Not Boring by Packy McCormick

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

Welcome to the 577 newly Not Boring people who have joined us since the last email! If you’re reading this but haven’t subscribed, join 19,190 smart, curious folks by subscribing here!Hi friends 👋,Happy Monday! This is, uhh, an important week here in the United States. With nearly 100 million early votes already in, tomorrow is officially Election Day. If you haven’t voted already, let this serve as one of hundreds of reminders you’ll get today across the internet: VOTE. Find the nearest polling place or early voting locations here: Because it’s not a normal week, I’m not going to write a normal post today. I’ll keep it short(er) and sweet and highlight leadership lessons from my favorite piece of writing: former Philadelphia 76ers GM Sam Hinkie’s Resignation Letter.I’m a huge Sixers fan, so I’m biased, but I promise you don’t even need to know what basketball is to appreciate Sam Hinkie, The Process, and the courage to do the hard thing in the face of ridicule. As one former Sixers colleague told SI, Hinkie’s approach “could be applied to a draft or an apartment search or a dating website.”I’ve been wanting to write about the letter for a while, and this week is right for two reasons. First, last week, the Sixers hired former Rockets GM, Daryl Morey, to become their President of Basketball Operations. Morey made waves last year when he tweeted in solidarity with the Hong Kong protestors, but for our purposes, what’s relevant is that Hinkie was Morey’s protege in Houston before he joined the Sixers. As ESPN’s Pablo Torre put it, “The Philadelphia 76ers kind of just hired their ex-wife’s older sister.” With Morey and new coach Doc Rivers, the post-Process era is officially over, and it’s a great time to revisit The Process.Second, tomorrow, the United States is electing a (hopefully new) President. It’s a good time to reflect on what makes a good leader, and Hinkie’s stoicism and peaceful transition out of the Sixers organization is an example that I hope Trump follows. Of course, I abhor Trump because I think he’s morally bankrupt and is willing to destroy Democracy for personal gain. But even if you’re willing to accept his personal flaws, he’s also an inexcusably short-term thinker, constantly trading what’s popular with his supporters today even for what’s in their best interest tomorrow. He’s the opposite of Sam Hinkie. No complex organization can survive a leader incapable of recognizing the long-term implications of their actions, including the United States. Vote.Today’s Not Boring is brought to you by… MainStreet is free money for startups. You sign up and plug in your payroll, MainStreet finds tax credits and incentives that apply to your business, and then they send you money now. I wrote about MainStreet in September, and maybe you didn’t believe me then. I get it. But since then, MainStreet has found over $1 million for Not Boring readers. That’s $1 million of government money in Not Boring companies’ pockets — an average of $50k — for like 20 minutes of work each.If you run or work for a US business that does anything technical, you need to check out how much money MainStreet can send you today. You don’t owe them anything unless you get paid.Now let’s get to it. Trust The ProcessFor 1,062 painful and glorious days, between May 10, 2013 and April 6, 2016, my hometown, Philadelphia, transformed. Known as the type of people who booed Santa Claus, Philly fans started talking about such highbrow concepts as undervalued assets, probabilities, and compounding. Always the heart of pro sports, Philly became the brain.The reason? Sam Hinkie and The Process.In Two Ways To Predict the Future, I compared two different types of leaders: Worldbuilders and Shotcallers. Shotcallers attack big, obvious markets and use brute force and big budgets to win. Shotcallers are like athletes -- Joe Naimath guaranteed a Super Bowl victory, Babe Ruth literally called his shot, and the Yankees spend their way into contention every year. In the business world, Quibi was a Shotcaller. It thought it could use a $1.75 billion war chest to storm in and own mobile video. Worldbuilders see the way the world should be in the future, lay out a clear vision and unintuitive plan to get there, and patiently execute for years or decades to achieve it, often in the face of vociferous criticism. Jeff Bezos, Elon Musk, Carta’s Henry Ward, and Stripe’s Collison Brothers are Worldbuilders. Hinkie is a Worldbuilder. Hinkie’s Process, his three year term as the Sixers’ GM, is textbook Worldbuilding. He had a vision for an NBA Championship in Philadelphia, charted a probabilistic path to get there, and then did the unconventional, criticism-attracting things required to make it happen. More impressively, he was a Worldbuilder in a league full of Shotcallers. Tech CEOs are supposed to be crazy and future-focused; NBA GMs are supposed to win now. If Hinkie’s Process is textbook Worldbuilding, his Resignation Letter is the Worldbuilding Textbook. It’s a rare glimpse into the thinking behind a genius leader’s strategy mid-stream, at a moment in time in which The Process was ongoing and the outcome still to be determined, but when Hinkie had no NDA to honor (the letter was supposed to be private) and no fucks to give. The letter doesn’t seem like it was written by a sports guy. It’s more like a Jeff Bezos or Warren Buffett letter, if Bezos and Buffett retired and no longer had any trade secrets to protect. The lessons in it are as applicable to investing and company building as they are to building an NBA contender. That makes sense. Sam Hinkie isn’t like most sports guys. Who is Sam Hinkie? Sam Hinkie sits at the center of my personal interest Venn Diagram: Philly sports, tech, and investing. Hinkie’s path isn’t like most NBA GMs’. He didn’t play pro ball, or even college. He didn’t work his way up through the ranks. He wasn’t a traditional “basketball guy.” His path looked more like an investor’s, a skillset he brought to bear on a league full of basketball guys.After graduating from the University of Oklahoma in Y2K, Hinkie spent two years consulting at Bain and another in private equity before getting his MBA at Stanford and heading to the Houston Rockets. There, he served as Special Assistant to the GM, Daryl Morey, the founder of the MIT Sloan Sports Analytics Conference that is the heartbeat of the advanced metrics movement. Morey and Hinkie built a culture and strategy around using statistics and analytical thinking in a league in which most decisions were made based on “eye tests” by “basketball guys.” Hinkie took his talents to the Philadelphia 76ers in 2013, where he undertook one of the most ambitious experiments in NBA history: The Process. When the Sixers hired Hinkie, it turned rooting for the Sixers from an exercise in futility, frustration, and boos into a quasi-intellectual pursuit. In the eyes of the fans, Hinkie transformed from a stats guy to a cult hero. Hinkie is a larger-than-life legend among a certain type of Sixers fan (seriously, read this Ringer piece or listen to an episode of The Rights to Ricky Sanchez to understand) who “got it” before anyone else. Any time we landed a high draft pick, or won a game, or advanced in the playoffs, that group shouted, “We were right,” proud that we could understand the long game when no one else could. The league and Sixers ownership, on the other hand, did not get it. Fed up with losing, after 2.91 years in Philly, they pushed Hinkie out. But people in other fields did; he’s crossed over seamlessly into the world of tech and investing, where he now runs a venture capital firm.I remember where I was when I knew he’d crossed over: walking across the Manhattan Bridge on my way home from work on a sunny May day, smiling as Hinkie dropped bombs on Invest Like the Best. It felt like my worlds colliding. Investors appreciate our guy, too. We were right. On Friday, after the Sixers hired Hinkie’s friend and former boss Daryl Morey, Hinkie did a rare interview, with Pablo Torre from ESPN: Worlds collided again. Startup people appreciate our guy, too. We were right. Lux Capital co-founder Josh Wolfe tweeted, “Trust the podcast. Trust the process.” Ludlow Ventures’ Blake Robbins tweeted that Hinkie is by far one of the smartest and most genuine people that he’s ever met, and said that “there is no one better at identifying (and betting on) young talent.” It’s that skill, along with a freakishly analytical mind and a humble courage, that translates so well from sports to tech and investing. Now, he’s putting those skills to the test in a new arena. In April, he raised $50 million for a new venture fund called Eighty-Seven Capital, which he will manage while continuing to teach courses on Negotiation and Sports Business Management at Stanford GSB. Hinkie’s approach translates across industries, from sports to tech to investing, and beyond. His tenure with the Sixers and the Resignation Letter he wrote to end it are chock full of lessons for anyone operating or investing in a competitive environment with limited resources. Take the long view, differentiate, and, of course, Trust the Process. The ProcessWhen Sam Hinkie arrived in Philadelphia, the Sixers were the worst thing an NBA team could be: mediocre. They finished the 2012-2013 NBA season with 34 wins and 48 losses. Even worse, the team had a barren roster and no hope. As Sam Hinkie told ownership, reflecting back three years later, “Your crops had been eaten.”The Sixers’ owners, private equity people themselves, brought in an unconventional savior to shake things up: Hinkie. Hinkie’s approach in Philadelphia was as unconventional as his background. SI described it like this: “Hinkie shed his best players and built the Sixers to lose, and then lose some more.” For his first act, on the night of the 2013 Draft, he traded away the Sixers’ one All-Star, Jrue Holiday, for Nerlens Noel, a rookie center coming off an ACL injury, and a future draft pick. Not a popular way to start!The trade was emblematic of Hinkie’s approach the next three years, which players and fans alike began calling “The Process.” The goal was excellence, not in the moment, or the next season, or even the one after that -- franchises don’t turn that quickly -- but at some point, when the probabilities overwhelmed luck. Good today was out; terrible today for the chance to be excellent in the future was in. That long-term thinking led Hinkie to do things that critics thought crazy and even wrong, including but not limited to:* Trading away good veterans to make the team worse in the short-term, increasing the probability of landing high draft picks that could turn into franchise-changing superstars.* Stockpiling tons of second-round picks, which Hinkie viewed as one of the most undervalued assets in the league, and maintaining cap space.