Not Boring by Packy McCormick

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

Welcome to the 1,262 newly Not Boring people who have joined us since Monday! (Thanks, Patrick!) If you aren’t subscribed, join 24,603 smart, curious folks by subscribing here!This week’s Not Boring is brought to you by… MarketerHire connects you with experts who can catapult your business into the next phase of growth. Just look at some of their success stories. Outer was named the fastest growing DTC brand in the summer of 2020 – while working with a paid social marketer from MarketerHire. Stuart and Lau hired four marketers from them and saw a 2x increase in ROAS. Jillies tested product/market fit with a paid social marketer and received 100+ orders in less than three weeks. The fastest-growing companies all have one thing in common: great marketers. Conversely, this time of year, companies that skimped on their marketing teams are feeling the pain in the form of outlandish spend or missed holiday sales. You need a pro on your side. Simply put, MarketerHire built the best way to hire marketers you can trust – on your terms. Hire hourly, part-time, or full-time with no long-term commitment. To get started, click the link below.Hi friends 👋 , Happy Thursday! It’s my favorite kind of Thursday: a Not Boring Syndicate Thursday! Since I sent the SkillMagic Memo in late October, our little Not Boring family has grown a little bit and there are more than 6,000 new smart, curious people here, so I want to take a second and describe how and why we do the Syndicate. (If you’ve been here for a while and the anticipation is killing you, skip to the memo). I love telling companies’ stories, both the very, very big ones and the very, very small ones, the ones at the earliest stages of their lives. A few months ago, we decided to launch a Syndicate and write investment memos on early stage companies, for a few reasons: * Building a startup, particularly at the early stages, is a challenging, scary, exhilarating, lonely, fun, uncertain roller coaster. I want to tell the stories of some of the most exciting companies while they’re in that wild stage, before they get big and famous, and when a little extra exposure can go a long way. * The Syndicate is a way to let Not Boring readers (accredited ones, for now) invest in startups together, and get access to deals that few of us could get on our own.* Venture Capital and early stage investing have a mystique around them, and I know I felt like it was something reserved for other, smarter, better connected people. That’s not the case, and I hope these demystify the process a bit. * Anyone can write that Stripe is a fantastic company (that doesn’t stop me from doing it, of course); I want to put my money where my mouth is and bet on companies before it’s obvious. * Watching what brilliant people are building at the early stages is the easiest way to see the future. So far, we’ve invested in five phenomenal companies: Apt, Composer, OZE, Swaypay, and SkillMagic. Today, we’re partnering with Jonathan Wasserstrum to invest in Outfit Renovations and peek into the future of architecture. If you’re an accredited investor, you can apply to join the Not Boring Syndicate here to get more information, including a deck and deal terms and potentially invest with us.This is NOT investment advice and is intended for educational & informational purposes only. Let’s get to it. Outfit: Not Boring Investment MemoThe Outfit Investment ThesisA couple of weeks ago, Fed Novikov, the co-founder of another Not Boring portfolio company that’s using software to streamline the traditionally heavy real estate industry, Apt, told me about a company a friend of his was starting and asked if I wanted an intro. As a quick check, I showed the company’s website to Puja. She’s the skeptical and sensible one in our relationship. Her reaction: “Woah. That is incredible.” That’s a word that I typically use about startups, but not her.Outfit is incredible as a product because it puts the dream we all have of living in a space we’re proud to show off within reach. Outfit is incredible as a business because it uses software to scale a traditionally unscalable product in a massive market while maintaining high margins. I’m excited to bring Outfit to the Not Boring Syndicate for a few reasons: * Market. The DIY Home Improvement Market is way bigger than you’d think -- $46 billion, 38% of all home improvement projects are DIY -- and growing, particularly as COVID pushes more people to buy and improve homes. Young startups in the home renovation space have recently raised tens of millions from top investors. * Product. There’s no solution in the market that sits between traditional DIY and hiring contractors. Outfit uses software, processes, and buying power to build the first scalable architecture product. * Founder. Ian Janicki is a second-generation architect with software and design skills honed at top tech companies. He’s one of the most compelling founders I’ve met.* Customers. Outfit’s customers are middle-class, suburban, and young. They’re not the typical startup target. They’re the IKEA generation, who want to get involved and roll up their sleeves. Outfit is to renovations what IKEA is to furniture, a natural next step.* Business Model. Outfit is asset light and scalable in an industry that… isn’t. They don’t need to deal with scaling labor (which is hard) or working across jurisdictions (which is really, really hard). * Vision. When Outfit is successful, you’ll be able to buy a new look for your home as easily as you can buy a new outfit for yourself. We put the deal live on AngelList last week, and already, AngelList itself has written a big check into Outfit via the Not Boring Syndicate. AngelList sees thousands of deals and only writes checks into a few, so it’s a big stamp of approval for what Ian is building. Read on to learn what they (and I) are so excited about. The DIY Market If you’ve felt a strong urge to refresh your bathroom or modernize your kitchen during COVID, you’re not alone. Bank of America surveyed over 1,000 Americans, and more than 70% planned to tackle home improvement projects during the pandemic. Even pre-COVID, the DIY Home Improvement industry was worth an eye-popping $46 billion. There are 2.6 million DIY bathroom projects and 1.6 million DIY kitchen projects in the US every year. This trend is just getting started. Last Monday, I wrote that We’re Never Going Back to the office in the same way again. One of the second-order consequences is that people will be moving more often, potentially out of major cities and to places where they can afford to buy a home. Ian actually built transplant.to to understand where people are moving earlier this yearAnother is that people won’t be commuting and putting in face time with their bosses, meaning that they’ll have more time to spend on other things. Plus, the insides of our homes are no longer a secret reserved for our closest friends and family; they serve as the background to our Zooms which mean that they serve as the backdrops to our lives. Two startups launched in the past eighteen months have seen early success. Block, launched in early 2019, has raised $21.5 million from investors including NEA, Lerer Hippeau, and Obvious Ventures. Made, launched early this year, raised a $9 million seed round from Base10, FoundersFund, and Felicis. Block and Made offer a great service to customers in New York and San Francisco, respectively, with over $30k to spare, but there’s a massive opportunity still up for grabs to serve the rest of the country with a better option. That’s where Outfit comes in. Meet OutfitOutfit is DIY renovations in a box. It’s unbundling architectural drawings into step-by-step directions. As a non-design person who managed a design team at Breather and tried to understand what drawings meant, I can tell you that this is like translating Ancient Greek to English.Starting with kitchen renovations, Outfit fills the gap between “figure it all out on your own” and “hire a contractor” by sending everything you need for the job to your door and providing interactive step-by-step instructions in an easy-to-use app. Outfit exists between traditional DIY, which is the cheapest option but comes with a ton of uncertainty and often yields subpar results, and hiring a general contractor, which can be at least 3x more expensive than DIY, requires permitting, and often comes in over time and over budget. Outfit uses software to combine the satisfaction and savings of DIY with the guidance and quality of hiring a contractor. Here’s how it works. * Choose a project template.* Take pictures and simple measurements of your space.* Outfit sends you instructions, tools, and materials.* You do the renovation yourself, and chat with Outfit experts right inside the app.Et voila! Outfit does all of this for only a small mark-up to a full DIY because it’s able to take advantage of a few things: * Software. Today, Outfit customers can take pictures and measurements of their space and receive a custom combination of instructions and tutorials. Over time, technology will make the process easier and faster. For example, getting LIDAR scan used to be done with a super-expensive device, and now it's on every new iPhone; trends like that mean that Outfit will be able to automate more of the process moving forward. * Negotiation at Scale. Outfit orders all of the materials and tools for its customers and coordinates deliveries, meaning that it can get discounts with vendors beyond what a general Pro gets.* Delivery. Home improvement retailers compete with Amazon for convenient next-day delivery, so they’re offering unbelievably cheap materials delivery. They’ve already done the hard part of getting these heavy items to the edge, which Outfit piggybacks on.To be clear, this is going to be difficult to pull off. No one has ever done it before. As a general rule of thumb, architecture and construction don’t scale. But Outfit’s founder, Ian Janicki, has spent most of his life building up the skills to change that. Ian: Product-Founder FitLike most of the deals we do in the Not Boring Syndicate, Outfit is very early stage. It’s a small team with an early product and a small batch of customers in their Beta. At this very early stage, where company and idea are one in the same, you’re betting on a few things: * The idea seems feasible. * The market is very big, or if the company is successful, it will create its own big market.* The Founder(s). Of these three, the Founder is the most important. The idea may change, and the market may not even exist yet. If it does, it’s likely full of unwelcoming incumbents looking to beat the new entrant out of business. A great Founder can overcome those obstacles, evolving the idea based on customer feedback while staying true to the vision, willing a market into being, and fighting for their big piece of it. Ian Janicki is the perfect Founder for Outfit. A second-generation architect, Ian grew up in the trades, working construction as a teenager before studying at the nation’s top undergrad architecture program, Cornell. While at Cornell, Ian learned how to engineer software as well as buildings. When he graduated, understanding that the path for a junior architect is a miserable one, he decided to head to San Francisco to try his hand at software instead. Over the past eight years, he’s worked as a Product Designer and Product Manager at open source mobile-app platform Xamarin (acquired by Microsoft), Microsoft, construction unicorn Katerra, and design unicorn Figma (the very same software with which I make all my beautiful images!). He always knew that he wanted to get back into architecture, but not in the traditional sense. Instead, he’s on a mission to make architecture scale with software. Outfit is the manifestation of that mission, and of the lessons he learned, particularly at Katerra. Traditional architecture relies on teams of junior people to churn plan after drawing after plan after drawing. Pre-fab has high fixed costs in a cyclical industry, tough labor arbitrage, and can’t reach economies of scale. Ian’s first exploration to make the process easier was to build an API for building permits and inspections, which, if you’ve ever had to deal with building permits and inspections is an absolute nightmare. The process requires in-person interaction across 20,000 separate jurisdictions with no standardization, no incentive to improve, and all of the fun that comes with dealing with local government. No go. He then looked at existing models, like Made and Block and realized three things:* They’re difficult to scale. * They still need to deal with permitting. * They’ve left a massive hole in the middle of the market. Made and Block appeal to the segment of the market that is willing to spend $30-50k to have someone else design and build beautiful bathrooms and kitchens for them. But that’s a small piece of the overall market. Outfit is for the rest. Target Customer and Marketing One of my favorite slides I’ve ever seen in a pitch deck is Ian’s customer slide, in which he defines Outfit’s customer as: “A middle-class, suburban, young couple (not you).” Often, companies whose products VCs can see using themselves have an easier time fundraising than products that they can’t. It’s one of the reasons that Airbnb had such a hard time raising money initially. What VC in their right mind would let a stranger stay in their house for a hundred bucks, or sleep on someone’s air mattress to save a few dollars? Outfit rightly calls out that it probably isn’t for most VCs. If you have more money than time, Outfit isn’t the solution for you. But Outfit’s customer is most of the country. They are: * Low on Cash, High on Time. Chances are, they put their life savings into the down payment on the home. They’re willing to spend the time to turn their investment into a home.* Used to Digital Experiences. They don’t want to deal with existing solutions, which are in-person, over-the-phone, and paper-based. * Willing to Pay for DIY as a Premium. The “IKEA Effect,” from a 2011 HBS study in which people assign higher value to things that they created, shows customers willing to pay 63% more for DIY. If you’ve been reading Not Boring for a while, you might remember a brilliant July guest post by native Texan Ali Montag titled Monopolies and Magnolias. She told the story of an American business empire that most of us didn’t even know existed: Chip and Joanna Gaines’ Magnolia. Launched from the popularity of the couple’s hit HGTV show, Fixer Upper, Magnolia now spans DTC, retail, a luxury hotel, a construction business, a seven-city real estate agency, best-selling books, a campus with restaurants and a shopping center, and more than 20 million social followers, with a cable network on the way. Magnolia’s secret is this: Magnolia is a monopoly because it serves an audience with few other exciting options. Magnolia is about slowing down. It’s about watching the sunset and enjoying a plate of chocolate chip cookies with your family. It’s about using real, full fat butter. That’s a signal many American women are eager to open their pocketbooks to share. Lighting a $28 valencia orange scented candle from Magnolia sends a signal to houseguests, family members, and to yourself: Home is important. She didn’t know it at the time, but Ali might as well have been writing about Outfit. It’s built for people for whom home is important, people Silicon Valley companies typically target only once they need to “cross the chasm,” people who want nice things but want them to be accessible and permanent, with some of their own elbow grease mixed in. Most of America drives pickup trucks -- the Ford F-Series has been the best-selling vehicle in the US for decades -- and when they want to do home improvements, they watch HGTV instead of calling the interior designer, and head to Home Depot instead of paying someone to do it for them. Outfit has a smart plan in motion to reach these customers efficiently (I can’t give away all the tricks here though 😉 ). Janicki is betting that once Outfit reaches these customers, they won’t just buy, they’ll share, too. Outfit is a product that was built to show off. Who doesn’t want to show before and after pics of the room that they built themselves? What influencer wouldn’t want to prove that they can build, too? Seriously, pause for a second and think of your friends. How many of them would spend a few weeks on a renovation without posting at least 5-10 pictures? Currently, with a small team and six months under its belt, Outfit already has hundreds of customers on the waitlist and influencers already reaching out to partner. Oh yeah, and it has its own HGTV star lined up. Anthony Carrino, host of TheBuild.TV is set to join the Outfit team to lead content and growth.  This is going to be a major advantage for Outfit: by targeting the customers others aren’t, and helping them share their progress, Outfit will build a loyal fan base that will help spread the product organically. And as customers feel that satisfaction of the first job, they’ll want to come back for more. Repeat, vocal customers are just one piece of a business model that Janicki … architected … for asset light scale. The Business ModelIn order to make architecture scalable, it has to be asset light, meaning that Outfit doesn’t own materials or hire contractors, it has to leverage software to replace repeatable processes, and it has to avoid permitting. That’s exactly what Outfit does. For an industry like home improvement that can seem a little bit messy, Outfit’s business model is surprisingly clean. After customers send Outfit pictures of their space and pick a package, Outfit gives them one price for the entire job. For a light kitchen refresh, that might be $1,500. That’s all the customer needs to worry about paying. From that $1,500, Outfit needs to: * Acquire the Customer, which it will do as outlined above. We expect CAC to decrease as customers share their work and come back to do more renos. * Purchase Materials from big box home improvement stores to specialty suppliers, using its professional discount, which will increase with scale. * Ship materials to customers, which vendors now offer cheaply in order to compete with online retailers. * Create a to-do list based on customer’s space starting with in-house and contracted labor, and moving increasingly to automated over time as LIDAR, AR, and other technologies become more ubiquitous and Outfit learns what works best for which specs. * Support customers with on-demand expert help. Outfit expects that once it’s a few hundred projects in, it will be able to generate a positive gross margin of around 20% on each job, and that those margins will improve as it benefits from scale, automation, larger ticket sizes, and more repeat customers. It’s important to remember that while Outfit is in the real estate and construction space, it’s a technology company. Although it deals with home renovations, something people have been doing as long as there have been homes, Outfit is only possible now, for a few reasons: * Abundance Necessitates Curation. Ecommerce has put everything online. Now, the challenge is to curate those materials. There are 100,000 faucets! Which one is best for my kitchen? You need an architect to figure that out.* Advanced Sensors. The technology to scan and map a space now comes built-in on new iPhones, and will only become more ubiquitous. * The Missing Piece of Ecommerce. We buy and configure laptops, cars, vacation rentals, and even homes (see: Opendoor) online. But until now, we haven’t been able to buy architecture online. Everything that once seemed crazy to buy online is normal now. * The Instagram Economy. Matcha took off in the United States because its green hue pops on Instagram. Outfit can go viral today in a way it never could have before.  * The Airbnb Economy. Airbnb is going public today, and the Airbnb economy is only going to grow from here. Outfit is a phenomenal solution for semi-professional Airbnb hosts who want to spruce their places up in order to generate more income.* Millennials Are Buying Homes. They’re the IKEA generation, and they’re used to doing everything online and on their phone. Now is the time for Outfit, but it’s just the beginning. Ian’s vision is to change the way we design and build spaces. Outfit’s VisionWith the money from its seed round, Ian plans to grow the team, build a self-serve eCommerce product, and continue to complete projects. Lots and lots of projects. When we spoke, he told me that he was starting with simple cosmetic projects in the bathroom and kitchen to get reps under the company’s belt, and that he wanted to do hundreds of them in the next year.As Outfit iterates through all of those projects, it will: * Build up a database of common floorplans and and edge cases that it can use to automate future projects. * Expand its library of instructions and resources based on customer feedback. * Understand the pain points that customers have throughout the process and build solutions to help get them unstuck. * Grow its customer base, who will become repeat customers and brand advocates by sharing their work. Helping customers do great work is crucially important. They’ll start with an easy project, get it right, and move on confidently to something a little more complicated. They’ll also want to stick with Outfit for the next room so they can easily match the aesthetic from the first. The combination of people completing and sharing more projects is Outfit’s Flywheel.Outfit will learn too, and it will be able to confidently expand into more project types, and to make each project more modular and magical. Its vision is to “build the buy button for architecture.”Imagine seeing a kitchen you love on Pinterest or Instagram, clicking “Buy on Outfit,” and getting materials and instructions delivered right to you. You might even be able to say, “I want to do steps 1-7 and 10-13 myself, but I would love to hire someone to help with 8 and 9.” Because Outfit is building a database of detailed steps, they can quickly and easily bid out the more challenging parts of the process, removing frustration while letting customers keep the sense of accomplishment from a job well done. At the same time, influencers can monetize their spaces by partnering with Outfit. Puja would buy Something Navy’s kitchen on Outfit right now if she could.Ultimately, DIY is a wedge into making architecture scalable using software. By working with the people who are willing to get their hands dirty upfront, Outfit will be able to work out the kinks in its software, logistics, and processes until anyone, anywhere can take a picture of a room, choose what they want it to look like, and get everything they need, from instructions, to materials, to labor, delivered to their door. Today, that’s kitchens in houses. In the future, that could mean full homes or offices. It’s the Magnolia, HGTV dream, accessible to anyone. It’s not hard to imagine the company’s customers starring in an Outfit show on HGTV one day soon. RisksEarly stage investing comes with major risks, and Outfit is no different. As with any early stage investment, the numbers suggest that you should expect any money you put into an early stage startup to go to $0. Here are a few Outfit-specific risks:* Solo Founder. Ian is working with a small team, but he’s still a solo founder. Many investors like to see co-founders with complementary skill sets working together to start a company.* Execution. Outfit is early. It has only completed one project so far with several others kicking-off later this month, and new challenges will arise as it tries to expand and scale. * Business Model. Outfit’s model relies on getting customers to pay a slight premium for the full package, and on getting its costs down using software. To the extent that it needs to do more things manually over the long term, margins will be hurt.* Competition. Competitors may try to copy aspects of Outfit’s business, large incumbents may enter the space, or new startups might form to compete.There are certainly risks that neither I nor Outfit is currently aware of that could sink the business. Again, this is not investment advice, and you should do your own diligence before deciding whether to invest. The Outfit OpportunityBuilding asset light, software enabled real estate and construction businesses is a holy grail that many have talked about attempting and few have achieved. If I had a dollar for every time I heard the phrase “asset light” while I was at Breather, I’d have more dollars than I could count. There’s a reason for that. Real estate and construction is the largest industry left largely untouched by software. The prize for the winners will be massive. In this case, the DIY Home Improvement market is a $46 billion annual prize, and if Outfit is successful, it will blur the lines between professional and DIY, giving it line of sight to a $250 billion market, just in the US, and just in housing. The two leading home renovation startups have raised over $30 million combined in the last 20 months from top investors. Because of Outfit’s asset light approach, it’s raising a much smaller amount to tackle an even bigger opportunity -- one that touches every part of the country, and not just the coasts. Already, Ian has top angels onboard including Gumroad’s Sahil Lavignia, Runway’s Siqi Chen, Mercury’s Immad Akhund, Kleiner Perkins EIR Thomson Nguyen, and Xamarin and GitHub’s Nat Friedman, Ian’s old boss. Outfit feels like one of those opportunities that we’ll look back on in five years and say, “Remember when we thought this was just about bathrooms?” In a world in which spaces will need to change and adapt more than ever before, new solutions in architecture and construction have the potential to reshape how we interact with the buildings around us. It’s why I love Apt, and why I’m so excited about Outfit. As excited as I am by the potential, Ian is madly passionate about it. It’s clear that this is his life’s work, that he’s the right person for the job, and that like the tradesman, architect, and engineer that he is, he’s going to experiment, tinker, build, demolish, and rebuild until he gets it right. I am thrilled to have the opportunity to participate in this competitive seed round, and to get the band back together and partner with Jonathan Wasserstrum, who runs one of AngelList’s most successful syndicates and its top PropTech rolling fund. If you’re an accredited investor and would like to learn more, you can apply to join the Not Boring Syndicate by clicking the button below. I’ll be sharing more details -- including deal terms and the deck -- over on AngelList.Inspired to go give your kitchen that facelift you’ve been putting off? Join the waitlist here. So inspired that you just want to join the team? Good news: Outfit is hiring! Reach out at jobs@outfitrenovations.com.Thanks for reading, and see you on Monday!Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 1,367 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 23,341 smart, curious folks by subscribing here!Today’s Not Boring is brought to you by… In September, I wrote about MainStreet, a company that literally just gets your company free money from the government. Since then, Main Street has found Not Boring readers $1.1 million in sweet sweet free government money. $1.1 million! It’s simple, you plug in your payroll, MainStreet finds tax credits and incentives that apply to your business, then they send you the money. Like I said, free money. On average, MainStreet finds companies around $50k. That’s a lot of holiday bonuses. If you work for a company in the US that has engineers, go, right now, and get your money.Hi friends 👋 , Happy Monday! Most weeks, as I’m researching and writing and preparing to hit send, I feel like a total imposter. Sometimes, like when I’m writing about the future of the office or Slack, topics that I’ve spent years thinking about, working in, and using, I’m comfortable that I know what I’m talking about and am qualified to opine. But mostly, I’m dropping into new territory and writing thousands of words about industries and companies in which other people have spent most of their working lives. When the topic is technical, I feel it even more.This week’s topic - APIs - is among the most imposter syndrome-inducing yet. On the one hand, it feels like I’m stating the obvious: APIs are an increasingly important piece of how software is built. On the other, I feel like I have nowhere near the technical depth or hands-on experience to write about the topic with the nuance it deserves. But in these cases, I view my role as being the shameless kid in class who’s not afraid to raise his hand and ask the question that everyone else is thinking. If there’s something happening that I know is important, but don’t know nearly enough about, and I do this for a living, chances are there are many of you who want to understand it a little bit better, too. This, then, is the beginning of an exploration, and I look forward to your thoughts and feedback. Now let’s get to it. APIs All the Way DownSome ancient Asian cosmological views are close to the idea of an infinite regression of causes, as exemplified in the following apocryphal story: A Western traveler encountering an Oriental philosopher asks him to describe the nature of the world: “It is a great ball resting on the flat back of the world turtle.” “Ah yes, but what does the world turtle stand on?” “On the back of a still larger turtle.” “Yes, but what does he stand on?” “A very perceptive question. But it’s no use, mister; it’s turtles all the way down.”