Not Boring by Packy McCormick

Welcome to the 805 newly Not Boring people who have joined us since the last email! If you’re reading this but haven’t subscribed, join 18,038 smart, curious folks by subscribing here!💙 Hit the heart at the top to like today’s essay, and if you really love it, share it!Hi friends 👋 ,Happy Monday! I suspect that most of the people reading this newsletter could recite the Facebook, Apple, Amazon, Microsoft, and Google (FAAMG) stories by heart. The American tech giants are widely covered, and rightfully so: they’re the biggest companies in the world, and they’re growing really fast. These companies do everything, vertically integrating and acquiring competitive threats on the path to market dominance.But there’s a new breed of tech leader emerging in Asia, led by Tencent, Alibaba, and SoftBank, that turn their first acts as product-first companies into second acts as investors. By spreading out their bets, Tencent and Alibaba have made themselves future-proof: they have upside whether customers choose their products or new entrants’, because they own large stakes in the most promising startups. (SoftBank… we’ll see, but I’m bullish.)Currently, Reliance is taking the western approach, but I think it would do well to follow its Asian neighbors’ lead. The opportunity is just too large for anyone, even Mukesh Ambani, to take on all by themself. I’ll explain. But first, a word from our sponsor:This week's Not Boring is brought to you by… Every Monday after I hit send, Public is the first place I go. Public makes investing social, which means different things for different people. For me, as an eternal optimist, I value having a positive environment in which people smarter than me can challenge my thinking and point out bear cases that my mind just chooses not to see. After two weeks of writing about Reliance, I couldn't be more bullish on India or on Reliance itself, so it's the perfect time for some friendly pushback and thought-sharpening. I’ll be discussing today’s essay  - including my thoughts on Tencent and SoftBank - and asking people for the bear case on India and Reliance. Join me. *This is not investment advice. See Public.com/disclosures/.Reliance’s Next Act The Cricket Proxy WarOutside of Philly and Duke sports, my favorite sports team in the world is the Mumbai Indians, the Indian Premier League cricket team owned by the Ambani family. If you don’t follow cricket, I highly recommend the Netflix series, Cricket Fever: Mumbai Indians as your gateway. After watching the Indian team in the Cricket World Cup every four years, last year was the first year that Puja and I watched the Indians religiously. We got a Willow subscription and woke up at odd hours to lock in for four hours of high-paced T20 cricket. Every match, in the corner of the screen, we saw this logo: The Indian Premier League’s logo looks a lot like the league logos westerners are used to seeing -- a silhouette of someone playing the sport with three letters -- with one difference: a title sponsor. In 2019, that title sponsor was Vivo, a Chinese smartphone company. This year, when the crowdless 2020 IPL season started in Dubai, we noticed a different logo. Vivo signed a deal to sponsor the IPL through 2022, but amidst the China-India conflicts, India’s cricket board dropped it in favor of a homegrown sponsor. Dream11, the $2.5 billion Indian fantasy cricket startup, took its place. China was out. India was in. Atmanirbhar Bharat. Uncharacteristically, Reliance took a backseat on the title sponsorship, but its influence is there, just spread out. Jio is the only company that sponsors all eight IPL teams. Its patch sits prominently on six teams’ jerseys. It’s just cricket, but when I look at that chain of events, I see Reliance’s future. China’s disappearance from the IPL and Jio’s multiple bets point to Reliance’s opportunity and the approach it should take in the Indian startup ecosystem. Reliance’s FutureReliance has a history of vertically integrating, but paradoxically, to capture the most value from the internet, it needs to loosen its grip. Instead of doing everything itself, Reliance should become India’s biggest growth stage investor. Last Monday, in Reliance: Gateway of India, we covered Reliance’s history and present. Reliance is a sprawling giant that spins cash flow from its legacy businesses into a tech-forward future:* India’s Biggest Company. $202 billion market cap on revenues of $105 billion* New Focus. Reliance Retail and Jio, make up 30% of revenue ($31 billion) but took up the lion’s share of the screen time at the company’s most recent AGM (84%).* Reliance Playbook. Undertake projects with high upfront costs, building complex businesses around them, wrangling Indian supply and demand, spreading out the costs over hundreds of millions of users, leveraging its favorable position with the government, and selling stakes to foreign companies and investors. * Gateway of India. Foreign companies and investors poured $20.4 billion into Jio for a 33% stake and are in the middle of investing in Reliance Retail, which has raised $5.1 billion for 8.5%. Reliance, which had raised billions of dollars in debt to fund its new projects, now has zero net debt, strong relationships with the world’s largest investors, communications and retail infrastructure that powers India, and the support of the Modi government, with whom it is working to realize PM Modi’s mission of Atmanirbhar Bharat, a Self-Reliant India that takes its place as a power on the global stage. In Part II of the essay, we’ll cover Reliance’s future and that of the Indian startup ecosystem, which will become increasingly intertwined: * Made by Reliance. Reliance has always vertically integrated. Jio and Retail seem to be following the same path, with homegrown and acquired solutions. That works better for infrastructure than it does for consumer apps. * The Indian Tech and Startup Ecosystem. The bull case for India tech is that it is China, just seven or eight years behind, with better western relations. Realizing the bull case would mean multiple hundred-billion dollar tech companies and trillions of dollars of value creation. As it stands, Chinese investors will capture more Indian upside than Reliance. * Reliance’s Tencent and SoftBank Opportunity. Reliance is well-positioned to become the next Asian mega-conglomerate turned investor. It can follow either Tencent’s or SoftBank’s approach, with a unique Indian spin. To date, Reliance has only built or acquired, while a thriving startup ecosystem has grown up around, and on top of, Jio. This is Reliance’s opportunity: to become the largest investor in India’s booming tech ecosystem. Investing in Indian startups represents a massive opportunity, but Reliance will need to evolve how it operates to take advantage of it. Made by RelianceOwning as much of the value chain as possible is in Reliance’s DNA, but it will need to find some corporate CRISPR to thrive in a time of Jio-powered Indian tech abundance.As discussed in Part I, Reliance’s history is one of vertical integration. From import licenses on yarn to textiles manufacturing to petrochemicals to petroleum refineries, Dhirubhai Ambani pushed Reliance to own an increasing amount of the value chain. Mukesh is no different. Instead of selling equity early or entering into JVs to finance his two biggest projects, Reliance Retail and Jio, Reliance raised debt and did the hard work itself, only selling stakes to foreign investors when his new business lines were well-established. Reliance built out the infrastructure and reduced its net debt to zero, and now, it’s building the devices, OS, and products and services on top of it with in-house or fully acquired technology, or via exclusive partnerships with global tech giants. In an excellent overview, What is Reliance Jio’s Plan?, Arjun Malhotra of Indian VC Good Capital, described Reliance’s plan to move up the stack with Jio, vertically integrating from infrastructure up to products and services.Reliance and the global tech companies that recently invested in Jio are working together to build out the full mobile stack:* Infrastructure. Through Jio, Reliance built a wireless data and broadband network across all of India over the past decade. It is now the largest telco in India. * Device. With Google and Qualcomm, Jio is building an affordable smartphone for the Indian market.* OS. Old Jio Phones ran on Linux-based KaiOS, but the new JioPhone will run on Android.* Product/Service. Jio will work with Facebook and its WhatsApp subsidiary to build the Super App through which Indian consumers do everything they need to do online. When Jio launched its wireless data service in 2016, it launched Jio Chat as its answer to Facebook’s WhatsApp and Tencent’s WeChat. The product looks like a WhatsApp clone. Since then, Reliance has all but abandoned JioChat as its entrant to the Super App battle royale. Its website hilariously features testimonials from 2016 befitting a pre-seed, pre-customer startup and a slapped on integration with its music service, JioSaavn. It reminds me of the Spotify integration I was so proud of building into the website for my party bus company in 2013, just to show that I could (note: I am not an engineer). Instead, through Facebook’s $5.7 billion dollar investment in Jio, the two companies are forming a partnership that could solidify WhatsApp as India’s Super App. Already, India is WhatsApp’s biggest market, with over 400 million MAUs, and is also the second largest market for Facebook’s Instagram, with 80 million users. But Facebook has faced regulatory hurdles in attempting to expand its Indian offering beyond chat. It has been unable to launch WhatsApp Pay, for example, despite years of attempts. Luckily for Facebook, jumping over (or through) regulatory hurdles in India is what Reliance does best. Combined, the two companies can offer users an all-in-one platform where they can chat, shop (Facebook Marketplace, Reliance Digital, Smart, Jewels, Trends, etc…), get healthcare (Jio HealthHub, Facebook’s Preventative Health Tool), find things to do (Facebook Local, Network18), and more. Facebook and Reliance are starting small, in part to assuage concerns that Reliance serves as the conduit through which a foreign tech giant can steal business from local companies. The two are partnering on JioMart (which is itself a partnership between Reliance Retail and Jio), allowing users to order from local kiranas via WhatsApp. Messaging the local kirana for delivery is an existing Indian consumer behavior, accelerated by COVID, that the two companies hope to make more frictionless through their partnership. From there, it’s easy to imagine a world in which WhatsApp, powered by Jio, becomes the way that Indian consumers access the internet, with the Super App essentially serving as the OS, as WeChat does in China. As I wrote in Tencent: The Ultimate Outsider: Chinese users do everything on WeChat. They communicate with friends, co-workers, and clients through WeChat. Businesses communicate with customers through Official Accounts. They can also sell things through those accounts. Thousands of businesses, including ridesharing (Didi) and food delivery (Meituan Dianping), launched on WeChat. Tencent’s approach should be instructive for Reliance. Even though WeChat sits in the most valuable position in China’s mobile value chain, Tencent decided to prioritize investing over building for most categories. In his piece, Tencent Has No Dreams, blogger Pan Luan criticized the company for losing its product focus, abandoning in-house projects in favor of investments.  He missed the point. By leveraging its place in the value chain, Tencent could watch battles play out in each category and back the winners instead of building its own category laggards. * Instead of building its own social commerce app, it invested in Pinduoduo.* Instead of building its own local shopping app, it invested in Meituan-Dianping. * Instead of building its own ecommerce store to rival Alibaba, it invested in JD.com.Recall Ben Thompson’s Bill Gates Line definition of a platform, based on this Bill Gates quote about Facebook as a Platform:This isn’t a platform. A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.A short-term play to capture as much value as possible from the services on top of a platform has negative long-term consequences to the value of the platform overall. With the right incentives in place, the ecosystem can build better products than the platform owner. Reliance is right to partner with Facebook to make WhatsApp the platform on top of which the Indian mobile economy runs, but it will undershoot its potential if it continues its attempt to vertically integrate the services on top of that platform. Today, to name just a few examples, Reliance has built or acquired solutions for:* E-commerce: JioMart* Reliance acquired NowFloats and Fynd to build JioMart* Education* Reliance acquired Embibe to serve as the foundation of its EdTech product* Video Conferencing: Jio Meet* Tencent actually built its own Zoom competitor, VooV, as well * Payments: JioMoney* Launched in August to compete with popular existing solutions like Paytm, PhonePe, Google Pay, BHIM, and Mobikwik* Healthcare: Jio Health* Like Teladoc or Livongo for India* Entertainment: Jio Cinema and Jio TV+ * Jio Cinema is Jio’s own OTT streaming service, while JioTV+ aggregates all of the best streaming services (Netflix, Prime, etc…) on a set top box* Music: JioSaavn* Acquired Indian-market Spotify competitor Saavn in 2018* Chat: JioChat* Acquired conversational AI company Haptik to facilitate business conversation on the app Despite its buying spree and massive budget, Malhotra points out that, as a result, Reliance doesn’t have the leading consumer aggregator in any category it plays in. Because Reliance has been insistent on building itself, it has missed out on the upside from category-leaders being created in India’s thriving ecosystem. Fortunately for Reliance, and for Indian consumers, it has been handed another gift from the government: a chance to get in the fastest-growing game in town. The Indian Tech and Startup LandscapeTo understand Reliance’s opportunity, you need to understand the Indian tech and startup landscape. The bull case for Indian tech is that it is China, just seven or eight years behind, with better western relations. According to Dhaval Kotecha, the Indian economy has some major tailwinds and will continue to be one of the world’s most dynamic consumption environments for five reasons:* Income Growth. The Indian economy is expected to grow at 7.5% per year through 2030. The lower-middle and upper-middle classes have grown fastest since 2005, from 23% and 7% respectively to 33% and 21% today. The upper-middle class and upper class are expected to double from 21% and 3% today to 44% and 7% in 2030. * Steady and Dispersed Urbanization. In 2005, 28% of the population lived in cities. Today, 34% do, and by 2030, 40% of Indians will live in cities. * Favorable Demographics. Today, 82% of India’s population