* Signing injured players who wouldn’t be able to play for entire seasons. * Drafting foreign players and stashing them overseas, where they would continue to develop for years before even potentially playing a game for the Sixers. The Sixers during The Process were terrible. They set a league record of 28 straight losses during the 2014-2015 season. They were even worse in 2015-2016, racking up just ten wins. But being terrible gave the Sixers hope. The NBA strives for parity, so the worst teams get more ping pong balls in the draft lottery, giving them a higher probability of picking first. The Cavs were terrible in 2002-2003, too, and that got them LeBron James. Hinkie was gunning for a similar outcome. The Sixers landed the #3 pick in 2014 and 2015 and the #1 pick in 2016 and 2017. They drafted Joel Embiid, Jahlil Okafor, Ben Simmons, and Markelle Fultz - two busts, and two superstars. Before Hinkie could see the fruits of his labor blossom, though, he was out. Sixers ownership, prodded by a league office fed up with the losing, pushed Hinkie out in April 2016. He was partially to blame; he didn’t even attempt to control his narrative, shying away from the media in order to keep his “light under a bushel” and his secrets away from competitors. But he was also right. After he left, something magical started happening. While the team botched the Okafor pick (under Hinkie) and traded up to pick Fultz (under Bryan Collangelo in a move that Hinkie never would have made), The Process landed them two cornerstone superstars in Embiid and Simmons. In 2017-18 and 2018-19, the Sixers made the Eastern Conference Semifinals, and were a Kawhi Leonard lucky bounce away from the Eastern Conference Finals. The Sixers win chart looks like a J-Curve, which occurs when a company spends upfront on something that will take a long time to pay off, but when it does pay off, it pays off really well. The Process worked. The Sixers haven’t won an NBA Championship (yet), but the probability of their winning one has been higher over the past few seasons than if they had kept fighting conventionally from a position of mediocrity. (If you want to go deeper on The Process, I got you. One of the first things I ever published online in May 2019 was The First Online Course on the Process.)Because sports are so public, and the outcomes so clear, The Process provides a clean case study in Worldbuilding. Let’s dive into its lessons. 7 Lessons from Sam Hinkie’s Resignation LetterOn his way out, Hinkie wrote a letter to Sixers ownership explaining the thinking behind The Process. He included ideas from diverse influences, from physicist James Clerk Maxwell to investor Seth Klarman to evolutionary theorist Charles Darwin because, he wrote, “cross-pollinating ideas from other contexts is far, far better than attempting to solve our problems in basketball as if no one has ever faced anything similar.” The reverse is also true. Cross-pollinating ideas from Hinkie’s time in basketball is far, far better than attempting to solve all of our problems in business as if no one has ever faced anything similar. Fortunately, someone leaked Hinkie’s Resignation Letter.Here are my seven favorite lessons from the letter and six quick hits from more recent interviews with Hinkie. 1. Take the Longest View in the RoomTaking the longest view in the room means acquiring underpriced assets and building underappreciated capabilities today knowing that they’ll pay off far in the future, when it’s too late for everyone else to catch up. It’s the most important lesson, because the long view unlocks all of the other moves we’ll discuss. My favorite companies take the longest views. Amazon, Snap, Slack, Spotify, Stripe. In Stripe: The Internet’s Most Undervalued Company, I quoted Stripe CEO Patrick Collison, who said of Amazon’s Jeff Bezos:There’s something quite deep about the notion of using time horizons as a competitive advantage, in that you’re simply willing to wait longer than other people and you have an organization that is thusly oriented.Taking the longest view in the room shifts the field of play. As Hinkie wrote, “to take the long view has an unintuitive advantage built in—fewer competitors.” Everybody is trying to sign LeBron James today; very few teams are trying to build up the assets that might give them a chance to draft the next LeBron James in five years. Everyone wants to buy customers via Google and Facebook ads today; very few companies built proprietary growth channels five years ago that are paying off today. Less demand means that those assets are relatively underpriced. Hinkie also uses Bezos as his example of someone willing to take the long view, writing, “Jeff Bezos says that if Amazon has a good quarter it’s because of work they did 3, 4, 5 years ago—not because they did a good job that quarter.”Taking the longest view in the room is also just mathematically advantageous. In his book, The Psychology of Money, Morgan Housel illustrates the power of time as clearly as I’ve ever seen. He points out that much of Warren Buffett’s success is due to the fact that he’s been compounding money since he was 10, and is still doing it at 90. If he had retired at 60, he’d be worth $11.9 million, not $84.5 billion that 30 extra years of compounding at 22% earned him. If RenTech’s Jim Simons had earned his 66% annual returns for as long as Buffett, he would be worth sixty-three quintillion nine hundred quadrillion seven hundred eighty-one trillion seven hundred eighty billion seven hundred forty-eight million one hundred sixty thousand dollars. Compounding, man. Worldbuilders take the longest view in the room. They know that to build enduring advantages, they have to accumulate small, non-obvious advantages over time that compound into an unimpeachable competitive position by the time that everyone else catches up. 2. Don’t Get Caught in a ZugzwangLast week, everyone watched The Queen’s Gambit on Netflix, and now everyone is a Grand Master. So you’ll probably know that in chess, zugzwang is a situation in which having to make a move leads to disadvantage. At the end of his letter, Hinkie writes, “So many find themselves caught in the zugzwang, the point in the game where all possible moves make you worse off. Your positioning is now the opposite of that.” To avoid zugzwang, increase optionality. That’s what Hinkie did with the Sixers. He got rid of expensive, pretty good players and flipped them for high-optionality assets like more cap space (room under the salary cap), draft picks, and young players with cheaper, more flexible contracts. All of that cap space meant teams that needed to dump expensive contracts had to run to Hinkie, who was waiting with open arms, taking contracts off their hands in exchange for more draft picks, cash, and young players. The canonical example is the 2015 trade with the Kings in which the Sixers took on Jason Thompson and Carl Landry’s expensive contract in exchange for Nik Stauskas, a first-round pick, and the right to swap two first round picks. Hinkie loved pick swaps, which allow a team to swap draft slots if the other team has a higher pick. They’re the kind of nerdy asset that Process fans adored. Take advantage of a team in zugzwang by retaining optionality.It’s important to note that Hinkie’s strategy worked because he played on a different timescale than opponents. He was happy to lose today to get high draft picks tomorrow, which meant that he was comfortable with a roster full of mismatched parts. A worse roster actually helped his long-term goals! Cap space and assets represent optionality, and mean that you’re never stuck in zugzwang but can keep playing until the ping pong balls bounce in your direction. 3. Cultivate a Contrarian Mindset Hinkie cites a 1993 Howard Marks letter to Oaktree’s clients titled The Value of Predictions, Or Where Did All That Rain Come From? In it, Marks laid out an idea that has become Silicon Valley gospel: in order to perform better than everyone else, you need to be both non-consensus and right. To illustrate his point, Hinkie paints a picture of an investment manager whose job is to grow his clients’ money in a market that’s flat for 30 years. That’s what the NBA is. Every team is fighting for the same fixed pool of wins with the same fixed salary cap. In a zero-growth industry, the only way to grow is to steal share from competitors. To do that, you need to be a contrarian. With all due respect to all the people who call themselves contrarians, there’s nothing quite like making the hard, unpopular call over and over again while being mercilessly heckled by Philadelphia sports fans. Hinkie was born to handle that pressure. Discussing Joel Embiid’s emergence as a superstar, he told Pablo Torre:Isn’t that fun to see the world come around to a secret you know that not everybody knows, or a conviction you have that you hold alone from the crowd, and that over time more and more people come to agree?By taking the longest view in the room and holding contrarian beliefs, Hinkie both secured a high enough pick to draft Embiid and had the courage to draft him despite a navicular bone stress fracture that scared other teams away. Now, the Sixers have a rare superstar (who will hopefully one day get in shape and lead the team to a Championship).4. Build an Intellectually Humble OrganizationThe Process got its name from Hinkie’s focus on processes, not outcomes. He would rather his team be wrong for the right reason than right for the wrong reason. Over time, the probabilities favor those who get the inputs right. It’s easy to get high on yourself when things go right: a big PR hit generates a ton of signups, everyone on Twitter is buzzing about your product, an enterprise client commits to a million dollar contract as long as you change a few things in the product. But Worldbuilders, those focused on a big, crazy long-term vision and the millions of small steps that it takes to get there, need to focus on getting the process and the inputs right. To do that requires the intellectual humility to understand if your early successes are repeatable, and why, and to adjust if not, even if things seem like they’re going well. To build an intellectually humble organization, the Sixers hired aggressively for people with humility about what’s knowable and what they know. They encouraged a few specific characteristics and actions among the staff: * Be curious, not critical.* Ask questions until you understand something truly.* Don’t be afraid to ask the obvious questions that everyone seems to know the answers to.