-- Carl Sagan, Gott and the TurtlesStripetecheryOn Thursday, the kind of thing that gets people like me very excited happened: Ben Thompson wrote about Stripe, which announced its new Stripe Treasury product, and interviewed its co-founder and President, John Collison. Stripe Treasury is “a banking-as-a-service API that lets you embed financial services in your marketplace or platform.” Simply, by writing a few lines of code, platforms can let their customers set up bank accounts at partner banks like Goldman Sachs and Evolve Bank & Trust. In the press release, Stripe highlighted its partnership with Shopify, which is using Treasury to build Shopify Balance. Now, when a merchant creates a Shopify account, they can set up a bank account at the same time, through the same platform. That’s incredibly cool in its own right, but it triggered bells in my head for another reason. When I was researching and writing Stripe: The Internet’s Most Undervalued Company, I asked people for the biggest knocks on Stripe. One answer I heard from multiple people was that they had too much customer concentration with Shopify -- by one estimate, even before the pandemic, Stripe was generating $350 million in revenue from Shopify alone -- and that Shopify would inevitably get sick of paying Stripe and build their own payments solutions. The Shopify Balance announcement means that the opposite is true. Instead of pulling its business, Shopify is integrating more deeply with Stripe. Many of its clients will keep their money in accounts managed by banks with which Stripe, not Shopify or the merchant, owns the relationship. Think of the switching costs if Shopify were to try to pull out of the relationship now. They’re practically married.Shopify is a really smart company. It wouldn’t tie its own hands for no good reason. Instead, it made a deliberate, strategic choice to focus on the things that it does best, and to plug in Stripe for all of the things that it does best. That’s what third-party APIs enable their customers to do. “API” is one of those acronyms you hear a lot. You might know that it means Application Programming Interface, and you might even know that APIs are the way software talks to other software, but if you’re like me, you’ve never really gone deep on them.The Stripe x Shopify announcement woke me up, though, and led me down a rabbit hole to places both familiar and new, to the question of what good strategy looks like on the internet and why most companies should just be API Frankensteins with one main point of differentiation. Like the turtles, modern software is APIs all the way down.So today, I’m going to take you down there with me. We’ll explore: * What Are APIs?* The API-First Ecosystem* Good Internet Strategy, Bad Internet Strategy* Why Shopify is Smart to Build on Stripe and Twilio* The Magic of API-First Business Models* Twilio and Investing in API-FirstAPI-first has some fascinating implications for how companies are built and where value is created. But first things first… What Are APIs? There’s an old Picasso fable that goes something like this: A woman approaches Picasso in a restaurant, asks him to sketch something on a napkin for her, and tells him that she’d be happy to pay whatever it’s worth. He obliges, scribbles something quickly, and asks for $10,000. “$10,000!?” the woman replies in shock, “But you just did that in 30 seconds!” “No,” Picasso tells the woman, “It has taken me 40 years to do that.”That’s one way to think about an API. APIs let companies leverage years of other companies’ work in seconds. For a more technical but approachable explanation, Justin Gage’s What’s an API? and APIs For the REST of Us are the two best resources I’ve found. According to Justin:Applications are just a bunch of functions that get things done: APIs wrap those functions in easy to use interfaces so you can work with them without being an expert.An engineer writes a bunch of code to manage complex things, and builds an API on top of the code to abstract away most of the complexity so that using all of that code is as simple as writing a few lines of code.On Invest Like the Best, Benchmark’s Eric Vishria describes it simply: people interact with software through Graphical User Interfaces (GUIs), software interacts with software through APIs. APIs handle an ever-increasing amount of things that get done in the world. Something that might have been a pen and paper process involving hundreds of people 50 years ago, and a dozen people clicking a computer screen a decade ago, is probably software talking to other software via APIs today. There are three types of APIs: * Internal APIs: Used to do complex things more simply within a company. * Public APIs: Typically used to open up datasets so the public can build on top of them. * Vendor APIs: Give customers the full superpowers of an entire company in a few lines of code.Today, we’re focusing on Vendor APIs, also known as third-party APIs. The companies who sell third-party APIs are called “API-first companies” (still with me?). Whereas an internal or public API abstracts away the complexity of some code through one clean endpoint, like this: An API-first company essentially abstracts away the complexity of a whole best-in-class company, giving clients the full output of a highly-focused org by typing a few things, like this: Hiring has traditionally been one of the most important things a company does. Picking the right API vendor is like the hiring decision on steroids. When a company chooses to plug in a third-party API, it’s essentially deciding to hire that entire company to handle a whole function within its business. Imagine copying in some code and getting the Collison brothers to run your Finance team. Just like in traditional hiring, the impact of that decision compounds over time, for better or for worse, but at full company scale.So let’s get to know the job candidates. The API-First Ecosystem API-first companies are a subset of Software-as-a-Service (SaaS) companies, with a few key distinguishing features: * Purchasing Decision. Traditional SaaS is a department-head, IT, or exec purchasing decision, while API-first is typically a product and engineering purchasing decision. * Users. Many people in a company interact with a typical SaaS product (like Slack, Salesforce, Airtable, Asana), whereas only the engineers typically work with API-first companies.* Business Model. The most common SaaS business model is to charge per seat, while most API-first companies charge customers by usage of the product, either based on Pay Per Call (each time the API is pinged, say if you’re sending an SMS via Twilio) or as a percentage of transaction size (Stripe charges 2.9% plus $0.30 for each transaction). * Use Case. Traditional SaaS products help employees get things done, APIs automatically do those things themselves. API-first companies can be confusing to explain, because many of them offer both API products and traditional SaaS products. Their customers run the gamut, from large platforms like Shopify and Uber all the way down to individuals who want to accept payments online, and everything in between. Puja and I just had pictures taken with Dev, and the photographer sent us her invoice via Stripe. She was using one of Stripe’s traditional SaaS products with a GUI, not writing code. For this essay, though, we’ll be talking about API-first companies whose customers build functionality into their products or internal processes via APIs. Those companies are increasingly able to build nearly everything non-core through APIs. In The Third-Party API Economy, Canvas Ventures’ Grace Isford maps dozens of players in the space across nineteen separate verticals. “There’s an app for that” is now “there’s an API for that.” For almost anything that a business needs to do, there’s an API-first company with a product or suite of products they can plug in. What’s incredible to me about this graphic is that each logo represents something that a company would have had to build on its own previously, that it can now do by writing a few lines of code, and do better than they would have ever been able to in-house. There are two main reasons for that: focus and scale. Focus. API-first companies focus on solving a very specific problem. Stripe started with payments, and put all of their efforts into building the best payments solution. Twilio started with messaging and calling. Plaid does bank data, Algolia does search, Shippo does shipping, Checkr does background checks. That focus means that everything the company does is oriented towards solving all of the problems related to that particular area. Importantly, it means that everyone who works for those companies went there to solve those problems. Whereas an engineer at Uber who signed up to change transportation would be pissed off if she were assigned to work on background checks, because it’s not the company’s core product, an engineer at Checkr is stoked to work on background checks, because that’s what the company is all about! Scale. API-first companies serve thousands or millions of customers, so they’re able to justify small improvements that build up to an incredible product over time. Plaid can spend the effort to integrate with even very small financial institutions, for example, since there will likely be thousands of people who use that bank across all of the products that use Plaid. API-first companies’ focus and scale give their software-building customers best-in-class products that constantly improve at costs that scale with their business. From the product side, they can be godsends. They’re also fascinating strategically in two ways: the competitive advantages of the API-first companies themselves and the impact they have on their customers’ competitive advantages. Let’s start with their customers. Good Internet Strategy, Bad Internet StrategyWhile I write more often about 7 Powers and The Outsiders, Richard Rumelt’s Good Strategy, Bad Strategy is probably my favorite practical strategy handbook ever written. Good strategy almost always looks simple and obvious and does not take a thick deck of Powerpoint slides to explain. It does not pop out of some “strategic management” tool, matrix, chart, triangle, or fill-in-the-blanks scheme. Instead, a talented leader identifies the one or two critical issues in the situation — and then focuses and concentrates action and resources on them.This is the beauty of API-first companies. They allow customers to focus on the one or two things that differentiate their businesses, while plugging in best-in-class solutions everywhere else. Just as AWS and the cloud let entrepreneurs launch more cheaply, API-first businesses allow them to scale and professionalize with low upfront costs and managerial effort. As one person in the space told me, “It’s actually becoming crazy to build your business in any way other than using all APIs except your point of differentiation.”Jeff Lawson, the founder and CEO of leading API-first company, Twilio, might disagree with the premise of talking strategy at all. On the Bessemer Venture Partners Cloud Giants Podcast, he said: I often say that strategy is a dirty word in business; it should be struck. Any time you find yourself talking about strategy, you’re probably off-course, actually. There’s only one business strategy: serve your customers. I don’t think that Rumelt and Lawson would disagree, actually. Both point at the same idea, that what people call “strategy” is often a bunch of fancy words and falsely precise goals that obfuscate the core purpose of the business: serving customers in a differentiated way. Judiciously using APIs where possible gives companies strategic clarity and the ability to solve their customers’ problems in a way that only they can. Identifying the “one or two critical issues” (Diagnosis) is just one piece of the problem. Good Strategy also involves defining a guiding policy and coherent actions.A guiding policy “outlines an overall approach for overcoming the obstacles highlighted by the diagnosis and tackles the obstacles identified in the diagnosis by creating or drawing upon sources of advantage.” It channels a company’s energy towards the areas where it has unique advantages.Coherent actions are the set of interconnected things that a company does to carry out the guiding policy, each reinforcing the other to build a chain-link system that is nearly impossible to replicate.  Walmart isn’t the leading retailer because it has lower prices, or because it puts its stores in a certain type of town, or because it’s built up the right distribution network, or because of any single thing that it does. It’s the leading retailer because all of those pieces work together in such a way that no one could copy Walmart without copying the whole system.If Lawson will indulge me, there are actually some pretty wild strategic implications to coherent actions in an API-first ecosystem, in which the traditional conveyor belt-style value chain model no longer makes sense. Traditionally, the coherent actions taken by a company would look something like Michael Porter’s Value Chain, which we discussed at length in Shopify and the Hard Thing About Easy Things. In 1985, Porter wrote:“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."Those discrete activities comprise a company’s value chain (although Rumelt might bristle at the word discrete and focus more on the links between activities). The Direct-to-Consumer Value Chain, for example, looks something like this (sans Support Activities):It’s clean and linear, like a pipeline. R&D leads to manufacturing, and so on. But in a world in which APIs infiltrate ever more functions of a business, the linear value chain no longer perfectly describes a company’s activities. Chris Sperandio, now at Stripe, wrote a piece while at Segment arguing that there needs to be a new, more dynamic model of a firm: the “Request/Response” model. In the essay on Shopify, I wrote: Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up. That applies to the DTC Value Chain, and to some extent, it applies to software and platform businesses building with many of the same APIs. If your competitor is using Twilio to send SMS to clients, you should, too, or else they’re free to build differentiated products while you spin your wheels reinventing the wheel. In the Request/Response Model, though, 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, and companies like Zapier and Tray.io function as “APIs for all APIs,” making connections between nearly any app with an API fast and easy.Not only can you put the building blocks together in unique ways (the “Infrastructure” column in the Request/Response model), but you can also build new experiences on top of them (the “Operations” and “Experience” columns in the Request/Response model).If the number of potential connections between APIs increases exponentially as more are added, companies have a near-infinite ability to create unique chain-link systems of coherent actions out of the existing primitives. Instead of a linear value chain in which using commoditized components in each step limits the number of places left to differentiate and create value, the Request/Response Model lets companies differentiate on two main fronts: * Direct. The core focus area, for which they build their own solutions. * Meta. The way that they organize all of the components in their ecosystem. That creates a dynamic system in place of a static chain, one that constantly improves and evolves as the companies behind each one of the components work on building the best possible input for their customers. So Why Does Shopify Rely So Heavily on Stripe?Which brings us back to why Shopify works so closely with Stripe, even though they paid an estimated $350 million for the privilege even before their pandemic-fueled growth, and why they continue to strengthen the partnership. It’s just good strategy. Shopify focuses on its key differentiators and building a coherent whole that is differentiated even while many of the components are modularized.Stripe is the prototypical API-first company. It does a whole lot of complicated things behind the scenes, and offers it to customers in a few lines of code that abstract away all of the complexity. When a company chooses to use Stripe Payments, it copies in those few lines of code and sits back while Stripe pushes updates to its core API 16 times per day. It lowers fraud, improves acceptance rates, accepts payments from more countries, pushes faster payouts, and does countless other little things that improve the payments piece of their customers’ businesses. That translates into more money over time, with no extra effort.And it’s not just Payments. It’s Treasury, Subscriptions, Billing, and Corporate Cards. The products it offers customers seemingly grow by the day as it leverages its work in one area to expand into adjacent areas with the goal of “Increasing the GDP of the Internet.” Two days before launching Stripe Treasury, for example, Patrick Collison announced Stripe Capital for Platforms, which lets platforms like Shopify lend money to their customers, again, by writing a few lines of code. By working with Stripe, Shopify gave its customers the power to seamlessly collect payments, then to easily manage subscriptions, then to borrow money, and now to launch bank accounts in a few clicks. Shopify is able to build products in months that would otherwise take years, and even then, wouldn’t match what Stripe is able to do given its unique focus and all of the hard, non-technical, regulator-and-bank-related work it does behind the scenes.In that sense, the Stripe x Shopify partnership is like an API in itself. Shopify plugs in Stripe, and Stripe continues to add new money-related products that Shopify can use itself and give to its customers. The better each Stripe product gets, and the more great products it offers, the less likely Shopify is to ever leave. And why would it? Instead of hiring armies of engineers and spending management brainpower on a second-class product outside of its core competency, it can pay Stripe to handle all of that. Stripe can build robust money-related solutions for Shopify at a lower cost than Shopify could build for itself, because Stripe is able to amortize the costs of everything that it builds over millions of customers, some large and many small. Lest you worry about Shopify’s dependence, though, while Thompson’s graphic shows Shopify as just one of many potential Stripe customers, Stripe is also just one of many third-party APIs that Shopify uses. When Twilio talks about its Flex product, for example, it uses Shopify as a case study. Flex, Twilio’s call center API, lets Shopify build customer experience solutions that it only dreamed of before, because Twilio has spent a dozen years and hundreds of millions of dollars creating all of the building blocks that Shopify’s team can use to design new solutions in minutes. As I was talking to my friend Ben Rollert, who’s building a company on top of APIs, he said that the value system in an API-first world actually looks more like the game Factorio than a traditional Porter Value chain. It’s probably not a coincidence that Factorio is one of Shopify CEO Tobi Lutke’s favorite video games, and the one game that he lets every employee expense. Uncoincidentally, Shopify is the low-key leader in building a business using APIs wherever possible in order to focus on its unique point of differentiation: building best-in-class digital eCommerce solutions. Just two weeks ago, for example, Shopify launched Handshake, a wholesale marketplace it acquired last year in order to compete with unicorn startup, Faire. Giving Shopify merchants access to more inventory at better terms all in one place is core to what Shopify does, and it takes advantage of the scale benefits that Shopify itself has, bringing demand from millions of retailers to bear on wholesale negotiations. Strategy is about knowing when to say no, so that when you say yes, you can go all-in. Because Shopify spends less time on non-core things, it’s able to increase its product velocity on the things that really matter to its customers. The Magic of API-First Business ModelsNow how about the API-first businesses themselves? Strong API-first businesses sit in this sweet spot: they provide mission critical but non-core functionality to their customers, like accepting payments, providing cloud security, or sending communications to customers. That means two things: * Massive Markets. API-first companies each provide a small slice of the things every business needs to do. Almost every company needs to collect money, remain secure, and communicate with customers. * Moats. They’re in a position in which companies can’t just rip them out -- imagine not accepting payments for even a day! -- but where it’s probably not worth the resources or defocusing to build a different solution in-house. Shopify’s increasing dependence on Stripe and Twilio also points to the importance of that position. And it’s not just Shopify. Facebook’s WhatsApp pays Twilio $100mm per year for account verification. One of the most common refrains that API-first businesses hear is, “Oh Company X will just build that in-house,” and yet, they almost never do. It’s not for lack of resources. Facebook generated more profit in 2019 ($57 billion) than Twilio’s entire market cap ($51 billion). It’s that once they’re integrated into a customer’s product, API-first companies have incredibly deep moats. Specifically, they benefit from network effects, economies of scale, and high switching costs. Network EffectsThe best API-first businesses have data network effects: the more customers that use the product, the better the product gets for each customer, because the API-first business can use data from one customer to improve the product for all of them. For example, every time a company uses Checkr to run a background check on someone, Checkr gets data on that person that it can use to benefit the next company who wants to hire them and it can pick up patterns across millions of people that allow it to perform more accurate checks more quickly and cheaply.Additionally, API-first companies that negotiate with third-parties on their customers’ behalf -- Stripe with credit card companies on fees, Shippo with FedEx and UPS on shipping rates, Twilio with carriers on messaging fees -- can bring the heft of their collective bargaining power to the table for their customers in a way that none of them could on their own. Economies of Scale API-first companies have scale economies advantages not just over new entrants, but more importantly, over their own customers who might consider just building the functionality in-house. Since they focus on one category and amortize their development costs over thousands or millions of customers, they’re able to build for all of the little edge cases that add up to big advantages. Twilio has relationships and contracts with every phone carrier and telco across the world, meaning that a customer can just plug them in and expect to get their messages delivered or their calls completed anywhere their customers may be. It would make practically zero sense for any one company not focused on the space to negotiate all of those deals for themselves, and even if they did, they wouldn’t have the same bargaining power Twilio does. Switching CostsRemember, one of the main reasons that companies use API-first products is that doing so gives them peace of mind that that slice of their business is in good hands so that they can focus on their own points of differentiation. Even if a company thinks it can save a little money or get a slightly better experience by switching vendors, doing so requires prioritizing that work over the countless things on the roadmap that are core to what the business does. Since most API products are building blocks that customers can use to create their own custom solutions and workflows, moreover, switching costs increase as customers build on top of APIs. Additionally, as an API-first company adds more functionality and products, as Stripe has done with both the Payments product and new products like Treasury, customers become more locked in. This is particularly true if an end user stores anything -- from money to data -- with the API-first company’s products. If a company needs to ask its customers to do something in order to continue using the service as usual, it will likely be too worried about churn or inaction to switch. This indirect relationship with the end user points to another advantage of the API-first business model: customer-led growth. In Slack: The Bulls Are Typing…, we talked about the fact that Slack sold into companies and then grew as they grew headcount. API-first companies have a model that’s potentially even more powerful. Once they convince a customer to embed their code, the onus is on the customer to grow their own customer base. That means that all of the Facebook and Google dollars fall on the customer, and that as they spend money to grow, the API-first company goes along for the ride. There are a few challenges and risks to the API-first business model, though: * Margins may be lower than traditional SaaS businesses. Many traditional SaaS products benefit from the “high upfront costs, low marginal costs” nature of software. APIs, on the other hand, often put a nice wrapper on top of existing products that come with their own costs. Stripe still has to pay credit card processing fees, for example, while Twilio has to pay carriers to send messages and make calls. API-first companies are typically lower-margin, higher-volume products. * Other API-first companies are coming after your place in the stack. The most valuable place in the API stack is to be right between your customer and all of their other vendors, abstracting away the complexity created by the other companies abstracting away complexity below them. Segment, for example, which Twilio recently acquired, is a Customer Data Platform that ingests all of the data that a company's other vendors create about its customers. It controls the customer relationship and modularizes the other APIs below it. That leads to one of the most important things to realize about API-first companies: they’re a lot more than just software. Anything that just takes complex code and simplifies it is probably at risk of being upstreamed by competitors or new entrants. The magic of companies like Stripe and Twilio is that in addition to elegant software, they do the schlep work in the real world that other people don’t want to do. Stripe does software plus compliance, regulatory, risk, and bank partnerships. Twilio does software plus carrier and telco deals across the world, deliverability optimization, and unification of all customer communication touchpoints.Getting the benefit of all of that grunt work in a few lines of code is why customers sign up for API-first products and stick with them, even as their bills balloon. Twilio and Investing in API-First“APIs give their customers superpowers.” That’s the phrase you see most often when researching the space and talking to people in it. It’s also how I felt when I found Twilio. My first exposure to the wonderful world of third-party APIs came six years ago, in my first few months at Breather. The most important part of my job as the first and only employee in New York City was convincing landlords to lease us space in their buildings, which we would then re-rent to strangers. It was a predictably hard sell, and I heard “no” more times than I care to remember. Then, after weeks of no’s, one landlord on East 27th Street said “yes.” There was only one problem: instead of a doorman, the building had a keypad that dialed out so that tenants could buzz in their guests. Given the fact that we had no one on site, our options were: * Send someone to the building with a key for every reservation.* Turn down the lease. * Get creative and figure something out. I chose C, and spent days googling derivations of “remote access building” and “unlock door building phone.” All of the solutions required installing hardware, which was a non-starter. And then I found Twilio. In the course of a couple of hours at a company Hackathon, I set up a Twilio account, got a custom phone number, asked the landlord to program the box to call that number, and wrote a script that played the DTMF tone that would unlock the door for our clients. I even recorded a message -- “Hi, welcome to Breather!” -- that played every time someone gained access. Then I took a subway up to 27th street, entered our suite number on the keypad, and held my breath. Five seconds later, I heard a click, and the door unlocked. I felt like a fucking wizard. Twilio gave me superpowers, which I used to sign leases on a whole swath of buildings that were previously inaccessible. A couple lines of code changed the course of the business. You would think, then, that when Twilio went public on June 23, 2016, I would have bought it on the first day. And you would be wrong. I ignored it, dismissing the company as a toy that let me unlock doors. That was a mistake. Since its June 2016 IPO, Twilio is up a casual 1,115%. Over the past year, it’s grown 222%, outperforming the BVP Emerging Cloud Index by 2.4x. Despite missing most of the runup, I’m still bullish on Twilio’s future and started a small position in the company that I plan to add to over time. There are a few reasons: * The API-First Business Model. For all of the reasons highlighted above, I’m a fan of the API-first business model. Twilio has a large and growing customer base and is able to cross-sell new products like Flex and SendGrid in a Stripe-like “Company-as-an-API” model. I love it when a hypothesis plays out in the numbers, and in this case, Twilio’s moats translate into a BVP Emerging Cloud Index-leading 137% Net Dollar Expansion.