is under 50-years-old, and by 2030, 77% of the population will comprise of Millennials and Gen Z. * Tech & Innovation. There will be 1 billion Indian internet users by 2030, driven in large part by Jio, which has reduced data prices by 95% since 2014. * Evolving Consumer Attitudes. As the population skews younger, richer, and tech-friendlier, more commerce will take place online. The online retail market is expected to quadruple, from $30 billion today to $100-120 billion in 2025. Kotecha highlights that India trails China by 7 years in internet users and 8 years in online shoppers, and that both are on a much steeper growth trajectory than the US.If India becomes the next China, its tech companies will create massive value over the next decade. A decade ago, China had four of the ten largest companies in the world by market cap: PetroChina (oil & gas), ICBC (bank), China Mobile (telco), and China Construction Bank (banking), worth a combined $890 billion. Reliance looks similar to that composition - it is both India’s largest energy player and its largest telco. Today, China has two companies in the global top ten, Alibaba ($831 billion) and Tencent ($688 billion). Both companies drove and benefited from the sharp rise in internet usage and ecommerce in China, and from investing in China’s startup ecosystem early. Tencent, for example, owns 20% of Meituan-Dianping, which despite being a decade old, is worth as much ($201 billion) as all of Reliance Industries today. Other investments, like JD.com ($127 billion) and Pinduoduo ($100 billion), are worth about as much individually as all of the Indian unicorns are worth today, combined. Over the past half-decade, India’s unicorn production has accelerated faster than any other country in the world, but it still has a lot of room to run. China, with its ~eight year head start, has 227 private unicorns worth $869 billion, according to Hurun.Including public companies, Chinese tech companies have created trillions of dollars worth of value. India’s are less than 10% of the way there. According to CB Insights and Hurun, there are thirty-three Indian unicorns, startups worth at least $1 billion on paper (including Zerodha, which hasn’t raised outside capital and bootstrapped its way to an estimated $3bn valuation). That number includes Flipkart, of which Walmart bought 81% for $16 billion in 2018. Combined, the Indian unicorns are worth $111 billion. The gap between India and China will close. Today, despite really starting to create unicorns consistently over the past four years, India has more unicorns than any country except the US and China (and potentially the UK, depending on which list you look at).The Indian startup ecosystem is just starting to hit its stride. Of the 33 Indian Unicorns, 27 crossed the billion-dollar mark since Jio’s launch in 2016. While there are a host of factors, Reliance and Jio have undoubtedly made things better for the tech ecosystem. Indian tech companies refer to their “Jio Moment,” when their user and engagement charts shot upwards because more people were able to access their products.  Startups that are largely building on top of Jio’s infrastructure are beating it across the categories in which they compete: * Flipkart, owned by Walmart, has a head start on JioMart in ecommerce, as do companies like Jumbotail on the grocery wholesale side and Facebook-backed meesho in social commerce. * Alibaba-and-SoftBank-backed Paytm has 150 million users and is valued at $16 billion.* Byju’s is the most valuable edtech startup in the world at $10.8 billion, and has a massive lead on Jio’s Embibe.It’s still early, and Reliance has the resources, relationships, and partnerships to put up a good fight. But the question is: why should it fight? As Indian startups go global, the opportunity is so large that Reliance should back Indian startups to take on the world.To date, most of the Indian startup ecosystem has been inward-looking: companies Made in India, Made for India. Flipkart is Amazon for India, Paytm is Ant Financial for India. India has mainly exported the raw material of tech -- engineering and management talent -- instead of finished products -- entire companies. Already, Indian-born CEOs run some of the largest companies in the US. Indians lead Google, Microsoft, IBM, Adobe, and more tech giants, controlling trillions of dollars of market cap. Mukesh Ambani runs India’s largest company, but his company is only the fifth most valuable global company run by an Indian CEO.India will continue to export some of the best tech talent in the world, particularly as COVID has made remote work an accepted reality. The country is expected to have the most software developers in the world by 2023, and companies like Pesto are training Indian developers to be remote employees for US startups and tech companies, upgrading them from outsourced resources to full-fledged members of the team. But India is also poised to become an exporter of finished tech products in a COVID-shaped world that is increasingly remote and tech-focused. Byju’s, the Tencent-backed education platform, is the most valuable edtech startup in the world. It recently acquired coding school White Hat Jr which runs these incredible* commercials against cricket matches:Note: Incredible as in entertaining. Critics charge that WHJ is running misleading advertising and that its instruction quality has suffered in its pursuit of growth at all costs. Mo’ money, mo’ problems is a universal startup phenomenon. Byju’s is gearing up to launch both products in the UK, Australia, New Zealand, Singapore, and Germany. Another Indian edtech startup, Quizizz, is used by 30% of elementary through high schools in the US and boasts an astonishingly high 82 NPS. At the earlier stage, Sequoia Surge lets Sequoia India invest earlier without signaling risk if the main fund doesn’t do follow-on rounds. Its structure allows it to experiment, and it’s currently working on building companies in India for a global audience. Typically, a startup would launch in the US, operate in the US, maybe hire a few remote engineers in India, and hire a local GM to try to enter the Indian market. Surge’s program flips that on its head. It builds companies in India to serve both the domestic and global markets, with executive, product, and engineering teams in India and GMs or local marketing positions in the markets they serve. For example, OnJuno, which offers a high-interest checking product (and is an upcoming Not Boring sponsor), is built and run from India with one person on the ground in the US to provide local market knowledge, expertise, and relationships. Indian startups now both Make for India and Make for the World, increasing the potential for China-sized outcomes. Particularly given the western world’s growing hesitation to work with Chinese tech companies, if India can Make for India and Make for the World, it has the potential to close the startup valuation gap with China and even surpass it over the next decade. One Indian entrepreneur and angel investor put the opportunity this way:What has changed? India can build for the world. We have the best talent and the best minds, and no shortage of passion and hunger. Chinese entrepreneurs are the only ones that have equal or better energy and passion to create a global impact, but they’ve had policies that have not allowed for that. There’s something to be said for policy and language. We will see India leapfrog China in terms of global impact.As it stands, though, Chinese investors will capture more of the upside from that impact than Indian ones. Backed by the WorldAtmanirbhar Bharat does not jibe with the current state of the investment world, in which, when an Indian startup succeeds, foreign investors, most disagreeably and prominently the Chinese, get wealthy. In fact, of the 11 funds that have invested in at least three Indian unicorns, none is entirely Indian. SoftBank leads the way with 11 Indian unicorn investments, and of the twelve largest Indian startups, only one -- Freshworks -- hasn’t taken money from any of SoftBank, Tencent, or Alibaba. * The funds’ countries imprecise, because as my friend Anmol Maini (whose investment memos on Indian startups are well-worth reading if you’re interested in learning more) pointed out to me that venture capital in India is complicated. Nexus is actually an India-US venture fund, SAIF Partners was originally founded in Hong Kong, and Sequoia, Accel, Matrix, and Lightspeed, while related to funds originally formed in America, operate as their funds with separate teams on the ground in India. But SoftBank is clearly Japanese, and Tencent and Alibaba are clearly Chinese, and India’s Asian neighbors are clearly benefiting from the rising valuations of Indian startups more than Reliance.SoftBank is the leading Indian unicorn investor by number of deals (11) and second by total valuation ($49.1 billion). The Chinese giants aren’t far behind. When I was researching Tencent, I noted that:It has shown a particular affinity for non-gaming investments in India, the only other country with as large a population as China’s. It has invested in ecommerce standout Flipkart, transportation unicorn Ola, education startup Byju’s, food delivery app Swiggy, and fintech darling Khatabook, among others. The numbers back that up. Tencent is invested in eight Indian unicorns, and is the largest investor by valuation, with $49.5 billion worth of Indian unicorns in its portfolio. Alibaba isn’t far behind, with 5 Indian unicorn investments valued at a combined $24.6 billion. In a country that so tightly controls who can invest in its companies -- recall that Indian companies cannot list directly on foreign exchanges (yet) -- allowing foreign investors to become the largest owners of India’s fastest-growing startups had to be an intentional decision. It was designed to increase foreign investment in the country to stimulate growth. However, given the fresh enmity between China and India, the Indian government passed legislation mandating its approval for any investments from countries with which it shares a border, most notably China. As a result of the new law, $3.6 billion food delivery startup Zomato reportedly can’t access $100-150 million of its investment from China’s Ant Financial. All of which leaves us here: * A thriving Indian startup ecosystem, with the third or fourth most unicorns in the world.* Increased consumer and business demand driven in large part by Reliance’s Jio Platform and Retail products. * Macro conditions shifting in India’s favor, including China’s practical expulsion from the country, at least temporarily. * A focus on Atmanirbhar Bharat, meaning both a vast TAM expansion for the best Indian startups and a gaping hole to be filled by an investor that will keep the financial upside in India.Reliance and Jio have the opportunity to take advantage of antipathy towards China to provide growth-stage capital to Indian startups that were until now largely funded by their Asian neighbors. Reliance’s Tencent and SoftBank OpportunityThe genius of Reliance’s Asian tech conglomerate peers Tencent, Alibaba, and SoftBank has been to turn cash flows from its core businesses into investments in fast-growing startups at home and abroad. The Indian startup scene is roaring at the same time that China/India relations are frayed and Atmanirbhar Bharat is in the air. That presents a golden opportunity for Reliance, and one that the company has hinted at wanting to capture: Reliance needs to become the next in the line of Asian conglomerates turned growth funds, one Made in India, Made for India, and Made for the World. To date, to Ambani, Made in India has meant Made by Reliance. Increasingly, Made in India should mean Backed by Reliance. At the end of Reliance’s long section on Jio in its most recent AGM (at 56:30 in this video), Mukesh Ambani made an appeal to India’s startups:Jio is still very much a startup. As such, we have a very special place in our heart for startups, who we consider our brother-in-arms. I believe there is no better partner for Indian startups than Jio. We are well-positioned to help Indian startups in a number of ways: technology development, product development, distribution market access, or even scale-up capital… We believe that this will be the true measure of success for Jio, to create a mighty knowledge coalition that solves India’s problems and opens the door for many more companies from India to step successfully onto the global stage.Ambani paints a compelling picture of a Reliance-supported startup boom, but thus far, it has made only limited forays into “scale-up capital.” Instead, it has competed with or fully acquired startups to roll into its own offerings. Instead of just acquiring, it should build up a portfolio of investments. I don’t think it’s a coincidence that many of the investors in Jio Platforms and Reliance retail, like the Saudi Public Investment Fund, Mubadala, and ADIA are also some of the world’s largest venture fund backers. Leaving SoftBank off the cap table and dealing directly with the Vision Fund’s LPs signals, to me at least, that Reliance is looking to cut out the middleman and start aggressively investing themselves. The move would make sense for both offensive and defensive reasons. The points on the offensive side are easy to understand: * Capture Upside Beyond Reliance. Investing in India’s top startups helps Reliance capture the financial upside it helped create, a $750 billion opportunity if it just catches up to where China is today. Investing vs. building or owning means that Reliance can capture upside even when other major players succeed. * Support Portfolio Companies. It has the opportunity to put its thumb on the scales for the companies it backs in India.* Cement Mukesh’s Legacy. Investing further cements Mukesh’s push from energy and petrochemicals into technology. He can become a less crazy Masa on the world stage.