* Be willing to say, “I don’t know.” To make sure that your thinking is sharp and that you’re right instead of lucky, Hinkie advocates keeping a decision journal. Keep score. Use a decision journal. Write in your own words what you think will happen and why before a decision. Refer back to it later. See if you were right, and for the right reasons. Reading your own past reasoning in your own words in your own handwriting time after time causes the tides of humility to gather at your feet.Checking your reasoning is hugely important for Worldbuilding organizations and for investors. Being right for the wrong reasons leads to overconfidence, and bigger bets based on the same faulty reasoning can lead to ruin. 5. Tolerate UncertaintyHinkie is a self-proclaimed Bayesian, referring to a theory in statistics in which you start with an estimated probability of a certain outcome and then keep updating based on new information. When you hear people on podcasts talking about “updating their priors,” this is where it comes from. In any organization that deals with complex decisions, from an NBA team to a startup, “uncertainties are savage. You need to find a way to get comfortable with the range of outcomes.” That means moving from the three settings that Amos Tversky says most people have when dealing with probabilities -- “gonna happen, not gonna happen, and maybe” -- to the better-defined numerical probabilities that they use in the Hinkie household. Because most people can’t tolerate uncertainty, they simplify by treating low probability things as impossible. That shuts those options off and decreases optionality. Instead, according to Hinkie, they should apply a numerical probability to an outcome and update as more information becomes available. This goes from academic sounding to life altering in basketball team building, though. Looking at a player with an estimated 10% or 20% chance of being a star over the next three or four years can’t be written to zero—that’s about as high as those odds ever get.The name of the game, then, is shrinking the gap between 10% and 20%, and then accumulating as many assets with as high a probability as possible. This is why Hinkie hoarded draft picks instead of trading them all away for one star player. Five players with a 10% chance at becoming a star is better than one player with a 30% chance. This is the same reason that I’m such a huge fan of Tencent’s approach - investing in a portfolio of promising companies instead of trying to build everything in-house - and why I think that Reliance should follow suit. It’s also why great early stage venture funds can generate outsized returns despite the fact that 80-90% of their investments will fail. If investors wrote everything with a 10-20% chance of success off as impossible, nothing would get funded, and the huge winners would never get a chance. 6. Maintain a Healthy Respect for Tradition Hinkie caught a lot of flack during his tenure for getting lost in spreadsheets and not actually watching basketball, to which he responded: Maybe someday the information teams have at their disposal won’t require scouring the globe watching talented players and teams. That day has not arrived, and my Marriott Rewards points prove it from all the Courtyards I sleep in from November to March.Hinkie put the burden of proof on the new ideas. He told O’Shaughnessy that if the team’s models told them something, they would check to see if the Spurs did that thing. If the Spurs, the smartest organization in the NBA over the past two decades, did the opposite, he assumed that his models were wrong unless proven otherwise. Or as he wrote in the letter, “Conventional wisdom is still wise. It is generally accepted as the conventional view because it is considered the best we have.” In an interview with Tim Ferriss, Stripe’s Patrick Collison said something similar, that while new models of management like Holocracy seemed interesting, most companies should just steal best practices from companies like Google and Amazon and the other proven winners and innovate in the areas like product where doing so would give them a competitive advantage. 7. … and a Reverence for DisruptionIn a beautifully patronizing jab, Hinkie told Sixers ownership, “I can imagine that some of these sound contradictory: contrarian thinking, but respect for tradition, while looking to disrupt.” The yin and yang resolves thusly: knowing where to copy and where to innovate saves energy that can be focused on disruption. Citing the extinction of a flightless bird in New Zealand, Blackberry’s demise, and AI’s ability to beat humans in AlphaGo, Hinkie highlighted that the traditional way of doing things works, until it doesn’t. Instead of professionalizing the organization and playing it safe, as new management often does, Hinkie told ownership: We should concentrate our efforts in a few key areas in ways others had proven unwilling. We should attempt to gain a competitive advantage that had a chance to be lasting, hopefully one unforeseen enough by our competition to leapfrog them from a seemingly disadvantaged position. A goal that lofty is anything but certain. And it sure doesn’t come from those that are content to color within the lines. That’s an important lesson for any NBA team not named the Lakers or any startup going up against a better-funded competitor. When you have fewer resources and are attacking from behind, you need to focus on a few key areas in which they can’t compete. Hinkie’s whole tenure was a case study in the counter-positioning power from Hamilton Helmer’s 7 Powers, doing something so crazy that competitors are structurally unable to match you. Before Hinkie proved that it was feasible, the Lakers, Celtics, Heat, Spurs, and other perennial superpowers couldn’t tank or trade away superstars to acquire assets in hope of future glory. They were already successful, so they couldn’t take the longest view in the room. The Sixers, though, were permanently mediocre, they had no choice but to mix things up..6. Six More Ideas Hinkie doesn’t talk to the press much, but when he does, he’s verbose and full of wisdom. The seven lessons from the letter skew organizational; six from his more recent profiles and interviews skew more personal -- they’re about how to be the type of person who can lead an innovative, contrarian organization with a long view. 7.1.Figure Out Whose Opinions Matter. Then Ignore Everyone Else. “If you want a few peoples’ opinions to mean a lot, the rest have to mean little. By definition, they have to mean little. If you want these three or thirty people to massively influence your thinking, then these 3 million or 30 million have to be weighted smaller.” 7.2.Be Long Science. Follow Wait But Why author Tim Urban’s three objectives to think like a scientist: be humbler about what we know, more confident about what’s possible, and less afraid of things that don’t matter. 7.3. “Lifelong Learning is Where It’s At.” As is abundantly clear from Hinkie’s website, he likes learning so much that he’s on the hunt for tools that will help him learn even faster. His whole approach is predicated on consuming and making sense of more and better data, and that applies professionally and personally. 7.4. Compound Trust Over Time. Trust grows over years of trust-building decisions.When Torre asked him when he knew that the Sixers were hiring Morey, he replied, “Oh Pablo, the nature of compounding trust with people over a long period of time is being careful about what you say and what you know. I’ll say this, it’s important to me to earn trust with people.” 7.5. “You don’t get to the moon by climbing a tree.” Hinkie patiently bided his time, accumulating assets and increasing the probability of future success. But when big opportunities presented themselves, he went all-in. Two examples: drafting Joel Embiid despite concerns about his health, and dropping everything to focus on his future wife once he met her. He describes choosing who to marry as the most important decision you can make, because it shapes who you will spend most of your time with and what your kids will be like. 7.6.Don’t Repeat the ProcessIf Sam Hinkie took the reins of the Sixers today, his actions would be different than they were in 2013. The league arbitraged away the advantages he saw back then, the team is in a different position, and he’s evolved. The Process isn’t about tanking, acquiring second round picks, and stashing players in Europe. It’s about taking the longest view in the room, balancing analysis and wisdom, continuously learning, and having the courage to be truly contrarian with the knowledge that to be better, you need to be different. That’s why the letter focused not on a prescriptive recipe for re-building The Process, but on a way of thinking about thinking that applies broadly to investing, innovation, and leadership. It’s a handbook to developing your own process.Trust The Process. Thanks as always to my brother Dan for editing. What a guy.It’s been a busy few weeks at Not Boring, and Substack has had some deliverability issues, so if you’re behind and you want to read anything but election coverage: * SkillMagic: Not Boring Investment Memo* Software is Eating the Markets* Pipe: Business-Funding FitThanks for reading, vote, 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 389 newly Not Boring people who have joined us since Monday! If you’re reading this but haven’t subscribed, join 18,850 smart, curious folks by subscribing here!Today’s Not Boring is brought to you by… Read on and I’ll tell you how Pipe is the smartest way to finance subscription businesses.Hi friends 👋 ,Happy Thursday! I love my job. * In February, when Pipe announced its seed round, I knew that the company was going to be special. It solves a problem I’d been thinking a lot about and elegantly marries tech and finance. I was jealous I hadn’t thought of the solution! * In July, when Alex Danco interviewed founder and co-CEO Harry Hurst and Pipe raised another $60 million, I knew my initial hunch was right. * Last week, VC Guide included Pipe on its Wishlist of “companies we'd ‘quit our jobs for’ and ‘leave our 4-year vesting schedules early for’” alongside Not Boring favorites Stripe, DoNotPay, Figma, Mercury, Discord, and Webflow. * On Monday, I included Pipe in my essay on software that’s eating the financial markets.* Then on Tuesday, Harry and I decided to do a Not Boring deep dive on Pipe.This is a company that I’ve admired from afar, and it’s surreal that I got to go behind the scenes. I’ve come away even more impressed. I can’t believe I get paid for this. Speaking of which… I told you that when I write company deep dives, I would tell you whether I’m making money via CPA (I get paid when someone signs up for the product) or CPM (I get paid upfront no matter what happens). I had a choice on this one and I chose a CPA deal, because I think that any reader involved with a subscription business should work with Pipe. Now let’s get to it. Pipe: Business-Funding FitI know, I know… I’m getting paid to write this essay. But my reputation is more important to me than any one deal, and I’m willing to stake it on this: for any recurring revenue business, checking to see how much your recurring revenues are worth today on Pipe is a no-brainer. Not comparing Pipe to other forms of financing or discounting is a disservice to your shareholders, including yourself and your employees. Pipe is building an entirely new asset class based on recurring revenue contracts. It’s not equity and it’s not a loan. Pipe lets businesses raise money today by selling their monthly or quarterly subscription cash flows directly through its platform. It’s as if you could convince all of your customers to pay you upfront, immediately in exchange for a small discount. We’re going to go deep on the business, but I love making Not Boring readers money, so I’m going to tell you how to do that first. Here’s how it works: * Sign up for Pipe and connect your banking, payment processing, and accounting software.* Pipe instantly assigns your subscription revenue a rating.* Once approved, you access the Pipe Trading Platform and can see how much investors are willing to pay for your subscription revenue right now. On average, investors pay $0.90 - $0.95 for every dollar of revenue they buy on Pipe.* Choose how much or which of your contracts you want to trade from an auto-populated list.