* Segment Acquisition. In October, Twilio announced that it was acquiring Segment, the leading customer data platform in a valuable position on top of many other API-first companies in the stack. In an interview with Ben Thompson, Lawson explained the deal by saying that to build a customer relationship, you need understanding and engagement. Twilio provided engagement, Segment brings the understanding. Thompson hypothesized that this could be the beginning of an ad product that could compete with Google and Facebook. If that’s the case, the opportunity is multiples of Twilio’s current market cap. Even without that mega-bull case, the two companies have an estimated $79 billion market to attack, and Twilio plans to use its relationships with developers to go after it. * Segment took a $3.2 Billion All-Stock Deal. Segment was one of the hottest API-first companies in the market, sitting in a plum position in the stack, and it chose to sell its company for all Twilio stock (which is down slightly since the day of the announcement). I trust that Segment had a good reason for its decision.* Developer Focused, API-First Juggernaut. When the Segment deal was announced, friend of Not Boring Logan Bartlett, a SaaS-focused VC at Redpoint Ventures tweeted:Twilio can become the leading acquirer in the API-first ecosystem and expand the building blocks it gives companies to build on top of. The API-first market map will become competitive M&A territory, and Twilio has shown that its unique combination of size and developer love, rivaled only by Stripe, is attractive to potential targets. These are just some rough thoughts (and obviously not investment advice). Twilio deserves a deep dive of its own. Luckily, investing in a company is my favorite way to force myself to get smart on an industry, and API-first feels like one that has a lot more to uncover. More doors to unlock, if you will. Thanks as always to Dan and Puja for editing, and to Ben and my other more technical friends for the input and ideas!Just a few more things. Last week was a whirlwind of fun conversations and collaborations, check ‘em out:* Acquired Slack x Salesforce Podcast :Acquired has been one of my must-listen podcasts for a few years, and their work is the starting point for a lot of my essays (including Tencent and SoftBank). It was surreal and so much fun to be able to join David and Ben to talk about Salesforce’s acquisition of Slack. * S-1 Club: Airbnb: It’s finally here. Airbnb is going public this week (rumored to be pricing at a $42 billion market cap). I teamed up with Mario Gabriele and the S-1 Club to go deeeeep on the company in preparation. * Remote Work Conversation with Paul Millerd: Last week, I wrote about Remote Work. My friend Paul Millerd has been living the remote life since before it was cool, quitting his job at a top-tier consulting firm to go solo. Really fun convo. Thanks for listening, and see you on Thursday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 759 newly Not Boring people who have joined us since the last email! If you’re reading this but haven’t subscribed, join 21,976 smart, curious folks by subscribing here:This Week’s Not Boring is brought to you by… MarketerHire.Hiring a full-time marketer can take months of legwork with no guarantee of success. That’s why MarketerHire built a network of expert marketing professionals, pre-vetted by top marketers from brands like Glossier, Allbirds, Headspace and more. In as little as 48 hours, MarketerHire's team matches you with a hand-picked expert marketer who is aligned to your business goals and can drive real results. Their network is filled with marketers who have deep expertise in email marketing, social media ads, growth marketing, SEO and more — and they're available on-demand in hourly, part-time and full-time engagements. No retainers. No long-term contracts. A couple of months ago, I was talking to my friend FJ about his eCommerce business, and he told me that he’d brought on a part-time marketer who was doing an amazing job. I asked if he used MarketerHire. He laughed, confused, and said yes. No joke, that’s a real story.The best part? There’s no risk. You don’t sign or pay anything unless you choose to work with someone. Plus, MarketerHire is offering a $500 credit for any Not Boring reader who signs a contract before 12/15/20. If you’re looking for marketing talent you can trust to deliver, click the link below to get started. Hi friends 👋 ,Happy Monday! On Mondays, I typically write deep dives on some of the most fascinating companies in the world. About once a month, though, I like to get a little wild, pick a trend, and work through its implications. Last month, I wrote that Software is Eating the Markets. Today, I’m exploring Remote Work, about which two things are true: * We talk about it a lot already.* Its potential impact is deeply underappreciated. Remote Work will change everything. Now let’s get to it. We’re Never Going BackAdmit it. When you first heard the news about the 90-95% effective vaccines, out loud you said:“Oh that’s wonderful! Think of all the lives saved!” While inside you were like: “Ah fuck.” That doesn’t make you a bad person. The selfish part of your brain has a faster reaction time than the good person part. And selfishly, for those lucky or privileged enough to have avoided losing loved ones to COVID and to be able to work from home, COVID has had some positives. The vaccine, for all its benefits, also means a few things you’re not going to be happy about if you’ve gotten used to the “new normal.” Bye bye ready-made excuse for any social event you didn’t really want to go to. Sweatpants are out, slacks are in. Hope you enjoyed spending time with your family, that’s done. Gas up the car for your morning commute! It’s time to go back to the office. Or is it? In month one, two, three, or even maybe four of the pandemic, it was a foregone conclusion that once this whole thing was over, we would go right back to the office. Then, after people moved around, spent more time with family, set up their home offices, became adept at matching sweatpants with a presentable top, and got used to their 15-second commutes, that conclusion seems less foregone. And as people learned new routines, companies adopted new ways of working together. It’s not perfect, but nothing ever is eight months in. Now, a debate rages among three camps: * Return. In this camp are the old school businesses and new school businesses led by more conservative leaders who want their teams to get back to the office so they can get back to real work.  * Remote. The organizationally bleeding-edge companies were remote-first or remote-friendly even before COVID, and many tech companies have announced that they plan to let their employees work from anywhere even after a vaccine.* Hybrid. This camp agrees that things won’t be exactly the same, and their solutions range from “Maybe we’ll let people work from home on Fridays!” to much more creative combinations. “Hybrid” gets a bad rap because to date, it’s meant “most of us are in the office but some of you can be remote and Zoom in for meetings,” but I’ll be referring to a more intentional type of Hybrid that treats everyone as a combination of Remote and in-person. Missing from the debate is the fact that it’s not really up to the companies to choose. Employees will ultimately make the decision. The best employees have more options now than ever before, and they’re not going to work for companies that make them shave, get dressed, hop into a car or a crowded subway, and sit at a desk in an office five days a week with their headphones on trying to avoid distractions and get work done. Choosing to Return to the way things were is like choosing not to adopt software a decade or two ago. It’s an option, but one that will doom a company to mediocrity. The idea that Remote is coming and the role of the office is changing is not novel. Much ink has been spilled on the subject, both before and after the start of COVID (no one, I think, has written better on the topic than my friend Dror Poleg). Even Bill Gates recently predicted that “30% of the days in the office will go away.” Generally, though, people are both overestimating the likelihood that companies will successfully Return to the office full-time and dramatically underestimating the first-, second-, and third-order impacts of Remote or Hybrid work. To help put that into context, we’ll explore:  * The Remote Hype Cycle. We all went Remote way too quickly. It’ll get better.* The Risk of Return. The decision isn’t up to employers, it’s up to employees. Companies that try to force a Return will lose the talent war.* New Physical and Digital Solutions. Remote won’t always mean Zoom, and the Office won’t always mean sitting at a desk five days a week. * Implications of Remote and Hybrid Work. The shift to Remote and Hybrid is going to change everything from work itself to housing, gaming, fitness, and so much more. We’re never going back to the way things were. Like any major dislocation, that presents massive opportunities for those who are prepared and is going to completely run over those who aren’t. This essay doesn’t have all of the answers. Instead, it’s an exploration of the trend, new options, and some implications, and a wakeup call to get ahead of this and win the gold rush. The Remote Hype CycleIt always feels safer to bet on the status quo. We’ve worked in offices for more than a century, and we’ll work in offices again. Partially, that’s because the burden of proof is always on the new thing; fads come and go, but at any moment, the way things are is the likeliest suspect for the way things are going to be. Partially, it’s because the new thing is clunky; of course it is, it’s new. And partially, it’s because all of the other things that will spring up around the new thing haven’t sprung up yet. Take the laptop. In a 1985 New York Times piece titled “The Executive Computer,” Erik Sandberg-Diment concludes a skeptical journey through various viewpoints on the laptop’s potential by writing: As the software that is capable of turning them into true satellite offices becomes refined, they will probably even be used - in fact, profitably so. But the real future of the laptop computer will remain in the specialized niche markets. Because no matter how inexpensive the machines become, and no matter how sophisticated their software, I still can't imagine the average user taking one along when going fishing.It’s hard to blame him. Desktop computers and floppy disks were the norm. Laptops were clunky. And the whole ecosystem of wifi, lithium-ion batteries, coffee shops, cloud-based software, and the millions of other things that combine to make laptops useful wasn’t yet in place. A laptop was a poor substitute for the real thing. Those in the Return camp think that, like the laptop, remote work will be for specialized niche companies, not the average one. They’re wrong, but it’s hard to blame them. Remote work today isn’t very good. * Remote is new. Before the pandemic, only GitLab really did it at any meaningful scale. * Remote is clunky. Sitting at your kitchen table all day with kids screaming in your ear while you hop on the 7th Zoom call of the day, which is, by the way, a depressing Zoom Happy Hour, is a terrible experience. * Remote’s ecosystem is underdeveloped. We’ve had to shoehorn pre-Remote solutions to fit a new paradigm, and the impending wave of new tools hasn’t yet arrived. Because of the biggest exogenous shock to the system in decades, remote work, which can be viewed comprehensively as a technology, hasn’t gotten the chance to methodically work its way through the Adoption S-Curve. Instead, like Snapchat, Laptops, and Bitcoin, it’s going through one of my favorite frameworks: the Gartner Hype Cycle. COVID triggered a rush to remote work, and proponents quickly prophesied a remote-only future in which everyone lives and works from anywhere -- the Peak of Inflated Expectations. As the reality set in -- Zoom fatigue, kids at home, loss of social connection with co-workers -- remote fell into the Trough of Disillusionment. Remote and Hybrid skeptics point at the shortcomings and say, “See, it might work for some companies, but not every company, not serious ones like ours.” Now, with a post-COVID world in view thanks to the vaccine, and faced with the possibility of having to put real pants back on, we’re hitting the Slope of Enlightenment, which is defined as 1) the point at which the benefits begin to crystallize, 2) second and third generation products emerge, and 3) some enterprises pilot solutions while the most conservative remain skeptical. Check, check, check. The manifold benefits of Remote or Hybrid are beginning to crystallize, a few of which are:* No Commute. People spend nearly one stressful hour commuting every day. That’s time they could be sleeping, working out, hanging with their kids, or even doing more work. Now that we’ve lived without commutes, it’s hard to imagine going back. * Live Anywhere. Not going to the office every day expands the choices for where to live. In Hybrid companies, employees might be able to live in the country two hours outside of the city and go in once or twice a week. Remote employees can live anywhere they desire, with anyone. Location will no longer be tied to employment. * Increase Opportunity and Access. Only .01% of the people in the world live in San Francisco, but a disproportionate amount of great jobs were based there. Now, the best people anywhere in the world can find their dream job without leaving their friends and families.* Find Better Talent. The flip side of the above is that companies who look globally can access the best talent in the world, regardless of where they happened to be born. * More Time With Family and Friends. Out of necessity and that magic that binds people going through a challenge together, people accepted that their co-workers were also going to be the people they spent the most time with: eight-plus hours in the office together, five days per week, plus happy hours. Remote will unbundle work and social.Importantly, all but the most conservative companies understand that they will at least need to be Hybrid, if not fully Remote, not because they want to, but because the best people want to.The Risk of ReturnTypically, it’s safe for companies or people to wait until a technology gets a little bit further up the Slope of Enlightenment before deciding whether or not to adopt it. Competitors might move a little faster in the short term, but they could always adopt the new thing next year and be OK.Companies don’t have that luxury with remote work. Those who force their teams back into the office risk losing their most valuable resource: their most highly-sought-after employees. In a May interview with The Verge, Slack CEO and Not Boring hero, Stewart Butterfield, responded to a question about how he’s planning to organize the company geographically: In other words, the decision isn’t up to the traditional decision-makers. The possibility of Remote work will create a liquid global talent marketplace, unshackling employment and geography and giving the best employees more optionality than they’ve ever had. Forward-thinking companies, too, will have more qualified candidates to choose from than ever before. If you believe that a company’s most valuable asset is its employees, then the decisions that companies make around Remote work in the coming months will be the most important they’ve ever made. There will be a massive first-mover advantage available to the companies who move quickly and intelligently. The shakeout will lead to a gaping bifurcation in talent quality. (I bought an iPad so I could make beautiful drawings like this)Remote Co can attract A players from anywhere in the world, including Local Co’s hometown. Local Co is left with the B and C players in its hometown. Last year, Stripe made Remote its fifth engineering hub, in addition to San Francisco, Seattle, Dublin, and Singapore. This September, it offered employees $20,000 upfront (with a potential cost of living pay reduction) to move out of the Bay Area, New York, or Seattle. Already a desirable place to work, Stripe can attract the best talent from anywhere in the world with the promise that they will be equally important to the employees in the four physical hub cities. On the other end of the spectrum, imagine a company that plans to make employees come back to the office five days a week. Assuming that most employees have gotten comfortable working from home and like the flexibility of at least a Hybrid option, and will look for jobs at companies that offer Hybrid or Remote work, this company is left with the people who: * Live in or near the city in which their office is located. * Don’t want to work for a Remote or Hybrid company or couldn’t get a job at the Remote or Hybrid company of their choice. It’s not just tech employees, either. I have one lawyer friend who just chose one offer over another because its location was going to be more flexible, and another friend in finance who told me that he’s going to look for a new job as soon as his firm asks him to come back to the office. If you choose to Return, you’re essentially making a bet that the benefits of all being in the same office every day outweighs the risks of attracting lesser talent and potentially losing your best employees. Mayyyyybe you make that trade if you assume that physical and digital solutions will remain exactly as they are today. But they won’t. They’re already improving. New Physical and Digital SolutionsOne of the features of the Slope of Enlightenment is that new generations of products emerge to make the technology accessible to and comfortable for a wider audience. COVID-era Remote married technology and circumstances that only an early adopter would typically put up with, with forced mass adoption. A post-vaccine world will combine the best of COVID-era Remote work with the ability to travel, socialize freely, and put the kids back in school, with new physical and digital solutions that bring the experience to mass market quality.Doing Remote or Hybrid well doesn’t just magically happen. It takes work, buy-in from leaders, and new, better ways of doing things. The companies and leaders who do it well will be in high-demand.Physical Before Not Boring, I spent six years at Breather working to make workspaces more flexible. I do not think the office is dead; I firmly believe what I’ve believed since starting at Breather: the office needs to become more flexible, distributed, and convenient, and spaces need to help people and teams do things that they couldn’t do anywhere else. But as Dror, with whom I spent a lot of time planning what Breather should be, wrote in Landlords are Zucked: The future of work will require space. But a lot of that space will be located, designed, and accessed differently from what we currently call "office space." ... The best companies will need less of the kind of office space that's currently on offer. And they will need it to be packaged and delivered in a way that fits the way their team members work.Slack’s Butterfield, who manages offices worldwide, agrees that the role of the office needs to change. In the same interview with The Verge, he said: Offices exist principally to facilitate people sitting at desks using computers. Whereas they could exist principally to allow for more effective collaboration, which means a bigger variety of spaces more dedicated toward meetings, a smaller number of fixed desks, and the expectation that if you already have this giant list of work, and you just have to plow through it, then stay home. And when it’s time to do the roadmapping session to get together with the team and think about what you want to do next, then come to the office.Slack has since announced that it will allow its employees to work remotely permanently, while maintaining and evolving its physical offices. Fredrik Carlström, the co-founder of Another Structure and Alma, put it well: “Companies need to let go of the idea that the office is the only way to organize work, and instead think about, ‘What do we want to achieve and how do we organize ourselves in the best way to achieve it?’”On average, companies in major cities spend $1-2k per month to keep their employees at a desk in an office because that’s just what companies did. Imagine what they could do with $20k per person per year, a blank slate, and a desire to organize themselves around what they want to achieve.For remote workers: * Give teams budgets to bring people together for a week each quarter to strategize, socialize, and build bonds. * Pay for co-working, Kettlespace, or Breather memberships near where people live. * Encourage employees planning to move to certain regions to choose locations near each other. If a bunch of people want to move to Texas for the sunshine and absence of state taxes, a company could build an outpost in Austin, contract a local realtor, and provide resources on the best schools and activities there (not that people need more motivation to move to Austin). * Provide allowances to join local chapters of work associations and social clubs, or to take classes, in order to build connections and skills beyond the workplace.* Buy Pelotons for every team member to bond over morning rides instead of water cooler gossip.* Travel to see clients more frequently, together, and make an event out of it. * Organize month-long workations, during which employees can move to one city and work together, enabling serendipitous interaction and deep relationship building.  Employees who live near a company hub should be able to participate in many of the same benefits as remote employees. Additionally, instead of mandating a certain number of days in-office, companies should view employees as customers who they need to convince to come in with a great product:* Re-design the office to facilitate things that employees can’t do at home: whiteboard rooms, podcast and video recording studios, screening rooms, maker tools, etc... * Take less space on more flexible terms in order to adapt and evolve as employees’ needs do.* Make the office feel more like a social club, with more focus on spaces for employees to share meals, have spontaneous conversations, and take in work-related programming. * Hire hospitality and flexible operators to help them figure it out. Alma does hybrid work/social well, so Carlström set up Another Structure to bring that expertise to companies that want to build the right spaces for this new world. * Infuse the space with technology to facilitate communication and collaboration with remote employees. Because physical space takes a lot of time and money to change, much of the future exists today in the words and plans of the people writing about and building in the space; but make no mistake, it’s coming. Each company’s space needs are different and this way of working is new; companies will need to think flexibly, listen to employees, partner with experts, and continue to evolve as they learn more. In addition to changes to the office itself, we’ll also see inventive new real estate tech startups emerge to help companies create better Hybrid solutions. DigitalI need you to repeat this mantra: “Remote doesn’t just mean more Zooms. Remote doesn’t just mean more Zooms. Remote doesn’t just mean more Zooms.” Zoom has been synonymous with WFH, and the prospect of sitting on multiple Zooms every day until we die makes some people just want to throw in the towel and go back to the office. Luckily, it makes some other people want to build better solutions. A new generation of software is on the way that will make remote work more social and lifelike, and less transactional. Branch, Gather, With, Here and Huddle (which is still in stealth) are the emerging leaders in the “Virtual HQ” space. Each takes a slightly different approach to building virtual spaces that feel more like a physical office than Zoom, Slack, or Teams. It’s clear what they see as Zoom’s biggest shortcoming: serendipity. Both Branch and With use the word “serendipity” in their one-line homepage descriptions, while Huddle opts for “spontaneity” and Gather promises that you’ll “bump into your colleagues.” Serendipity makes people feel like they’re in an office, an important first step towards building a remote org. GitLab, the largest fully remote company pre-COVID, has spent a lot of time thinking about how to make remote work...work. They identified four phases: * Skeupmorph. Mimic the physical work experience, remotely. Branch and Gather are in this phase, building digital spaces that look like video game-ized offices and recreating physical serendipity. * Functional. Take advantage of remote to function differently. Huddle sits between Skeumorph and Functional, with a light office layout on top of tools that enable fluid communication and collaboration. With and Here sit squarely in this phase, dropping the office layout and organizing around digital tools instead.* Asynchronous. People can work when most convenient, and only meet synchronously for informal communication and bonding. * Intentionality. Rethink how your business works and what’s possible, like measuring employees based on outputs instead of hours and taking advantage of global talent.As companies gain more experience with Remote, expect startups to build tools for them to move through to the 3rd and 4th phase, as well. Beyond the software looking to replace the office, new tools built for the new way of working and gathering are thriving. Loom, the asynchronous video startup, raised a Series B in May at a $350 million valuation. The company is less than four years old. Even more whiplash-inducing, virtual events platform Hopin closed a $125 million Series B in early November that valued the company at $2.1 billion. Hopin is 17 months old. While a $2.1 billion valuation seems outlandish for such a young company, eye-popping numbers like that are like pheromones to other entrepreneurs. We are at the very beginning of a multi-trillion dollar gold rush to build software that makes remote work as enjoyable as the best parts of the real thing. Remote also presents new challenges and opportunities around which companies can hire which employees from which countries. Pesto, which I’ve written about previously, trains skilled Indian engineers to work in global companies as part of the team, and works with employers to hire those engineers. Further down the stack, Turing interviews, tests, and vets remote engineers, and lets companies hire the best ones from around the world at half the cost of a similar engineer in Silicon Valley. There are more companies in this space, across a range of functions, and many more will enter -- the global talent arbitrage can be massive and the rewards for the companies who curate that talent will be, too. Hiring those remote employees is one thing, managing the complexity of employing them is another. That’s where new startups like Deel and Panther come in. Both offer payroll, benefits, and compliance to companies hiring international employees. Deel, founded in March 2019, raised $14 million from a16z in May and another $30 million in a Series B led by Spark Capital in September. Panther closed a $1.7 million pre-seed round (in which I invested a very small amount through a syndicate) from top Silicon Valley angels, despite being based in Tampa, FL. It’s rare for companies from Tampa to raise those types of early stage rounds from SV investors without real numbers behind them, which is an early sign of Remote’s potential to shake things up in itself. Hiring and payroll software is just one subcategory of Remote startups blossoming during COVID. There are so many that there are early stage funds like remote first capital entirely focused on funding companies with a Remote or Hybrid thesis. New innovations typically take some time to develop and proliferate. The S-Curve plays out over years. COVID means that large-scale Remote and Hybrid don’t have that luxury, and that the masses were introduced to Remote work at a point in the curve at which only the most fervent early adopters would normally play, where the tools and solutions are still awkward. But that same rush of demand also means that we are going to see a continued explosion of new physical and digital solutions that will quickly make Remote increasingly palatable and pleasurable. Just as we’re all racing through the adoption curve together like Sonic the Hedgehog and hitting speed bumps at high-speed, the implications of this new technology are going to come fast and furious. Implications of Remote and HybridMy absolute favorite thing that the market does during COVID is that any time any good news about the virus is announced -- the curve flattens, something reopens, vaccines show effectiveness -- “work from home” stocks like Zoom, Peloton, and Slack tank.The more sophisticated explanation is that good news about the virus means good news about the economy which means maybe interest rates rise earlier than expected and fiscal stimulus is off the table, leading to lower valuations for growth stocks. That might be true in some cases, but doesn’t explain a two-day 25% drop in Zoom’s stock. That drop is explained by the idea that people think that once we all take the vaccine, we’ll be working from home a lot less and companies won’t need Zoom anymore. Leaving aside whether Zoom is overvalued generally, that precipitous decline shows that the market believes that once we have a vaccine, we’ll largely go back to working the way we were before. Lower Zoom usage would be one of the first-order consequences of going back to work in an office five days a week. I think that’s misguided, and that’s just one of the countless first-order implications, which should be the easiest to understand and price in. By thinking through the first-, second-, and third-order consequences of continued Remote and Hybrid work, you can find opportunities where others don’t. It’s a version of narrative-based investing, when you believe that the story the market is telling itself is wrong and think through what will happen once the narrative begins to change. I don’t have all the answers -- I could be totally wrong and all of you might be back in an office every day in six months -- but I’ll give a few examples of what I think a Remote and Hybrid future could mean. You should think through your own ideas here, too. First-Order ConsequencesIf Remote and Hybrid win out, a few things seem likely to happen as a direct result: * Urban Office Prices Will Fall. Office prices in cities like San Francisco and New York will continue to fall in the short-term while companies figure out how to build spaces that attract employees. Flexible operators and spaces, like Convene, Industrious, Breather, Flex by Squarefoot, Switchyards and Kettlespace will have the opportunity to position themselves as experts in building spaces that attract employees, on flexible terms.