* Transform the World. Mukesh has publicly stated that the world will change more in the next eight decades than it has in the previous 2,000 years. Investing in a portfolio of early and growth stage companies is the most surefire way to capture the upside that creates. The points on the defensive side are less obvious but even more important: * De-risks Succession. Mukesh knows all too well that succession battles can tear a family apart. If you’ve watched Cricket Fever: Mumbai Indians, which follows the Indians’ 2018 IPL season and heavily features his son and potential heir, Akash, you know that Mukesh needs to diversify against his succession risk. While Isha seems to have more potential, investing in a broad portfolio of the best Indian, and eventually global, startups would protect the company from relying solely on the third generation of Ambanis. * Turns Reliance from Bully to Benefactor. One of the biggest knocks on Jio Platforms is that even if its products, like its payment and chat apps, are inferior to startups’, it will suck the air (and money) out of the startup ecosystem by outspending and undercutting new entrants. Instead of starving young competitors, Reliance should back them. Anything the company does that is seen as supporting instead of limiting the Indian tech ecosystem will let it continue to operate in its quasi-monopoly status without strong public backlash. * Keeps Prices Low. Reliance caught heat for anti-competitive practices by extending Jio’s free period past the common 90-day window and then jacking prices once customers were locked in. While price gouging may be better for profits in the short-term, building an engine that benefits from the overall health of the economy would allow Jio to keep prices low while still capturing upside. Tencent doesn’t charge for WeChat; it does well when the people and companies that use it do well. Depending on the success of Jio Platforms, there are two approaches that Reliance might take as it goes down the Mega-Corporate Venture route:  the SoftBank approach and the Tencent approach.The Tencent ApproachAs I wrote in Tencent: The Ultimate Outsider, Tencent leveraged its Super App, WeChat, and its position with the government to invest in companies at home and abroad. In China, it runs the Tencent Capital + Traffic Flywheel: see which companies perform well on WeChat, invest in them, send them more traffic, profit. It has invested in Chinese giants like Meituan-Dianping, JD.com, and Pinduoduo using this approach. Tencent also leverages its place as a gateway to China to invest in foreign companies including Spotify, Snap, and Tesla. As mentioned earlier, it’s also the largest investor in Indian startups by market cap. With an increased focus on Indian self-reliance and increased scrutiny on Chinese investment in the country, those are investments that Reliance should be making instead of Tencent. It’s beginning to look a lot like Tencent already:* It is working on a Super App for India, likely WhatsApp in partnership with Facebook.* Like Tencent, it’s focusing on “smart retail” with Reliance Retail and Jio Mart. * Its dominant position and close ties with the government mean that foreign companies that want to play in India are all but forced to partner with Reliance (see: Facebook, Google, Amazon).If it succeeds in building a Super App, Reliance will be in a similar position in India to Tencent’s in China. It will be able to see which Indian startups are performing well in its ecosystem, invest in them, and give them the capital and traffic to all but guarantee success. Like Tencent, it can invest off its own balance sheet, now that it is debt free, hugely profitable, and focused on tech growth, and it can invest even more in the winners to acquire controlling stakes and turn them into subsidiaries, as it did with Embibe. It can also invest in foreign companies, both public and private, who want preferential access to the Indian market. Through Retail and Jio, Reliance has already done so much of the hard work to wrangle supply and demand that it could present a ready-made package to foreign companies who want to launch or grow in India. By investing broadly and supporting its portfolio (and “supporting” can be a pretty strong word when it comes to Reliance in India), it can capture upside no matter which sectors or companies succeed in India. Unlike Tencent, Reliance doesn’t even have an Alibaba to compete against. It’s the undisputed leader in the market, which means that its upside is potentially unlimited should India continue to catch up to China and become the preferred Asian opportunity for foreign investors. The SoftBank ApproachIn Masa Madness, I wrote about Masa’s journey to transform SoftBank from a PC software distributor to a telco to the world’s largest and most profligate venture fund. With the success of Jio, Reliance underwent a similar transition, from an energy and petrochemicals company into India’s largest telco. It may continue to follow SoftBank’s path: use a combination of cash from its operating businesses and investments from LPs to spin up an off-balance sheet fund to invest in growth-stage startups. Its relationships with the Jio and Retail investors place it uniquely to build its own, more domestically-focused, less insane version of SoftBank’s Vision Fund. Today, SoftBank is the largest investor in Indian unicorns by number of investments, but two things signal Reliance’s desire to compete, instead of partner, with the Japanese giant: * SoftBank was looking to invest $2-3 billion in Jio but never closed the investment, either because SoftBank was forced to sell assets to raise cash or because Reliance wouldn’t have it. SoftBank is currently sitting on the waitlist for a Reliance Retail investment. * Reliance is raising money directly from the Vision Fund’s LPs. Instead of using Masa as an intermediary, Ambani built direct relationships with the Saudis and Mubadala. Look at SoftBank’s LPs vs. Jio and Retail’s investors. Reliance doesn’t need SoftBank, and given the mission of Atmanirbhar Bharat, I don’t think that India’s startups will either if Reliance enters the growth equity fray. The Vision Fund’s two largest investors also invested in Jio or Retail, as did Qualcomm, and Jio has spoken to Foxconn about manufacturing its higher-end LYF smartphones. Instead of SoftBank’s Apple and Sharp, Reliance has Facebook, Google, Intel, and potentially Amazon. Instead of Larry Ellison, Reliance has KKR, TPG, Silver Lake, L Catterton, General Atlantic, GIC, and Vista Equity Partners.In the SoftBank approach, Reliance raises a fund from these investors to use its advantageous position in India to invest in growth-stage and public companies, both domestic and foreign, who want to operate in India. Increasingly, that will be every company. The SoftBank approach is lower-risk, lower-upside than the Tencent approach of investing off of its own balance sheet. I think that the company is more likely to take the Tencent approach -- it’s closer to the company’s historical approach of vertically integrating and capturing more upside -- but either approach is a better long-term play than its current one.  In either scenario, Reliance has the scale, expertise, and relationships to pull this off: * Jio and Retail have taken in more investment in the past 6 months ($25 billion) than the entire Indian startup ecosystem raised in 2019 ($14.5 billion). * Reliance has the stated desire to work with startups. * Prime Minister Modi has been friendly to Reliance, often to the detriment of foreigners, and his Atmanirbhar Bharat mission seems to call for local funding instead of the traditional reliance on outside capital.* It is better positioned than anyone to capture upside if India grows and exports its expertise to the rest of the world.Reliance can ride the Indian tech wave with its operating businesses if the demand stays in India, but it has the desire to do more - Made in India, Made for India, Made for the World. It’s the playbook that Reliance is beginning to run itself, and it should open that playbook up to Indian startups and keep the upside from those companies’ global success in India. Made in India, Backed by RelianceWhen I ran the idea that Reliance should become a growth equity investor past a few people involved in the Indian tech ecosystem, I got some variation of the following: “That’s probably what they should do, but it’s not in their DNA. Their culture is all about building and owning everything.” It’s hard to argue with the Ambanis’ results. Reliance’s stock, which has compounded at a 32% CAGR for an astonishing 43 years, is already up 44% YTD, making it the first company in Indian history to trade at a $200 billion market cap. But the internet behaves differently than infrastructure. It’s an environment of abundance and power law returns. On the internet, it’s often better to own a smaller piece of the category-leader than it is to own all of the second-or-third-place company. Today, Reliance is the only company in India worth over $200 billion. In a decade, there are likely to be many, and Reliance should facilitate that explosion and participate in the upside.If it can pull off the transition from operator and investee to operator and investor, it will remain the best way to invest in India for decades to come. So how to play it? It’s difficult to invest in Reliance because of Indian laws around foreign listing. You’d need to set up an Indian bank account and demat account, or just buy something like the INDA ETF, of which Reliance makes up about 16% of the weight. But as we speak, driven in part by Reliance’s desire to offer shares in Jio on the NASDAQ, India is hammering out changes to its laws that would allow its companies to list directly on foreign exchanges. If that happens, and if Reliance lists in the US, I think its price could explode. Spend the next few months before foreign listing getting smart on India, starting with Reliance. It’s a company to watch and learn from. Not many companies can make the transition from one generation of leadership to the next, from old-line industries like oil and petrochemicals to new technology infrastructure, platforms, and smart retail. Its next act, investing in Indian unicorns before they hit the scale of China’s startup darlings, could be its most impressive and impactful yet. India is the next tech superpower. Its companies are going to Make in India, Make for India, and then export to the rest of the world. Indian tech today is like China a decade ago, with more upside given the two countries’ relative status in the west.I am bullish on Reliance whether it continues to vertically integrate or begins to invest in India’s startup ecosystem. Owning the infrastructure in a fast-growing market is super valuable. But over time, I believe the latter approach will lead to an outcome that is multiples better than the former. Investing in Indian startups is both a smart offensive and defensive move, and will ensure that the company can thrive even with eventual internal and governmental succession.Chak De India! Massive thanks to Anmol Maini, Arjun Malhotra, Rohan Malhotra, Sid Jha, my father-in-law, and uncle Sudhirbhai for educating me on India’s history, economy, and startup landscape, and to Dan and Puja for editing.Verified Not BoringIf you’re enjoying Not Boring and want to spread the word, you should get involved with the Verified Not Boring referral program. It means the world to me. * 10 Referrals: Thank you shoutout in the next Not Boring* 20 Referrals: Not Boring Stickers* 30 Referrals: Limited Edition Not Boring T-ShirtGet your referral link and track the leaderboard by clicking this button, and start sharing with your smartest, most curious friends on Twitter, LinkedIn, text, or email.We will be back on Thursday with a new Not Boring Investment Memo 👀Thanks for listening,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 1,034 newly Not Boring people who have joined us since the last email! If you’re reading this but haven’t subscribed, join 17,234 smart, curious folks by subscribing here!Hi friends 👋 ,Happy Monday! This is my first Not Boring as a dad, and we are absolutely loving it (although please forgive me if there are sections in which it seems like my brain is mush — it is.)The timing worked out perfectly for this week’s topic. A couple of weeks ago, I asked people on Twitter for their favorite international companies that not enough people know about. The topic of today’s Not Boring, Reliance, was among the most popular answers. So for my first essay as a father to a half-Indian son, I get to tell the story of India’s most important company. But first, a word from our sponsor: This week's Not Boring is brought to you by… As we'll discuss today, Reliance democratized investing in India back in 1977 when it went public at ₹10/share. The low price gave everyone a chance to own a little piece of a public company, and its strong performance since has generated huge returns for regular investors. Today, Public is democratizing investing by making the stock market social. It's the place where newcomers and experienced investors alike come to discuss their favorite companies and market trends. And it keeps getting better. Just last week, my favorite pseudonymous FinTwit account, Ramp Capital, joined Public.I’ll be discussing today’s essay over on Public, and can't wait to talk about the surge of Indian IPOs on US exchanges over the next year on there. Join me. *This is not investment advice. See Public.com/disclosures/. So throw on some A.R. Rahman…and chalo! Reliance: Gateway of IndiaIn Mumbai, a short walk from Leopold Cafe and across the street from the Taj Hotel, where Puja’s parents were married, a large stone arch-monument called Gateway of India sits between the city and the Arabian Sea. The British commissioned Gateway of India in 1911 to commemorate the landing of King-Emperor George V and Queen-Empress Mary, the first British monarchs to visit India. After Indian Independence from Britain in 1947, the last British soldiers left India through the very same gate. Today, that structure is largely a tourist destination. The real Gateway of India, as far as foreign companies and investors are concerned, is Reliance Industries.Atmanirbhar BharatSince I started writing Not Boring, one type of company has fascinated me more than any other: the Asian tech conglomerate.Japan’s SoftBank, led by Masayoshi Son, distorted both the private and public markets through its Vision Fund and 555 Fund investments. Masa has been reinventing his company since the ‘80s; today, it’s more investor than operator. The 2010s were China’s decade. Tencent and Alibaba, with a combined market cap of $1.4 trillion, are now household names in the kinds of households that read Not Boring. They’ve parlayed strong core businesses into unparalleled global equity portfolios.The 2020s will be India’s decade. And unlike China, which features a fierce competition at the top between Tencent and Alibaba, in India, Reliance is the main game in town.  Reliance Industries Ltd (“Reliance” or “RIL”) is like an India-focused Exxon, Dow Chemical, Walmart, AT&T, and Comcast all rolled into one. If it fulfills its Jio vision, it will add Shopify, DoorDash, Zoom, WeChat, Square, AWS, and more to that roll. Its $200 billion market cap is the largest in India, where its backstory, leaders, products, and dramas are well-known. But when I asked a bunch of smart non-Indian friends what they knew about Reliance, they replied, “Who?” I salivated. Nothing gets me jazzed like an under-discussed Asian tech conglomerate. At RIL’s helm is Mukesh Ambani, one of company founder Dhirubhai Ambani’s two sons. Mukesh is the richest person in Asia and the sixth richest person in the world, with a net worth of $85 billion. His house is worth more than whole small cap companies.Under Dhirubhai, the company was a dominant force in domestic Indian business and politics for nearly thirty years. Under Mukesh, particularly since the start of Coronavirus, it is making a dramatic push into the western consciousness.This summer, Reliance made waves by selling 33% of its Jio Platforms business for $20.4 billion to a who’s who of international strategic and financial investors, from Facebook to KKR to Mubadala. Over the past three weeks, Reliance has been at it again, selling stakes in its Reliance Retail business to many of Jio’s financial investors, with a potential Amazon investment waiting in the wings. It’s no surprise that the world’s largest companies, investors, and sovereigns want a piece. India is the world’s most important growth story, and Reliance is its gateway.Now, I might be biased on the India front. Last week, I became a dad to a half-Indian son, and this is a picture of me at my wedding: So caveat emptor. But I’m in good company. When many of the world’s smartest investors plow large sums into not one but two Reliance subsidiaries in less than six months, you should take notice. Here’s why they’re excited about India: * The world’s second largest country by population with 1.3 billion people.