* Click “Payout” and receive the money within a day. * Pipe makes money like an exchange, charging a one-time maximum 1% fee to companies and another fee to investors.From sign up to cash in bank in 24 hours:That’s it. In less time than it takes to set up a Slack group, your company can raise as much money as it might in a months-long, dilutive venture capital fundraising process or in an equally painful venture debt raise that leaves you with liens on your business and warrants outstanding. If you run or work for a recurring revenue business, you should see how much your monthly or quarterly cash flows are worth today. At the very least, it’s free and fun to check; at best, you might be able to fund your company’s growth without raising another round. Who is Pipe for? Pipe works with companies that make recurring revenue - from SaaS to subscription content businesses, and everything in between. Pipe’s clients are small businesses with as little as $100k in ARR all the way up to publicly traded companies that make hundreds of millions in ARR. If your business makes recurring revenue, whether it’s venture-backed, bootstrapped, or public - chances are, Pipe can help you raise cheaper capital faster.If that sounds like your business and you want to give it a try: I only write deep dives about companies that I think can help your business. MainStreet, for example, has gotten Not Boring readers nearly $1 million back from the government already. But I also only write about companies that I think are fascinating to learn about. I’ve been excited about Pipe since long before Harry approached me about working together because of its potential to solve one of the biggest problems facing startups. Business-Funding FitFor such an innovative, smart group of people, startup founders all fund their businesses pretty much the same way they’ve been funding them for years. Every time they need to raise money to build or hire or grow, they sell shares in the company to venture capitalists in exchange for cash. In early February, I was working to start a company and thinking a lot about the right way to finance it. Having just left a business that raised a lot of venture capital in part to sign leases and do construction, I was acutely aware that venture capital wasn’t the right money for everything that startups do. This is not a “VC is bad” piece. VC is an incredibly important piece of the capital structure and often the only way to fund the ideas crazy enough to become the biggest companies in the world. The seven largest companies in the world by market cap -- Apple, Microsoft, Amazon, Google, Alibaba, Facebook, and Tencent -- all raised VC in their earliest days. Pipe itself has raised $66 million from top VCs like Craft Ventures and Tribe Capital in the eight months it’s been alive! But it’s overused, largely because better forms of financing haven’t been easily accessible to startups and small tech businesses. As I was noodling on the idea, Alex Danco dropped Debt is Coming and of course, he nailed it, putting into words all of the disparate concepts swimming around in my head in one compelling argument. If you’re as interested in this topic as I am, you need to read the whole thing, but I’ll try to boil it down:* There are two phases of a technical revolution: the Installment Period, when new things are being invented and tested and investments are more speculative, and the Deployment Period, when outcomes are more predictable and a dollar in should generate a known number out. * In many software businesses, we’re entering the Deployment Period.* The “VC model capital stack” of using VC exclusively to fund a business makes sense in the Installment Phase, but the Deployment Period requires different types of funding. * In this phase, when many businesses generate predictable recurring revenue and their marketing engines are finely tuned enough to predict how much it will cost to acquire a customer and how much that customer will spend over time, it makes sense to add some debt to the capital stack. Tribe Capital’s Jonathan Hsu, whose excellent piece on Carta I’ve cited many times, captured the idea well when Danco interviewed him in July 2019:When you acquire some customers and they start yielding revenue that behavior sounds an awful lot like buying a fixed income instrument and there is a lot of sophistication around how to value those cash flows. In some sense, what we’ve seen over the last decade is that software enables a whole new business model – recurring revenue – which is both good for customers and is good for investors. It’s good for investors because it becomes more “predictable” in the sense that it starts to look more like a fixed income yielding asset and thus more amenable to traditional financial techniques and thus potentially “in scope” for a wider set of investors.It’s a huge vote of confidence, then, that Tribe invested in Pipe this July. And that when Danco interviewed Hurst in that same month, he titled the article “It’s Not Debt, It’s Better.” What Danco and Hsu both realized in two steps is: * There should be a better way to finance recurring revenue businesses. * Pipe is that better way. Even better than debt.Pipe solves the problem that both Hsu and Danco alluded to: right now, the way that startups fund themselves doesn’t match their business models or maturity. Product-Market Fit gets most of the headlines. Product-Founder Fit is an up-and-comer. But Business-Funding Fit -- funding each business with the right type of capital -- is an equally important piece of the puzzle when it comes to generating outsized returns over time. As we discussed in Tencent: The Ultimate Outsider, Will Thorndike analyzed eight of the businesses that most outperformed their peers and the market over decades in his book, The Outsiders. The thing that they all had in common was that their CEOs were all excellent capital allocators. They were thoughtful about how they funded their businesses and how they spent the money they had. Not every CEO is a great capital allocator. Most aren’t. But in an interview with Alex Danco, Hurst noted that new tools make it easier to find Business-Funding Fit:Based on the fact that most founders are builders, not CFOs, it’s a fair assumption that most founders aren’t naturally skilled capital allocators and so aren’t aware of all of the alternative methods large companies utilize to finance their businesses. What I see happening in B2B fintech is a sort of ‘consumerization’ of these previously unknown and unavailable methods of financing to the benefit of all founders, at all stages. Before, a founder could say with a straight face, “Look, I’m a product person, not a finance person.” Now, there’s no excuse not to take an hour to see if Pipe or other alternative financing methods could help them grow more efficiently and keep more equity in the hands of the people building the company. For recurring revenue businesses, Pipe is Business-Funding Fit in a box. Pipe provides those companies with a new way of financing themselves that is cheaper and faster than any existing alternative.Pipe is the Lowest Cost of Capital for SaaS & Subscription Businesses There are four ways that a business with recurring revenue could traditionally finance itself: * Equity / VC. As discussed above, most startups fund themselves by selling equity to venture capitalists. It typically makes sense for startups to have VC in the mix because startups are risky and banks won’t underwrite them at earlier stages. * Debt / Venture Debt. When businesses start generating fairly stable cash flows, they can borrow money against them from a bank or a venture debt firm. Loans and venture debt normally comes with a higher interest rate, liens on the business, and warrant coverage that gives the lender the right to buy shares at a specified price and is therefore dilutive. * Revenue-Based Financing (RBF) / Merchant Cash Advance (MCA). Companies like Clearbanc, Stripe, and Square offer financing to businesses based on their understanding of those businesses’ payments and expenses. RBF / MCA sits somewhere between equity and a loan. It’s not collateralized by assets in the business like a loan and doesn’t dilute shareholders like equity, but it requires payment based on a percentage of revenue. Think of this like Kevin O’Leary’s deals on Shark Tank.* Discounts for Annual Subscriptions. While this isn’t typically thought of as a form of financing, most subscription businesses offer customers a discount off of the monthly price in exchange for paying for a full year upfront. These companies are essentially borrowing money from customers at a high interest rate (typically 15-30%). Pseudonymous business analyst John Street Capital did a deep dive comparing Pipe to the three traditional types of external financing in Recurring Revenue: The Rise of an Asset Class. Based on his assumptions, he found that Pipe was the cheapest cost of capital for a fast-growing, subscription-based business. Again, the full post is worth a read if you’re choosing among the different financing methods. The takeaway is that Pipe costs less than venture debt or RBF in terms of rate, and much less than both venture capital and venture debt (when warrants are included) in terms of value given to investors, assuming that the business is growing and trades at market multiples. One commenter pointed out that with interest rates where they are, venture debt is going for 5% in some cases, but even at 5%, when warrants and liens on the business are considered, Pipe is much cheaper. The comparison doesn’t even take into account the fact that fundraising, whether venture capital or venture debt, is a time-consuming, defocusing process. When a company is in fundraising mode, it often requires the full focus of the senior leadership team, pulling them away from activities that would help grow the business. And the legal fees can be killer! What about just discounting to get customers to pay annually instead of monthly? Pipe wins here, too. I did an informal survey of some subscription businesses that came to mind. Even at $0.85 cents on the dollar, which is a much lower bid than most of Pipe’s customers trade at, Pipe would still be a cheaper financing method than the discounts that leading subscription businesses offer their customers to pay the full annual amount upfront. At 16.67 - 30.95%, those discounts are effectively incredibly expensive loans! Plus, according to a Pipe customer survey, annual discounts only entice ~7% of customers to pay upfront instead of monthly. Just like the subscription businesses want the money upfront, their customers want to keep their money as long as possible, and so the annual discount trade rarely clears. If a subscription customer is a SaaS company and wanted to be really smart, I suppose they could trade their own subscriptions on Pipe for a 5-10% discount to annualized cash flow and then use that cash to pay for the other subscription upfront saving 20-30% 🤯There’s one more important thing to note on annual discounts versus Pipe. Subscription businesses are valued on a multiple of top line revenue. Because of the way accounting works, when a business offers an annual discount, they are giving away top line revenue, but when they sell monthly subscriptions at full price and sell their recurring revenue on Pipe, they get to keep the full amount in the top line, supercharging their valuation. Let’s take Slack, the company that I love so much despite the fact that its performance is dragging my entire portfolio down. If 7% of its customers choose to pay annually with a 16.67% discount, and it trades at a 19.9x EV/LTM Revenue multiple, it’s giving up $200 million in enterprise value by discounting instead of using Pipe! That’s enterprise value that I, as a beleaguered shareholder, would love to have in my pocket.Why Now: Pipe’s Flywheel By now, we’ve established that Pipe should exist. It’s a brilliant idea that helps businesses fund themselves more efficiently and gives investors access to a new asset class that strips out all of the noise and directs those sweet, sweet recurring revenue cash flows right into their veins. But it’s fucking hard to start a new asset class on a new exchange. It’s a two-sided marketplace problem: you need to both convince companies to sell their revenues and investors to buy them. That’s part of the reason that Pipe has raised so much money for a company its size. When Pipe announced its seed extension, Hurst highlighted this challenge: We are connecting SaaS companies with investors, and in order to do that, liquidity needs to be in the marketplace. Only a small portion of the new financing will go to core operations—we run lean and mean—and a vast majority of the money will go into the marketplace, so as more SaaS companies sign up, there will be liquidity.This is what the challenge looks like in practice: * Pipe needs to simultaneously attract companies willing to sell their recurring revenue and investors willing to buy it.