* Remote and Hybrid Companies Will Attract Talent. Employees will flock to companies with both flexible Remote and Hybrid options, and increasingly, demonstrated skill at managing remote and in-person teams. Remote Work experts will become a part of many companies’ People teams. * Remote and International Hiring Will Explode. Companies will take remote and international hiring seriously, and will need to wrestle with how to compensate people who do the same job from different parts of the world. Over time, companies will learn how to work better remotely and push through cost of living adjustments, saving money on salary in addition to rent.* Spend Shifts to Perks and Software. Companies will reallocate the money that they would have spent on higher salaries, a desk for every employee, and office perks to better at-home setups, fitness, food, and travel allowances, and more software. * Work From Home Trade is On. The WFH software companies will continue to thrive until and unless new, better, remote-first products begin to steal market share. Cloud’s dominance will accelerate as companies realize the shift is permanent. Zoom will be at-risk over the medium-term, but numbers will continue to surprise to the upside for a while as people take time to digest the idea that a vaccine doesn’t mean the end of Remote.* Short Return Companies. Companies that try to force a Return on their employees will lose their best employees, and by optimizing for “willingness to come to the office every day,” will hire B and C players. Their decision will also expose a short-sightedness akin to not wanting to leverage software a decade or so ago. “Return” will be a leading indicator of underperformance. Obviously, some companies -- medical, manufacturing, hospitality, and the like -- should Return, but you should short companies that have another option and don’t take it. Second-Order ConsequencesDigging a level deeper, things start to get a little less obvious and a little more interesting. * More Consumer Travel, Less Business Travel. If more employees can work from anywhere and save money by not commuting and eating at home every day, they’ll be able to travel more frequently. A higher proportion of travel will be for pleasure instead of business, meaning that consumer-focused companies like Airbnb look more attractive than hotels, which generate a lot of revenue from business travel and corporate events.* People Will Move More Often. They’ll experiment with new cities. That could be another win for Airbnb, whose long-term stays let people live in a new place for weeks or months at a time. It’s also part of Chamath’s thesis for acquiring Opendoor. As more people move more often, iBuyers that make the process of buying and selling a home easier will gain more market share in a growing market. * Social Will Go Local. As people look for new ways to meet, either because they’re living in a new place, or because they don’t rely on work for friendships in the same way, social will go local again. Gyms and group fitness classes with post-workout social programming could offer a way to meet new people, like Crossfit already does so well. Speakeasies and other hidden social clubs in empty office space might provide excitement for members and some cashflow for office landlords. The “Soho House for X” trend that was underway pre-COVID will come back with a vengeance as people who have been cooped up for months seek to replace the social role the office used to fill. * The Metaverse. People will turn to other online spaces, too. Gaming will continue its meteoric rise, and the Metaverse will be pulled forward. I would bet on Tencent (Epic, Discord, and dozens of gaming investments), Unity, Snap, and the impending Roblox IPO.Third-Order ConsequencesThis is where things start getting really wild. Unshackled by the office’s location, people will move where they want to move, often out of expensive cities and into more affordable towns with better weather. Those are first-and second-order effects. Some third-order effect might be that because they’re saving more money, they have more money to invest, and the trends that I wrote about in Software is Eating the Markets towards more retail investment in stocks, art, real estate, and more will accelerate. Other potential third-order effects include: * Rise of Alternative Education. As mobility increases, more people will need to give online or alternative education a real shot, because they’ll be loathe to gain freedom from the office but remain tied down by their childrens’ schools. Homeschooling options like SchoolHouse, which matches groups of families with teachers to form microschools, Primer, an online homeschooling community and infrastructure startup, or Outschool, which lets kids take online classes or camps from anywhere, will appeal to parents who want to move while keeping their kids well-educated.* More Fluid Employment. Productive employees may work multiple full-time roles. In GitLab’s fourth phase, Intentionality, employees are measured on output. If employees can keep up the output, employers will be comfortable letting them work multiple jobs. The absolute star performers, who Dror calls “The 10x Class,” will put their talents up for a global auction, and will reach income levels similar to top athletes and celebrities.* New Employee Stock Options. As companies and employees enjoy a more transitory relationship, and as Remote leads to more precise performance tracking, equity will have to evolve to be rewarded for performance and contribution instead of tenure and rank. As Sari and I wrote, we think that Fairmint is in a great position to make this possible technically. Remote will make it acceptable culturally.And what about cities? Will New York really be a ghost town? Is this the end? I don’t think so. I think that remote will make room for a new wave of young, hungry, social creatives who bring fresh energy to the city. As in nature, monocultures like San Francisco, which has mainly served to house people who work in tech, will struggle, while permacultures like New York, home to all types and for all reasons, will prove too resilient for a little Remote Work to kill. This Changes EverythingThis was just a stream of consciousness thought experiment. Other people -- you -- will think of many more implications than I have, and there are myriad outcomes that are impossible to predict today, at the dawn of the mass shift to Remote. The possibilities will multiply and crystallize as we get out there, try new things, and adapt. Timing these things is impossible. In this case, leases are long, and the sunk cost fallacy might push some employers to bring their employees back. At the very least, companies may not see savings from not being in the office for many years. But understanding what’s happening and what the implications might be when they do is a little bit easier, and massively important. There are few things that change everything. The move from office-only to Remote will be one of them. It’s worth taking the time and brainspace to think through what it means for you, your company, and your portfolio. Not Boring will remain fully Remote and ready. See you out there. Thanks to Dan and Puja for editing, and to Dan and Dror for input and inspiration.We’ll be back on Thursday with a Not Boring Investment Memo on a company I can’t wait to tell you about. 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 867 newly Not Boring people who have joined us since the last email! If you’re reading this but haven’t subscribed, join 21,217 smart, curious folks by subscribing here:💙 We’re the #11 free newsletter on Substack. Like this email to help break the top 10!Hi friends 👋 , Happy Monday! Short week, we got this. If you told me even a year ago what I do for work today, I wouldn’t have believed you. To whit:This week, I got to co-write an analysis of a Mexican beer, Coca-Cola bottling, and convenience store conglomerate with the brains behind a wildly popular pseudonymous Twitter account, Post Market, and send it out to over 21,000 people. And I’m getting paid for it… by a company I wrote about in my analysis on Slack (which may or may not have moved the market) whose Director of Content I coincidentally included a picture of holding a “Hinkie Died for Your Sins” sign in my essay on Sam Hinkie three weeks ago.And it all started with a tweet:The internet, ladies and gentlemen… Today’s Not Boring is brought to you by… Crossbeam.  Crossbeam is the world's first and most powerful partner ecosystem platform. They act as a data escrow service that finds overlapping customers and prospects with your partners while keeping the rest of your data private and secure. Crossbeam believes that the ecosystem economy will drive the growth of SaaS businesses. If your company uses partnerships to grow, you should map your accounts with Crossbeam, for free (!), today. FEMSA: The Most Interesting Company in MexicoA Post Market x Not Boring CollaborationThe C-Store InternetIn Mexico, the road to the Metaverse goes through a convenience store. Fourteen million Mexican shoppers walk through OXXO’s doors each day to buy everything from a Coca-Cola to Fortnite V-Bucks. OXXO is the on-ramp for the digital economy in Mexico. Over 60% of Mexico’s population is unbanked, and the Mexican economy is still largely cash-based. Instead of entering a credit card online, millions of shoppers go to the nearest OXXO to pay cash for over 5,000 digital services, from V-Bucks to Amazon to Netflix to electricity bills. Mexican consumers trust OXXO more than they trust the banks, as evidenced by the fact that OXXO’s Saldazo debit card is already the most popular in the country. That puts OXXO in the prime position to build the digital wallet for Mexico. To a reader in a developed country, the idea that a convenience store (“c-store”) chain could become a fintech powerhouse sounds preposterous. It sounds even more loco when you learn that OXXO’s parent company, Fomento Económico Mexicano, S.A.B. de C.V. (FEMSA), is the 130-year-old descendent of a brewery, Cervecería Cuauhtémoc Moctezuma, founded by five families in Monterrey in 1890. But emerging markets afford opportunities for scope unrivaled in developed markets. When a country’s infrastructure is underdeveloped, the companies that build out the physical and digital logistics and distribution own unimpeachable channels through which they can push a wide range of products and services. Digitally, WeChat, Gojek, Grab, and other Super Apps are essentially the internet in their respective home countries. Because they own the digital infrastructure, they’re able to build their own services on top or extract rent from the companies that do. FEMSA falls into a related category of companies that, by owning the customer relationship and habits due to physical proximity, may be able to expand into ownership of their digital transactions as well. If it succeeds, FEMSA will be Mexico’s Super App. FEMSA is to Mexico as Reliance is to India. Both are old companies, run by descendants of the founders, with histories of vertical integration and unmatched capabilities in distribution in economies that lack strong infrastructure, and a proven ability to push a variety of products through those distribution channels. Where Reliance dominated polyester, petrochemicals, and refining in India, FEMSA built its empire on cerveza and Coca-Cola. When he took the reins of the family business, Reliance’s Mukesh Ambani’s first new venture was to launch Reliance Retail, which is now the largest retailer by stores in India. FEMSA’s Chairman and former CEO, Jose Antonio “Devil Fernández” Carbajal, took over his family company’s struggling OXXO subsidiary and grew it into the largest convenience store chain by number of stores in the Americas. And now, like Reliance did with Jio, FEMSA is using its legacy assets, and the cash flow they spit off, to build a digital growth engine that might transform the business, and the economy in its home country, yet again. Today, FEMSA’s value comes from three main businesses: a 47% stake in the world’s largest Coca-Cola bottler, a 15% stake in brewer Heineken, and FEMSA Comercio, which runs pharmacies, gas stations, and most importantly, OXXO convenience stores throughout Mexico and Latin America. Funds love c-stores. They’re the closest thing the physical world has to the internet. They’re easy to stand up, ubiquitous, offer high returns on capital, sell high-margin products like soft drinks, alcohol, salty snacks, and tobacco, and generate strong brand loyalty by becoming a part of their customers’ daily routine. I start every morning with Wawa, and until Amazon delivers $1 coffee within five minutes, that’s not going to change. With COVID though, that physical ubiquity, typically a massive moat, became a liability. Mexico has been one of the hardest hit countries in the world, with mortality rates near 10%, and the government has enacted austerity measures instead of stimulus. While the country has largely avoided lockdowns, many people have opted to stay home, and same store sales across FEMSA’s properties have taken a hit. As a result, FEMSA (NYSE: FMX) crashed from a pre-COVID high of $97.59 all the way to $53.50 in early November, before picking up after Biden’s victory (he’s expected to be friendlier to Mexico) and promising vaccine developments positioned FEMSA as a reopening trade. Even after its recent move up, FEMSA’s core business is still undervalued and comes with a free option on Mexico’s Super App. Today, FEMSA is like 7-11, the Post Office, Coca-Cola, and Heineken all rolled into one. Tomorrow, if it’s able to fight through the COVID dip and accelerate its digital transformation, it could be all that plus M-Pesa or Gojek. It will have to act quickly to make that happen. The Latin American digital wallet is a highly sought after prize, and COVID has handed digital-first competitors a drawbridge over its physical moat. This isn’t FEMSA’s first rodeo, though. Devil Fernández told a Stanford GSB class in 2009: Mexico has been a typical emerging country with all the typical problems that they have, which is every period of time, we have some kind of political or economic crisis. This (the financial crisis) is the first time the economic crisis wasn’t created by Mexicans!COVID is the second. Each time FEMSA has faced disaster in its 130 year history -- from devaluation to financial crisis to murder -- it has reset and come back stronger. The FEMSA Story The FEMSA story is a cycle of vertical integration, diversification, and re-focusing, all under the guiding hand of its founding families. In 1890, five men -- Isaac Garza, José Calderón, José A. Muguerza, Francisco G. Sada, and Joseph M. Schnaider -- founded the Cuauhtémoc Moctezuma Brewery in Monterrey, Mexico.Quickly, the founding families established a governance structure that professionalized the business: one family runs the company and reports to the others as shareholders and board members. In its first fifty years, the group vertically integrated: * 1899: Built a glassworks Fábrica de Vidrios y Cristales to make their own bottles, * 1921: Spun up their own bottle cap maker, Famosa,* 1926: Established Empaques de Carton Titan, a packaging company,* 1929: Established a distributor, Company Comercial Distribuidora* 1936: Founded Malta S.A. to supply the malt needed to make the beer, and constituted all of the businesses into a holding company, VISA. * 1942: Faced with steel shortages due to WWII, founded a steel mill, Hylsa, to manufacture the steel they needed for bottle caps. Fifty years in, the small cerveceria was a fully vertically integrated operation. It even produced its own talent. In 1943, Chairman, Eugenio Garza Sada, built a university, Instituto Tecnológico y de Estudios Superiores de Monterrey, modeled after MIT. “The Tec” is now a top three Mexican University and feeder to the company. Current FEMSA Chairman, Devil Fernández, studied and met his wife, herself the daughter of a former FEMSA Chairman, there. This paragraph is not relevant to the story but.. In 1969, the geniuses in the bottling business invented a beer bottle that opens other beer bottles, and called them “opening bottles.” (Ed. Note: I cannot for the life of me fathom why every bottle doesn’t do this.)Beyond genius bottles, the company continued to grow and expand, into synthetic fibers and chemicals, like a Mexican proto-Reliance. And like Reliance, two brothers, Eugenio and his brother Roberto, sat atop the company without a clear “supreme.” In this case, though, it wasn’t acrimonious, and the brothers decided to split the company in two in 1973: * ALFA, under Roberto, would take packaging, steel, fibers, and chemicals. * VISA, under Eugenio, would take the bank, Banca Serfín, and the brewery and the companies in its vertical development. Tragically, that same year, a political group called Liga Communista 23 de Septiembre killed Eugenio in a failed kidnapping attempt, which the Echeverria government allegedly knew was coming. From here on out, we will follow his side of the company. 1978 was arguably FEMSA’s most important year in the past half-century. That year, VISA went public on the Mexican Stock Exchange and launched its first OXXO store in Monterrey. Flush with cash at a time when diversification was en vogue thanks to the book In Search of Excellence, VISA levered up and went on a buying spree. Many of the acquisitions were ill-advised. Devil Fernández said that they got into car plastics, flowers, canned food, pizza, cheese (to vertically integrate the pizza), peanuts (to go with beer), Burger Boy (like a small Mexican McDonald’s), homebuilding, and what they called the “cold meat” business, or cemeteries 😬  They even entered into three fishing JVs, with the French, Spanish, and Japanese. They did make one very smart move: buying the Mexico City Coca-Cola franchise from The Coca-Cola Company for $60 million. In 1982, though, the government devalued the peso and crushed VISA, which was forced to sell off non-core businesses, including the bank. It even tried to sell its Coca-Cola franchise back to Coke for $22 million. When Coke came back at $19 million, VISA, offended, decided to keep it. That was fortuitous - its stake in the business is worth over $4 billion today. The company, reconstituted as FEMSA in 1988, re-focused on its beverage businesses, which included Tecate as a result of a 1954 acquisition and Dos Equis and Sol after a 1985 merger. It held on to OXXO as well. Explaining the decision, Devil Fernández said, “50-60% of what we sell in OXXO are beverages. It gives us a lot of feedback from the customers.” In other words, OXXO is FEMSA’s version of the tight feedback loop with customers that modern DTC brands espouse. When Devil Fernández joined the company in 1987 in the planning division, OXXO was an unloved money-loser with only 500 stores in a company that prided itself on making things. He told his boss, “This business has a lot of potential, it's a pity no one takes care of it,” to which his boss responded, “OK, you go run it then.” Devil Fernández switched out the team, cut stores in half by dropping underperformers, set a goal of re-growing to 1,000 stores, and focused on OXXO as its own business instead of as the brewery’s ugly younger sibling. Meanwhile, in 1993, in partnership with Coca-Cola, it spun out Coca-Cola FEMSA as a separate entity and sold shares on both the Mexican Stock Exchange and NYSE. It retained 47.2% of the business, a stake it still owns today.The Devil became FEMSA’s CEO in 1995 and led the back half of a busy decade. "The Devil has a love affair with his two new babies, Coca-Cola and Oxxo," said Ernesto Canales, a Monterrey corporate lawyer. In the first clue of FEMSA’s eventual tech ambitions, it had a wild late ‘90s and Y2K, listing its shares on the NASDAQ in 1998 and partnering with Oracle to create Solística.com, an internet based logistic services company, which somehow still operates today!The next decade, from 2000 to 2010, was defined by acquisitions to expand its core beverage businesses. It bought Panamco, the largest Coca-Cola bottling operation in Latin America to become the second largest bottler in the Coca-Cola system worldwide, bought back the 30% stake in its breweries that it had sold to Labatt, and acquired the Brazilian brewery Kaiser. In 2010, to further focus on his Coke and OXXO babies, Devil Fernández sold the beer business, FEMSA Cerveza, to Heineken in exchange for 20% of Heineken’s stock (it still owns 15%). Over the past decade, the company has rapidly expanded its Comercio (especially OXXO) and Coca-Cola businesses. It’s acquired Coca-Cola bottling businesses in the Philippines, Brazil, Guatemala, and Uruguay, while opening over 1,000 OXXO stores per year and adding pharmacies into the mix via acquisitions in both Mexico and throughout Latin America. In 2018, Devil Fernández retired as CEO (while retaining the Chairmanship) and handed the reins to Eduardo Padilla. Under Padilla, pre-COVID, FEMSA is showing worrying signs of repeating its early ‘80s “diworsifying” mistakes. In November 2019, it paid $750 million to acquire US-based wholesale B2B cash and carry company Jetro, and in March, it paid $900 million for Waxie, a seemingly random US janitorial supply company. But like devaluation in 1982, COVID might provide a refocusing force. Already, Specialty’s, a Bay Area bakery that FEMSA acquired in 2016, shut down in May due to pandemic-induced closures. That should serve as a sign that FEMSA needs to focus on its core businesses, which are just now rebounding from COVID slowdowns, and expansion into its adjacent digital opportunity.What is FEMSA Today? Today, FEMSA is the third largest company in Mexico by market cap at $23.5 billion, behind only Walmart’s Mexico and Central American subsidiary, Walmex ($49.8 billion), and Carlos Slim’s telecom giant América Móvil ($47.0 bn). It employs 320,000 people in 13 countries. FEMSA’s governance structure enables a long-term view. The families of the cerveceria’s five founders still own 39% of the company. Bill Gates, via his investment firm, Cascade, and the Bill & Melinda Gates Foundation, is the company’s second largest shareholder with ~9% ownership. Cascade’s CIO, Michael Larson, sits on the board. He’s joined by Robert Denham, Warren Buffett and Charlie Munger’s personal counsel and confidante. The combination of the family’s stewardship with patient capital like Gates’ means that FEMSA is able to take the longest view in the room. It means that a tragedy like COVID is a blip to FEMSA and not an existential crisis.When asked how FEMSA was handling the financial crisis, swine flu, and drug wars in 2009, Devil Fernández responded:One of the advantages of family ownership is that the long-term view is there. We are not thinking or worried about next quarter’s numbers. Never. If you asked me how they’re going to be, I don’t know and I don’t care, because we see the long-term potential of the company. We are always making decisions that will influence the numbers in the future, not the next quarter.Thanks to Devil Fernández’s priorities as CEO, and now as Chairman, the future of the company is beverages and OXXO. What was once a sprawling collection of companies in various quasi-tangential businesses is now cleanly organized into three units. * Coca-Cola FEMSA. FEMSA owns 47.2% of the largest Coca-Cola bottler in the world.* Heineken. FEMSA acquired a 15% ownership stake of Heineken in exchange for its beer businesses, which included Sol, Tecate, and Dos Equis. * FEMSA Comercio. OXXO, which falls under Comercio, is the crown jewel of FEMSA’s holdings. It operates over 20,000 c-stores, more than anyone else in the Americas. FEMSA also operates its Health and Fuel divisions under the Comercio business unit. A fourth unit, Strategic Businesses, mainly serves its other business units with logistics (Solistica!), point-of-sale refrigeration, and plastics. Comercio, and OXXO specifically, is increasingly important to FEMSA’s present and future. It has nearly doubled its share of FEMSA’s revenue and EBITDA over the past decade, and its 20,000-strong network of small-format stores is the company’s most important strategic asset. The business units work together. Beer money funded the launch of OXXO and the expansion into Coca-Cola bottling, and OXXO now provides distribution and customer touchpoints for Heineken’s beers and Coca-Cola’s beverages, which spit off cash the company can use to expand OXXO and push into digital services. Breaking apart the three core businesses highlights that despite the synergies, FEMSA trades at a conglomerate discount to the sum of its parts, before even accounting for its digital upside. FEMSA’s Business Units by the NumbersCoca-Cola FEMSAIf you wanted to “Buy the world a Coke,” you’d need to actually purchase those Cokes from its 225 bottling partners worldwide. Coca-Cola doesn’t make, bottle, and distribute its own product. Instead, it has a series of contractual relationships with Coca-Cola bottlers throughout the world. Coca-Cola owns a portfolio of brands and their formulations, and sells the bottlers concentrates of its beverages. The bottlers add water, fizz, and packaging, and then sell the finished product in their markets. Coca-Cola is wildly popular in LatAm, with 5-15x the market share of its closest competitors. Coca-Cola FEMSA (“KOF”), with operations in Mexico, Brazil, Colombia, Uruguay, Argentina, Chile, the Philippines, and other Central American countries, is the largest Coca-Cola bottler by volume in the world. In 2019, it generated $10.3 billion in revenue by serving 3.4 billion cases of Coca-Cola beverages to 260 million customers at 1.9 million locations. That represented 12% of Coca-Cola’s global volume. Distributing Coke products in Mexico is very different than distributing them in the US. Mexico City has more retailers by number than all of the United States, but drop sizes, which run from 200-400 cases per week in the US, are closer to 2 cases per week in Mexico. That requires a very different set of competencies. Because of KOF’s scale, unique capabilities, and contractual relationship with Coca-Cola, it is able to approach the partnership as an equal. For example, Devil Fernández has spoken about the importance of dictating the price at which it sells Coca-Cola products instead of allowing Coca-Cola to make that decision. KOF’s strategic and financial importance to FEMSA comes from its steady growth and the cash it generates. It’s grown revenue at a 7% CAGR and Free Cash Flow at 10% over the past decade. Even through COVID, FCF remained relatively flat, and KOF continues to throw off cash that FEMSA can spend to expand Comercio and push into digital services. HeinekenIn 2010, FEMSA sold its breweries, including popular brands like Dos Equis, Sol, and Tecate, to Heineken, in exchange for 20% of the premium Dutch brewer. (FEMSA currently owns 15%.)The Heineken stake has been good to FEMSA -- it has grown at around a 10% CAGR for the past decade. Heineken has invested heavily in emerging markets, specifically Africa and China, where it signed a partnership in 2018 with China Resources Enterprise, giving it a 20% stake in the country’s market leader and brewer of its most popular beer, Snow. Prior to COVID, Heineken reported its strongest period of growth in over a decade, led by double-digit growth in the Heineken brand in emerging markets, including Mexico. But it will face headwinds in Mexico moving forward. This year, a ten-year exclusive agreement with Heineken is set to expire, and OXXO entered into an agreement with AB Inbev to begin selling its Modelo brands, including Corona, the most popular in Mexico. While it will continue to sell the beers that Heineken acquired from FEMSA, the relationship is less important now and Heineken will take a hit by losing the OXXO exclusive in one of its biggest markets. We wouldn’t be surprised to see FEMSA sell its 15% stake in Heineken now that the stock is rebounding and approaching all-time highs. That would generate roughly $8.5 billion that the company could put towards FEMSA Comercio and the digital transformation. FEMSA ComercioFEMSA Comercio, which includes Health, Fuel, and most importantly, Proximity ( mainly OXXO), is FEMSA’s growth engine. Since Devil Fernández took over its operations in the late 1980s, FEMSA has grown from ~500 stores to 20,000, dwarfing its nearest rival 7-Eleven with nearly 10x the number of stores in Mexico and almost twice as many in the Americas.  