* The fifth-largest economy in the world by Nominal GDP at $2.94T.* The second fastest-growing trillion-dollar economy behind China.* Expected to grow mobile users by 40% to 800 million by 2023.* Not China. The Indian economy has similar characteristics to China’s without the CCP’s... baggage. Plus, India is leading the anti-China charge, banning 59 Chinese apps after a May border clash between the two countries in the opening salvo of a battle being fought with dollars instead of guns. Increasingly, India is the play for smart money that wants to bet on Asian growth and technological capability without China’s political or ideological hairiness. And Reliance is the best partner for foreign companies and investors who want exposure to India. These are just a few of its accomplishments: * The first Indian company to cross a $150 billion and then $200 billion market cap.* Responsible for 3% of Indian GDP and 5% of its tax revenues [source].* Reported ₹772,752 crore or roughly $105 billion in revenue for the past fiscal year. (This conversion isn’t intuitive, so from here on out I’ll use dollars, but for our edification, “crore” means 10 million and a dollar is currently worth about 73 rupees.) * Runs India’s largest energy and petrochemicals business, part of which it will spin off to attract more global investment from the likes of Saudi Aramco and BP.* Operates the country’s largest retailer, Reliance Retail, and is pushing into ecommerce with JioMart, in a traditionally super-fragmented market.* Bringing about a mobile revolution with Jio Platforms, slashing data costs by 95% since 2013 and driving a 20x increase in Indian data consumption to 8.3 GB/mo/user, on par with South Korea. * Market cap has grown at a 32% CAGR for the past 43 years.In 2020, fueled by Jio and Retail, Reliance is up another 47.5%.Most of Reliance’s success to date is due to its fortress position in its home market. Now, it’s going global. During Reliance’s most recent Annual General Meeting in July, Mukesh Ambani highlighted Reliance’s plan to build products that are “Made in India, Made for India, Made for the World.” He wants to run Amazon’s “First-and-best customer” strategy on a national scale. In many ways, Reliance’s strategy is a reflection and extension of Prime Minister Narendra Modi’s Atmanirbhar Bharat Abhiyan, which translates to “Self-Reliant India Mission.” Announced in May, Atmanirbhar Bharat is not as isolationist or protectionist as it sounds. It’s meant to make India “a bigger and more important part of the global economy.” No company is better positioned to profit from Atmanirbhar Bharat than Reliance. To date, Reliance has very much been Made in India, Made for India. Its stock has been the most widely-owned in India for over four decades, but it’s nearly impossible for foreign investors to own directly. Now, India and Reliance are taking their place on the world stage. No doubt driven by Ambani’s desire to take Jio Platforms public on the Nasdaq, the Indian government is considering changing rules that prohibit Indian companies from listing directly on foreign exchanges. Now is the time to get smart on India, and this two-part series will serve as your guide to Reliance’s history, present, and future. In Part I today, we’ll cover Made in India, Made for India:* Reliance Under Dhirubhai. Dhirubhai Ambani learned to work the government and its regulations to his advantage in building a multi-billion dollar energy and petrochemicals empire. * Succession. Dhirbubhai’s death precipitated a vicious succession battle between his two sons, Mukesh and Anil. * Reliance Today. Reliance is the first Indian company to hit a $200 billion market cap. While the great majority of its revenue and profits come from its energy and petrochemicals businesses, Mukesh is reshaping the company to focus on Retail and Technology. It benefits from the Modi government’s mission of Atmanirbhar Bharat.* Reliance Retail. Reliance runs the largest retail business in India, and is wrangling entropy on both the supply and demand sides to modernize India’s retail infrastructure in partnership with existing retailers big and very small. It’s attracting investment from abroad, and Amazon might be next. * Jio. By leapfrogging 2G and 3G to focus on 4G and 5G, Reliance built India’s largest telecom network in under a decade. Investors from Facebook to KKR have poured more money into Jio in the past six months than all Indian startups raised in 2019 combined. In Part II, we’ll make some predictions about Reliance’s future, its opportunity in the Indian technology landscape, and its growing importance on the world stage. We’ll cover how Reliance is ready to Make for the World. By the end of this two-parter, you’ll understand why Reliance is on the precipice of becoming one of the world’s most important tech companies. When it joins that echelon, it will be unique among its peers in that its most important input in the early days wasn’t silicon, but polyester. Dhirubhai Ambani: The Polyester PrinceThe Dhirubhais [of this world] are to be thanked, not once but twice over. They set up world-class companies [and] by exceeding the limits in which those restrictions sought to impound them, they helped create the case for scrapping those regulations.-- Arun Shourie, former Indian Minister for Disinvestment, Communication, and Information Technology. Quote from The Billionaire Raj.The history of Reliance has been well-told in many places, from books like The Billionaire Raj to The Polyester Prince to Vedica Kant’s excellent essay, Reliance: Origins. I will lean on these sources heavily in this history, and you should read them if you’re interested in learning more.Born in a small village to a schoolteacher father and his wife in what is now the state of Gujarat in British-ruled India in 1932, Dhirubhai Ambani’s life is a classic rags-to-polyester suits story. When he was in his late teens, Dhirubhai moved to Aden, a British port in modern-day Yemen, where he worked as a Shell pump attendant and then office clerk. At Shell, he learned the oil business, but in the Yemeni souks, he learned to trade. In To Understand Jio, You Need to Understand Reliance, Byrne Hobart recounted this telling story from The Polyester Prince:In the early 1950s, monetary authorities in Yemen noticed a concerning trend: a currency shortage. After investigating the matter, they traced it back to a young clerk in the city of Aden, who had discovered that at the prevailing exchange rate, Yemeni rials contained more silver than their face value. So he bought them for British pounds, melted them into silver, exchanged the silver for pounds, and repeated the process.Young Dhirubhai saw that rials were worth less as currency than as metals, and arbitraged the system to generate a tidy profit. It was the first example of what would become a long career of understanding and bending the system to achieve his desired outcome. Soon after, Dhirubhai returned to India and founded Reliance Commercial Corporation in 1966. In 1973, he renamed the company Reliance Industries, representing its expanded focus. Leaning on his education in the souks of Aden, Dhirubhai started Reliance by trading spices and textiles. He made his first fortune, though, in import licenses. To encourage manufacturing, the Indian government put strict import limits on yarn and other textiles, giving licenses only to textile exporters who needed to import raw materials. Dhirubhai acquired these “Replenishment Licenses” from the exporters and began to control the supply of yarn. His next moves showcased what would become two major elements of Reliance’s success: vertical integration and cultivating government relationships. In order to capture more of the profits from the yarn, Ambani set up a textile manufacturing facility, vertically integrating from trade of raw materials to manufacturing finished products.He also formed important government relationships with aides to Prime Minister Indira Gandhi (no relation to the Gandhi). In The Billionaire Raj, James Crabtree wrote, “His philosophy was to cultivate everybody from the doorkeeper up.”His relationships paid off early and often. Vedica Kant wrote that in 1971, PM Gandhi’s government set up a High Unit Value Scheme, which allowed the import of polyester filament yarn against exports of nylons. Reliance “accounted for 60% of imports and exports under the scheme.” In 1977, a new Congress scrapped the scheme, forcing Reliance to focus on retailing to the Indian market instead of exporting, which had accounted for much of its business to that point. Dhirubhai created the Vimal polyester suit brand and established a network of Vimal franchises across India to sell product directly to consumers. That same year, under pressure and needing cash, Reliance decided to go public. It democratized access to public market equity investments in India by offering stock at an incredibly affordable ₹10 per share. Puja’s parents lived in India at the time and told me that everyone bought shares in Reliance. The numbers back them up. In an investment frenzy that makes Tesla and Apple’s stock split-driven demand look tame, Reliance’s IPO was 7x oversubscribed. As Indian stock market investors quadrupled between 1980 and 1985, one in four owned Reliance shares. So many people owned Reliance that, years before Warren Buffett brought Berkshire Hathaway’s shareholders together in Omaha, Dhirubhai Ambani held his Annual General Meetings in sold-out cricket stadiums. Hobart points out that the IPO “gave Reliance a broader political constituency: instead of buying individual regulators with bribes, they nudged the electorate with dividends.” As Puja’s dad explained it to me, Reliance made a lot of regular Indians wealthy, as the stock grew and split and grew and split and grew and split over the intervening 43 years. At the 2017 AGM, Mukesh Ambani said that ₹10,000 invested at IPO would be worth ₹1 crore in 2017, a 1000x return. The stock is up 3.25x since then, which means that $1,000 invested in 1977 would be worth $3.25 million today. Reliance Industries’ stock has grown at a 32% CAGR for 43 years! For context, the new Netflix show Bad Boy Billionaires: India, tells the story of Sahara, a pyramid scheme that promised poor Indians 6.5x returns over 15 years on small amounts of money. Those investors lost everything. Had they invested their money in Reliance stock, instead, they would have multiplied their money by 64x over the same period. Flush with cash, supported by millions of happy shareholders, and with Indira Gandhi back in power in the early 1980’s, Reliance backward integrated, making its own polyester fibers through a subsidiary, Reliance Petrochemicals. The liberalization of the economy set the stage for further expansion.Between its independence from Britain in 1947 and 1991, India operated a protectionist economy with heavy state intervention, more akin to the Soviet Union than the United States. (In fact, India was militarily aligned with the Soviets during the Cold War, and still flies MiGs today, although as its economy becomes more American, it’s buying more of its arms from the US.)Pre-1991, elaborate licenses and red tape, known as the “License Raj,” limited who could set up what type of business. Dhirubhai played this system masterfully to produce Reliance’s early success, and from that strong position, Reliance was well-prepared to take advantage of economic reforms. In 1991, under Prime Minister P.V. Narasimha Rao and Finance Minister Manmohan Singh, India liberalized and laid out a five-point plan to foster the Indian economy:* Abolish the License Raj by removing licensing restrictions for all but the most security-sensitive industries.* Incentivized foreign investment by pre-approving all investment up to 51% by foreign companies, allowing them to bring money, technology, and development.* Incentivized technological advancement by scrapping the need for government approval for technology agreements. * Dismantled public monopolies by selling shares in public sector companies and limiting public sector growth to things western governments do, like infrastructure and defense. * Uncapped company upside by eliminating the concept of an MRTP company, which were placed under government supervision when their assets exceeded a certain value. My father-in-law told me that this evolution from a state-run to liberal economy was planned all along, and Reliance was prepared. The company still benefits today.Freed by India’s liberalization, Reliance backward integrated even further, establishing Reliance Petroleum to finance its own oil refinery, Jamnagar, which was the world’s largest when it opened in 2000. (Just to give you a sense of Reliance’s mind-blowing scale, it’s casually the largest exporter of mangoes after the company planted mango trees at Jamnagar to assuage pollution concerns.)Reliance was on a tear and Dhirubhai was worth $25.6 billion when, in 2002, he suffered a stroke and passed away at age sixty-nine. As captured in the quote at the beginning of this section, he not only built a leading Indian company, he exposed and leveraged holes in the Indian regulatory framework that likely played a part in liberalizing the economy. Dhirubhai left behind an enduring legacy and a multi-billion dollar empire. His death set off a succession battle fit for Jio TV+. Succession: Reliance Edition Dhirubhai Ambani had two sons. Mukesh, the elder brother, was an “unflashy, introverted, and well organized” Institute of Chemical Technology grad who enrolled at Stanford GSB before dropping out to help his father run Reliance. Anil, two years his junior, was a “flamboyant financial wizard” who got his MBA from Wharton. While Dhirubhai was alive, the two sons worked well together, but after his death, they battled fiercely for control of the company. “The war,” as it was referred to, got so bad that the brothers, who lived in the same building in Mumbai, coordinated their entry and exit through associates so as not to run into each other. The battle was one of the reasons that Mukesh decided to move into his own digs, Antilia, the second most valuable residential property in the world behind Buckingham Palace at $2.2 billion.After three years of fighting, Mukesh and Anil’s mother, Kokilaben, got them to agree to a peace accord, which she announced in June 2005. Each brother would get half of the company: * Anil: Reliance Group, including RIL’s newer businesses like Reliance Energy (power), Reliance Infocomm (mobile & telephone), and Reliance Capital (non-bank finance).