* If it attracts a lot of companies and few investors, there will be more supply than demand and investors’ bids will be low - maybe they would pay $0.70 for $1 worth of revenue. * If bids are low, companies will leave and find better ways to fund the business, including offering bigger discounts to entice customers to pay upfront. * If Pipe attracts a lot of investors but few companies, there won’t be enough recurring revenue streams for investors to buy, and it will remain small. One way to solve that in the early days is by buying liquidity - supporting the market by either buying recurring revenue streams itself or by paying more to bring companies onto the platform. Pipe is good enough at what it does, and well-financed enough, that it would have solved the chicken-and-egg problem either way, it just would have cost a lot upfront. The only thing better than being good, though, is being good and lucky. Almost all of the factors that I wrote about in Software is Eating the Markets are coming together to smash through Pipe’s liquidity challenge. * SaaS and subscription businesses, from Zoom to Peloton to paid newsletters, are growing incredibly fast during COVID, creating more supply of recurring revenue streams. * Interest rates are at all-time lows, and investors are looking for yield.* Investors are particularly interested in SaaS and subscription business companies as evidenced by their equities’ outperformance in the market, and are more than happy to buy exposure to the cash flows directly without paying a huge multiple.* Pipe sits right in the middle of those two, providing an exchange on which companies can earn cash today and investors can buy the revenue streams they want. * More liquidity means more transactions, which builds trust in the asset class, and more bids competing for revenue streams means better bids, which attracts more companies.This is Pipe’s flywheel and network effect: more bids → better prices → more companies → more bids.In many ways, Pipe’s flywheel is like Opendoor’s. More transactions lead to better pricing which leads to more transactions. Pipe is the cheapest and most efficient capital for SaaS and subscription businesses today. The beauty of a marketplace or exchange, though, is that once you get it going, it just keeps getting better over time. As Pipe continues to turn the flywheel, it will become even more of a no-brainer tool in the SaaS and subscription business financing toolkit. And it’s just getting started… Matching Financing to Businesses Pipe is just getting started. * First, it focused just on SaaS businesses. * Then, it opened up to all subscription businesses. * Next, Pipe is developing a Recurring Revenue Offering that allows companies to pre-sell future subscription revenue to raise even more money. * In the future, Pipe will provide a greater and greater number of financing alternatives custom built for tech businesses. Pipe is in the business of creating Business-Funding Fit. Its skills -- pulling in companies’ financial data via APIs, assigning ratings based on that data, attracting investors, providing liquidity, and managing seamless ongoing financial transactions -- will be extensible to many more subscription-based business models over time. Think internet bills, cable bills, cell phone bills, membership fees, fitness app memberships, creator economy subscriptions… if it’s a digital subscription, Pipe should be able to turn MRR into ARR and provide access to cheap, efficient capital. If I ever turn on paid subscriptions for Not Boring, Pipe is going to be my first call. If you run a SaaS or digital subscription business, sign up for Pipe to keep more equity in your team’s pockets.If you work for a SaaS or digital subscription business, tell your CEO and finance team to sign up for Pipe and then ask for a raise.If you’re an investor with SaaS or digital subscription businesses in your portfolio, tell them to sign up for Pipe to avoid unnecessary dilution in future rounds and keep your pro rata allocation to make more investments, and then tell those founders to sign up for Pipe.Pipe is going to be one of the most transformative companies of the next decade. You heard it here first. Thanks to Harry for partnering with me to turn this around on a tight timeline!If you’re interested in a behind-the-scenes look at Not Boring, I spoke to my friend, the Media Operator himself, Jacob Donnelly on his podcast. Give it a listen 👂🏻Thanks for listening, and see you 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 574 newly Not Boring people who have joined us since the last email! If you’re reading this but haven’t subscribed, join 18,613 smart, curious folks by subscribing here!Hi friends 👋 ,Happy Monday!Not Boring straddles two worlds - technology and finance. I try to bring pro-level insights to a consumer audience. Today’s essay is about what happens when those things start to blur, when technology alters finance and consumers play a larger role in shaping the markets.It’s an early exploration of a topic that I’ll be writing a lot more about in the months and years ahead, putting thoughts down on paper so that we can debate and stress-test them together. I’d love to hear your thoughts in the comments.But first, a word from our sponsor:Today's Not Boring is brought to you by…Seemingly everyone is talking about how next week’s elections will impact the markets and their investments. The fear makes sense -- historical data shows US presidential elections tend to make investors more conservative. Even my most risk-seeking, SPAC-loving friend told me that he’s going to cash until after the election. But knowledge is better than fear: do markets perform better in Democratic or Republican administrations? And most importantly, is there an ideal investment strategy during an election season?Weathering financial uncertainty during this election is crucial for long-term financial success. Yet, it can be challenging to find a go-to source for trustworthy and unbiased insights. That’s where Zoe Financial comes in.Read Zoe Financial’s Top 5 Investment Impacts of US Presidential Elections Here:Software is Eating the MarketsIn 2011, Netscape and a16z founder, Marc Andreesen, wrote a guest post in the WSJ titled Why Software Is Eating the World. With nine years of hindsight, he was so obviously right that it’s cliché to cite it today. I’m kind of mad at myself for typing these words right now. Software has fundamentally altered nearly every industry. Netflix put a dent in cable’s long standing dominance, and already TikTok and Fortnite threaten Netflix. Newspapers are dying. Millions of people now earn livings in the Gig Economy or the Passion Economy. A private company, SpaceX, is doing things that NASA can’t. The list goes on. But despite that, we operate under the assumption that financial markets are somehow different, impervious. Of course, technology has impacted finance. High-speed trading accounts for an increasingly large percentage of activity, and institutional investors will spend millions or billions on any tech that gets them a slight advantage. But if recent tech history is a guide, technology’s ultimate impact on finance will be less about further entrenching incumbents; it will empower consumers. Consumers are participating directly in the market in greater numbers than ever before, but every analysis I’ve read treats increased retail participation as a temporary COVID-induced blip, and retail traders as irresponsible and irrational gamblers just looking to have a good time. Soon, serious people argue, things will go back to the way they were.They may be right. But what if they’re not? Investing in Social StatusIn November, back when San Francisco was still more physical place than state of mind and most people associated Corona with lime, Alex Danco wrote an excellent post called The Social Subsidy of Angel Investing. In it, he argued three main points: * Angel Investors in the Bay Area don’t just invest for the financial returns; they also invest for the social returns. * The social rewards of angel investing solve an important chicken-and-egg problem in early stage fundraising that financial rewards do not.* The social returns to angel investing have a strong geographical network effect, because they require a threshold density in order to kick in.In San Francisco, owning a Ferrari wasn’t nearly as cool as owning pre-seed shares in Stripe or Uber. In some ways, startup equity behaved more like a Veblen Good -- one that paradoxically sees more demand as the price goes up -- than like an investment. How else to explain the mad dash to invest in Clubhouse at any price? A high price signaled a more competitive round, which meant more social status for getting in.To an outsider, this might seem crazy. Why invest your hard-earned money in something that doesn’t provide the best risk-adjusted returns? When angel investors wrote checks into startups, they were really buying two things: an asset with a potential financial return and a status symbol. As usual, Danco was prescient, but he couldn’t have predicted what happened in the year since his post. Since the beginning of the COVID pandemic in the US in March, the economy is struggling, consumers are buying fewer things, and millions are unemployed. And yet, the stock market hovers near all-time highs. People are spending less on services and luxury items, and investing more.There is no one way to explain everything that’s been going on, but there are a few that I like: * Low Rates + Fiscal Stimulus: Interest rates are at all-time lows, so anyone looking for yield needs to invest in stocks. Plus, the Fed has provided a backstop that makes risky assets less risky. * Tech Strength: Tech companies make up a bigger piece of the major indices than ever, and they are actually benefiting from COVID. Plus, normal people are familiar with those companies -- we use their products every day -- so they are more likely to invest in them. * Boredom Markets: Investors are bored at home -- Bloomberg’s Matt Levine calls it the “boredom markets hypothesis” -- and not spending as much discretionary income on fun experiences and luxury goods, so they’re investing instead. There’s another take that I haven’t heard but want to explore today: Software is eating the markets. Flush with cash and empowered by new tech platforms that blur the lines between investment, experience, entertainment, and digital assets, a segment of consumer investors are shifting money from consumption to investment. Consumer investors expect different things from their investments than professionals do and value assets differently as a result. New technologies, regulations, social trends, and asset classes mean that this shift is here to stay, and could continue to gain momentum after COVID is gone. This time, maybe it really is different. 