t even know I wanted. According to eMarketer, Facebook is slowly stealing market share from Google: Not only is Facebook growing faster than Google, it’s doing so at a much higher margin. Facebook’s numbers are astonishing. * Revenue. $70.7 billion in 2019, grew 21.2% YoY in Q3. * Gross Profit. $57.9 billion in 2019, good for an 81.9% gross margin. (Google’s is 55.6%)* EBITDA. $34.6 billion in 2019, for a 48.9% EBITDA margin.* Cash. $55.6 billion as of September 30, 2020, even after its $5.8 billion Jio investment.* Users. 3.2 billion Monthly Active People across its apps worldwide.Despite its mind-blowing business model and the fact that Facebook is essentially a tax on eCommerce, its stock has remained relatively sleepy even as eCommerce penetration has doubled. Facebook’s Boring Stock PerformanceIn Software is Eating the Markets, I wrote about the idea that because of new software products and increased access, retail investors are actually buying more than just a financial asset when they buy a stock; they’re buying social status, entertainment, education, and a digital asset that they can proudly display. Tesla is Exhibit A here. Owning Tesla gives you social status - its fans are a community, and its products ostensibly save the planet. Elon Musk is entertaining as hell (watch Elon debate Jack Ma). Following Tesla (and by extension, SpaceX) is an education on the bleeding edge of technology. All of that means that Tesla bulls are proud to show off their Tesla shares as if they’re a digital asset with their own independent value. As a result… This can work both ways, though. Take Facebook. Owning the company has negative social status and is not a digital asset that most people would proudly display. We’re already bombarded with news about Facebook and all of the evil things it does, and spend over an hour on its properties every day, so investing in it is not that educational. And the company is a $700 billion-plus behemoth under attack from regulators; the stock doesn’t move wildly, it’s as blue chip as tech gets, which isn’t very entertaining. And have you ever watched Mark Zuckerberg speak? 😴The Retail Investor Chart for Facebook looks something like this: Is anyone pumped to tell their friends they bought Facebook? I feel kinda embarrassed writing this whole thing, tbh. Add some antitrust hairiness into the mix, and you get this...The underperformance is more stark when you compare Facebook to its competitors across Social, FAAMG, and eCommerce. Here it is versus the social media companies Snap, Pinterest, and Twitter. To be sure, Pinterest and Snap grew much faster (off much smaller bases) than Facebook. While Facebook grew 21.2% YoY in Q3, Pinterest grew 58.2% (2.7x faster) and Snap grew 52.1% (2.5x faster). But their prices grew much faster than the relative revenue growth rates would suggest: Pinterest’s price is up 8.5x more than Facebook’s, and Snap’s is up 6.8x more. And then there’s Twitter, which actually grew revenue more slowly (at 13.7%) but has outperformed Facebook stock by 1.8x.So maybe it’s just that the market loves anything with a lower market cap because those stocks have more perceived upside (it doesn’t make sense, I know). If that’s the case, Facebook should fare better against the other FAAMG stocks (Apple, Amazon, Microsoft, and Google).Nope. Facebook is tied for the worst YTD performance among the FAAMG stocks with Google, at 33.3%, just slightly behind Microsoft (35.2%). Amazon and Apple have outperformed Facebook by more than 2x at 68.7% and 66.7% respectively. Facebook, though, sports the second-fastest YoY revenue and EPS growth behind Amazon, growing nearly twice as fast as Apple, Microsoft, and Google, and the highest gross margins and EBITDA margins of the bunch.We can do the same thing for eCommerce, where AMZN is the laggard at 68% YTD growth.Summarizing all of that in one, clean metric: Facebook trades at the lowest LTM and forward P/E multiples of any of the FAAMG, Social Media, or even eCommerce stock in its comp set. Like I said, people hate Facebook. But ‘tis the season, and anything even resembling value that has tech upside is a gift from Market Santa. Plus, holiday shopping might break the floodgates. Facebook owns the most valuable digital real estate in the world during the time when digital real estate is more important than it’s ever been. The Importance of Digital Real EstateIn the Social Capital 2018 Annual Letter, Chamath Palihapitiya wrote: “Startups spend almost 40 cents of every VC dollar on Google, Facebook, and Amazon.” I’ve written about this many times, but only from the perspective of the startups doing the spending. From Facebook’s perspective, taking its share of 40% of the money startups raise is a fantastic thing. And Chamath wrote that back when many startups had the option to spend on retail distribution… In order to counteract Facebook, Google, and Amazon’s power and decrease customer acquisition costs (CACs), many DTC companies came offline, into physical retail. Physical presence gives brands the opportunity to acquire customers who happen to be walking by. What they lose in margin from paying rent and employing store associates, the idea goes, they make up in lower CACs.Warby Parker kicked off the trend a few years ago by launching their own brick and mortar stores, and other DTC darlings like Bonobos, Casper, and Everlane followed suit. A 2018 JLL report projected that digitally native brands would open 850 retail locations in the next five years. Countless more added retail to their channel mix by selling through Walmart, Target, and other big box