* Mukesh: Reliance Industries, including oil refining, retail, and exploration, and petrochemicals. As part of the terms of the agreement, the brothers agreed to a ten-year non-compete, meaning that Mukesh couldn’t get into, say, telecoms until 2015. (Hold on to that thought.) At the time of the split, Mukesh was the third richest man in India, with a net worth of $7 billion, with his younger brother right behind him at number four, worth $5.5 billion. From this point on, we’re going to be following Mukesh’s side of the house, Reliance Industries, because he has outperformed his younger brother by orders of magnitude. You already know that Mukesh is the richest man in Asia, worth $85 billion. How about Anil? In March 2019, Mukesh had to bail him out of a $77 million dollar loan he owed Ericsson, in exchange, the rumors go, for Anil’s attendance at Mukesh’s daughter Isha’s late 2018 wedding. In February 2020, Anil declared before a UK court that he was bankrupt, with assets of $82.5 million and liabilities north of $300 million. Although many don’t believe he’s as poor as he claims, it illustrates how far he’s fallen.Reliance TodayMukesh built on his father’s legacy to create an empire spanning energy, petrochemicals, digital services, and media and entertainment. Today, Reliance makes money in six main ways: It’s super simple, just 158 subsidiaries and seven associate entities:Reliance even owns my favorite cricket team, the Indian Premier League’s Mumbai Indians. Mumbai won the 2019 IPL Championship led by Mukesh’s wife Nita, who also runs the Reliance Foundation, and his son, Akash, who is an executive on Jio and Retail. It currently sits atop the 2020 IPL standings, too. As with any multinational conglomerate, there’s a lot going on at Reliance, so to understand the company’s priorities, it’s helpful to look at how the company talks about itself, and for how long: In Acquisition in the Key of G Sharp, I wrote that one way to think about Google is as the United Arab Emirates: “The UAE is ridiculously wealthy right now because of oil, but it knows the oil money won’t last forever, so it’s investing heavily in new growth opportunities like tech and tourism.” In that essay, I compared search ad revenue to oil. In Reliance’s case, the analogy holds, except we’re literally talking about oil. Reliance’s Oil-to-Chemicals (O2C) business, spanning the entire energy value chain from exploration and production, to refining and petrochemicals, to marketing and retail, is responsible for 69% of Reliance’s revenue ($73 billion) in 2019-2020 and 63% of its profit ($7.6 billion). But Ambani realized that oil cannot be the long-term future of the business. In addition to committing to hydrogen, wind, solar, fuel cells, and batteries on the road to its carbon neutral by 2035 goal, Reliance is doing two things with its oil business: * Raising Cash. Last year, Reliance announced a ₹7,000 crore (~$1 billion) investment from BP for 49% of its fuel retailing business, and now it’s in the process of spinning off a big piece of its O2C business, including its oil refinery, petrochemicals, and fuel retailing assets. It’s valuing the subsidiary at $75 billion and is in talks to sell 20% of the unit to Saudi Aramco. * Running the Middle East playbook. Reliance is taking the cash it generates from the legacy oil and petrochemicals business in new growth areas, namely Retail and Jio.Oil and petrochemicals are Reliance’s past. Retail and Jio are its future. Reliance Retail and JioDuring the Annual General Meeting, Reliance spent 57 minutes talking about its business lines. It dedicated 42 of those minutes to Jio, the new gem of the portfolio, despite the fact that it makes up only 8.9% of revenue and 25% of profits. It also spent five minutes on Reliance Retail, which is increasingly tightly linked with Jio and key to its future growth plans. Both Reliance Retail and Jio, two business lines Mukesh started after his father’s passing, follow the New Reliance Playbook: * Use balance sheet and cheap debt to spend on high upfront fixed costs and spread them out over millions, and potentially billions, of customers t low marginal cost.* Build up a complex, capital-intensive business using local know-how, logistics expertise, and connections. * Aggregate hard-to-wrangle Indian demand and supply.* Sell access to that demand to international companies and investors via investment and strategic partnership. It’s worth noting that an important part of Reliance’s playbooks, old and new, is its governmental relationships. Reliance’s relationship with Modi’s government has helped Jio and Retail succeed, for better or worse. Two examples highlight the cozy relationship: * In 2016, Reliance and the State Bank of India set up a JV to provide banking and remittances through Jio and Reliance Retail. * Modi’s government is making it difficult for BSNL, which provides telecom to India’s poorest and most remote regions, to obtain licenses to upgrade to 4G. The denial is ostensibly because they use Chinese components, but many believe it’s a bid to help Jio at the expense of BSNL.Critics claim that Reliance unfairly benefits from its relationship with Modi and his BJP government to the detriment of competitors, potential competitors, and consumers. While there seems to be a great deal of truth to the criticism, this is nothing new for Reliance, or indeed, for large corporations anywhere (Oracle/TikTok, anyone?). Dhirubhai built Reliance on the strength of his relationships with the government, and Mukesh is carrying on that legacy, helping Modi achieve his development goals for India and benefiting in the process. This relationship deserves its own essay, but for now, know that it exists, and is both a tailwind while the BJP is in power and a potential risk if it falls out of power. Before that happens, Reliance needs to further cement its place as crucial infrastructure for the Indian economy so that any government has no choice but to work with it. Retail and Jio are crucial to that aim.Both business lines speak to Mukesh’s ambition to build a new Reliance of his own design and highlight Reliance’s position as the only serious way for foreign companies to access the Indian market at scale. They also prove that, like Tencent’s Pony Ma, Ambani is a masterful capital allocator, turning legacy assets and cheap debt into two future-ready, cashflowing businesses valued at a combined $120 billion. Reliance RetailIn 2006, one year after taking the helm of Reliance Industries, Mukesh launched Reliance Retail, a nationwide network of retail outlets. Since then, Reliance Retail has grown into the largest and most profitable retail business in India and the fastest-growing retailer in the world, increasing revenue by 8x and profits by 11x in the past five years alone. Today, it boasts 11,874 stores, more than two-thirds of which are in Tier 2, 3, and 4 cities (which, in India, can mean a few million residents), covering 28.7 million square feet. Its breadth is astonishing: It has grocery stores, cash and carry stores, corner stores, consumer electronics stores, and fashion & lifestyle stores, along with its own consumer brands in each of those categories. It also boasts exclusive partnerships with many of the world’s largest retail brands. Partnering with Reliance is the easiest way to access Indian consumers. It is also piloting JioMart in 200 cities across India, powering local kiranas, which are like small, family-run bodegas, to physically overhaul them in 48 hours, set up and manage delivery operations, offer 7% lower prices than competitors, digitally track inventory, and auto-replenish based on inventory levels. It’s arming the existing, super-fragmented network of rebels, proving aptitude not only at wrangling demand but wrangling hard-to-wrangle Indian supply.JioMart’s approach, combining elements of Amazon, Shopify, and DoorDash to empower instead of replace the local vendors might be the ultimate form of retail entropy wrangling.  It even promises to be the first farm-to-home company at scale globally, bringing fruits and vegetables direct from the farmers who make up so much of the Indian population directly into consumers’ homes, sort of like an early Pinduoduo for India. These are all things that a foreign company just couldn’t do on its own. Instead, in order to participate in the massive growth of the Indian retail economy, foreign companies and investors need to, you guessed it, invest in, and partner with Reliance. Over the past two weeks, Reliance has sold about 8.5% of Reliance Retail for $5.1 billion to foreign investors, all but one of whom also invested in Jio Platforms (which we will discuss below), valuing the unit at $60 billion. It is also in talks with Amazon for an investment of up to $20 billion in exchange for a third of the business, despite a potential legal battle brewing between the two. When Reliance acquired Future Group for $3.4 billion in August, it did so despite Amazon’s right of first refusal on the business, which Amazon is now suing Future Group to enforce. It will be fascinating to watch how this plays out in light of Amazon’s potential investment in Reliance Retail. If Amazon, which has struggled to gain a foothold in India due to regulatory issues (coincidence?), capitulates, it will further highlight Reliance’s fortress position as the gateway to foreign investment in India. Backed by some of the world’s biggest investors, and with the ultimate strategic retail partnership waiting in the wings, Reliance has the cash to subsidize its kirana and merchant partners and wrangle Indian ecommerce. It might also be in a position to export its capabilities to other developing markets with a similar informal retail structure and infrastructure to India. Made in India, Made for India, Made for the World. And Retail is only Reliance’s second-biggest opportunity… Jio PlatformsJio, Reliance’s digital services arm, is Mukesh’s ultimate bet on the digital revolution, which he calls, “the greatest disruptive transformation in the history of mankind, comparable only to the appearance of intelligent humans 50,000 years ago.” (He sounds kind of like Masa when he talks about it.) It burst into the global consciousness this summer when seemingly every major tech company and investor in the world invested billions of dollars in quick succession. Jio is first and foremost a national telco built from the ground up that skipped legacy telephony systems and opted to go data-only through 4G, and soon 5G, infrastructure. That decision created a significantly lower cost structure that allows Jio to undercut competitors and deliver voice and data and world-low rates. Four years after its 2016 launch, it is the #1 mobile provider in India and the #2 largest mobile provider in the world.Recall that when Anil and Mukesh Ambani split the Reliance empire, Anil got telecoms and the brothers signed a 10-year non-compete. So how did Mukesh end up as the brother with the enormous mobile network? In From Oil to Jio, Vedica Kant highlights that in a 2010 effort to restore familial harmony, the brothers scrapped their non-compete, opting for a much simpler agreement that stated that RIL wouldn’t get into gas until 2022. That freed Mukesh up to go hard at telecoms, and he did. That same year, in June, the Indian government began auctioning off 3G and broadband wireless-access (BWA or 4G) spectrum. Most bidders focused on the 3G, while a little-known company called Infotel won the 4G licenses in all 22 regions. After the winners were announced, Reliance swooped in and bought 95% of Infotel for $670 million. Like Walt Disney buying up the Florida swampland that would become Disney World via shell companies to keep prices down, Ambani used Infotel to keep his deep pockets hidden to other bidders. When they realized that Infotel was just a front for Reliance, competitors cried foul, to no avail. Ambani had the rights to 4G across India. Between 2010 and 2017, Reliance spent $32 billion of its own money and debt to build out a nationwide 4G network focused exclusively on data, not traditional 2G and 3G circuit-switched telephony services. That decision meant that voice could be handled over the data network for a fraction of the cost. As Ben Thompson wrote in India, Jio, and the Four Internets, Reliance’s strategy with Jio was the classic technology play: massive upfront costs with near-zero marginal costs. It spent $32 billion to build a 4G network that covers all of India, and offered three to six months of free data and voice to acquire as many customers as quickly as possible. When Jio officially launched in 2016, the impact was massive. By offering three and even six months of free data and voice, Jio grew from 1.5 million subscribers in its first quarter to 398 million subscribers in the quarter ended June 30, 2020 (although the FT points out that potentially one-fifth of those users are now inactive, largely due to price increases). In four years, Jio acquired more mobile customers than there are people in the United States, with room to spare. Jio’s low cost structure also made it nearly impossible for competitors to match them. In just three years, it caused four mergers and two bankruptcies, including Anil Ambani’s Reliance Communications. While Jio was a death knell for competitors, it was incredible for consumers. When Jio launched in 2016, the average Indian used 400MB of data per month. As of June this year, Jio users were consuming an average of 11.3GB, a nearly 30x increase. The national average, including non-Jio customers, is now 8.3GB, on par with tech-forward South Korea, meaning that Jio forced its competitors to up their games, too. More data consumption doesn’t just mean that people were more tied to their phones, it means that they were connected to the internet -- all of the commerce and communication and education and more -- without lag for the first time. Jio unlocked massive growth in the Indian tech ecosystem, in both creation and consumption, and in the inflow of foreign dollars. As happened with Retail, investors saw that Jio cracked a challenging Indian distribution problem and poured money into the company to share in the upside and gain access to the Indian market. In April, Facebook kicked off a flurry when it invested $5.7 billion for a 9.99% stake in Jio. Facebook had tried and failed to bring better* (*arguable) internet to India with its Free Basics, and realized that partnering with Jio was the smarter route. India is WhatsApp’s biggest market (as I can attest based on the flood of WhatsApps messages that stream in from Puja’s family every day), and the two companies have already launched a partnership to let consumers order directly from local JioMart stores via WhatsApp.  