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. That doesn’t mean that people are sitting at home bored and gambling; they may be making perfectly rational decisions when accounting for the many roles their investments are doing for them now.The rise of consumer investors will alter how markets operate. To understand why and how, we’ll cover:* The State of the Market. People have a lot of savings, they can’t spend on luxury goods and experiences, and rates are historically low. Enter: more fun asset classes. * What Clayton Christensen Got Wrong. Consumers and professionals value different things in the products they buy. Why not in the investments they make? * New Technologies Breed New Spending Patterns. New platforms make investments feel more like digital goods and steal spend from non-investment categories.* Modern Platforms and Asset Classes. The platforms driving retail investment in stocks, alternative assets, venture, and crypto.* Is It Different This Time? Why the COVID-induced changes to the way we invest might persist.Let’s start with why things are the way they are. The State of the MarketIn March, it seemed like the world was ending. Stocks plummeted 35% between late February and late March. Millions lost their jobs. Anyone deemed non-essential stayed inside. Everyone braced for a deep recession. But then, things shifted. The Fed stepped in and lowered rates while the government pumped trillions of dollars of fiscal stimulus into the economy. While 12.6 million Americans remain unemployed and 100,000 small businesses will never reopen, the market has roared back. Not only did public companies perform well, new ones came to market to take advantage of insatiable demand for risk assets: * Companies like Snowflake, Unity, Asana, Palantir, BigCommerce, and Lemonade IPO’d to great success.* SPACs dumped new, riskier supply onto the market, and the market is gobbling it up. * Startups are raising at ever-higher valuations, including companies that themselves offer new assets classes to yield-hungry investors. People much smarter than me have explained why the markets are the way they are today. * Dan McMurtie called it very early in Devil’s Advocate: The Bull Case back in May. * Jesse Livermore discussed first, second, and third order causes and effects on Invest Like the Best.* Howard Marks recently wrote a letter to Oaktree’s clients called Coming Into Focus.Their explanations go something like this: * The Fed lowered the Fed Funds rate, on which all other rates are based, to 0-0.25% on March 15th. * The Federal government learned from the 2008-2009 financial crisis and stepped in quickly to provide $3 trillion in fiscal stimulus to support a shut-down economy, which both pumped money into the system and gave investors confidence in a backstop. * Low interest rates did a lot of things:* Stimulated the economy: “Mortgage rates are so low, we should buy a house!”* Increased the discounted present value of future cashflows: everyone adjusted their models with lower discount rates, and present values shot up automatically.* Brought down demanded returns across all asset classes: when the risk-free rate is lower, people also expect lower returns on riskier assets, which drives up prices. * Forced people to search for returns in riskier assets: if returns on all asset classes come down, you need to invest in riskier assets to get the same return.Importantly, low interest rates favor more fun assets, like art, cards, and tech stocks, over more boring ones, like bonds and value stocks. Tech stocks got a triple whammy of tailwinds:* The underlying businesses improved as everything moved online, and tech businesses like Zoom and Shopify reported massive growth.* Lower discount rates benefit every company’s valuation, but they benefit faster-growing companies the most. All else equal, if Company A has a higher proportion of its cash flow in future years than Company B, Company A’s DCF-based valuation will improve more as the discount rate drops. Tech companies, which trade profits today for growth and profits in the future, are the ultimate beneficiary of low rates. * Retail investors love investing in the tech companies they use every day, and a segment of retail investors has a lot more cash to invest. Additionally, with bonds at all-time low rates, investors can make a rational argument that they should actually diversify into more interesting asset classes like art, trading cards, real estate, and sneakers, which are now more accessible due to Reg A+ and the businesses the regulatory change has enabled. It’s hard to measure the impact of “fun” on asset prices, but across almost every consumer category, a more fun product with a better user experience will attract more dollars than a more boring one with a worse user experience. The same applies to investing.Simultaneously, the type of people who invest in the markets already maintained their income but dramatically lowered their expenses. While personal consumption expenditures on goods bounced back to pre-COVID levels quickly -- people need to eat -- spending on services in August 2020 remained 7% below August 2019 levels, and McKinsey forecasted that the luxury goods market would drop by 35% to 39%. People are traveling less, dining out less, getting their hair cut less, and buying fewer physical status symbols. No one can see the red sole on your Louboutins when you’re on a Zoom.As a result, retail investors have more money to spend. Disposable personal income is up 5% year-over-year (YoY) and the personal savings rate doubled from 7.3% last year to 14.1% this year!  Retail investors, regular people investing their personal money, now make up 25% of trades versus 10% in 2019. With savings accounts yielding next to nothing, people are putting that money to work in financial assets, including but not limited to stocks, not just for the potential financial gain, but because those assets themselves are filling the need for social status, connection, entertainment, and education that we’re not able to get elsewhere.I did an informal twitter poll to see what people were doing with the money they weren’t spending:60% of people decided to invest their money - in stocks, Bitcoin, and new alternative assets - instead of buying new things or saving it in cash. When interest rates are near-zero and inflation risk looms, investors feel the need to put money to work. Viewed through that lens, recent investment behavior looks a lot less like crazy professional investing and a lot more like consumers buying things and experiences that also have financial upside. What Clayton Christensen Got WrongIt’s easy to make fun of the new wave of Robinhood-using, SPAC-buying, WallStreetBets-posting “investors.” They’re not doing the type of deep analysis traders would do, choosing to invest with the herd instead of uncovering their own hidden value gems.One popular view of this phenomenon is that in a market like this, Robinhood is just a casino. Gamblers know the odds are against them, but they do it anyway, for the rush or the small chance of a huge return. That’s certainly part of it. But this retail trader trend has persisted for nearly a year, around the world, and I think there’s something more to it. Retail investors value different things than institutional ones. In What Clayton Christensen Got Wrong, one of the earliest Stratechery pieces, Ben Thompson critiqued the titular HBS professor and creator of disruption theory’s prediction that the iPod and iPhone were doomed to fail. Christensen argued that while Apple’s integrated approach makes sense in the early days of a new market, over time, as the products’ components become commoditized, a more modular approach wins out. When even modular products become “good enough,” the low-cost solution dominates the market.What he got wrong, according to Thompson, was assuming that consumers and businesses make decisions in the same way. Specifically, Thompson highlighted three of Christensen’s flawed assumptions:* Buyers are rational.* Every attribute that matters can be documented and measured. * Modular providers can become “good enough” on all the attributes that matter to buyers.Those assumptions largely hold for business buyers, but not for consumers. Business buyers care about getting all the features they need at the lowest possible cost. Consumers care about user experience, and how a product makes them feel. Institutional investors still account for the vast majority of dollars traded. Even though retail traders’ share of daily average revenue trades (DARTs), according to Citadel, has more than doubled in the past year from 10% to 25%, professional investors still make 75% of trades, and make much larger trades. But if retail participation persists, 25% is still a large enough share to impact the market, and retail investors care about different things than professionals do. Like iPhone buyers and Bay Area angel investors, this new generation of retail traders is buying more than just an expected future return when they buy an asset. Although they’re often derided as irrational, or gamblers, or YOLO traders, retail traders might be behaving perfectly rationally when you price in everything else that they’re buying: an experience, a status symbol, a digital good, belonging, entertainment, education, and more. That should mean that they have a higher willingness-to-pay than someone who attributes no value to those things. During COVID, if some retail investors have come off as irresponsible gamblers, I’d argue that that has more to do with the software they’re using than their investing preference. Robinhood encourages gambling; it feels like a game. But new products designed with the investor-as-consumer in mind are changing that.New Technology Breeds New BehaviorsIn Audio’s Opportunity and Who Will Capture It, investor Matthew Ball wrote about technology’s impact on audio, video, and gaming. Song lengths, for example, are a function of the medium on which the song is played or the way its creators are paid. 45s limited a song’s length to below four minutes; Spotify’s pay-per-listen business model encourages shorter songs that can be played more often. But while each new form factor or delivery method for music stole share from the previous generation, new forms of video and