OXXO stores are margin machines. They’re small, about 100m2 each, cheap and easy to build out, and sell high-velocity, high-margin products like chips, tobacco, and beer. As OXXO continues to expand into digital services, of which it currently offers over 5,000, its margins will benefit from their near-100% margins. As a result, OXXO stores generate an annual after-tax Return on Invested Capital of ~30%. In 2019, OXXO did $9.4 billion in revenue, but revenue is down 3.8% YoY for the first nine months due to COVID. When COVID passes, there are two big non-digital growth drivers around the corner: * Continued Expansion. The company sees the potential for 30,000 stores in Mexico alone, with additional expansion in other Latin American markets.* Corona. No, not the virus. That’s bad for growth. But OXXO will soon begin selling Corona, Mexico’s most popular beer, with a rollout to all stores expected by 2022.In addition to Proximity, FEMSA Comercio started its Health Division in 2012, and has grown through acquisition and expansion to become the 2nd largest pharmacy chain in Latin America, with nearly 3,200 points of sale. In 2019, FEMSA added 800 new pharmacies, its biggest growth year to date, and the timing couldn’t have been better. Due to COVID, Health is the only division within FEMSA that has grown revenue YOY. First nine months revenue grew from $2.2 billion in 2019 to $2.4 billion in 2020, despite mobility restrictions that limited otherwise strong demand. The Fuel division, which was made possible by the country’s denationalization of state-run Pemex, operates 545 service stations out of approximately 12,500 in the country. After adding 87 stations in 2018, Fuel added only six in 2019, another bit of fortuitous timing as Fuel was the hardest-hit Comercio business, down 27.5% to $1.3 billion in revenue in the first nine months of 2019. Undervalued at Less Than The Sum of Its PartsLooking at each of FEMSA’s business lines separately exposes deep undervaluation.This year, FEMSA has materially underperformed both the Bolsa Mexicana de Valores (“Mexbol”) and its own components (KOF & Heineken). At its trough valuation, the FEMSA “stub” (FEMSA market cap minus the value of its stake in Heineken and Coca-Cola FEMSA) traded at a value of $7.5b or <6.0x EBITDA. For context, Walmex, the largest retailer in the region, has historically traded at 14.0x EBITDA. FEMSA is arguably a better business, and is inarguably growing faster than Walmex (ex-COVID), and it’s trading at half price.Further, if you reduce the valuation by the $1.7b of investments made in the U.S. ($900M for WAXIE in March 2020 and $750M for Jetro in November 2019) the implied value of the Femsa Comercio business was a meager ~$6 billion. Since its November lows the implied valuation has recovered to $11.5b for the Comercio division ($10b excluding the recent U.S. distribution acquisitions). Of note, the valuation dislocation persisted until November, well past the market lows of March 2020.While ‘Sum-of-the-Parts’ discounts are worthless without a catalyst to close them, there is reason to believe that FEMSA will monetize its Heineken stake in the coming year. At its current market value, it could monetize its interest in Heineken for ~$8.5b. FEMSA’s ‘conglomerate discount’ has seemingly been exacerbated by the expiration of their lock-up on the Heineken stake (which expired in late 2015), but parking $1.6 billion of cash in cash-and-carry and janitorial distribution in the U.S. has done little to assuage investor concerns around capital allocation. Latin American ECM bankers are salivating at the opportunity to lead the spin-off of OXXO, which would undoubtedly unlock material value; but thus far the family has resisted any approaches. Beginning next year, FEMSA will disclose with a P&L for both the legacy logistics business, which is called Solistica and the acquired Jan-San business, which will further highlight the strength of the crown-jewel OXXO business.FEMSA’s current business is undervalued, and that’s before even taking OXXO’s potential digital transformation into account.  OXXO’s Strategic ImportanceWhen BlackBerry founder Mike Laziridis first introduced the term “Super App” in his 2010 Mobile World Congress address, he said: This is what we mean when we talk about super apps: creating experiences that are so seamless to use, that are so well integrated with the core applications that they become a natural part of your daily interactions.He was talking about BlackBerry as the Super App, which, lol, but the point stands: Super Apps offer convenience. They’re the one, easy-to-access place where you can get most of the things you need every day. In that sense, OXXO is already Mexico’s Super App. “Convenience store” is one of those phrases that’s so commonly used that it loses its original meaning. But the convenience of the convenience store allows them to grow while much of brick and mortar retail struggles in the face of Amazon and eCommerce more broadly. OXXO’s 19,000+ locations in Mexico mean that an OXXO is never far away. In fact, in most of the regions in which it operates, there’s more than one OXXO for every 10,000 people, and those OXXO’s have the things people want every day -- chips, cigarettes, beer, soda, and water. Taken together, that means that Mexicans go to OXXO often. Every day, 14 million, or more than 1 in 10 Mexicans, shop in an OXXO. An average of 735 people frequent each small OXXO per day, and most multiple times per week. When the OXXO is only two minutes away, people can visit OXXO more conveniently and frequently than they visit most websites. All of those customer touch points serve to build trust with, knowledge of, and proximity to customers, which OXXO has leveraged to expand its offerings. For example, OXXO introduced the Saldazo debit card in 2012, and it has issued over 14 million cards since. The advantage is in the name of the business unit in which OXXO sits: Proximity. With 19,000 OXXO stores and an additional 1,250 pharmacies and 545 gas stations, FEMSA has 50% more retail locations than there are combined bank branches in the country (13,000). If you’re going to the OXXO to pick up beer anyway, why not deposit the cash you earned that day?FEMSA’s Head of Investor Relations, Juan Fonseca, told the WSJ, “This is the first banking relationship for most of the users of this product,” adding that while the cards don’t generate much revenue from fees, they do generate data that helps OXXO tailor in-store promotions. Launching a low-fee debit card to collect data is a move that only a well-funded, ubiquitous, trusted brand with a long-term focus could pull off. Beyond data, it established a new behavior in customers -- paying cash to OXXO for something other than a physical item right now -- that laid the groundwork for digital payments. In 2016, FEMSA invested in payment startup Conekta’s Series A, and partnered with the company to let customers pay cash for more than 5,000 digital services in-store. In a country in which 60% of the people don’t have a bank account, OXXO is their “Pay Now” button. For those without a credit card, OXXO is where they go to pay for their Netflix or Spotify subscription, pay their electricity bill, or buy Fortnite V-Bucks. Stripe accepts cash payments made in OXXO stores, meaning that any company that uses Stripe for payments can sell its products via OXXO.  Like a digital Super App, OXXO puts everything customers need to buy in one place. OXXO even works with most retailers’ biggest enemy: Amazon. Whereas Amazon has crushed most retailers, c-stores are worthy adversaries because their frequent, low average order value purchases are difficult for eCommerce companies to serve economically. Plus, in a country in which home delivery is often difficult or even dangerous, OXXO serves as a network of Amazon pickup points close to customers. Add in the fact that unbanked customers can’t pay for Amazon products without a cash payment option, and Amazon has no choice but to work with OXXO. “Mexico runs on cash,” Enrique Culebro, head of Mexico’s internet association, told Reuters. “This is the huge advantage of a company like Oxxo.” OXXO’s relationship with Amazon and other eCommerce businesses creates this beautiful flywheel: This same flywheel holds for any digital purchase of a physical product. Customers need to come to OXXO at least twice per transaction, where they buy things (good for revenue short-term) and build more brand loyalty and trust with OXXO, which enables OXXO to push more products and services like debit cards and digital wallets. By sitting at a crucial point in the value chain, between customers and everything that they want to buy online, OXXO generates revenue from both sides. OXXO Pay’s pricing power evinces its importance to both retailers and customers: retailers pay OXXO 3.5% per transaction and customers pay 10 pesos. That place in the value chain is why OXXO will be able to successfully build a digital wallet. OXXO’s Digital Wallet and Super App AmbitionsDigital wallets -- apps like PayPal, Apple Pay, Venmo, AliPay, Mercado Pago, and M-Pesa that allow people to store money digitally and pay online and in-person -- are a huge and growing market. Since 2017, the market has nearly tripled from $368 million to $1 trillion in 2020.  They’re also extremely hard to build, because they’re essentially marketplaces. Success requires liquidity -- there need to be enough retailers that accept the wallet that it’s valuable for customers, and enough customers who use it that it’s valuable for retailers. This is OXXO’s moat: it already has 14 million DAUs and 5,000 supplier relationships, including massive ones like Amazon and Stripe that provide ample supply liquidity. It’s also proven its ability to expand from traditional c-store retail to Saldazo debit cards to OXXO Pay. By owning Mexico’s digital wallet, OXXO will: * Own the consumer financial infrastructure in the world’s fifteenth largest economy, with the potential to expand throughout Latin America. * Build lending products based on customer transaction history, giving people who previously had no access to credit new opportunities. * Facilitate and participate in the growth of Mexican eCommerce.* Further cement its place in customers’ lives, both online and offline, as the only viable omni-channel solution. Building the digital wallet is a multi-billion opportunity in its own right. But it also means grabbing the lead position to add more services and build the leading Mexican, and potentially Latin American, SuperApp. Latin America is fertile ground for Super Apps because of its underdeveloped infrastructure and unbanked population. It’s less like the United States, which may be past the point of Super Apps, and more like Asia, where multiple Super Apps sit at the heart of multi-billion dollar companies. Indonesia’s Gojek is valued at $10 billion, nearly half of FEMSA’s valuation and more than FEMSA’s stub ex-Coca-Cola and Heineken stakes. Indonesia’s GDP is nearly 20% lower than Mexico’s. Gojek is backed by Chinese giant Tencent, whose own Super App, WeChat, is the key to its $726 billion valuation. Also in China, Alibaba spin-off Ant Financial’s digital wallet/SuperApp, Alipay, was preparing to go public at a market cap north of $300 billion before the Chinese government scuttled its plan. That’s over $1 trillion in market cap driven by Super Apps, in just one country. And then there’s India, where Reliance raised over $20 billion for Jio at a $60 billion valuation, including $5.7 billion from Facebook, in part to grease the wheels for WhatsApp to become the Super App there. Earlier this month, it began rolling out WhatsApp Pay, a big step towards realizing that vision, and confirmation that in emerging markets, partnering, instead of competing, with the local powerhouse is smart business. There’s a long way to go between where OXXO Pay is today and what even Gojek, Grab, or Line offer, and the larger Super App companies like Tencent, Ant, Mercado Libre, and Jio are a lot more than a Super App, but those companies success show the bull case for FEMSA. Given that the core business is already undervalued, OXXO’s strategic position in the value chain means that investors have a free option on a $10+ billion opportunity. COVID-Accelerated RisksBuilding the winning Super App would be massively valuable to FEMSA. You didn’t think it would be easy, did you?While COVID created a buying opportunity by tanking FEMSA’s stock price, it also legitimately put a damper on FEMSA’s growth, exacerbating existing political and competitive threats to the business. There are two main categories of risk:* Political. Mexico’s President Andrés Manuel López Obrador (“AMLO”) has proven unfriendly to big business and openly opposes FEMSA in a few key areas. * Competitive. COVID pushed more transactions online, providing a boost to competitors like Rappi and Mercado Libre. PoliticalAMLO is bad for business. The President mishandled COVID -- its 9.8% mortality rate is among the highest in the world, and instead of providing stimulus, the government implemented austerity measures. Of specific concern, AMLO’s government blames Coca-Cola for the country’s high mortality rate. More Coke = more obesity and diabetes = higher COVID mortality rates. In October, the government imposed regulations that will force Coca-Cola to put big octagonal black warning labels on its products by December 1st. That’s bad news for FEMSA’s cash cow. AMLO hit FEMSA’s cash more directly in May, when the company agreed to pay $398 million in taxes to “resolve interpretive differences over taxes paid outside of Mexico.” Walmex also agreed to pay $358 million. But there’s hope for FEMSA. From a pre-COVID high of 80%, AMLO’s approval rating has dropped to 59%. Finally, as is often the case with emerging market investments, investing in Mexico comes with significant currency risk. Between February and April, the Mexican Peso / US Dollar exchange rate shot up from $18.54 to $24.99, and the government has intentionally devalued its currency multiple times in recent history. CompetitiveChallenges with government and currency are nothing new to FEMSA. Recall that the 1982 devaluation forced the company to shed non-core businesses to service debt, which left it in a healthier position. The bigger threat to the business comes indirectly from COVID. As it has around the world, COVID accelerated the growth of eCommerce in Mexico and Latin America. While nothing beats the speed and convenience of paying cash at the local OXXO, many customers were forced to adopt alternatives during restrictions. Essentially, COVID jammed OXXO’s Flywheel, and opened the door for pure-play eCommerce competitors.These three slides from a recent McKinsey presentation on Mexican consumer sentiment during COVID present both opportunities and threats to FEMSA, depending on how consumers are transacting online: McKinsey notes a shift to digital and omnichannel. If consumers are going to OXXO to pay cash for digital services, that should present a short-term boost to margins and an even stronger opening for OXXO to push its digital wallet. Customers don’t want to go to the store every time they need to pay for something online during COVID, so funding a digital wallet once and being able to pay for anything online is a valuable offering. But less frequent trips to the OXXO jam the flywheel. If people aren’t running out to grab a beer, maybe they won’t pay for that thing on Amazon, then they won’t come back to pick it up and buy more chips and beers. They may also turn to more pure-play eCommerce businesses like Rappi, a Latin American Super App that offers food delivery, groceries, and retail, Amazon, and Mercado Libre. They may set up a Mercado Pago digital wallet to pay for it all. OXXO’s 20,000 location footprint, a major moat during normal times, is less impactful when people don’t leave the house as frequently, creating an opening for competitors who don’t want to pay a tax to FEMSA for every online transaction.  Still, as Lindsay Lehr points out, creating liquidity for digital wallets in Latin America is really hard, and OXXO Saldazo’s hybrid approach -- starting with the prepaid debit card, with physical touchpoints, backed by one of Mexico’s most trusted brands -- is the only one that has worked in the country to date. Latin America will be one of the next decade’s biggest growth stories, and just as Asia and India have seen fierce competition to own customers’ digital lives, Latin America will be a knife fight. Whether FEMSA comes out on top will depend on whether it’s able to leverage its physical advantage before the market gets comfortable with digital-only solutions. So What Will It Be? Throughout FEMSA’s 130 year history, betting against the company, particularly when it looked like it was down and out, was never the right call. Now is no different. In the worst case scenario, FEMSA, an undisputed market leader with an impossible-to-replicate physical network of trusted c-stores, is just a CPG business trading at the multiple of a structural loser. The bull case for FEMSA is that it leverages its distribution advantage and consumer touch-points to launch the leading digital wallet in Mexico. The Mexican economy should directly benefit from more sanguine relations with a new administration in the U.S. and will continue to benefit from off-shoring of manufacturing from China to Mexico. As a potential key player the digitization and development of an increasingly important economic partner to the United States, FEMSA's strategic assets and distribution know-how position them to play a key role as the toll-keeper of Mexico’s eCommerce ecosystem.FEMSA takes the long view. As a result, it has smartly and patiently put the right pieces in place over decades. It built bottling and distribution capabilities through its breweries that it parlayed into the world’s largest Coca-Cola bottler by volume and the largest c-store chain in The Americas by locations. It’s leveraged its physical footprint to engrain itself in its customers’ routines and build their trust, which it used to create the country’s most popular debit card and turn itself into the physical manifestation of the Mexican internet. The company’s patience has given it the tools and opportunity to build the digital wallet and Super App for Mexico, and potentially much of Latin America. But they are in a tight window that COVID tightened, and now they need to move quickly to concentrate their resources on capturing the big, digital prize. How do we think it’ll play out? Never bet against the Devil. Viva FEMSA. Thanks to Post Market for collaborating with me on this, and to Dan and Puja for editing.Full Disclosure: I own a small amount (<2% of my portfolio) of FMX. This is not investment advice!Thanks for reading, and Happy Thanksgiving! 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 937 newly Not Boring people who have joined us since last Thursday! If you’re reading this but haven’t subscribed, join 20,818 smart, curious folks by subscribing here!🎧 To get all not boring episodes when they come out, follow on Spotify.Hi friends 👋,Happy Thursday! Check my pulse. I’m excited. This is my first collaborative essay, and my collaborator is someone I’ve been a huge fan of for a while: Sari Azout. Sari is an early stage investor, strategist, and author of one of my favorite newsletters, Check your Pulse (go subscribe now and come back). Last week, she wrote an excellent piece on community-curated knowledge networks and is building a product in the space that I cannot wait to try.Not Boring is all about telling the stories of the very big companies that have an outsized impact on the world and the markets today, and the very small companies on the bleeding edge that will shape the future. Sometimes, those companies are so bleeding edge that to explain them well in context, I need to bring in someone who’s gone deep in the space. For social and programmable money, that person is Sari. The subject of today’s essay, Fairmint, has the potential to be massively impactful. Its total addressable market is “equity” and it has the potential to expand that multi-trillion-dollar TAM by including more stakeholders in upside, aligning incentives, and unlocking new business models. Let’s get to it. Today’s Not Boring is brought to you by… Free Agency is one of those ideas that should so obviously exist that I’m surprised it hasn’t until now. They provide Hollywood-style representation to top and emerging tech talent. You get a dedicated Talent Agent to guide your job search, make intros to hiring managers, VCs, recruiters, and founders in the Free Agency network, meet with you weekly, and handle all search activity and communications. You just need to interview. They even connect you with industry and company experts to prepare for your interviews and negotiations.Unlike recruiters, Free Agency works for the talent. Their incentives are aligned with your success -- when you find your dream job, they share in a small percentage of your new base salary for a year. They’ve represented hundreds of candidates at places likeLyft, Netflix, Amazon, Notion, Google, WaPo, Zoox, SpaceX, and more. If you’re smart enough to read Not Boring, you’re smart enough to get an Agent. Fairmint & the Democratization of UpsideRadical Compensation The history of financial innovation is the history of democratizing access to upside. As more stakeholders share in the wealth they create, they’re incentivized to collaborate, experiment, and innovate. There would be no Silicon Valley, for example, without the Employee Stock Ownership Plan (ESOP).When a group of engineers known as The Traitorous Eight left Shockley Semiconductor Laboratory to found Fairchild Semiconductor in 1957, investors rewarded their treachery with a new type of compensation: stock options. If Fairchild did well, they would do very well. Options seemed radical then; they’re commonplace now. Startups are risky, and they don’t have nearly as much money as their more established competitors. Options, which give employees a small chance at a life-changing payout, are how startups compensate for that risk, and they’ve been the pixie dust that has fueled Silicon Valley’s meteoric half-century rise.When the products startups made were things like microchips and database software, it made sense that the employees should share in that upside. But what happens when the boundaries between employment and work begin to blur? When people become the product.In just the past week, both Airbnb and DoorDash filed their S-1’s ahead of going public. Many employees and investors will become multi-millionaires. Some will officially become billionaires. Uber and Lyft have added more than $30 billion to their combined market caps over the past month, enriching investors and employees alike.  That’s a beautiful thing. The American dream. But millions more who fall in a new gray area between “employee” and “product” -- the Dashers who deliver your food, the drivers behind the wheel of your Uber and Lyft, the influencers who create content on Instagram, and the Hosts who let you into their home -- don’t participate in that upside. The result is that the economic interests of the largest internet platforms are poorly aligned with their most valuable contributors, their users.User-Generated EverythingThe digital economy has radically changed the nature of the relationship between customers and corporations. Individuals have switched from being passive consumers to being an essential force in creating value, either through their actual work (Airbnb, DoorDash, Uber, Sofar artists, Wikipedia editors, Airbnb hosts) or their data (Facebook, Google, etc). Today, the user is not only the consumer. The user does the work. In the gig economy, users who contribute time and data are rewarded linearly — to earn more, an Uber driver needs to drive more. The platform grows exponentially, while the platform’s most important asset — the driver — earns linearly. As large platforms get richer off their users’ personal data and time, people are trying to regain control. We spent the last fifteen years working for gig money, likes, retweets, or follows. The platforms gave us reputation or cash, but no ownership, upside, or voice in its evolution.But the balance of power is shifting, and companies are recognizing the need to better align with their users.Over the past few years, we’ve been seeing a lot of experiments in this space. * Andrew Yang’s Data Dividend would force platforms to pay users for their data.* California’s AB5 would have forced Uber and Lyft to treat drivers like employees instead of contractors until voters supported Prop 22, which exempts gig economy companies… for now. * Denim startup DSTLD became the first customer-funded fashion brand when it raised $1.7 million from customers via crowdfunding in 2016, and gave away equity to shoppers who shared the brand. They tripled sales that year. * In 2016, Juno tried to take on Uber by offering its drivers equity in the business. The next year, it sold to Gett, which shut it down in 2019.* In 2018 and 2019, several of the biggest tech companies, including Uber and Airbnb, filed letters to the SEC, asking it to allow them to share ownership with their users.* Just this past week, Packy got an email from Airbnb letting him know that, as Host, he was eligible to buy from an allocation of IPO shares. Those shares have typically been reserved for banks and their clients. Those attempts have been clunky and largely unsuccessful because platforms have used old tools to solve new problems. The Internet is a new way to interact, so it’s only natural that 40 years after its invention, we will come up with digitally native ways to distribute and exchange value, unconstrained by legacy financial infrastructure. Just as the first online ads looked a lot like print ads and have since evolved into digitally-native formats, we should expect digitally-native ways to distribute and exchange value on the Internet.We need tools for the next era of social networks, creators, and businesses to engage with their community while monetizing along the way. The time is right. * Cultural tailwinds support inclusive economic models as opposed to the extractive models that defined the first decade of the gig economy. * Software is eating the markets, giving more people knowledge of, comfort with, and access to, new investment opportunities.* Crypto is making it possible to financialize everything. Bitcoin is ripping, up 57% over the past month heading into Thanksgiving. It’s eerily reminiscent of the 2017 Crypto Bubble, but it’s different this time. With use cases becoming clearer, Crypto 2020 is much more about the infrastructure on top of which a wave of killer apps are being built. Web3 and CryptoIf we assume that the WWW has revolutionized information and the Web2 revolutionizes interactions, the Web3 has the potential to revolutionize agreements and value exchange. It changes the data structures in the backend of the Internet, introducing a universal state layer, by incentivizing network actors with a token.-- Shermin Voshmgir, Token Economy“Crypto” comes with a lot of baggage, so it might help to boil it down to the three main use cases in the context of the Ownership Economy:* Financial. Raise funding that communities, creators, and companies need to create things while aligning your upside with early fans, workers, and other participants. * Social. Create a community around you in which your fans and users engage and become your distribution. There’s also an element of social signaling that you were the first involved, and tiered access to exclusive rewards. * Governance. Give stakeholders a voice in the decisions about your business, platform, or community. It is still incredibly early. Instead of thinking of crypto as a full-fledged product, think of it as a new set of tools engineers and entrepreneurs can use to build. Just as the internet in the late ‘90s was engineering-heavy and design-light, crypto thus far has focused too much on the technology and not enough on the user experience, too much on what is technically possible and not enough on how it can improve people’s lives. There is a vibrant ecosystem of new projects that are powering the infrastructure for social tokens, including:* Props Project is a turbocharged loyalty program that rewards people with tokens for doing things like sharing and engaging. * Foundation bills itself as “Culture’s Stock Exchange,” and features a collection of crypto art that users can invest in and trade. * Zora is a marketplace to buy, sell, and trade limited-edition goods by buying one of a limited supply tokens that’s exchangeable for socks, t-shirts, and more.* Roll mints branded tokens, or social money, giving people and communities their own custom tokens like $SARI, $PACKY, $THANKS, $HOLLA, or $RNG.Social tokens provide fans a means of not only sharing financial upside with their favorite creatives but also enable tiered, tokenized access based on fan engagement. For example, Richard Kim’s Random Number Generator is a Discord server for founders and investors in the gaming community in which status is determined by the amount of $RNG users hold. Users earn $RNG (minted on Roll) by signing up early, doing cool things for the community, creating, and winning competitions. Members can use the $RNG they earn for both exclusive access and for financial gain, as Kim plans to create fiat liquidity for $RNG holders. Social tokens allow creators to own, control and coordinate the value that they create across platforms, like a digitally native rewards program with upside for both creators and fans. But as much as crypto fans want to believe they’ve created something startling and revolutionary, in reality, the experience feels: unfamiliar (payments happen off-platform), overwhelming (you end up in a confusing maze of wallets - jumping from Coinbase to Metamask to Uniswap, often unclear what you own), and pyramid scheme-y.In an excellent post, Kim reflects on the challenges of token-based communities: Whether they acknowledge it or not, tokenized communities are so focused on token price that they lose sight of why they were created to begin with--the shared values and interests, the intrinsic motivators, the glue that is left when all other bindings are stripped away.This is common with new technologies -- the first iterations focus too much on the technology itself instead of the user experience the technology facilitates. Social tokens represent one step in a fundraising progression -- from traditional cap tables and ESOPs towards more programmable, easily exchangeable money that fits into the flow of a well thought out user experience.  