Including Facebook, between April and June, Reliance sold 33% of Jio Platforms for $20.4 billion to a range of world-class investors hungry for a piece of the action for financial or strategic reasons, or both. The transactions value the subsidiary between $58 billion (Facebook and Google got a better price for strategic reasons) and $66 billion (for everyone else). Can we take a second to discuss the brilliance and uniqueness of Reliance’s financing strategy here? It was both a huge bet and a capital markets arbitrage. * Instead of raising equity financing when Reliance kicked off the project years ago, when it would have had to sell huge chunks of the business to raise the requisite $32 billion, more akin to a JV than a subsidiary with outside investors, Reliance took advantage of its existing balance sheet and pristine credit rating to raise non-dilutive debt. * With the business up and running, Reliance was able to sell just one third of the business for $20.4 billion to pay down debt, picking up both strategic partners for Jio Platforms and financial partners for future endeavors (like Retail, and, I think, something bigger soon). * Issued an innovative $7 billion rights offering in June, in which existing shareholders bought shares at a discount with a deferred payment plan, like Affirm for equity, to pay down more of the overall company’s debt. No other company in India could have pulled this off, large or small. Telcos were locked into their existing networks and didn’t have the borrowing capacity of a large conglomerate. Reliance’s credit rating is higher than the government’s, meaning that it can borrow at the lowest cost of capital in India, and its size and government relationships make it the ideal investment for foreign companies and investors looking to play in India. Once Mukesh convinced himself that this was going to work, a big if, the way he chose to finance it was the highest-upside route.Today, Reliance has zero net debt, well ahead of its March 2021 goal, with its next big bet ready for market: 5G. Ambani said at the AGM that "Jio has created a complete 5G solution from scratch, that will enable us to launch a world-class 5G service in India, using 100% home grown technologies and solutions.” Jio plans to both connect India with 5G as soon as spectrum is available, and to export 5G solutions as a complete and managed service to other countries. This plan was in the works before the May border skirmishes with China, but it benefits from India’s and the western world’s growing discomfort with China. Whereas China’s Huawei had been a critical piece of many countries’ 5G infrastructure plans, the US, UK, and India banned Huawei components, and Belgium recently rewarded its 5G contract to Nokia over Huawei. Huawei’s loss is Jio’s gain, and the 5G war is just one example in a trend away from China and potentially towards India. And it has more Jio assets up its sleeve. The Jio Platforms investors only bought a piece of the wireless network and services. Reliance also has separate entities for:  * Jio Fiber, which provides wired broadband service, and in which Reliance just invested $5.4 billion to buy a 48.4% stake from a trust, valuing the subsidiary around $11 billion.* Reliance Jio Infratel, which owns a portfolio of wireless towers in India, and for which Brookfield Asset Management paid $3.4 billion to acquire a 93% stake in 2019.  Reliance views Jio, including Platforms, Fiber, and the upcoming 5G network, not just as the underlying infrastructure layer, but as the platform on which it can offer a suite of digital services, from chat and payments to education and TV. With 5G, it will extend its Internet-of-Things capabilities.This is not a new playbook. The spectacular failure that was AOL/Time Warner comes to mind, as does WebTV. The idea of combining the infrastructure with the apps and content makes intuitive sense, but it hasn’t really worked. Jio has unique characteristics - including a massive market share in an enormous market and partnerships with Facebook and Google - that give it the chance to pull this off, although early adoption of Jio’s apps and services have been less impressive than consumer adoption of its infrastructure. In just four years, Mukesh built a legacy-defining telco that generates $9.4 billion at a 33% EBITDA margin. Jio did about as much in 2019-20 EBITDA as Twitter did in 2019 revenue. And as India’s wealth grows, Jio will be able to charge more for its service, giving it upside even if consumers shun the apps and services it builds on top. What’s Next for Reliance? Whether or not Jio succeeds in getting consumers to use its apps and services, it has the opportunity to emulate a couple of other Asian tech giants that we’ve discussed in previous essays: Tencent and SoftBank. If it succeeds in building a superapp, it will be in almost exactly the same position that Tencent is in China - controlling the flow of Traffic and Capital. Even if it fails to generate app adoption, though, Reliance controls both the wired and wireless pipes in India, giving it another cash cow that it can use to support and export the Indian tech ecosystem. Today, we got up to speed on Reliance’s past and present. I hope you leave this essay excited to learn more about the Indian tech scene and Reliance’s role in it, because in Part II, we’ll explore Reliance’s future. That will take us on a journey through: * The Indian startup landscape* Further into China/India relations* Reliance’s Tencent and SoftBank Opportunities* India’s impending emergence onto the global exchanges Thus far, we’ve focused on Made in India, Made for India. Next time, we’ll discuss how Reliance will Make for the World.Thanks to Dan for the edits, and to my father-in-law, uncle Sudhir, and Sid Jha for their input! And of course, to Puja, for bringing Dev into the world and still reading drafts 😍Thanks for listening, 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

If you’re listening but haven’t subscribed, join 16,497 smart, curious folks by subscribing!Hi friends 👋,Happy Thursday! As I’ve started to monetize Not Boring, I’ve been very pleasantly surprised by the companies that want to tell you their stories. I thought I was going to need to take bold stands and say no to advertisers whose products I don’t believe in, but I’ve noticed something cool happening. All of the sponsors that I’ve worked with are Not Boring readers, they understand the things that I’m excited about, and they realize that if you’re reading Not Boring, you’ll probably be excited about them too. They see their products in the trends and ideas we discuss, and reach out because they recognize the alignment. These are companies I’m genuinely bullish on, and I can’t believe they pay me to tell you about them. A couple of weeks ago, I told you about MainStreet, a company that literally gives startups free money. As a result of that post, Not Boring readers are getting over $900k back from the government this year. Today, I’m writing about Fundrise, a pioneer in the “everyone is an investor” space and one of the smartest, easiest ways to add real estate to your portfolio. When I wrote about MainStreet, I mentioned that it was a CPA deal, meaning that I got paid when people signed up and saved money, and that I would call out when I was doing which type of deal. Fundrise is paying me a flat fee and I don't receive any additional compensation from you signing up for the platform.Let’s get to it. Fundrise & the Magic of DiversificationLast week, I ended my piece on Opendoor talking about my desire for new ways to invest in real estate and make the asset class more liquid and accessible. It’s been under my nose this whole time: Fundrise. Fundrise gives retail investors access to institutional quality real estate investments without high fees and with transparency around the performance of your investments. Having worked in real estate tech, I’ve known about Fundrise for a while, but my conception of the company was based on its earliest model in which Fundrise crowdsourced investments on a property-by-property basis. It was one of the first companies to use crowdfunding for real estate, but it’s evolved since then. Over the past few years, Fundrise has overhauled the model to run more like a traditional real estate private equity fund, but funded entirely by its individual investors, who invest around $8,000 on average. But that doesn’t mean Fundrise itself is small. To date, since its founding in 2012, Fundrise has invested in $4.9 billion worth of real estate, to great success. Since 2014, its platform’s average annualized returns ranged from 8.76% in 2016 to as high as 12.42% in 2015. Last year, it returned 9.47%. What’s really fascinating is that not only are the real estate funds backed largely by individual investors; the majority of the company itself is funded by those same investors. That means that Fundrise can play the long game, and avoid the trade-off between growing quickly and charging high fees to make venture investors happy, and investing patiently with low fees to make its fund investors, who also back the company, happy. So how does it do it? Fundrise is one of a growing list of companies that takes advantage of Reg A+ to democratize investment in asset classes that were previously unavailable to all but the wealthiest few. As I wrote about in Secure the BaaG on Monday, companies like Fundrise give everyone access to similar investment opportunities that professional investors and the ultra-wealthy have access to, and allow us to build diversified portfolios that generate better risk-adjusted returns than going all in on NKLA calls. If you’ve been wanting to invest in real estate but didn’t want to buy and manage a portfolio yourself, or pay the high fees associated with real estate private equity, you can check out Fundrise now:But, as always, this is all about learning, so we’ll cover: * The importance of diversification into alternative assets like real estate* What makes Fundrise different than traditional approachesWhy Invest in Real Estate? DiversificationTwitter is the best. A few days after my Opendoor piece, I was scrolling the tweets and came across this one from the SPAC King, Chamath Palihapitiya, the same guy who took Opendoor public: Chamath pointed out that in a low interest rate environment, the traditionally suggested 60/40 Stocks/Bonds mix no longer makes sense. While many in his replies pointed out that because of the way bonds trade, you can still generate strong returns on bonds if you know what you’re doing, his larger point stands. The traditional way of building a portfolio doesn’t make as much sense as it used to.  Today, retail investors have access to a larger universe of options than we did before, and investing in uncorrelated assets creates better risk-adjusted returns than investing only in stocks. In his seminal paper on the topic, “Engineering Targeted Risks and Returns,” Bridgewater CEO Ray Dalio wrote about his hedge fund’s Post-Modern Portfolio Theory approach, an evolution of the Yale Endowment’s Modern Portfolio Theory. He describes different approaches to get to a target 10% annual return. In the traditional approach, an investor needs to put most of his or her portfolio in equities, which typically generate higher returns than cash, bonds, real estate, but at a higher level of risk. Being so heavily concentrated in one, high-risk asset class is a riskier way to generate returns than he’s comfortable with, so he recommends another approach, that boils down to a few ideas:* You can generate a similar risk/return profile to equities by using leverage in other asset classes. * Diversification into uncorrelated assets -- both of asset classes (beta) and the managers who invest in those asset classes (alpha) -- produces better risk-adjusted returns than high concentration.* By leveraging non-equity asset classes to the same risk/return level and diversifying across more uncorrelated asset classes and managers, you generate better risk-adjusted returns. For our purposes, the specifics are less important than understanding this key concept: allocating money across a diversified portfolio has historically generated better risk-adjusted returns than concentrating in just stocks, bonds, or even the traditional 60/40 split.Which brings us back to Fundrise. Investing in real estate as part of a diversified portfolio should theoretically produce better, less risky returns over time than whatever your portfolio looks like today. Fundrise makes it easier than ever for retail investors to do that, at a lower cost.Meet FundriseOK, so adding real estate to your portfolio is probably smart. How do you do it? Traditionally, there have been three main ways to invest in real estate:* DIY: This is the original way to invest in real estate. Buy a house and live in it, buy a house to flip, buy an apartment building and rent it out to generate income, buy an office building and rent it out to generate income. The list goes on and on, but all of them have two things in common: they require a lot of cash and they’re a lot of work. * Real Estate Fund: Give your money to professionals, have them do all the legwork (or coordinate with third-parties to do the legwork) and generate returns after fees. This is a great approach - if you could have invested in Blackstone’s real estate funds over the past thirty years you would have made a lot of money - but access is typically reserved for the ultra-wealthy. * REITs: In 1960, Congress established REITs to give retail investors access to investments in income-producing real estate. An investor can buy nearly 100 publicly-traded REITs or an ETF containing a portfolio of REITs, like Vanguard’s REIT ETF. Publicly traded REITs appear to be low fee, but by the time it gets to you, many parties will have taken cuts for their piece of the process, from sourcing to management. Fundrise is different. Fundrise is a Natively Integrated Real Estate Fund that raises money from retail investors like me and handles the whole real estate investment process, from sourcing to rehab to management, using technology to remove layers and lower fees.Here’s how it works. Investors go to Fundrise, set up an account, and choose how much to invest. You can invest as little as $500, although investing over $1,000 gets you access to its Core product, which allows you the ability to allocate across all of its funds, and $10,000 gets you access to its Advanced product, which allows you to choose the funds into which you invest. I’m not a huge regulation nerd, but Fundrise uses the one regulation that I absolutely adore to make an asset class traditionally reserved for accredited investors available to anyone: Reg A+. Reg A+, passed as part of the 2012 JOBS Act, lets companies raise up to $50 million per year from non-accredited investors. It’s the regulation that enables companies like Rally Rd. and Otis to make cultural items like cars, art, and sneakers more easily investible. I don’t think it goes far enough to open up new asset classes (that’s for