video games increased the size of the overall pie. The advent of mobile gaming didn’t mean that people spent less time and money on console gaming, it meant that they played more games, because they could do so from anywhere. Like mobile gaming, new investment platforms will grow the overall investing pie.The dot-com bubble was driven by both tech stocks, and tech platforms that allowed retail investors to easily trade for themselves for the first time, at the click of a button. E*Trade touted trades for just $14.95 while suggesting that if investors wanted something done right, they had to do it themselves.That new technology brought more people into the market and encouraged new behavior. Unwatched by the professionals, retail investors could make risky gambles that they would be too embarrassed to tell their broker to put in for them. The time between hearing about a hot new stock and being able to execute a trade fell to practically zero. But the online brokerages’ interfaces were simplistic, and the ways for “investors” to find and communicate with each other limited to clunky, text-based message boards. They weren’t buying new experiences, just trying not to miss out on the gains their neighbors were generating. They moved money from savings, brokerages, or 401ks into accounts they managed, and invested in anything with a “.com” in its name. In other words, they changed how they invested the same pool of investment funds, personally directing investments towards riskier trades, but didn’t re-allocate money from buying things or experiences. In fact, personal consumption expenditures grew at slightly higher rates in 1999 than in the years leading up to the bubble.Instead, investors moved money from safer assets, like bonds, into riskier ones, like shares of Pets.com, despite the fact that bonds’ expected returns were higher than stocks’. We all know how that ended. Today is different. People are looking for new ways to spend money they would have otherwise spent on new clothes, trips, dining, and all of the things that people valued before the pandemic. It even makes sense for most people to move allocations away from bonds -- the most boring asset class -- because of low rates. Concurrently, new platforms are changing both what assets retail investors can buy and their experience owning those assets. That has major implications on the prices that people will pay and the returns they’ll accept. Because the expected long-term return on many goods and experiences is zero -- you don’t expect to get $120 back after going to a concert for which you paid $100 -- treating investments partially as a consumption good and partially as an experience should mean that consumer investors are willing to pay higher prices, or conversely, to get lower returns.This won’t just drive up the value of hot stocks. Prices are not nearly as crazy as they were during the dot com bubble, and they won’t be. It will represent a shift from consumption into investments on new platforms and in new asset classes. New Platforms and Asset ClassesChanges in the availability and user experience of four asset classes are leading the charge: * Stocks, Options, and Bonds* Reg A+ / Alternative Assets* Venture Investments* CryptoWhen Cryptokitties burst onto the scene at the peak of the crypto craze in late 2017, supporters heralded a new age of unique, digital assets that people would buy and trade like they trade art or Pokemon cards. Digital items and skins in Fortnite, Roblox, and Animal Crossing proved that digital assets were a multi-hundred-million dollar economy. But the ultimate digital asset might be investments in traditional assets with new digital interfaces. Assets that were once cells in a spreadsheet or totally inaccessible are coming to life online. Stocks and OptionsThe first company that comes to mind when you think of COVID and investing is Robinhood. No private startup has benefited more from COVID than it has. Last July, it raised its Series E at a $7.6 billion valuation. In May, it raised again at $8.5 billion. Then just four months later, in September, it raised at a $12 billion valuation. Today, its shares are trading at a 43% premium to September’s price, or $17.1 billion, on Forge.It’s no wonder. Robinhood announced that it passed 13 million accounts (up 3 million since the start of COVID) in May, passed every broker in terms of DARTs in June at 4.3 million, and akram’s razor estimates the company now has 16 million active clients. When more investors are consumers, specs matter less than UX. Out are heavy stock-screening tools, in is one-click mobile buying. People like Robinhood because it gives them control of their portfolio, at their fingertips. On the other side of the coin, another 2010s investing darling, Wealthfront, has been eerily quiet during COVID, not releasing a new Assets Under Management (AUM) number since they reported having $20 billion AUM last September. People are less interested in playing it safe and passive with Wealthfront, opting instead to control their own portfolios. Data from audience intelligence platform Pulsar on social media mentions of the two companies backs that hunch up.In 2017, people talked about Robinhood and Wealthfront about the same amount. Today, people talk about Robinhood 20-50 times more than Wealthfront. That said, as I’ve written before, I think Robinhood is like Napster. It reshaped how consumer investors trade and forced legacy players to adapt, but it will face issues with regulators and new companies that learn from Robinhood, take its advancements for granted, and build new and better user experiences will ultimately win. As I wrote about in the Not Boring Investment Memo on Composer, companies that give users the control of a Robinhood with the ability to build hedge fund-like strategies, like Composer, stand to do tremendously well. For relatively sophisticated retail investors, Composer will make Sharpe Ratios the new returns, and enable individuals to profit from building strategies that others use. As financial assets become more like digital assets or consumer goods, companies like Public that let customers show their allegiance to their favorite companies will thrive as well. Seemingly small design differences between Public and Robinhood will matter more over time. For example: * Robinhood is single-player, and those who want to talk about their holdings need to take screenshots and discuss on Twitter or Reddit. Public is multi-player, facilitating conversations among users around particular companies and themes in the app.* Robinhood shows tickers on the home screen, while Public shows logos. * Public sends users t-shirts with their top holdings on them, tying peoples’ identities more closely to the companies they own, and built a Twitter plug-in that brings up a company’s chart when users scroll over its $hashtag to be where the conversation is.A stock bought on Robinhood feels like a gamble or an investment. The same stock on Public feels like ownership of a company, with the digital and physical assets to prove it. Another startup, CommonStock, adds a community element and competition layer on top of any brokerage account by creating a global leaderboard based on actual portfolio performance. CommonStock landed a massive $9.7 million seed round in August. CommonStock allows the best consumer investors to build followings, and less experienced investors to learn from them. Consumer investors can now get access to professional-quality data through tools like Atom Finance and TIKR, which offer lightweight Bloomberg Terminal functionality at a fraction of the cost.We will see more products that make owning stocks feel like owning a piece of the company itself over time, whether from existing startups or new entrants. One idea would be to create a digital equivalent of AmEx’s “Member Since ‘00” card for stock ownership. I would love to show off the fact that I’ve owned Shopify since $89 and SNAP since $20 without screenshotting my position sizes.Small design improvements like that would build both loyalty to the platform and encourage holding on to investments longer instead of recklessly day trading. While Robinhood seems like the winner, we are just getting started. In October, Alpaca raised a $10 million Series A to continue to grow its API-powered trading service, which makes it easier for startups to build new products focused on the user experience instead of the back-end tech.Reg A+ and Alternative AssetsAs I wrote about in Fundrise & The Magic of Diversification, diversification produces better risk-adjusted returns than a highly correlated portfolio. With interest rates at all-time lows, investors are looking away from bonds and to new asset classes.A new crop of companies is taking advantage of regulatory and technological changes to give regular investors access to alternative asset classes, from collectibles to real estate to SaaS receivables. This will pull money from consumer goods, experiences, and bonds into assets that are as much fun to own as they are good investments. While returns are certainly important to these companies’ customers, a UX that makes the assets feel more tangible is equally important. Design blurs the line between investment and digital asset.Many of these companies take advantage of Reg A+, which was passed as part of the 2012 JOBS Act and lets companies raise up to $50 million per year from non-accredited investors. Reg AT companies often let people invest in fractional shares of an asset, like a classic car or an Andy Warhol painting, that would otherwise have been too expensive for all but the ultra-wealthy. To give you a taste, here are five of the alternative asset investing platforms that are most interesting to me: Rally (née Rally Rd.) is “a platform for buying and selling equity shares in collectible assets,” including exotic cars, memorabilia, watches, rare books, and wine. Rally raised $17 million in September, and cited 200,000 users with transaction growth of 195% over the past 12 months. With people stuck at home and not able to buy things, they moved money into investments in things that may appreciate over time. Otiscalls itself “the investment platform for culture.” Investors on the platform can buy shares in a wide-range of assets from a LeBron James rookie card to original X-Men comic books. The company recently partnered with MSCHF to turn ridiculously high medical bills into art, and sold $20 shares in the art to pay off 73k of peoples’ medical bills. Fundrisegives retail investors access to institutional quality real estate investments through a product that they call an eREIT. Fundrise has a clean interface through which investors can see and track the performance of the individual properties that the fund invests in. That makes the investment more tangible, which provides value beyond the financial returns. Masterworkstakes art collecting digital and makes it accessible to regular investors. With as little as $1,000, investors can buy shares in works by Andy Warhol, Jean-Michel Basquiat, Keith Haring, Picasso, Banksy, and Monet. Even a digital portfolio of blue-chip art is more tangible than a bond, is something buyers can brag about to friends, and provides an excuse to learn art history, and returns from blue-chip art have doubled the S&P 500’s over the past twenty