stores. COVID stopped that trend in its tracks. Not only did it push digitally native brands back to online-only, it forced offline businesses to move online in earnest for the first time.eCommerce platforms’ share prices have skyrocketed during COVID as a result. Amazon is the only one in this basket of eCommerce leaders that hasn’t more than doubled, and it’s up 68% off a market cap that was just under $1 trillion coming into the year. And it’s about to get really crazy. The fourth quarter is traditionally the strongest time of the year for retailers and eCommerce companies because of holiday shopping. This is what Black Friday used to look like: This year, most of that chaos moved online. Shopify saw a 76% increase in Black Friday/Cyber Monday sales from $2.9 billion in 2019 to $5.1 billion in 2020, while independent sellers on Amazon increased sales 60% to $4.8 billion. It makes sense that eCommerce platforms’ shares would rally. That’s where shopping gets done today. But Facebook should be a major beneficiary too, because brick and mortar wasn’t just where the sale happened, it’s where discovery happened as well. Now, both digitally native and traditional retailers are being forced to acquire customers online, creating marginal demand for Facebook’s product and driving up CPMs across the board. I spoke to two people who confirmed my hunch: * An eCommerce company told me they were seeing higher CACs than ever before because of increased competition from offline retailers, but that they were spending anyway, because they needed to hit holiday targets and were still seeing a positive return on their Facebook ad spend.* A venture capitalist told me their portfolio companies, large private companies in the US and abroad, were setting records for Facebook spend recently. With physical real estate’s decreased importance, digital real estate is more important than ever. And no other digital platform can reliably deliver the same returns for advertisers that Facebook can across its Facebook and Instagram properties (although some companies outperform in specific channels). That position is starting to show up in the numbers. In July, Facebook guided to 10% YoY revenue growth in Q3. Thanks to an unexpectedly strong August and September, it grew 21% YoY, blowing out its own expectations. While it didn’t give specific guidance for Q4, CFO Dave Wehnher said on the earnings call that the company expects Q4 growth to be higher than the Q3 growth rate. I think it’s going to report eye-popping Q4 numbers. Today, ten million businesses advertise on Facebook across the globe. If they consolidate all of their spend online over the holiday season, it will provide a short-term spark to Facebook’s stock. But it’s Facebook’s backward integration directly into commerce that gets me most excited. The Most Ambitious Backward Integration in HistoryWhat Facebook is trying to pull off is unprecedented: it’s a $780 billion company that generates 98.5% of its revenue from a high-margin ads business backward integrating into eCommerce. Ads won’t just be top-of-funnel, they will be the funnel.Facebook does more for businesses than just allow its ten million advertisers to target customers with personalized advertising. It also gives 200 million businesses a suite of free tools to reach, communicate with, and now, sell to customers.To hear Zuck and Sandberg talk about it, it almost sounds like Stripe without the Irish brogue -- they, too, want to increase the GDP of the internet by empowering small businesses. While Stripe benefits from a growing internet in the form of transaction fees, Facebook benefits from more demand for ads. Increasingly, Facebook is backward integrating from simply being an advertising platform into building the tools to facilitate customer communication and commerce in-app. Just like Tencent built tools for businesses in WeChat after seeing businesses communicating with customers in the app, Facebook saw businesses in Thailand use profiles on WhatsApp, Facebook, and Messenger as their homepages and leaned in by adding features. They built catalogs, then a Marketplace Tab, then power tools. Now, Facebook powers roughly 1% of Thailand’s GDP (~$5 billion in GMV), and Facebook is rolling out the tools that it built there in the US and around the globe. Over the past year, Facebook has undertaken two related projects to unify the Family of products and help businesses sell through them: Messaging Interoperability and Shops. Messaging Interoperability. Facebook is in the middle of a large infrastructure project that will allow people to send messages to each other from their Facebook messaging product of choice -- Messenger, Instagram Direct, or WhatsApp. If I spend all of my time on Instagram, but my mom uses WhatsApp, I’ll be able to send a message from my Instagram Direct to her WhatsApp, and vice versa. In September, Facebook released the first leg of the project: cross-platform messaging between Messenger and Instagram. Interoperability has two main benefits for Facebook. First, it strengthens its network effect by increasing the utility for any user if their friends use any of the three Facebook messaging products. Second, it allows businesses to communicate with customers wherever they prefer. Facebook’s new Business Suite, which it also rolled out in September, features one inbox for customer messages from Instagram Direct and Messenger and comments on Facebook and Instagram posts. Communication is the easiest path online. It’s easier than building a website and accepting payments, even with Shopify and Stripe. If Facebook’s Business Suite and improved messaging capabilities allow more businesses to sell online, it will create more potential ads customers and maybe more businesses willing to pay for Facebook to run the lightweight backend of their business.Shops. In May, Facebook announced the launch of Shops on Facebook and Instagram. Shops let businesses set up free storefronts on their Facebook or Instagram profiles, powered by one backend. From the Facebook or Instagram stores, customers can either click through to buy on the businesses’ websites, or buy directly in-Shop via Checkout.  