Like social tokens, Fairmint is built on DeFi rails, but unlike them, you wouldn’t know that from looking at their site. Defi is part of Fairmint’s tech stack, not its main value prop. Meet FairmintFairmint is like Kickstarter on steroids, mixed with Carta, embedded right in the products we use and love. They’re building the picks and shovels for founders to turn their equity into the most powerful tool to engage with their contributors. Equity powers the entire stack of entrepreneurship and is the most powerful tool to align financial interests. It has a simple value prop: help make this company more valuable, and you will be rewarded. Equity is the reason startups can write that bullet that goes something like...* Be a team player. Be willing to get your hands dirty, go above and beyond the responsibilities of your role, and do whatever it takes to help this company reach its full potential! ...on every job description, with a straight face. It is also the greatest wealth-building financial instrument. Until now, the absence of a single, global, open, and interoperable system of record for equity has hampered innovation and the democratization of equity ownership. Luckily, global, open, and interoperable systems of record are what crypto does best, and Fairmint is using it to build “software-powered financing services to raise capital continuously from anyone who supports their product and mission.”Fairmint created the Continuous Agreement for Future Equity (CAFE), an updated version of Y Combinator’s SAFE, which lets a company’s stakeholders buy or earn equity in the company, at any time, directly from their website. It’s “programmable equity.” Companies will be able to add a “Buy Equity” button right to their site as easily as they add a “Buy with Apple Pay” button today. Importantly, users and investors don’t need to know or care that they’re dealing with a DeFi product. They only need to think about how the product benefits them:* Founders benefit because fundraising is no longer a full-time job. On Fairmint, founders raise funds on a rolling basis in a “set it and forget it” fashion. They can set up automated incentivization plans and align their stakeholders with their success. And it gives them flexibility -  if they don’t want to sell and if an IPO is not in the cards, their investors can still get liquidity. * Investors benefit because they get a clearer path to liquidity and can invest in the companies they love and trust at stages usually reserved for insiders and VCs. * Users benefit because they can participate in the financial upside, either by purchasing shares or earning shares for supporting the company.Shares sold via Fairmint are dollar-denominated and look like any other investment you might own. Fairmint abstracts away a ton of complexity, so users can focus on how they might use Fairmint to grow their business. Our heads are swimming with possibilities: * What if Wikipedia was owned by the editors? * Could the small businesses that list on Yelp, or the contributors who power its ratings, own shares in the company? * Could Reddit reward its moderators with ownership? * Why couldn’t Airbnb give Hosts equity when they become SuperHosts? * Shouldn’t Uber’s drivers own a piece of the business if they maintain a high enough rating over enough rides? * Would writers be less likely to leave Substack if they owned a piece of the company?* What if early users of SaaS products could invest in the company itself? My mom has been singing Zoom’s praises since 2014. She’d be retired if they worked with Fairmint.* What if Taylor Swift’s fans could replace Scooter Braun? And these are just the businesses that have been able to thrive with existing financial infrastructure. What kinds of businesses could work with Fairmint that couldn’t have before? One area that seems ripe for this model are marketplaces with particularly challenging cold-start problems. A marketplace cannot acquire demand if there is no supply, and  the supply side has no incentive to join if the demand isn't there. This makes marketplaces extremely difficult and expensive to build. Many marketplace companies either fail or are forced to raise a lot of venture money so they can try to spend their way to liquidity. What if, instead, they incentivized early participants with ownership in the company? Instead of just “supply,” marketplace participants become loyal builders and evangelists. If companies can provide incentives for early adopters to participate before critical mass is achieved, they’re more likely to pose a credible threat to incumbents. As Charlie Munger said, “Show me the incentives and I’ll show you the outcomes.” A lot of business models that failed in Web 2.0 will become viable in Web3. The next generation of platforms like Homejoy and TaskRabbit, which solved the marketplace liquidity problem only to suffer from “platform leakage” as customers and providers took their relationship offline after the first transaction, could stand to benefit from aligning their incentives with the people who do the work.Coming full-circle, could CAFEs replace the traditional ESOP that has fueled Silicon Valley’s growth, facilitating more liquid employment while retaining the benefits of equity ownership? The current model -- negotiate an options grant before you’ve started working and slowly earn those options as you spend more time at the company -- is a clunky solution that optimizes for lower administrative burden and keeping employees at the company. Worse, employees who leave before an exit often can’t afford to buy shares today and hope for an outcome later, and give up the right to buy their shares, missing out on the upside. But what if companies could give employees equity on an ongoing basis based on their contributions? There are countless examples of more junior employees making a bigger impact in two productive years at a company than some execs make over four years, but the current structure isn’t set up to handle those cases. And ongoing liquidity would be hugely valuable in ensuring that all employees are able to make money from the shares they’ve earned. When stakeholders -- partners, investors, creators, evangelists, and employees -- are properly incentivized, the possibilities dwarf the imagination. Idealism aside, though, Fairmint will face a few key challenges in making that future a reality. * Ownership Distribution. Nailing an effective ownership distribution that incentivizes the right behaviors is VERY hard. Fairmint will need to give companies templates and best practices to help them get started. There will inevitably be a period of trial and error here. * Product Marketing. Explaining what Fairmint does is a challenge. They’re currently explaining it simply as “the ESOP for customers,” and it seems to be working. * Double-Edged Switching Costs. There’s no such thing as a “free trial” with Fairmint. Once you decide to use Fairmint and sell shares via a CAFE, switching to another model is a huge pain. That creates high switching costs, but also barriers to adoption. Fairmint has its work cut out for it, but we’re rooting for it to succeed. A world in which Fairmint is successful is the kind of world we want to live in. VisionThere’s this recurring theme on the internet (and with people more broadly): When something is easy, people will do more of it. Creating content was the first thing that became easy on the internet, and more people began to create content. WordPress turned people into bloggers. YouTube turned them into videographers. Substack is turning us all into newsletter writers. Likewise, if creating and sharing value becomes easy, more people will do it.In the same way the internet was a democratizing force that gave everyone in the world the ability to easily create and share information, the next step is to give everyone in the world the ability to easily create and share value.Better economic alignment between platforms and participants is coming, and will enable the advent of true stakeholder capitalism to give billions of people the opportunity to build wealth alongside the products and services they love and use. New technology is powerful not because of what it can do, but because of what people can do for other people with it. Crypto can create new financial models, and those new financial models can in turn unleash a monsoon of creativity and new business models. Fairchild Semiconductor’s investors couldn’t have envisioned Fairmint when they decided to incentivize the Traitorous Eight with upside in the business. But with hindsight, we can draw a wavy line from one to the other. Driven by network effects, technology has radically changed the pace of wealth accumulation. It took Hyatt 63 years to be worth $7 billion. It only took Airbnb 12 years to be worth $18 billion. Crypto’s true promise is the ability to usher in a new economic operating system where distributing that value is as easy as paying payroll. One that can close the wealth gap by pulling wage earners out of the debt stack and into the equity stack. One that allows people to share in the upside and ultimately shift the paradigm of ownership to the individuals and communities responsible for creating value. Viewed through that lens, Fairmint is more than a product; it’s a movement.Trying to write thousands of words every week with a new baby is exhausting. So since the Zest Tea team sent me some of their high caffeine teas a couple of weeks ago, I’ve had one every day. My favorite is the Spiced Chai Infusion Sparkling Tea (please send more, Cou!). They have more caffeine than coffee, without the jitters or crash, and they’ve helped me maintain prolonged focus despite my suboptimal sleep schedule. If you’re looking for clarity in the chaos, get yourself some Zest, and use code “notboring” for free US shipping.Thanks for reading, and see you on Monday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the xxx newly Not Boring people who have joined us since the last email! If you’re reading this but haven’t subscribed, join 20,xxx smart, curious folks by subscribing here!Hi friends 👋,Happy Monday! There are over 20,000 of us here now — thank you for making that happen 🙌 If you’ve been here for a while, you know that Slack is my favorite investment. The market, thus far, has not agreed with me. You didn’t think I was going to go down without making my 6,900 word case, did you?But first, a word from our sponsor.Today’s Not Boring is brought to you by… BarrelBarrel is a creative and digital marketing agency run by my friend Peter Kang. The Barrel team has worked with clients like Barry’s, Dr.Jart+, Bare Snacks, ScottsMiracle-Gro, Rowing Blazers, Hu, and many more to build their Shopify Plus sites and marketing strategies across email, paid, and SEO.Please don’t waste your marketing dollars on poorly done ecommerce websites and paid social campaigns. Work with Peter and the Barrel team to create experiences that deepen your relationship with your customers.Now let’s get to it. Slack: The Bulls are typing…Imagine you haven’t read the title of this post and I told you about an unnamed public SaaS company that:* Builds an essential WFH software product,* Has the second highest gross margins of any of the 54 companies tracked in the BVP Nasdaq Emerging Cloud Index, * Is the eighth fastest-growing company in the index, which has outperformed the Nasdaq by nearly 3x YTD.Bet you’d say, “Sounds like an awesome company. I’d love to buy it, but it must be so expensive at this point. Damn, bummed I missed it.” And then I’d say, “Nope! You didn’t miss it. It’s actually deeply underperforming the Nasdaq this year.” “Ahh,” you’d reply, “Underperforming. Now I know what company you’re talking about. Slack!”From Day 1, I’ve known Slack was a long-term play. It acquires customers slowly, but is incredibly good at retaining and growing with them once they’re hooked. That takes time to pay off. I’ve owned shares in Slack since the day it IPO’d direct listed on June 20, 2019 at $38.50 based on that thesis.As it tanked, I bought more. It kept dropping, I kept buying. Over time, Slack became my biggest position (full disclosure etc...), all based on the thesis that it would just keep compounding and compounding until one day, everyone woke up to the fact that it was a juggernaut.When it became clear that we would all be working from home for a long time, I thought I was a genius. I was picturing early retirement and yachts and islands (or at least a trip to an island and a boat cruise). But then, as I wrote about in May, Zoom Zoomed, and Slack slacked. It was only a matter of time. Slack just had to pick up, right? Wrong. Other than one brief, glorious run leading up to Q1 earnings on June 3rd, it kept sinking. And I kept buying. Any time the market tanked, and I had my pick of “discounted” stocks, I chose Slack. It got so bad that my friend texted me this last week when I took advantage of the Vaccine-Induced Tech Selloff to, you guessed it, buy more Slack: The Not Boring Portfolio -- the fake portfolio I made to track the companies I write that I’m bullish on -- has done incredibly well, outperforming the S&P 500 by 2.6x and the NASDAQ by 1.8x, except for Slack. Like Carrie Mathison in Homeland, “I have never been so sure, and so. wrong.”But I’m not quitting on Slack. Partially because it’s underperformed SaaS so badly during COVID, I think it’s one of the best opportunities in tech. Wall Street hates it because of the threat from Microsoft Teams, but that’s our opportunity. Slack is the rare chance to be contrarian and right by betting on a fast-growing public SaaS company with extremely high gross margins. I’m openly and unabashedly bullish on Slack. But to keep myself honest, I’m going to lay out my bull case for Slack and would love to hear your counterarguments in the comments or over on Public. The Slack ThesisI’ve written about Slack twice before: * While Zoom Zoom, Slack Digs Moats* Acquisition in the Key of G SharpSlack co-starred in both essays, but I’ve never given it the solo performance it deserves. I’ve never laid out my bull thesis in toto. So here it is: Slack is already a top quartile SaaS company trading like a bottom quartile SaaS company because of that age-old worry that “Microsoft will just crush it.” It’s one of the fastest-growing public SaaS companies in the world with eye-popping gross margins. Slack is world-class at acquiring, retaining, and growing with the fastest-growing companies in the world. As they grow, Slack grows, and revenue compounds while costs stay relatively flat. Slack Connect will turbocharge that compounding by allowing non-Slack companies to try Slack in a lightweight way, and more seamless integrations weave Slack more deeply into the fabric of work. The narrative about Slack doesn’t even match today’s numbers, let alone its clear compounding potential. A misplaced narrative is my favorite kind of investment.Slack is hated, and one paragraph plus a question isn’t going to change that. So we’ll need to lay out the case in some more detail. Luckily, writing thousands of words about tech companies is what I do best, and I’m fired up about this one. So let’s go bear hunting: * What is Slack? Most of us probably use Slack, but we’ll try to put it into words. That’s surprisingly hard, even for Slack itself.  * Connecting Slack’s Strategy. Slack Connect is crucial to Slack’s strategy.* # by the #s. Slack’s numbers are among the most impressive of any cloud-based SaaS company, and they keep getting better.* The Bear Case: Teams, Mostly. The market thinks Team is an existential threat to Slack. That narrative is wrong, and there’s no better opportunity than an incorrect narrative.* ARK Invest and The Power of Compounding. ARK Invest is long Slack because it understands the impact of compounding over time. * Stickiness, Net Dollar Retention, and Free Cash Flow. Slack’s customers stay Slack customers, and grow with Slack at an industry-leading rate. That’s starting to produce positive Free Cash Flow, and it’s all upside from here. * The Real Threat. Since Slack’s upside is predicated on its ability to acquire and retain young, fast-growing companies, the real bear case is that startups skip the channel-based communication for tools that allow them to collaborate in-app. * Picking Up the Slack. When will Slack stock stop slacking?A bet on Slack is a bet that technology companies are going to grow, that a platform will beat the inferior monolithic solution, and that communication is at the heart of productive collaboration. Ultimately, it’s a bet that the market is telling itself the wrong story. When the narrative changes, so will Slack’s trajectory.What is Slack?“Six and a half years and it’s still kind of hard to explain,” Slack’s CEO Stewart Butterfield told Jim Cramer on Mad Money in early October. That challenge is reflected in the ever-evolving way Slack describes itself. In March, right before most US companies decided to work from home, Slack defined itself by what it replaces:In August, Slack defined itself as “where work happens.” By October, Slack landed on the framing that it’s going with now: Slack is your new HQ.Stewart explained it to Cramer on Mad Money: I think maybe the pandemic times make it a little bit easier because we can say Slack is your office when you don’t have a physical office anymore. It’s where work happens. But I don’t know how helpful that ultimately is. It’s always been the kind of thing that people don’t know they want, but once they have it, they can’t live without it. The difficulty describing itself is core to Slack’s challenges to date, and the idea that once companies start using Slack, they can’t live without it is core to its promise. At the most basic level, Slack offers channel-based workplace communications software. The company believes that as companies grow, most of the work they do becomes communicating with each other. Its software allows companies to set up channels for each of the teams, projects, and workflows that comprise their business, and to integrate external software to smooth those workflows. It’s maniacally focused on making communication more effective. It does that by working on the little things that make the overall experience of using Slack delightful. For example, it was the first workplace chat tool to sync your place in a channel across devices, meaning that the conversation on the desktop app would pick up where you left off on mobile. It puts an enormous amount of thought into something as simple as when to send which notifications, as exemplified in this now-famous notification decision tree:I could keep going and compare Slack and Teams feature for feature, but no one disagrees that Slack is a better product (unless your company does everything in Office, in which case Teams’ tighter integration with its own products is an advantage). One caveat, lest I come off as too much of a fanboy: Slack can be incredibly distracting and make it seem as if “work,” or something that feels like work because it’s in Slack, follows you everywhere. If you don’t manage your notifications properly (I turn mine off except for @ mentions), you can get sucked into an endless hole of HAPPY BIRTHDAY!!!s, @channels, and cat gifs. Plenty of Slack users hate Slack. Done right, though it can greatly enhance a company’s productivity by organizing conversations, making anyone reachable at the tap of a keyboard, enabling easy document sharing, and automating workflows via integrations. It can be a company’s OS. To be the OS, it needs partners. Slack realizes that it can’t build the best of everything. It doesn’t even use its own video product internally; it uses Zoom. Instead, it wants customers to choose the software that works best for them for each thing that they do, and then make that software work better by integrating it into the company’s workflows and communications. As Butterfield puts it: For whatever software our customers already use, or whichever software they use in the future, we’d like to make their experience of those tools better because they use Slack… Slack with Slack Branded Feature X is probably less valuable than Slack with Competitive Branded Feature X in the same slot, because now you’re using Slack and you have an integration set up.And then there’s Microsoft, whose bet is that you’re willing to take a bunch of pretty good software as long as it comes with Excel and Outlook. Three points illustrate Slack’s commitment to the open platform approach: * Integrations. On page 5 of its most recent earnings presentation, Slack highlighted that there are 2,300 apps in its directory, 700k custom apps and integrations used weekly, and 820k developers actively building for Slack. It’s running Microsoft’s old Office playbook. * Partnerships. According to Crossbeam, Slack has 1,316 publicly announced technology and channel partnerships, almost 50% more than the 887 Microsoft has across the whole company. * Slack Fund. Slack not only partners and integrates with companies, it invests in them. Slack launched the fund at the end of 2015 in partnership with leading VCs like Accel and a16z to encourage developers to build apps on top of Slack. Today, the fund invests in some leading companies in the productivity and collaboration space. Most notably, Slack invested in:* Asynchronous video company Loom’s Seed through its $30 million Series B, * Buzzy collaborative presentation software Pitch’s Seed and $19 million Series A, * Leading password manager 1Password’s $200 million Series A* Virtual events company Hopin’s Seed, Series A, and Series B* Partnership management company Crossbeam’s (remember them from the last bullet?) Series A and Series B. All of Slack’s investments have or will have Slack integrations, and it’s not hard to squint and see a loose association of products that, collectively, can take on Microsoft. While Slack’s product and partner ecosystem can be hard to explain, its business model is straightforward: it is a software-as-a-service (SaaS) business that charges companies a monthly rate for every employee that uses it. The name of the game for Slack is to acquire companies, keep them happy, and grow with them as they grow. The more people a company hires, the more people use Slack, the more money Slack makes. It’s so focused on customer retention over short-term revenue maximization that it actually scans how many people at a company actively use the product daily, and proactively refunds companies for people who have been inactive for a certain period of time. Slack is horizontal software in an enterprise software market full of vertical players. Until recently, that meant that it built the chat layer across all of the vertical-specific things that a company does by integrating third-party software. As Ben Thompson pointed out, that focus on chat allows Slack to work not just between different teams in the same company, but across companies as well. Connecting Slack’s StrategyIn July, Slack rolled out Slack Connect, which lets companies collaborate with each other via Slack. Say you’re working on a fundraise. Instead of emailing the internal team, external counsel, and banks, you can put everyone in one Slack workspace, set up channels for each piece of the project, and share documents seamlessly. This is brilliant for the obvious reasons: * It makes the product go more viral. * It’s another step towards replacing email.* It allows Slack to build what Thompson called an “enterprise social network.” But it’s brilliant for a less obvious reason that ties into Butterfield’s quote at the top of this section: “It’s always been the kind of thing that people don’t know they want, but once they have it, they can’t live without it.” Slack Connect uses the forward thinking companies that already use Slack as salespeople into the slower-moving, longer sale, Microsoft-using organizations, and it gives those companies a very specific reason to use Slack i.e. “If we want to win Stripe’s business, we’d better try this Slack thing.” It uses greed as a Trojan Horse through which it can prove Slack’s softer, ineffable benefits. Phase I -- getting companies to use Slack Connect and invite their partners seems to be working. Connects help Slack grow leads exponentially. Since introduction in Q2 2020, Slack Connect has grown at a 27% Compound Quarterly Growth Rate (CQGR), and connected endpoints, the number of companies connected to each workspace, is growing even faster. In Q2 2020, six companies connected to each workspace; a year later, 7.3 companies connect to each workspace. That means that there’s a double compounding happening as more companies set up Slack Connect workspaces and invite more partners into each. Slack doesn’t yet report conversion from an invite to a Slack Connect workspace into paying customer, but watch out for that number once they do -- it will mean that Slack is able to expand into new customers at a near-zero Customer Acquisition Cost (CAC). Connect creates the Slack Flywheel: * Acquire forward-thinking, fast-growing companies, * Build core chat functionality that works so well that customers love the product,* Let companies set up integrations with all of the other software they already use, creating high switching costs, * Make Slack such a core part of the workflow that companies would rather work with outside partners via Slack than over email, creating network effects,* Get groups of companies to set up workflows and integrations that allow them to work more easily together, creating even higher switching costs,* By experiencing the product through Slack Connect, convince new customers to join Slack, love the product, set up workflows and integrations, and invite new companies to join them via Slack Connect, kicking the loop back off. Slack Connect looks like a silly sideshow if you’re looking for reasons to be bearish on Slack, but it’s core to solving a challenge Slack knew it had since the beginning. In July 2013, two weeks before Slack’s preview release, Butterfield sent the team a memo later titled We Don’t Sell Saddles Here. In it, he talked about the challenge and opportunity incumbent in building a product in a new category. Because people didn’t have a frame of reference for the product, Slack needed to show them what the product could help them do and become instead of listing off a set of features. They needed to build a product that was “really fucking good,” listen to customers, and evolve in order to “build a customer base rather than gain market share.”  Slack Connect is the latest evolution of that thinking -- software that is so “fucking good” that companies convince their partners to use it, and help it build a compounding customer base.  That’s a lot of words, though. The beautiful thing about Slack is that the strategy shows up so clearly in the numbers. # by the #’sIf you want to build a product so good that your customers will stick with you, grow with you, and acquire new customers for you, you do a couple of things: spend on research & development (R&D) and sales & marketing (S&M). That’s exactly what Slack has done, and it means that for now, unlike Zoom, Slack is unprofitable. Slack has reported numbers as a public company for five quarters, meaning we can compare YoY numbers for the most recent quarter to its Q2 numbers a year ago. In its first year public, Slack: * Grew revenue 49% from $145 million to $215.9 million* Decreased the cost of revenue from $31.1 million to $28.4 million as gross margins improved by 8.3% from 78.5% to 86.8%* Reduced SG&A, which includes S&M, by 39.1% (up 10% compared to the first non-IPO quarter)* Reduced spend on R&D by 56.7% (down 1% compared to the first non-IPO quarter)* Shrunk Operating Losses from $363.7 million to $68.6 million (or $26 million compared to first non-IPO quarter)* Improved Free Cash Flow by $18.7 million from -$7.9 million to $10.8 million.That’s phenomenal performance, showing Slack’s ability to get operating leverage out of the business over time. But since IPO, Slack’s stock price is down 33%, while the Nasdaq is up 47% and the BVP Emerging Cloud Index, which tracks public cloud Saas companies, is up a nice 69%. Maybe its numbers aren’t as good as its peers? John Street Capital did an analysis on Slack’s performance versus the other 53 companies in the BVP Emerging Cloud Index on November 6th. (I’ve updated Slack’s rankings from JSC’s analysis based on new companies reporting and Slack’s updated price, pulling from BVP’s website.)Even among some of the best performing stocks of the past year, Slack shines! Second best gross margin, eighth fastest growth rate, fifth best net dollar retention, and fifteenth best sales efficiency! It’s putting up top quartile numbers, but it’s trading like an average company based on multiples and a bottom quartile company based on performance. This relative performance surprised even me, the biggest of Slack bulls. The narrative around Slack has been “If it can’t grow quickly and can’t generate a profit even during WFH, it’s a dog.” But it has grown faster than almost any SaaS company and has a clear path to profitability! Slack’s currently trading at $25.75 with an Enterprise Value (EV) of $14.1 billion. If it traded at average BVP Emerging Cloud multiples, it would trade 20% higher, at $31.05 and a $17 billion EV. If it traded at top quartile multiples, as its numbers suggest it should, it would trade 75% higher, at $45.10 and a $24.7 billion EV. And if its stock had performed in line with top quartile YTD stock performance, it would be trading at $51.96 and a $28.4 billion EV, 102% higher than it is today. It’s dragged down by three things:* A below average LTM Free Cash Flow Margin and unprofitability, which can be explained by its desire to pump money into S&M and R&D in order to acquire customers who it will retain and use to acquire new customers over time. * Investors fed up with underperformance who have given up on the stock.