years.Pipe, founded in 2019 and launched in June, turns SaaS contracts into a new asset class.Instead of raising dilutive venture capital, SaaS businesses can sell their contracts to investors looking for yield and exposure to a different asset class. It’s a fixed-income like product with more tangibility than buying a bond, giving investors some of the social status and fulfillment they might get from a venture investment but with predictable returns. This is a growing category, and as more money moves from consumer goods to investments, I expect new companies to make more and more assets investible. For this space to grow into its full potential, I would love to see a company build APIs to knock down silos and bring these alternative assets into the context of an investor’s full portfolio. Alt, which is building a tool for people to value and manage all of their existing alternative assets -- like the physical baseball card collection or wine cellar -- hinted that it might tie into the other alternative investment platforms, and from there, it could provide the one connection to investors’ brokerages. Venture Investments One of the reasons that angel investing in the Bay Area was such a status symbol is that it was fairly exclusive. Venture investments don’t trade publicly, so to invest in the best companies, you needed to know someone or know someone who knows someone. Technology, new fund structures, and regulatory changes are combining to work their magic here, too. Platforms like AngelList and Forge give regular (albeit, currently, high net worth) people the opportunity to access high risk, high reward venture investments, from early to late stage, and even in the public markets. These investments are often as much about status, education, and helping something new come into existence as they are about expected returns.Syndicates and Rolling FundsThe rise of syndicates (like the Not Boring Syndicate) and Rolling Funds, which allow leads to raise money via quarterly subscriptions instead of through closed funds, mean that any accredited investor can now access and invest in early stage deals, sourced by people that they trust, in rounds priced by more experienced investors. AngelList is the leader in both syndicates and rolling funds. The company makes it simple to set up a fund, take investments from LPs, and deploy capital into startups. In exchange, AngelList takes a fee and keeps a piece of the upside, or “carry.” As of 2019, AngelList had $1.8 billion in AUM, and 1,657 startups were funded on the platform last year. The company hasn’t released 2020 numbers, but I expect that there will be a significant uptick. Already, there are 47 unicorns in the portfolio -- AngelList, via its carry and investments it makes in deals, sneakily has one of the most impressive startup portfolios in the world. Assure sits behind the scenes and provides SPV and fund administration, so that leads can focus on deal flow and investor relations. AngelList is actually an Assure client, as is Republic, which lets non-accredited investors put as little as $100 into startup deals. For those with big enough syndicates and their own network of LPs, it may make sense to skip AngelList and work directly with Assure to save on carry and keep more of the upside. Pre-IPO Equity MarketplacesAssure also powers marketplaces on which startup employees can sell their shares to accredited investors before a liquidity event. Employees get liquidity to make important purchases, and diversify their holdings, and investors get access to investments before public market investors. Investors also get the chance to say, “I invested in [Stripe, Robinhood, Airbnb, DoorDash] before it was public” without as much risk as earlier stage ventures. There’s no greater status symbol right now among a certain group than Stripe equity. The three biggest players in this space are Forge, EquityZen, and SharesPost.Like Public, these marketplaces are logo-first. The investments are as much about being involved in the companies as they are about the potential financial returns. This space will get much more interesting in the next couple of years as two unicorns compete to make startup equity more legible and liquid. Carta is using its position as the system-of-record for startup equity to launch CartaX, the “first vertically integrated market ecosystem for private equity.” CartaX will compete with Forge, EquityZen, and SharesPost from a strong position - nearly every startup already tracks their equity in Carta, so selling should be as easy as flipping a switch. Just last week, Stripe announced that it’s entering the fray by leading a $10 million dollar round for Carta competitor, Pulley. While neither Pulley nor Stripe has mentioned plans to build a secondary shares marketplace, I think it’s only a matter of time. SPACsOne way to view Special Purpose Acquisition Companies (SPACs) is as a way for companies to go public before they’re ready, dumping risk on less sophisticated investors to give investors, employees, and sponsors equity. I don’t subscribe to that view. I think that SPACs are a necessary intermediate step that bridges the artificial line between private and public markets. Today, it’s clunky. There are some great companies going public via SPAC, like Opendoor and DraftKings, some risky ones, like Virgin Galactic, and some outright frauds, like Nikola. SPAC-hungry investors are bidding some companies’ prices up to levels that don’t make sense. But more people have access to investments earlier in companies’ lifecycles than before because of SPACs. Structures that push the boundaries, like SPACs, make the way things are seem ridiculous. Why, for example, can a non-accredited investor buy shares in Nikola, but not a strong private company like Stripe? That will force regulators to re-think who can invest in which types of companies, and how. Taking it a step further, why can anyone with enough cash in the bank spend it all on something like a jetski, but not shares in a startup? As investments take more wallet share from goods and experiences, we’ll need to rethink how they’re regulated and communicated, and SPACs are one step in that direction.CryptoCrypto is back. After relative obscurity in its first few years, Bitcoin’s price chart looks almost exactly like the Gartner Hype Cycle.Bitcoin itself exhibits the characteristics of a Bay Area angel investment -- looking forward from 2013, investing time, money, and effort in Bitcoin might or might have been a good financial decision, but being a person who invested in Bitcoin said something about you. It provided social status within the community, an education on a new technology, entertainment, and other rewards not captured by Bitcoin’s price. Today, Bitcoin’s price is rising steadily as institutional investors realize that an allocation to crypto makes sense at least as a hedge against inflation and potentially as a way to get in early on a new payments infrastructure. Last week, PayPal announced that it would allow its customers to buy and sell Bitcoin on the platform, and even spend it via PayPal and its Venmo subsidiary. While Bitcoin is going mainstream, other crypto-based decentralized finance (“DeFi”) applications are turning more companies, products, and people into potential investments and broadening the definition of what is investible. According to Pulsar, social buzz around both Bitcoin and DeFi are up significantly on the year, but it looks as if Bitcoin’s recent rally has taken some of the shine from DeFi.Everything going on in crypto deserves its own Not Boring essay soon, but I’ll give you two examples to give you a flavor for what I mean. Roll is “blockchain infrastructure for social money. Built on top of Ethereum, Roll allows creators to spin up their own cryptocurrency that their audience, customers, or community can earn by doing things that the creator wants to encourage. For example, my friend Holyn launched her own token, $HOLLA, that readers can earn for subscribing to her newsletter, sharing it on social media, or referring friends, and redeem for conversations with Holyn, tweets, or beta app invites (like Clubhouse).Richard Kim recently launched a User-Governed Collective called R.N.G., which 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 by signing up early, by doing cool things for the community, by creating, and winning competitions. Unlike $HOLLA, Kim wants to create liquidity for $RNG holders, making positive participation in the community akin to an investment. Source:From Nothing to Something with R.N.G.By making it trivial to launch a token, Roll gives creators the power to create new use-cases underpinned by cryptocurrencies. Fairmint, which created the Continuous Agreement for Future Equity that allows businesses to make equity programmable,barely even mentions crypto on its website. Instead, it focuses on what the technology makes possible: seamlessly granting equity in a business to all stakeholders, not just employees or investors. Airbnb might give equity to hosts automatically when they become Superhosts, or a new SaaS company might give equity to people who refer new customers, theoretically aligning the incentives of everyone involved, and turning all stakeholders into investors. We are in the earliest innings in this space, but I’m now more bullish on crypto than ever before  because it is both an inflationary hedge and a way to empower new forms of ownership in a world that is trending towards everything becoming an investable asset. Taken together, new technologies and financial products are blurring the lines between investing, consuming, experiencing, and participating. COVID was a catalyst; will the shift persist?This Time It’s Different? In the 1930s, investor John Templeton said, “The four most dangerous words in investing are: this time it’s different.” Michael Batnick amended that claim in 2017 when he said, “The twelve most dangerous words in investing are ‘the four most dangerous words in investing are: it’s this time it’s different.’” It’s dangerous to think that the fundamental mechanics of the market have fundamentally shifted, but it’s also dangerous to think that they haven’t. So which is it this time? I have no crystal ball. I don’t know if stocks and other asset prices will be higher or lower this time next week, next month, or next year. But I do think that the composition of the market, what consumer investors invest in, how they do it, and what they care about are fundamentally changed. On a long enough time horizon, as more assets become investible, information is more freely available, and companies create new user experiences that continue to blur the lines between consumption and investment, software will have the same impact on the financial markets that its had on media, retail, travel, transportation, and even space travel. Software will eat financial markets, cut out middle men, and turn investing into an experience from which consumers get more than a financial return. Still, only a relatively wealthy subset of consumers participate in financial markets; for software’s impact here to be truly revolutionary, it will need to increase access and participation in the markets. There are early signs that make me hopeful. This time, it really will be different. 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