Instead of building all of the eCommerce infrastructure itself, Facebook is partnering with any eCommerce platform not named “Amazon.” When Zuckerberg announced the product in May, he invited Shopify CEO Tobi Lutke to the stream. That highlights Shopify’s relative importance, but it is not, as originally reported, Facebook’s exclusive partner. Understanding the relationship between the two companies in light of Facebook Shops is a whole ‘nother post, but it’s interesting that Shopify is acting like an API-first company for Facebook here. Shops does a couple of things for Facebook. First, it should help increase conversion by removing friction, which will ultimately make businesses want to buy more ads. Second, Facebook will make money from a small transaction fee via Checkout. Over time, Messaging Interoperability and Shops will continue to converge. On the Q3 earnings call, Zuckerberg said that the goal is to build a commerce platform around messaging, starting with bringing Shops to WhatsApp and Messenger, and by building tools that let businesses follow up with customers, complete transactions, and accept payments. In a first step towards monetizing that vision in the US, Facebook began testing a new ad product, click-to-messaging, through which businesses can generate conversations with customers. That ad product, and the increased focus on commerce through messaging, helps explain Facebook’s late-November $1 billion acquisition of Kustomer (talk about a high Kustomer acquisition cost!). Kustomer is a control center for conversations that take place across channels -- from text, to email, to social media -- which fits nicely with Facebook’s goal of unifying messaging, and also uses AI to handle simple requests, which should allow businesses to deal with increased conversation volume generated by click-to-messaging ads.Just last week, Facebook rolled out more features to improve messaging-based and in-app commerce. Last Wednesday, it added carts to WhatsApp, and on Friday, it added shopping to Reels, its TikTok clone.These solutions are still clunky. In the US, for example, WhatsApp carts don’t support payments, so businesses and customers need to arrange payments separately. But Facebook recently rolled out WhatsApp payments in India, where it is the country’s SuperApp, after years of government pushback. Facebook’s $5.8 billion investment in Reliance’s Jio Platforms likely helped grease the wheels. As with Marketplace in Thailand, as Facebook works out the kinks in India, it will roll out messaging-based payments to its 3.2 billion MAPs around the globe as it slowly convinces governments it can be trusted with our money.As it continues to connect its various platforms and integrate more commerce and payments functionality, Facebook will complete the most ambitious backward integration in history, from ads into eCommerce. It will own the funnel. To be sure, all of this is early and unproven, and Facebook isn’t exactly known for its product innovation. For a unification project, it all feels a bit piecemeal. Plus, the company has also faced headwinds in markets around the globe, where governments are slow to trust Facebook to handle payments. But it points to how Facebook is thinking about unifying its products to help businesses not only reach, but communicate with and sell directly to, new and existing customers, wherever they happen to be. To that end, it’s not hard to imagine that Facebook might even roll out Shops and messaging functionality through its mobile app ad network, Facebook Audience Network. The implications of that would be enormous. It would mean businesses will be able to set up … shop … anywhere they’re able to place ads today. Imagine checking out directly in ads across the internet; see, click, buy, or talk to a person (or AI) to answer any questions. If Facebook pulls off that vision, it will have its own Everywhere Store to battle Amazon’s Everything Store. Oh yeah, and one more thing… Facebook’s Next RealityEverything that Facebook has achieved on mobile is made more impressive by the fact that Facebook almost missed the platform altogether. It was a desktop-first product when it went public, and the market didn’t believe it could make the transition to mobile. The app was janky and built on HTML5 (RIP), and analysts feared that a mobile NewsFeed couldn’t support an ad load. Its shares fell from $42 to $19 in Facebook’s first three months as a public company.Zuck fixed the mobile problem by acquiring Instagram and pushing the company into a hard pivot, but it was harrowing, and he vowed to not miss the next one. To that end, Facebook made two acquisitions that are particularly intriguing: * Oculus. Acquired the maker of VR headsets for $2.3 billion in 2014. * CTRL-labs. In a less splashy move, acquired the brain-computing startup for between $500 million and $1 billion in 2019.  