* A painfully lazy bear narrative that goes something like this: The Bear NarrativeAs much as we like to pretend that markets are fairly efficient, sometimes the market as a whole writes a story about a company and then looks for confirmatory evidence. That’s exactly what’s happening with Slack. Maybe as a punishment for going the Direct Listing route instead of going through a traditional IPO, maybe because most banks are Microsoft Office users, maybe because Slack went public as a money-losing company right around the time that other unprofitable, unloved stocks like Uber and Lyft went public, or maybe because the street decided that it collectively just didn’t like the cut of Slack’s jib, the stock has been beaten down ever since it went public in June 2019. The bear narrative around Slack focuses mainly on Microsoft Teams. The market views Teams, backed by superior distribution, a limitless balance sheet, and the fact that it’s bundled in free with Office365, as an existential threat to Slack’s growth. Each and every time Teams releases new usage numbers, Slack drops. And Teams’ growth has been impressive. From 13 million Daily Active Users (DAUs) in July 2019, Teams recently reported 115 million DAUs in October.Two things are important to keep in mind, though: * Office365, of which Teams is a part, has 258 million paid seats. Teams’ growth is just a function of getting its existing customers (which is a lot of customers) to use another one of its products.* Teams DAUs includes Skype and video conferencing, which are easier to grow quickly than the channel-based communications piece of the product. In fact, Teams highlights its video capabilities ahead of chat on its own website -- it’s there in plain sight, that it’s as much a Zoom competitor as a Slack competitor. But the market doesn’t squabble over those details! Because the narrative around Slack is bearish, the market views anything Slack reports through shit-colored glasses. It believes that Teams is an insurmountable threat, and it’s constantly on the lookout for confirmatory evidence. * When Slack reports Operating Losses, it views Slack as another unprofitable startup versus one investing in sales & marketing and research & development today to acquire customers it will retain forever.  * When Slack reports 49% YoY revenue growth, it compares Slack to Zoom’s 355% growth instead of the rest of the BVP Emerging Cloud Index’s 27% median growth. * When Slack announces net dollar retention of 125% (down from 132% last quarter), it says, “Look, knew it. Slack must be losing customers to Teams!” instead, “Wow, that’s top quartile among emerging cloud companies! Of course it’s down a little, companies had to lay people off because of COVID. It’ll bounce back” To be fair, Slack isn’t helping itself on the Teams narrative. While Butterfield talks about Teams as if it’s a non-issue and says that the company has never lost a customer to Microsoft, Slack brought an antitrust complaint against Microsoft in the EU in July, claiming that “Microsoft has illegally tied its Teams product into its market-dominant Office productivity suite, force installing it for millions, blocking its removal, and hiding the true cost to enterprise customers.” Between July 21st, the day before the complaint, and August 11th, Slack dropped 15%. “We knew Teams was killing you,” the market gloated, “or else why would you have called your daddy?”Of course Teams is a threat. It’s free, it comes pre-installed with Office and auto-opens when users open Office, and Microsoft has gotten its groove back under Satya Nadella. But Mr. Market is dramatically overestimating the threat by missing a few important things with respect to Slack vs. Teams: * They Do Different Things. Teams is more about video than it is about chat. In fact, Teams limits the number of channels and employees that can be in any one workspace to a level that’s lower than most large companies need.* Companies Often Buy Both Slack and Teams. A gain for Teams isn’t necessarily a loss for Slack.Because Slack and Teams do different things, many companies big and small use both Slack and Teams. Ben Thompson said that he uses both, and Butterfield has said that many of Slack’s largest customers use both Slack and Teams. * Slack has Tripled Revenue Since Microsoft Released Teams. Microsoft released Teams in 2017, and Slack has tripled revenue, including strong growth in enterprise customers. This hints at the truth of points one and two.* Microsoft is Converting Its Own Users to Teams. As mentioned above, Teams’ DAUs are less than half of the total paid Office365 users.Data from Pulsar Platform supports that third point. More people talk about Slack more on Twitter than they talk about Microsoft Teams:Despite more DAUs, Slack has more buzz. What’s more interesting, though, is who talks about Slack and Teams. Pulsar is able to look at which types of people talk about each product based on their bios and their interactions on Twitter. Most of the people who talk about Microsoft Teams are Microsoft Loyalists, IT pros, and educators, while the people who talk about Slack are designers, product people, entrepreneurs, young professionals, software engineers, marketers, media pros, and hackers. As a simple rule of thumb: the type of people who use PCs use Teams, and Apple users use Slack. Have you tried using Excel on a Mac? Microsoft is winning its own users. 😴  Slack is winning startups and growth companies. 🚀I could go on and on about why the Teams argument is bullshit, but Butterfield does a great job of picking it apart starting at 28:12 in this interview with the Verge. Give it a listen:Two quotes summarize it well:Or as Regina from Mean Girls’ would put it, “Why are you so obsessed with me?”The market has bought Microsoft’s narrative hook line and sinker, and it’s wrong. There is nothing I like more than finding a bearish narrative that the market tells about a stock and that I think will break over time. * After Facebook IPO’d, the market didn’t think it could figure out mobile. I bought shares at $19 (of course, I’m an idiot and sold at $45). * In March, I wrote that Spotify would break out when it shifted more earshare to podcasts and reversed the narrative that the market told about its structurally poor margins. When it signed Joe Rogan a couple of months later, the stock popped and it hasn’t looked back. * In June, I wrote that Snap was coming out of the trough of disillusionment that it was in because the market didn’t think it could attract older users or monetize. It’s doubled since. Slack is the next big narrative breaker. As its numbers continue to get better, the market will realize that Teams isn’t as big a threat as it thought. And the numbers are going to get much better, thanks to the Compounding Power of Young Users. Ark Invest and The Compounding Power of Young UsersCathie Wood built her fund, ARK Invest, on the belief that disruptive innovation is very inefficiently priced. On Invest Like the Best in 2018, she told Patrick O’Shaughnessy, “If you give us a long enough time frame, we will call ourselves a deep value manager, that’s how undervalued these innovation platforms are right now.”  Why should you care? Because Cathie Wood has beaten the pants off of Mr. Market over the past five years. ARK’s Innovation ETF and Next Generation Internet ETF have outperformed the NASDAQ by 3x and the S&P 500 by 5.5x over the past five years. And while Mr. Market hates Slack, Cathie Wood loves it. Slack is the 9th largest holding in ARK’s flagship Innovation ETF ($388 million), the 11th largest in its Next Generation ETF ($97 million), and ARK even owns a little bit in its Fintech Innovation ETF ($13 million). One of the world’s best performing funds over the past five years owns nearly half a billion dollars worth of Slack. So what does Cathie Wood understand that Mr. Market doesn’t? As O’Shaughnessy summarized in the interview, “Markets just tend to do a poor job extrapolating exponentials, they’re not good at pricing in exponential growth over a multi-year period.” Wood put it even more succinctly: “The power of compounding over time is massive.” This is what makes Slack special and why I’m so bullish: Slack is a bet on the tech industry continuing to grow and compound over time. It generates revenue on a per seat basis, which means that its best play is to acquire customers that are going to add more seats over time. To that end, Weng of Revealera, which provides alternative data for job openings and tech trends,  put together an incredible analysis that confirms what I intuitively felt and what Pulsar picked up on: growing companies use Slack. Weng highlighted three particularly relevant stats: * Slack Users Are Twice as Engineering Focused. Among companies that use Slack, 20% of job openings are for engineering roles. Only 11% of Teams companies open roles are for engineers. As I highlighted in the SkillMagic memo, according to LinkedIn, the five fastest-growing jobs in the world are engineering related. * The Biggest Startups Use Slack. Not only do startups use Slack generally, the biggest, most valuable startups in the world do. 65 of the 100 private companies by valuation according to CB Insights use Slack, including 8 of the top 10. * Slack is a Hireable Skill. Slack is mentioned in twice as many job openings as Teams, and the gap is widening. As the world moves remote, Slack is more than a tool, it’s a skill companies are hiring for.Check out some of the companies that use Slack:The only reason there aren’t more impressive logos in that image is because I had to stop. Every time I searched for a company, it hit, and then I saw two more multi-billion companies around the one I searched for. It even has MIT and Stanford so they get the next generation of unicorn founders when they’re young. In Q2 alone, it won Stripe, Shopify, Peloton, Unity, DoorDash, and Wayfair. Add in its June deal with Amazon, and it’s hard to imagine a portfolio better positioned to grow over the next decade. In fact, Slack’s roster of customers really is like owning a portfolio: as they grow, Slack grows with them, with no additional acquisition marketing spend. This is the Compounding Power of Young Users, one of my favorite ways to think about companies like Snap and Stripe who take the longest view in the room. Stealing customers from Microsoft would be great, but it’s not necessary. Slack just needs to acquire young and fast-growing users and make sure they stick around. Stickiness, Net Dollar Retention, and Free Cash FlowRiding the Compounding Power of Young Users is a two-step loop:* Acquire Young, Fast-Growing Users. As shown above, Slack destroys Teams here. * Retain Those Users and Grow With Them. This is all about stickiness and Net Dollar Retention.Net Dollar Retention refers to how much existing customers spend over time, after accounting for churn. It is the most important metric to look at when considering a company’s ability to compound over time, and Slack is world-class. According to John Street Capital, the top quartile of the BVP Emerging Cloud Index averages 121% net dollar retention. Slack, in its worst Net Dollar Retention quarter since going public, had 125% net dollar retention, which means that the group of customers that Slack had in Q2 last year spent 25% more on Slack this year. For Slack, net dollar retention over 100% comes three ways: * Customers add more of their existing employees to Slack. * Customers grow, hire new employees, and add them to Slack.* Customers upgrade from Standard ($6.67/seat/mo) to Pro ($12.50/seat/mo) or Enterprise (>$12.50/seat/mo). As I covered in While Zoom Zooms, Slack Digs Moats:Fader and McCarthy inferred (Part I and Part II) that only 10% of Slack customers churn within the first year, and that Slack retains a shocking 80% of its paying customers over 5 years. For comparison, according to Profitwell, the median monthly churn rate for SaaS businesses is 5-10%. Proportionally, most SaaS businesses lose as many customers in a month as Slack loses in a year.For 100 companies that are using Slack today, 80 will still be using Slack in year five, and those 80 will spend 2.4x (100*1.25^4) as much as the original 100 did in year one. That chart says more than meets the eye. On the surface, it shows that Slack will grow its revenue from its existing customers over time. One layer down, it shows why Slack is going to be a Free Cash Flow machine. Currently, despite having the second best gross margins of any Emerging Cloud company, it has slightly negative Free Cash Flow (FCF), -1% over the last twelve months. It’s one of the bear’s biggest knocks, particularly when compared with Zoom and its 27% FCF margin. But look more closely, and see its Net Dollar Retention working its magic: As revenue has grown, SG&A and R&D have stayed largely flat. That’s called operating leverage. And it means that over the past year, Slack went from an Operating Loss of $363.7 million and FCF of -$7.9 million in Q2 2020 to an Operating Loss of $68.6 million and positive FCF of $10.8 million in Q2 2021, the most recent quarter.Put another way, unless it makes a conscious decision to spend more on Sales & Marketing or R&D in the future, the gains from compounding revenue growth are going to drop straight to the bottom line. If it keeps up its revenue growth and gross margins while keeping SG&A and R&D relatively flat, in five years, it will be generating over $4 billion in profit on $5 billion in revenue. In another five years, that’s $35 billion in profit on $41 billion in revenue. More conservatively, if it grows revenue by a more modest 30%, keeps gross margins stable, and doubles spend on SG&A and R&D, it will generate $2.7 billion of profit on $3.7 billion in revenue in five years and $8.7 billion of profit on $10.6 billion of revenue in a decade. At the BVP Index average ~20x revenue multiple, that means an EV of $70-100 billion in five years and $200-800 billion in a decade. Compounding comes at you fast.That’s the magic of compounding, and it’s enabled by the two things Slack does best: acquiring fast-growing users and getting them to stick around. Getting that for $14 billion today seems like a steal. The biggest threat to that growth isn’t Microsoft’s dinosaur ass. It’s Slack’s inability to continue feeding the next generation of young, fast-growing companies into the loop.  The Real Bear CaseWhile I don’t take Wall Street’s bearishness on Slack very seriously because it’s based on a lazy thesis followed up with confirmation bias, I take Kevin Kwok very seriously. In The Arc of Collaboration, Kwok argued that instead of becoming the central nervous system for collaborative productivity, Slack is actually the “911 for whatever isn’t possible natively in a company’s productivity apps.” By that, he means that as more software like Figma, GitHub, Jam, and Salesforce allows people to communicate and collaborate directly within the app they’re using to get work done, Slack is a mere backup plan. If a designer and a PM can chat within Figma or a PM and an engineer can collaborate on the website within Jam, Slack becomes the place where people go when their regular processes break. In that world, it’s not the company’s central nervous system, and loses its crucial spot in the value chain. There’s still room for a “meta-coordination layer” in a world in which collaborative productivity tools eat each piece of the work companies do, but Kwok doesn’t think it’s Slack, at least in its current form. “If you have to switch out of a product to use Slack,” he argues, “then it is not the layer tying them altogether. Instead, the layer needs to exist a layer above.”Kwok used Discord, which is a meta-layer of text, audio, and video chat that exists a layer above all games, as the best analog. At the time he wrote the piece in August 2019, Discord was purely gaming focused. But during quarantine, Discord has repositioned itself as a more general “place to talk.” Discord isn’t yet positioning itself as a workplace collaboration tool, and there are all sorts of integrations and gnarly compliance work it would need to do to get there, but Discord, or something like it, is a bigger threat to Slack than Microsoft Teams is. If Slack’s ability to grow into its potential is predicated on its ability to attract the youngest, fastest-growing users and grow with them, then Discord, which targets younger users than Slack does, could cut off the loop that fuels Slack’s growth. Indeed, according to Pulsar, the entrepreneurs and designers who are Slack’s most vocal users are beginning to talk about Discord, too. So what should Slack do? The easy answer would be, “buy it,” but at the $3.5 billion valuation it received in June and Slack’s depressed stock price, it would have to spend over a quarter of the company to acquire Discord. Plus, Butterfield has said that the two companies do very different things, and don’t want to do what the other does. And yet, buying Discord might be the smartest move Slack can make to protect its future and grow the customer base it’s able to serve. But that’s a topic for a different essay. For now, Slack needs to take Discord seriously and steal its tricks in order to truly become the meta-layer that enhances peoples’ ability to do their best work instead of the distraction that it can often become. It should do three things to improve its customers’ ability to do work and dig a deeper moat to prepare for the inevitability that Discord or a similar work-focused product comes after it.First, it should consider opening up its API to power the next wave of collaborative productivity tools. Call is Slack-as-a-Service (“SlaaS”). Imagine Airtable or Webflow with Slack voice calls and chat built in, for example. Teams could chat directly within the software while working in it, and even employees who aren’t in the software could participate in the conversation from inside of the Slack app, just like Discord users can be a part of the conversation with their friends whether or not they’re playing the game.Extending its position as the hub for thousands of integrations, it might even serve as the pipe that allows products that integrate with Slack to integrate with the products that embed Slack-as-a-Service. So if Loom integrates with Slack, and Airtable uses Slack-as-a-Service, Loom could integrate with Airtable via Slack.  Second, like Tencent, it should double down on leveraging its position in the value chain to identify the workplace collaboration and productivity tools that its customers love the most, and provide capital via an expanded Slack Fund and traffic via its app directory and integrations. Finally, it should double and triple down on Slack Connect to acquire more customers more quickly and efficiently, and create network effects that new entrants can’t compete with. If Slack can serve as both the connective tissue among companies, and between companies and the products that they use, all within their existing workflows, it will be in a position to compound its advantage for years to come.(Update: Butterfield went on 20 Minute VC with Harry Stebbings this morning (!!) and said that Slack is working on Huddles, always-on audio channels (like Discord!), Stories (like Instagram), and allowing companies to host code within Slack. He said, “Slack five years from now will function much more like the lightweight fabric for systems integration that we’ve always believed it can be on the platform side, and will come to encompass most of the people you communicate most frequently with even if they’re outside of your organization, because that’s something that’s exploding right now.” Slack is executing on points one and three, smart.)Picking Up the SlackLook, I’ve been wrong on Slack so far. I have no idea if I’m right now, and if I am right, I don’t know if that will express itself in Slack’s stock price in the next week, the next month, or even the next year. Compounding is slow before it gets fast. What’s worse, even though Slack has not benefited from the WFH stock rally to the same extent that Zoom or most other cloud-based SaaS companies have, it’s still vulnerable to drop with those stocks on any news about a potential vaccine or reopening. But the fundamentals are there. Slack doesn’t care if you’re working from home, working from an office, or doing some combination of both. Unlike Zoom, Slack is just as useful in any of those scenarios. Slack’s numbers are good, improving, and underappreciated. The Teams narrative is loud, overdone, and puts shit-colored glasses on all of the good things that Slack is doing. I’m taking every opportunity I can to pick up more Slack, because once the narrative shifts, I think it’s going to take its rightful place amongst the most valuable SaaS companies in the world. If you’ve read this far, here’s a bonus: I teamed up with Switchboard to give $500 to charity:water and get you access to an incredible event.Switchboard makes it possible to learn with the world’s leading experts while doing good.They are hosting a closed door chat with Ryan Graves on Giving Tuesday (12/1) where attendee proceeds support Ryan’s charity of choice, charity:water, a non-profit that directly funds water projects that impact health, education, and women empowerment outcomes. To celebrate Giving Tuesday, Switchboard is matching the first $5,000 in raised funding.I’m covering the 10 tickets for Not Boring readers. Mention NotBoring in the Q&A submission form, and if you’re one of the first 10, your $50 ticket is on me. Social trends data was brought to you by Pulsar, the Official Audience Intelligence Sponsor of Not Boring. Big thanks to Marc and the Pulsar team for helping pull signal from the noise.Thanks to Dan and Brett for your feedback and input.Thanks for listening, and see you Thursday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 505 newly Not Boring people who have joined us since the last email! If you’re reading this but haven’t subscribed, join 19,695 smart, curious folks by subscribing here!🎧  For a more auditory trip, listen here or on Spotify.Hi friends 👋,Happy Monday! Damn it feels good to be an American. Speaking of feeling good, today’s essay is on one of the least boring trends I’ve ever written about. Mental health disorders are an epidemic, and we have been fighting it with antiquated and suboptimal tools. The solution might come from an unexpected technology that we’ve had at our disposal for decades. Let me make an important caveat upfront: I am not a doctor or a registered adviser. This is not financial or medical advice. Don’t go out and take anything or buy anything without a prescription or doing your own research. But you should know about the growing research around psychedelics’ efficacy in treating mental health disorders and the companies bringing treatments to market. But first, a word from our sponsor. Not Boring’s very own growth guru Tommy Gamba has launched Stacker Labs, a turn-key content marketing and SEO service for startups....If you’re an avid reader, you know how much I hate Google and Facebook taking nearly 40% of every dollar raised in advertising and customer acquisition costs. Stacker Labs wants to fix that problem by helping companies win in organic search. Stacker develops newsworthy, data-driven stories on your behalf and then then syndicates them through partnerships with hundreds of top tier news outlets, including SFGate, Chicago Tribune, NY Daily News, and Newsweek. The result is your branded stories getting hundreds of high quality/SEO-friendly pickups, valuable reach into new audiences, and that sweet, recurring organic search traffic.For Not Boring readers, Stacker Labs is extending 20% off content campaigns in Q4 and guaranteeing a minimum of 50 pickups for each story. For those of you with SEO and/or content marketing on the roadmap, Stacker Labs is a no brainer to supercharge your growth.Now let’s get to it… The Magic of MushroomsLet’s Take a TripWhat do you think of when you think of psychedelics?Maybe you think of hippies in the 1960s. Maybe you think of Phish concerts. Maybe you think about that one time in college. Maybe you just think: those are drugs, they’re illegal, they’re dangerous, and they’re bad. Just Say No.To steal a phrase from Michael Pollan’s bestselling 2018 book on the benefits of psychedelics, I want you to Change Your Mind. By the end of this essay, you’ll understand why we underestimate psychedelics, the promise they hold in solving our biggest mental health challenges, and the business model behind the first public psychedelics company in the US, COMPASS Pathways.It’s easy to get excited about psychedelics. MDMA combined with therapy looks like it may cure PTSD in a large number of patients. Psilocybin with therapy is showing promise in fighting depression. And unlike traditional medication, psychedelics can cure while creating meaning. In a 2006 Johns Hopkins study, 67% of participants who took psilocybin rated the experience either the most meaningful or among the top five most meaningful in their lives! As Matthew Johnson, the Associate Director of the Johns Hopkins Center for Psychedelic and Consciousness Research wrote, “Psychedelics are psychoactive substances that historically have attracted exaggerations of benefits as well as alarmism.” So let’s try to avoid exaggerations, and instead take a trip together to soberly explore:* The Psychedelic Renaissance. After fifty years, psychedelics are going mainstream again.* The War On Drugs. Like the Food Pyramid, but Drugs. * Mushrooms’ Magic. Although there are many promising psychedelic compounds, we’ll focus mainly on psilocybin given its potential wide-ranging benefits. * COMPASS’ Pathway. The story behind the first public psychedelic company. * COMPASS’ Business Model. COMPASS is like a dating app -- it’s product may be so good that it’s bad for business. But analysts are bullish, and so am I. * Irrational Exuberance About Psychedelics’ Future. Can they make the world a more harmonious place? Can they unleash creativity? Can they cure everything? The Psychedelic RenaissanceBecause of long-held negative or recreational associations, most people are unaware that psychedelics are the most promising treatment for a wide range of mental health issues -- from depression to alcoholism to anorexia -- that we’ve ever seen. The psychedelic renaissance couldn’t have come at a better time. The world desperately needs innovative solutions to mental health disorders. The worldwide numbers are staggering. And those numbers are pre-COVID. According to a JAMA Network Survey, depressive symptoms have tripled during the pandemic.The total direct and indirect costs of the mental health epidemic are expected to reach $6 trillion by 2030, up from $2.5 trillion in 2010, according to the World Economic Forum. The Lancet Commission estimates that number to be as high as $16 trillion when you include the loss of productivity, and spending on social welfare, education, and law and order. Despite the huge need, the last real innovation in the fight against mental illness was the release of Prozac in 1988.After fifty years in the dark, though, psychedelics are once again getting the chance to shine. Led by public figures like Michael Pollan, Tim Ferriss, and even Joe Rogan, and leading institutions like Johns Hopkins, NYU, Berkeley, and Imperial College London, therapeutic psychedelics are going mainstream again: * On election night, Oregon voted to legalize psilocybin for mental health treatment in supervised settings. Washington, DC voted to decriminalize it. * The FDA granted Breakthrough Therapy Designation, which they grant to therapies that have shown great promise and clinically significant improvement over available therapies, to three trials using psychedelics to treat mental health indications, one with MDMA and two with psilocybin, the active ingredient in magic mushrooms. * Last week, Johns Hopkins released a new study that showed that treatment with psilocybin and supportive psychotherapy produced rapid and large reductions in depressive symptoms in adults with major depression, with a magnitude of effect four times larger than antidepressants’.At this point, you might be thinking: dope. This sounds amazing. Give people shrooms! But this isn’t a healthcare newsletter. Not Boring isn’t Out of Pocket. Why are you telling me this?  