another post), but it’s a great first step in democratizing access to better diversified portfolios. Fundrise is a leader among Reg A+ companies, so much so that it appears on the Regulation A Wikipedia page.Through Reg A+, Fundrise also lets certain investors in its funds invest directly in the company itself through its internet Public Offering. Since its Series A raise of $38 million in 2014, the company has been primarily  funded by the same people who invest in its funds. In 2017, for instance, it raised $14.6 million from 2,300 Fundrise members. That feels like a testament to its customers’ love for the product. It also creates a strong alignment between fund investors and the company itself. Cadre, another real estate investment startup co-founded by Jared Kushner, Josh Kushner, and Ryan Williams, has raised $133 million from venture capitalists. With that investment comes the expectation of rapid growth and strong profitability, which could lead to lower underwriting standards and higher fees. Plus, Cadre does not avail itself of Reg A+, and focuses only on accredited investors who can put up the $50k minimum investment. Ok, enough nerding out about Reg A+. How does the investment in Fundrise’s real estate funds work? Regular people invest directly into a fund, which goes out and acquires, renovates, and manages properties across asset classes (residential and commercial), geographies (“Smile States” from LA, down the southern coast, and back up to DC), and strategies (income or growth). You can check out Fundrise’s investment offerings here.Because Fundrise is natively integrated -- using technology to integrate supply, demand, and operations and build a direct relationship with its investors -- it is able to charge lower fees than investing in a traditional REIT. You can read more about Fundrise’s fee structure compared to Vanguard’s REIT ETF here, but it boils down to the fact that Fundrise invests your money directly into properties and cuts out a series of middlemen. Additionally, because Fundrise investments are private and non-traded, they are less correlated to the overall market than publicly traded REITs. When the market crashed in March, for example, Vanguard’s REIT ETF tanked nearly 45% even though underlying real estate prices didn’t fall that far. Publicly traded securities are subject to the short-term whims of the market to an extent that private, non-traded funds aren’t.To whit, Fundrise’s Net Asset Value (NAV) increased 2.41% in H1 this year, not in line with historical results but still positive and significantly better than Vanguard’s. That does come with a drawback, though. Fundrise closed redemptions during the Coronavirus in order to maintain cash reserves, protect the larger portfolio, and keep its long-term focus. That’s likely a good thing in the long-term, but in the short-term, it reduces your liquidity. It’s worth noting, however, that Fundrise has since reopened its redemption program.Over the long-term, though, that stability has produced strong returns for Fundrise’s investors. Since switching from a property-by-property crowdfunding model to its current fund-based model in 2014, Fundrise has generated average annualized returns between 8.76% and 12.42%.The TakeawayWe’re in an incredible era in which it’s now more possible than ever for normal people to build a diversified portfolio across asset classes. In addition to traditional stocks and bonds, we can invest in startups (via the Not Boring Syndicate, for example), exotic cars and collectibles, via Rally Rd., in smarter automated investment strategies (soon, through Composer), and directly in real estate funds via Fundrise. As someone whose public market equities portfolio is heavily weighted towards high-risk, high-return tech stocks, diversifying the rest of my portfolio into uncorrelated asset classes like real estate helps me sleep at night. But while diversification is smart, diversification alone is kind of boring. The thing I like about Fundrise is that its app and website actually let you look at all of the assets in your portfolio. It doesn’t feel like you’re investing in “Real Estate Portfolio X,” it feels like you’re investing in an apartment building in California, a warehouse in Texas, and and office in Florida. Seeing each property, how they perform individually, and how those performances compose the overall performance of the fund is more fun and makes it easier to learn what’s going on. It’s the good parts of passive investing mixed with the entertainment and education of being more hands-on. All of these things combined -- the product experience, low fees, and strong performance -- are why Fundrise is the only 5-star reviewed real estate investing company on NerdWallet, and why I’m excited to be able to tell you all about it today. To check out Fundrise and see if it makes sense as part of your diversified portfolio, click the link: 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 1,018 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 16,200 smart, curious folks by subscribing here!This week’s Not Boring is brought to you by…As you’ll read today, one of my most strongly-held beliefs is that we are in the earliest innings of a movement towards more accessible, democratized investing across all asset classes. The lines between finance, gaming, media, and social are only going to get blurrier from here. Saying “I don’t really follow the markets” is no longer an option. But it can also be hard to understand where to start, and to build up a portfolio in a responsible way. That’s where Public comes in. Public makes the stock market social by letting you buy and discuss stocks and the companies behind them with thousands of smart, curious people. I’ll be discussing today’s essay and the companies behind the trend over on Public. Join me. Hi friends 👋,Happy Monday! I read a lot -- from sci-fi to 10-Ks to Twitter -- and a bunch of seemingly disconnected ideas float around in my head and interact with each other and sometimes form the fuzzy outline of something that I can’t quite clearly articulate but that feels important to explore. Occasionally, I’ll try to put some of these concepts into words. Today is one of those days. Today’s essay isn’t meant to be the final or complete picture, but a starting point and a way to shake up our collective brains and see what insights fall out. So throw on some Daft Punk… … and let’s get weird. Secure the BaaGLife Imitates Sci-FiWould it be possible to run a real business in a way that feels like playing a video game?This question has been swimming around in my head for the past few weeks, probably because I’ve been reading too much sci-fi.Before it was a terrible movie, Ender’s Game was one of my favorite books. You should read it, but here’s the plot: A talented six-year-old kid and two-time murderer named Ender goes to Battle School to train to fight an alien enemy known as “Buggers.” He excels and advances through the tests rapidly. For his final test, a war hero named Mazer Rackham puts Ender through a simulation, first solo and then in command of his classmates, in which his fleet is surrounded by Buggers protecting their Queen’s planet. Ender decides to blow up the planet and wins the simulation, only to find out that he was fighting the real war all along. That stuck with me since I first read the book twenty years ago. Imagine thinking you were playing a game only to discover that you were commanding armies of real people. Treating war as a video game abstracted away a lot of things -- pressure, moral complexity, fear, individual people -- and turned it into a game that a ten-year-old could win.Orson Scott Card wrote Ender’s Game in 1985, the same year that Nintendo released Super Mario Bros. on the original Nintendo Entertainment System. When the most advanced video game system was 8-bit, single-player, and 2D, it wasn’t obvious that video game skills would translate to battlefield success.  But thirty-four years later, in 2019, the US Army began actively recruiting video gamers. It even put together an all-Army esports team to compete in Call of Duty, Fortnite, and League of Legends tournaments across the country. As war-based Massively Multiplayer Online Games (MMOGs) become more realistic and war is increasingly fought via drones, the skills required to be good at each are converging. Business has a history of following defense. Many of the once-advanced technologies that underpin the economy today, from the internet to GPS, computers to digital cameras, were first developed for the military before being commercialized by private industry. Just as Ender’s Game predicted video games’ growing importance in war way back in 1985, Daniel Suarez’s Daemon novels described a future in which an artificial intelligence runs the economy by controlling humans like video game characters. You should read that one, too, but here’s the PacksNotes: When video game developer Matthew Sobol dies, he unleashes a computer program, the Daemon, on the world. It infiltrates the computer systems of major corporations and governments, crippling them, while simultaneously coordinating the actions of Daemon-sympathetic humans on the Darknet, an Augmented Reality layer that turns the physical world into a video game. By incentivizing humans with points, status, and credits, the Daemon turns civilization into a video game and rebuilds a new economy from the ground up. Today, three trends are converging to make a version of Suarez’s predictions possible: * Video Games are Eating the World. Video games are worth more than the film industry already, and games are spawning thriving virtual economies.* Business-in-a-Box (BiaB). Software is replacing more pieces of every industry’s value chain, and making it easier to operate businesses at higher levels of abstraction.* Everyone is an Investor. As more assets become more investible by more people, we move up another level of abstraction, to the point where more of our work is a capital allocation game. Together, these three trends mean that Suarez’s vision is possible, but instead of AI controlling humans like video game characters, humans will run Business-as-a-Game (BaaG). That means:* Game-like Environment with Real-World Implications. One digital interface through which an operator or operators can run a business and lead people, like a MMOG. * High Level of Abstraction. The business should operate at a high enough level of abstraction that goals are understood and important metrics are trackable and actionable, like numeric attributes, health scores, and points in games. * Persistent Environment, Liquid Resources. Because of clarity around goals and metrics, players should be able to join and leave companies on-demand, like Uber drivers with specialized skills, aiding in the quest when most useful. * Rewards Based on Skills and Contributions. People should be able to join companies semi-anonymously, via an avatar tied to a confirmed real identity that is not necessarily visible to the employee (Crucible is making this possible). People will be hired and rewarded based on trackable contributions instead of traditional credentials. At the simplest level, BaaG is just a shiny new interface on top of existing tools that makes work feel more fun. One way to think of it is, “What if developers built business-in-a-box software in the Unreal Engine?”As it evolves, BaaG can mean new ways of allocating human, digital, and financial capital to projects, more seamless employment, and new ways of crowdsourcing, prototyping, and simulating products and business models.While the work will feel fun, challenging, and game-like, the consequences will be real. Money won and lost in the game will be real currency, and real products will be delivered to real customers. That said, Business-as-a-Game is only possible in a world of relative abundance, where basic needs are met and we can afford to spend more time on creative and financial pursuits. Already, more business runs through software than ever before, and already, virtual economies are real and massive. According to SuperData, virtual marketplaces generated $109 billion in 2019, 85% of which came from the purchase of virtual goods. Virtual economies will only get bigger, and a Metaverse like the one I described in Tencent’s Dreams seems like an inevitability. Even before a full-blown Metaverse, though, which may be decades away, software and financialization have already abstracted away so much complexity that certain businesses could be played like Massively Multiplayer Online Role Playing Games (MMORPGs) today. Instead of quick reflexes, though, the most prized skill will be capital allocation.  BaaG seems far-off, but the pieces are already in place. We just need to tie them together. Video Games as More Than GamesVideo games are having a moment. There are a few obvious reasons, some of which we’ve discussed before:* We’re all stuck at home due to the Coronavirus, and video game usage increased 75%* Unity, the gaming engine that powers 53% of the top 1,000 mobile games, went public at a $20 billion market cap and revealed eye-popping numbers (check out the S-1 Club’s breakdown here)* Epic Games, which makes both Fortnite and the Unreal Engine, is in a battle with Apple over the tech giant’s 30% App Store cut* Matthew Ball has been evangelizing and people in finance are listening* Fortnite has been an absolute monster, with over 350 million players and $1.8 billion in 2019 revenue. * More importantly, Fortnite hints at the possibility for games to be more than games. Fortnite popularized in the west a popular Chinese business model that we discussed in Tencent: The Ultimate Outsider, namely making games “free to play”and monetizing through in-game purchases of digital items like stickers, skins, and dance moves. In the game, Epic brings together brands and media companies like the NFL, Jordan Brand, DC Comics, Marvel, and more in one digital marketplace. It’s also shown that a game environment can host activities that go beyond playing a game, from premiering the Star Wars: The Rise of Skywalker trailer in the game to hosting the Travis Scott: Astronomical concert attended by over 12 million people simultaneously.While the in-game events are eye-popping and hint to a future in which games are much more than games, in-game purchases are more economically important today. Most of the $109 billion in virtual marketplace revenue goes not to the platforms or game developers, but to individuals and small companies that create digital items for purchase in-game. In games like Roblox and Manticore, users create and monetize not just in-game items, but their own games and their own worlds. In 2020, Roblox expects that its creators will generate over $250 million, and Epic just led a $15 million round for Manticore, a Roblox for grownups. The definition of a video game is evolving beyond the OED’s: “a game played by electronically manipulating images produced by a computer program on a television screen or other display screen.” Increasingly, video games and work will blur, and video game dynamics will be an abstraction layer on top of the real world. Just as Ender was able to make decisions without worrying about the details and the Daemon built an economy by incentivizing thousands of participants with Darknet credits, I think that we will be able to run businesses a layer of abstraction up from the way we run them today. Kind of like playing a game. On the consumer side, there are a few ways in which business and games interact already: Business Simulation GamesGames like Virtonomics, Capitalism II, and MIT’s Business Simulation Games let players pretend that they’re running a business. I’m as big a business nerd as anyone, and these games seem dull even to me. Job Simulator is funny, at least. It’s based in the year 2050, when humans no longer need to work and instead simulate the jobs of old through video games. GamificationBack when I was looking to leave finance to join a startup, I took a Gamification course on Coursera. The Verification I got for completing it is still on my LinkedIn page.  