As of August, Facebook rolled Oculus, CTRL-labs, Portal, and Snap Lens Studio lookalike Spark AR into Facebook Reality Labs. The division, reporting to Andrew ‘Boz’ Bosworth, is responsible for Facebook’s efforts in VR, AR, and the spatial computing operating system. With its hands tied on social and messaging acquisitions, eight of its last ten acquisitions have been under Facebook Reality Labs. It’s easy to dismiss the effort -- who wants Facebook controlling the Metaverse? -- but it’s showing potential. * Portal. After a chilly reception that went something like “no fucking way am I letting Zuck into my house,” Portal sales have taken off during the pandemic. My sister lives in Ghana, and she and my mom talk over Portal every day. When we’re all physically distanced, the Portal can make people feel closer together. * Oculus. Facebook lowered the price point for the Oculus Quest 2, it’s newest VR headset, to $299, and pre-orders surpassed the original Oculus’ by 5x. Oculus Quest 2 is the best standalone headset on the market, and is likely to be the best-selling of all-time.* Spark AR. While this is a painfully blatant rip off of Snap, the same logic I used for Snap holds here: by putting lightweight AR in hundreds of millions of peoples’ hands, Facebook is getting an early headstart on building Mirrorworld.* AR Glasses. Facebook has plans to release AR glasses next year, in partnership with Luxottica. Early attempts to build AR glasses -- from Google Glass to Snap Lenses -- have ranged from butt-of-joke to toy-like, but if Facebook can marry what’s worked in Oculus with the lighter touch needed for AR, it has a shot. Just like Facebook’s social apps, the Facebook Reality Labs products will work together, in this case to try to usher in the era of spatial computing on Zuck’s terms. To become the platform, Zuck predicts the company needs to sell 10 million Oculus headsets in order to attract enough developers to build an ecosystem. That’s why the company dropped its price to $299. The prize couldn’t be bigger: if Facebook becomes the default platform for VR, AR, or both, it will hold the position that Apple and Google hold in mobile today. Plus, it will be able to plug in its social, messaging, and commerce features to the new platform from day one, creating new opportunities for businesses, and of course, for Facebook itself. Is Facebook owning a foundational Metaverse platform a good thing? Probably not. Over the past two weeks, I finally read Ernest Cline’s 2012 Metaverse instant classic, Ready Player One, and his new sequel, Ready Player Two, so I’m on high-alert. If the real thing turns out to be anything like the books’ fictional OASIS, the decisions that the platform owner makes will have an unprecedented impact on billions of lives. Ready Player One takes place in a VR world powered by an advanced Oculus Quest-like headset. Ready Player Two raises the stakes when it moves players from VR headsets to ONI, a non-invasive neural interface through which players can control their avatars and experience others’ lives just by thinking. Facebook has its own answer to ONI in CTRL-labs, which brings great promise and great danger, and will need to be regulated appropriately if it comes to market.Dystopian visions aside, in both fiction and, I suspect, reality, the company that owns the Metaverse will be the most valuable in the world. We’re many years away, and I prefer Tencent and Epic’s more decentralized approach, but Facebook is a contender, and you get that upside potential for free. Putting it All TogetherFacebook is hard to love. Concerns around privacy and anticompetitive behavior abound, it rips off other companies’ product work, and I’m not convinced Mark Zuckerberg isn’t a robot. But as Ben Graham told a young Warren Buffett, “In the short run, the stock market is a voting machine; in the long run, it’s a weighing machine.” Facebook will do more than $80 billion in revenue with gross margins over 80% and EBITDA margins over 40%. Half of the people in the world outside of China use its products. It’s built arguably the best business model in the world. It stands to benefit as much as anyone this side of Seattle from the dramatic and sudden shift to eCommerce.But despite that, it’s trading at the lowest P/E multiple among FAAMG, eCommerce, and social media companies. There are obvious headwinds. We’ve discussed many in the piece, including an active antitrust lawsuit, and we haven’t even mentioned two of the strongest:  * Apple’s IDFA update in iOS 14 which will hurt Facebook’s ability to collect data and target customers in apps.* TikTok may steal attention, the lifeblood of an Aggregator, from Facebook, or at the very least, hamper its ability to acquire young users. But Facebook is undervalued relative to any set of peers, and that’s before taking its bets on the future into consideration. In the near-term, it is unifying messaging, social, and commerce in the most ambitious backward integration in history. Long-term, it may become the platform on which the Virtual Reality economy is built. And we got through this without mentioning Facebook’s crypto project (currently: Diem) 😏  or its Giphy acquisition.I love finding an overblown bearish narrative. Normally, I disagree with its sentiment. In this case, I agree -- Facebook feels icky -- but in this market, I’m not letting a little ick get in the way of a good value. Thanks to Dan and Puja for editing! You’re both the Sheryl to my Zuck. Full Disclosure: I own shares in Facebook which make up less than 2% of my portfolio. This is NOT INVESTMENT ADVICE and I am not a registered financial adviser or CFA. I’m a guy who writes a free newsletter. Caveat emptor. Thanks for reading, and I’ll 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