In September, COMPASS Pathways (NASDAQ: CMPS) IPO’d and became the first public company with a psilocybin-based product. ATAI Life Sciences, a “biotech platform to heal mental health disorders” with a wide range of psychedelic-based therapies, recently raised a round from investors like Peter Thiel and Michael Novogratz and is expected to go public soon. It’s tempting to group psychedelics companies like COMPASS in with the “green wave” of cannabis companies that have taken the market by storm starting with Tilray’s IPO in July 2018. But psychedelics companies like COMPASS are less like cannabis companies, which have mainly focused on recreational use, and more like biotech stocks focused on the hardest-to-tackle mental health indications. ATAI’s Colin Keeler told me:We’re seeing increasing acceptance across investor classes - traditional biotech investors, Silicon Valley, family offices. The biggest names and the best analysts in the space are approaching psychedelics with real sincerity, and the government to a large extent is approaching them the same way, because mental health disorders have such a large unmet need.The research reports back him up. Citron Research, best known as an activist short fund, gushed uncharacteristically when it called COMPASS, “the most compelling IPO of the year whose significance to humanity has the potential to be a generational stock.”Here’s the crazy thing. Most hot IPOs feature companies whose products weren’t even imaginable a decade or two ago. We’ve been studying psilocybin’s benefits for 62 years. What the hell took us so long? The War On DrugsIn this time of vicious political division in the United States, I think there’s one thing that all Americans can agree on: Richard Nixon was a real dick. In addition to being the Watergate guy, in 1971, Nixon declared a War on Drugs that has, among other evils, cost the United States over $1 trillion, disproportionately targeted Black people, and led to an arrest for drug possession every 25 seconds.The War on Drugs cost millions of American lives and prevented tens of millions more from their Constitutional right to the pursuit of happiness. It’s the reason that we lump all Schedule One drugs together as “bad and dangerous” despite their vastly different profiles, while doctors happily write prescriptions for the opioids that kill 128 Americans every day. So why’d he do it? In 1955, a New York banker named R. Gordon Wasson went to Mexico in search of a god-like mushroom, and detailed his experiences in a 1957 Life Magazine article called “Seeking the Magic Mushroom,” bringing the experience into the western consciousness. He also brought psilocybin into the lab. He sent mushroom samples to Albert Hofmann, a Sandoz scientist who had previously discovered LSD, and in 1958, Hofmann isolated the chemical structure of the active compound. By 1960, Sandoz released Psilocybin pills under the name Indocybin. With Indocybin, scientists and psychologists began doing real research on psychedelics’ potential benefits. According to the Beckley Foundation, the number of scientific studies published on psilocybin grew from five in 1958 to forty in 1968. The American Psychologists Association focused on LSD research, specifically a paper titled Personality change associated with psychedelic (LSD) therapy at its 1964 meeting. But psychedelics jumped from the lab and into the counterculture. In 1960, Harvard clinical psychologist Timothy Leary started the Harvard Psilocybin Project with Richard Alpert (who would later become Ram Dass) using psilocybin they ordered from Sandoz. The Project undertook some legitimate research, like the Marsh Chapel Experiment in which divinity students were administered the drug in a chapel to determine whether it could facilitate profound religious states (ten out of ten self-reported that it did), but largely devolved into the epicenter of recreational psilocybin and LSD use.Harvard shut down the project in 1962, but Leary continued his work spreading the word about mushrooms and LSD. In 1966, he famously told America’s youth to “Turn on, tune in, drop out.” Despite pleading from serious researchers who feared that Leary was going to “wreak havoc on all of us doing LSD work all over the nation,” Leary pushed on, like the friend who gets too high and gets everyone in trouble. According to Pollan, Leary said things like “LSD is more frightening than the bomb,” and “The kids who take LSD aren’t going to fight your wars. They’re not going to join your corporations.” The FDA didn’t like the sound of that, ordering in 1966 that researchers halt all work with psychedelics. Neither did Tricky Dick. In 1970, in large part to slow down the anti-war counterculture movement, the Nixon government passed the Controlled Substances Act, which classified psilocybin and LSD as Schedule One drugs, which have no medical use and a high potential for abuse. In 1971 Richard Nixon declared the War on Drugs and labeled Leary “the most dangerous man in America.”When Harper’s writer Dan Baum tracked Nixon’s domestic policy chief John Ehrlichman down in 1994, Erlichman admitted that the War on Drugs was an indirect way to target the two enemies of the Nixon administration: the antiwar movement and Black people. “Did we know we were lying about drugs? Of course we did.” In a total narc move, the US also pushed other countries to follow its drug scheduling guidelines. The 1971 UN treaty, the Convention on Psychotropic Substances, largely adopted the US scheduling, grouping psilocybin with drugs like heroin and crack cocaine and effectively halting research on its benefits worldwide. Despite being built atop a lie, the War on Drugs and its associated propaganda worked for decades. It’s why we’re just getting back to psychedelics now. When I was in 7th grade, we had to read a book. I forget what it was called or what it was about; the only thing I remember is that the main character’s older brother did acid once, lived in a flop house, and had frequent flashbacks in which spiders crawled all over his body for years.It surprised me to find out many years and “no acid for me, thanks!”s later that LSD and mushrooms are the two safest drugs out there on the active/lethal dose and dependence potential scale. All weekend, I was drinking beers and coffee; turns out I would have been much safer tripping. The War on Drugs was like the Food Pyramid on crack, tricking generations of Americans into making unhealthy decisions despite the best intentions. Nixon started it, and Raegan picked up where he left off, waging an all-out media offensive. In 1987, the Partnership for a Drug-Free America dropped the classic “This is Your Brain on Drugs” commercial. Lied to again! A 2014 Proceedings of the Royal Interface study actually looked at the brain on drugs, psilocybin specifically, and discovered that this is your brain on drugs:Far from killing brain cells, psilocybin rewires the brain and forms rich new connections, at least temporarily, between parts of the brains that don’t normally speak to each other. That’s why people report seeing music or tasting colors when they’re tripping. The bad press and propaganda surrounding mushrooms, largely a remnant of the culture wars of the early 1970s and late 1980s, obfuscates their incredible therapeutic promise. Mushrooms’ MagicOver the past decade, researchers have begun studying psilocybin again. And the findings, although early, have been incredibly promising for a variety of mental health indications. Early research focused on patients suffering from depression due to terminal cancer:* At UCLA in 2011, Grob et. al showed that psilocybin reduced depression and anxiety for at least six months in twelve patients with anxiety and acute stress due to advanced-stage cancer. * At NYU in 2016, Ross et. al showed a “Rapid and sustained symptom reduction following psilocybin treatment for anxiety and depression in patients with life-threatening cancer” from psilocybin treatment. * At Johns Hopkins in 2016, Griffiths et. al found that “Psilocybin produces substantial and sustained decreases in depression and anxiety in patients with life-threatening cancer.”Dr. Stephen Ross of NYU Langone (where our son was born!) said of his study:It was very surprising and very moving to see somebody terminally ill with cancer feeling like their life is over, scared out of their mind, disconnected from family and friends and their spirituality, to suddenly just be out of that terrible place and feeling so much better.More recent studies have focused on otherwise healthy patients suffering from MDD or TRD:* At Imperial College London, Carhart-Harris et al. in 2016 and 2018 showed a reduction of over 50% in the Beck Depression Inventory scores of patients with TRD. * Just last week, at Johns Hopkins, Griffiths et al. showed that two doses of psilocybin with psychotherapy produced “rapid and large reductions in depressive symptoms, with most participants showing improvement and half of study participants achieving remission through the four-week follow-up.”  Alan Davis, a researcher at Hopkins, said of the study, which was supported by Tim Ferriss, Blake Mycoskie (TOMS), Dave Morin (Facebook, Path), and Matt Mullenweg (WordPress): The magnitude of the effect we saw was about four times larger than what clinical trials have shown for traditional antidepressants on the market. Because most other depression treatments take weeks or months to work and may have undesirable effects, this could be a game changer if these findings hold up.Taken together, the studies point to rapid and durable reduction in symptoms related to depression. Improvements in many studies have persisted six months to a year after the treatment, with research underway on longer-term effects. That means that psilocybin treatment with therapy may be as close to a one-shot “cure” for depression as we have. The results are particularly promising because they solve such a large unmet need. Hundreds of millions of people globally suffer from depression and other mental health disorders, and the current medications are the same ones patients have been using since I was born. As Davis pointed out, the pharmacological solutions available today, selective serotonin reuptake inhibitors (SSRIs) like Prozac and Zoloft and lesser-known serotonin–norepinephrine reuptake inhibitors (SNRIs) are given chronically (meaning you need to take it forever once you start) and have chronic side effects like loss of libido, headaches, nausea, and insomnia. Mental health is a huge, underserved market and research suggests that psilocybin could crack it. Sounds great! If only there was a way to invest… Meet COMPASS Pathways.COMPASS’ PathwayThe COMPASS Pathways story starts like so many other startups’ lore: entrepreneurs experience a problem, can’t find a good solution, and set out to build it themselves. In this particular story, George Goldsmith and Ekaterina Malievskaia’s son developed severe depression shortly after going to college in 2011, and his parents wanted to help. The couple were particularly well-suited to solve a health problem. Goldsmith was a serial entrepreneur and founder of Tapestry, which facilitated drug developers and regulators working together to speed up approvals, and Malievskaia was a doctor who worked in internal medicine and global health. And yet, despite their backgrounds, they couldn’t find a treatment that helped their son. So they dug into the research. One morning in February 2013, Goldsmith told BioBoss, Malievskaia came to him with a discovery: “I just found an article on this medicine called psilocybin. It’s really part of magic mushrooms. You were alive in the ‘60s and ‘70s, what do you know about it?”That led the two down a rabbit hole, they launched a non-profit, and then converted it into a for-profit company in order to better bring a psilocybin-based depression treatment to market. But hold up. Also like many other startups’ founding stories, COMPASS’ seems to be generously edited to fit the current narrative. A well-researched 2018 Quartz article by Olivia Goldhill claims that Goldsmith and Malievskaia originally told researchers and psychologists working on their non-profit, C.O.M.P.A.S.S. that they were focused on using psilocybin to treat end-of-life anxiety for terminally ill patients. Through the non-profit, they were able to recruit researchers to help the cause without formal contracts or payment. In June 2016, they created the for-profit company, COMPASS Pathways, in London, and began telling the story about their son’s depression when the company announced itself in a September 2017 article in the Financial Times. They also announced a £4 million seed round from Fortress’ Michael Novogratz and Christian Angermayer, who would launch ATAI Life Sciences (which owns ~25% of COMPASS) the following year.While the conflicting backstories and potentially shady practices are cause for concern, COMPASS seems to be executing tremendously well as a for-profit. In October 2018, COMPASS raised a £25 million Series A. Based on promising early research, that same month, the FDA granted COMPASS Breakthrough Therapy Designation (“BTD”) for a “randomised controlled phase IIb study of psilocybin therapy in 216 patients with treatment-resistant depression in 20 sites across Europe and North America.” The BTD is significant because it can shorten the process of drug development and review by about 30%, driving down costs. The BTD is one of three that the FDA has granted to psychedelic-based treatments -- it granted the other two to non-profits, one to MAPS for its trial on MDMA to treat PTSD and one to the Usona Institute for its trial on psilocybin to treat major depressive disorder (MDD). The FDA designation is emblematic of COMPASS’ approach to working closely with regulators, payers (what healthcare calls the entities that actually pay for treatments, like insurance companies and governments), and leading research institutions. Its Scientific Advisory Board includes the former Director of the National Institute for Mental Health along with researchers from Harvard, Stanford, Duke, Johns Hopkins, and Imperial College London. Sure, its first treatment is psychedelic-based, but it wants you (and regulators) to know that it’s legit. Patented legit. One of the concerns about the business model of psilocybin-based therapeutics is that, since mushrooms grow naturally, it’s hard to protect IP. But you can’t just prescribe ‘shrooms, and COMPASS developed its own synthetic psilocybin formula, COMP360, to best-in-class Good Manufacturing Practices standards. Because it created a controlled formulation, it was able to apply for a patent on COMP360 in a therapy protocol for patients with TRD, which the USPTO granted in December 2019. COMPASS is still in Phase IIb trials, but the company is moving forward on the financing side. In April 2020, it raised an $80 million Series B from investors ranging from ATAI Life to Tinder founder Justin Mateen to healthcare fund Soleus Capital to contrarian venture capitalists Founders Fund. COMPASS became the first publicly traded psychedelic drug stock when it went public on September 18th, 2020. It raised $127.5 million in order to fund research and clinical trials, and to continue developing digital technologies to pair with its therapies. The market was high on the offering, sending shares soaring 23% on opening day, from $23.40 to $29. As of Friday afternoon, shares were trading at $38.71, up 65%, fueled by strong analyst support, an October 23rd CNBC appearance by Goldsmith (the stock popped 16% before he went on when CNBC announced he was up next), and the election night psilocybin victories in DC and Oregon. COMPASS’ current market cap is $1.35 billion; not bad for a pre-revenue company! But biotech stocks trade differently than most other stocks and make even tech stocks look tame. Biotechs are mainly driven by their progress in clinical trials and the total addressable market. Both bode well for COMPASS:  * Market Size. 100 million people worldwide suffer from TRD, 4 million of whom are in the US. And it has the potential to expand to treat more conditions. * Clinical Trial Progression. Because COMPASS has the BTD from the FDA and the recent Hopkins results at its back, it’s trading as if it’s almost certainly going to pass Phase IIb and move onto Phase III trials. The bigger questions for COMPASS are around its business model. Is its product too good to support a good business? COMPASS’ ChallengesCurrently, COMPASS is in the exciting stage of the treatment development lifecycle in which the majority of its efforts are just focused on proving that it’s safe and it works in treating TRD. If it succeeds in trials, though, it will need to shift from drug development to building a profitable business. The core of COMPASS’ business is offering psilocybin therapy in a three-step process: * Preparation: Therapist and patient get to know each other in a series of preparation sessions to understand the issues the patient faces and to allow the patient to get comfortable with the person who will guide their psilocybin session.* The Psilocybin Session. The patient lies on a bed, takes a psilocybin capsule, and puts on an eye mask and listen to a “specially designed playlist” to help them focus internally. A therapist and assisting therapist are present throughout the 6-8 hour session.* Integration. Patients come back for therapy sessions in the following days to discuss their experience in the psilocybin session and generate insights and ideas to change emotional and behavioral patterns.To ensure a consistent experience, COMPASS will roll out its own clinics. By contrast, MAPS, the non-profit using MDMA to treat PTSD, is focusing on training therapists to use the therapy in their own practices. There are two main, interconnected challenges to this model: * It’s Expensive. COMPASS’ therapy is more than just a pill. It includes many hours of labor in preparation, during the session, and in the integration phase from trained therapists. That gets expensive quickly. Johnson & Johnson has faced reimbursement challenges with its eskatemine therapy, which also requires repeated in-office treatments. * It Works Too Well. Early research suggests that psilocybin therapy can cause remission of depressive symptoms in one to three sessions. Contrast that with SSRIs like Prozac, which patients take (and insurance companies pay for) for the rest of their lives. That means that there’s little recurring revenue, so COMPASS needs to convince the payers to cover all of its costs plus a margin in the first shot. Once it completes trials and takes its product to market, COMPASS becomes like any other company: it needs to lower costs and generate more revenue.To bring down costs, COMPASS is building digital products that will allow it to track and assist in delivering psychological support, effectively using telehealth where permissible to lower costs and better support patients while building more robust data. It’s also testing simultaneous administrations through which it can support six patients at the same time to lower labor costs and improve scalability. The Phase I study demonstrated the feasibility of the simultaneous approach.To convince payers to pay more, COMPASS will need data. One way to think of COMPASS is like a dating app that your parents pay for. Dating apps have huge addressable markets -- everyone wants to find someone -- but a big problem: if the dating app works, two customers find each other, settle down, and never use the dating app ever again. They’re the victim of their own effectiveness! BUT there’s a twist if you’ll allow me to torture the analogy. Imagine that the single people using the apps aren’t the ones paying for them. Their parents are. And in this analogy, the parents are worried that if their kid doesn’t get married, they’ll have to support him or her financially for the rest of his or her life. So the dating apps strike a deal with the parents: you pay us some discounted amount based on what you’d have to pay to support your kid for the rest of his or her life, and we’ll make sure that doesn’t happen. The payers -- insurance companies and governments -- are COMPASS’ patients’ parents here. COMPASS needs to convince them that it will save them a lot of money over time.David Burstein, co-founder of Brain Trust Collective, told me that the best case scenario for COMPASS and other psychedelic-based treatments for non-acute conditions is being able to accurately quantify the direct and indirect costs of poor mental health. Recall that mental health disorders are expected to cause direct and indirect costs of $6-16 trillion by 2030. The payers, governments and insurance companies, will need to foot a large portion of that bill. If COMPASS can prove, with data, that paying for its treatment will lead to lower spend elsewhere, it can justify the high price point. In terms we’re more familiar with, COMPASS would generate a high AOV on first-purchase to make up for the low repurchase rate. Burstein thinks that the most straightforward path to this outcome in the near-term is to quantify the relationship between mental and physical health. It seems obvious on the surface that better mental health leads to lower stress which means less obesity, fewer heart problems, and a reduction in a whole host of physical maladies. But payers don’t pay based on intuition; they pay based on data. COMPASS’ digital tools might help in collecting ongoing patient data that they can use to demonstrate a relationship between improved mental health and lower physical health costs. Goldsmith’s background is in dealing with regulators and payers to bring drugs to market, and he’s bent over backwards to acknowledge the importance of relationships with payers and regulators in interviews. Goldsmith is well-suited to the task and this early in the development process with strong results at his back, he has the time and cards to play it right.The COMPASS Bull CaseAssuming that COMPASS passes its clinical trials, lowers costs, and convinces insurance companies and governments to cover the full therapy, this is one of the most exciting companies on the market. Partially, I’m bullish because the mission is so important and its product so promising. In Software is Eating the Markets, I wrote:Like angel investments in the Bay Area, when you add social and experiential value to other asset classes like stocks, sneakers, and cryptocurrencies, price is divorced from hard math and becomes more emotional. COMPASS fits that thesis. There’s just something cool about owning a piece of a company that could improve peoples’ mental health more effectively than anything that’s come before. All of the other technological innovation -- flying cars, the Metaverse, even life extension -- mean little if people are miserable.Beyond the societal benefit, though, more serious analysts who (theoretically) get paid to ignore the hype and focus on the business are also wildly excited about COMPASS. All six analysts reports I read on the company have a “Buy” or “Outperform” rating on the stock with an average price target of $72, representing 86% upside from Friday’s closing price. Most of these targets assume some probability of around 50% that COMPASS passes its Phase III clinical trials, and expect the company’s peak sales to be between $1 and $2.5 billion. Upside scenarios, in which trials go quickly and smoothly and the safety profile remains clean, go as high as $180, or 365% up from current prices. Bear cases in which they fail trials go as low as $3 or $4. There are five main points to the bull case for COMPASS: * Depression is a Large and Unmet Need. 322 million people suffer from Major Depressive Disorder, 100 million of whom have Treatment Resistant Depression, four million of whom are in the US. At $20k per treatment, that’s a $80 billion TAM in the US alone. Unfortunately, depression is only growing and has spiked during COVID. If COMPASS works for just TRD, it has a lot of room to run. GW Pharmaceuticals, the first FDA-approved cannabis treatment, only treats pediatric epilepsy (~15% as many afflicted as TRD) and it has a $3.6 billion market cap, 3x higher than COMPASS’.* Psilocybin Shows Promise. Research has shown that psilocybin treatment has a large and durable effect on depression, even after just one session. COMPASS itself and independent researchers from leading universities continue to produce strong results. COMPASS’ COMP360 could have a much greater benefit in fewer sessions than J&J’s esketamine treatment, Spravato, which should make reimbursement easier. The FDA’s Breakthrough Treatment Designation should speed up development and lower costs. Remember, in pre-revenue biotech stocks, fast and clean approval is the name of the game.* Relatively Strong Defensibility. While psilocybin itself isn’t patentable, companies will need a synthetic version that complies with Good Manufacturing Practices to go to market via the clinical path. COMPASS’ synthetic version, COMP360, is patent-protected in the US and many countries around the world. Further, its proprietary digital tools, training, and eventual network of physical locations should provide barriers to entry. Generics won’t be able to steal share from COMPASS as easily as they can from other drugs because COMPASS’ therapy involves both the drug and the therapy. * Best People. COMPASS has built a team of employees, advisors, and investors that is the best in the industry. Its founder, George Goldsmith, is not what you’d expect from a psychedelic CEO; his background in working with regulators and payers should help smooth the approval and reimbursements process. COMPASS’ Scientific Advisory Board has representation from all of the leading psilocybin research institutions, giving it a cornered resource. It’s backed by ATAI, Peter Thiel, and strong biotech investors, and has an advantage from being the first company in the space in the public markets. * No Competition from Big Pharma. Because COMPASS breaks big pharma’s model -- it involves expensive in-person treatment and doesn’t need to be prescribed over a long period of time -- none of the major pharmaceutical companies are competing with COMPASS in the space. COMPASS is the best-resourced company in psilocybin, and is currently the only way to invest in the psychedelic trend in the US markets, which should mean increased investor demand. COMPASS is risky. So risky that its F-1 contains 92 pages (p. 14 - 105) of risks including everything from failing clinical trials to currency risks to data leaks from its digital product. It’s an early stage biotech company with added regulatory and public perception risk because its first drug is psychedelic, plus it’s based in the UK, plus that questionable backstory as a non-profit looms, plus it needs to operate a network of physical locations, plus it has non-profit competitors that might try to undercut it on cost, plus plus plus… But unlike many biotech companies, COMPASS’ plan is not to develop one drug and sell it to a major pharmaceutical company. It has a fifty year vision of “accelerating patient access to evidence-based innovation in mental health,” and plans to address more mental health disorders both with COMP360 and new treatments. That means that the risk could be rewarded with uncapped upside.Additional indications for COMPASS’ psilocybin therapy represent the major bull case. Assuming that the company is able to get FDA and international approval for additional indications for which psilocybin has shown promise, including MDD, anxiety, end of life care, eating disorders, pain, substance abuse, epilepsy, OCD, and even Autism and Alzheimer’s, the company’s potential could be orders of magnitude larger than estimates suggest. Irrational Exuberance About Psychedelics’ FutureSee what I just did there? It’s exceedingly hard to research psychedelics and not get incredibly excited about their potential to cure all of our ills. The researchers, companies, and analysts in the space have a professional duty to stay calm and do the science, but as an outsider, it’s fun to explore the possibilities. In the medium-term, once COMPASS has come to market with its treatment for TRD, it should be able to more easily expand into other indications, like the ones I mentioned above. Imagine one treatment that can make a dent in everything from depression to addiction to eating disorders. Personally, nothing scares me more than Alzheimer’s. My grandmother had it, and as I’ve written about before, my biggest fear is that I or the people I love lose our memories. It’s very early, but some researchers believe that psilocybin might even be an effective treatment for Alzheimer’s Disease Dementia.In 2019, Johns Hopkins opened the Center for Psychedelic and Consciousness Research to work on studies using psilocybin to treat Alzheimer’s, as well as smoking cessation, anorexia, alcoholism, and of course, depression. Sixty-two years after Albert Hofmann first synthesized psilocybin in a lab, we’re just getting started. Beyond medical applications, psilocybin and other psychedelics, when used responsibly, have the potential to enhance well peoples’ experiences as well and unleash creativity and innovation that would lead to breakthroughs across fields. Early Silicon Valley engineer and current Salesforce VP Peter Schwartz said, “I have no doubt that Hubbard LSD all of us had taken had a big effect on the birth of Silicon Valley.  Steve Jobs famously called taking LSD “a profound experience, one of the most important things in [his] life.” What does the world look like if hundreds of millions of people held back by depression suddenly rewire their brains and unlock new creativity? If you’ll allow me to get even more hippie, writing this during such a divisive election made me wonder how much less divided we’d be if everyone just underwent a little psilocybin treatment. If we’ve learned anything from Timothy Leary, though, it’s to make sure that the utopian vision doesn’t get in the way of the real medical benefits. Everyone needs to Trust The Process and let COMPASS, ATAI, and the other psychedelics-based mental health companies bring their products to market. Be cool, man. Thanks to Dan for making me look like I know how to write, and to Colin and David for serving as my… guides… through the world of therapeutic psychedelics.Full Disclosure: I own CMPS stock (less than 1% of my portfolio). It’s how I got interested in the company in the first place.Thanks for listening, and see you on Thursday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co