Gamification, as I am now officially qualified to explain, is the application of game elements and digital game design techniques to non-game problems, like business challenges. This means techniques like giving users badges for doing things you want them to do. We’ve evolved since then, at least according to Superhuman’s CEO Rahul Vohra, who shared “how to move beyond gamification” with a16z. Instead, today, Superhuman uses elements of game design to make the experience of using its product rewarding for users. Sounds a lot like gamification to me. Either way, since so many companies building consumerized SaaS follow Superhuman’s lead, game design née gamification is once again in vogue. That means that while running a business itself isn’t exactly like a video game yet, the consumer’s experience increasingly is. Virtual WorkplacesCOVID put the burgeoning virtual workspace movement in overdrive. In Zoom, Unity, and the Quest to Scale Corporate Drudgery, Mario Gabriele wrote about the three approaches to replicating what the office does, virtually. But simulations, gamification, and virtual workplaces aren’t exactly what we’re after. Business simulations are just that - controlled environments with a small set of variables and no real-world consequences. Gamification simply uses game mechanics to make customers (and occasionally employees) do the thing you want them to do. And VR in the workplace is just another environment in which humans can do the work they would typically do in an office. The question we’re after is whether it’s possible to run an actual business, with consequences outside of virtual worlds, in the same way that you would play a game. What It Takes to Run a Business TodayAs more entrepreneurs build more and better software products to help companies launch, manage, and grow, more of the value chain becomes commoditized. For example, there are multiple software and services companies that handle each piece of the DTC Value Chain. In Shopify and the Hard Thing About Easy Things, we discussed the idea that the commoditization of the DTC value chain means that it’s harder than ever to stand out from the crowd. More software has another implication that we’ll focus on today: operators are running their businesses at ever-higher levels of abstraction. What does that mean? Just like video games allow players to control their characters’ moves by pressing some buttons, B2B software lets operators track and control things that entire teams of employees once did with a few clicks. But it’s not just ecommerce. Venture capitalist Nikhil Basu Trivedi recently wrote about Business-in-a-Box Platforms (BiaB), including but not limited to Shopify, that “enable new businesses to be started, managed, and grown using their products.” These BiaB companies all take a set of products someone would need to start a business in a particular vertical, bundle them together, and sell them to aspiring entrepreneurs. They abstract away the complexity of building a business, and narrow the set of choices an entrepreneur needs to make. For Phyllis Schlafly to send her anti-feminist newsletter, she needed to maintain a list of addresses, type up hundreds of copies, stuff and lick envelopes, and send them out through the postal system. For me to send you this newsletter, all I have to do is open a new Substack post (spend 30-50 hours researching and writing) and hit send. Want to teach people guitar? You no longer need to start a school, rent a space, or put up flyers all around New York City. Just set up a Teachable account, record what you know, set it live, and start making money. Even massive multinational businesses far too complex to run entirely out-of-the-box are now designing products as involved as cars and buildings within the Unity and Unreal engines, avoiding the time, expense, and imprecision of many rounds of physical prototypes.Modern software allows business owners and employees to do an increasing percentage of the things they need to do through software, and direct an ever-larger amount of resources at the click of a button. Take Amazon’s Mechanical Turk, for example. Previously, if you wanted people to perform a task, you had to source, hire, train, and pay each person separately. Today, you can access thousands of peoples’ labor by typing a few keys. This same dynamic plays out in a more personalized way across platforms like Fiverr and Dribbble.  Each of the pieces alone doesn’t seem revolutionary. We’ve been able to contract small amounts of peoples’ time for a while. Digital prototyping isn’t new. We communicate with humans and bots in the same Slack window all the time. Software and automation are integral to modern business and have been for decades. From inside the day-to-day progress, it’s hard to grasp a paradigm shift. But when you zoom out and look at all of the pieces coming together, the possibilities get exciting. We’re getting close to Business-as-a-Game.So what would a Business-as-a-Game Look Like? Business will start to feel like a video game in simpler, single-player industries first, and evolve towards more complex, multiplayer industries over time. Just as video games evolved from text-based single-player games to the visually rich MMOGs popular today, I believe the types of businesses we will be able to run as if they were video games will start simple and single-player and become massively open over time. In some industries, we’re almost there. MediaBen Thompson has written about the idea that media businesses are the first to respond to new paradigms because of their relative simplicity. Take a single-person media business like Not Boring. What I do is kind of like a game. Every week, I sit at a computer for hours, hit keys trying to unlock combinations of letters that people will enjoy. If I do it well, I get more subscribers, or points. If I do it poorly, I lose points. The amount of income I generate is correlated with the number of points I have. I can choose to trade my points in today for prizes (by going the paid subscription route) and limit my ability to earn more points in the future, or choose to try to find patrons (sponsors) to support my continued quest for points (thanks, Public!).I also need to figure out the best way to keep getting more points. Today, I choose to do that by spending more time trying to make the content good and sharing what I write on Twitter, where I pick up another set of points that I can trade for points in this game. See, it’s kind of like a game. Because it’s just me, and because the metric is so clear, there’s already so little complexity that it’s not hard to imagine what I do as a game. The only difference is the interface.Because I use a suite of tools, from Substack to Roam to Figma to Twitter to LinkedIn, I know that I’m not in a game. In media, for a new writer or content creator more broadly to think that they’re in a game would mainly just require a new UI on top of all of those tools.EcommerceIn my essay on Shopify, I wrote that if I wanted to start a DTC business: I could find and order product wholesale on Alibaba, set up a store on Shopify, drive customers to the site by buying ads on Facebook, Google, and Instagram, either myself or by hiring a growth marketing contractor on Marketerhire, take payments via Stripe, drop ship directly from China with Boxc or import with Flexport and ship with USPS, answer customer questions on Zendesk or Kustomer, and return items via Returnly. For a simple product like a t-shirt, running an ecommerce business as a game would also largely be possible today with an abstraction layer on top of all of those pieces of software packaged as a game. I could choose which t-shirt I want to sell from a virtual store, pick a price at which to sell it, create a digital storefront more easily than designing an island in Animal Crossing, and raise points to fund advertising and production by selling digital versions of the t-shirts or presenting my pitch to other players in the game. Once I had enough to allocate towards ads and physical production, I could choose which platform to advertise on and adjust in real-time based on how many points it takes me to find buyers. I might even deal with angry customers whose shirts don’t fit right through in-game chat. As the company gets bigger and the product gets more complex, so would the game. With a more involved supply chain, more sophisticated marketing, and more angry customers, players could recruit other players to join their team and share in the profits. Jobs would be more fluid, more akin to Mechanical Turk or Fiverr than full-time employment, aided by simplified metrics that new teammates could easily understand. To get from where we are today to Ecommerce the Game would require: * A rich virtual world in which players could design and render products (Unity or Unreal)* Scoreboards that track CAC, LTV, attribution, costs, and other inputs, respond to user decisions and customer feedback in real-time, and present them simplified as points* An interface that abstracts away administrative complexity - Stripe Atlas presented as “Name Your Business and Pick Your Global HQ” and Ramp presented as a way to spend points and earn rewards* APIs to connect all of the tools that businesses currently use, from Shopify to Stripe to Facebook Ads Manager to USPS, and allow in-game actions to control real-world resultsShopify’s CEO Tobi Lutke is a big gaming fan, crediting some of his success in business to the time he spent playing Starcraft. Might Shopify be the first to develop Ecommerce the Game? Beyond EcommerceOver time, more and more businesses will be able to be run as if they’re games, from real estate to SaaS and even to large-scale manufacturing. As robots replace labor (each robot replaces 3.3 human jobs according to MIT), more business is run via software, and complexity is continually abstracted away, there are very few businesses that won’t be able to be run as if they’re games. I’m actually surprised that no one has developed game interfaces for running a business yet. When you start to think about all of the disparate, 2D tools we use to work as compared to the rich, contained environments in which gamers play, the way we do things seems bland. And we’re getting to the point at which developing game interfaces for work is technically feasible.* Unreal and Unity make game development relatively cheap and easy* More of the value chain in nearly every industry is run through software and connected via APIs* Looker and other business analytics tools turn messy data into scoreboards that anyone in the business can manipulate and trackPlus, with games being such an unpredictable hits-driven business, many developers would line up for the steady cash flows and high upside represented by B2B SaaS businesses, particularly given those businesses’ recent public market success. As more of the discrete things we do at work begin to look more like games with persistent scoreboards and simplified decisions, and more of the complexity gets abstracted away, the decisions we’ll make look like investing. Capital allocation will become an increasingly important skill.At the meta level, this is a manifestation of a growing trend: everyone is becoming an investor. Everyone is an InvestorAt its most abstracted, business is about resource allocation. I invest in thing X, it produces return Y. The technical trends on the gaming and BiaB software side are converging at the same time that everyone is becoming an investor. Some call it the “Financialization of Everything,” some blame Robinhood, and ex-Coinbase CTO and investor Balaji Srinivasan recently tweeted: The reason he might be right is that it’s becoming easier and easier to meet basic needs with less effort. Instead of spending months growing and harvesting corn, we spend a second deciding to allocate some of our money to buying corn. According to Our World in Data, over the past two centuries, as we have moved from spending most of our effort on farming, to manufacturing, and now towards investing, our condition has improved:* Extreme poverty declined from 89% to 10% of the world population* Literacy increased from 12% to 86% * Only 4% of infants die within their first five years compared to 43%That frees up time for higher-leverage pursuits. We spend more of our time at higher layers of abstraction, having gone from extracting raw materials for our own consumption, to trade, to manufacturing, to management, and now, to investing. We’re essentially playing a video game every day as investing across various asset classes in real-time through digital interfaces becomes more mainstream. We have a certain number of points, and with increasing frictionlessness, we allocate those points to businesses or products that we think will put them to the best use.Just as operators can run more of their business by clicking buttons, investors can allocate capital to those businesses by looking at numbers. Increasingly, investors means all of us and numbers are real-time. For example, getting a loan used to mean reams of paper, in-person interviews at the bank, credit checks, and auditors. Today, a small business or startup can take out a loan near-instantaneously through Square Capital, Stripe Capital, Clearbanc, or Pipe, all of which read and lend against digitally legible cash flows in real-time.As regulations relax, software improves, and numbers become instantaneously available, more people are able to invest in more asset classes. Put another way, when everything is financialized, business increasingly becomes a game in which the goal is to maximize the return on allocated resources. As a few examples:  * No-Fee Trading Apps. Public makes the stock market social, allowing users to help each other decide where to allocate their money. Robinhood makes stock and options trading feel more like a game. * More Sophisticated Investing Strategies. Soon, Composer will let anyone build, test, and manage automated hedge-fund style portfolios through a simple UI.* Syndicates and Rolling Funds. Syndicates like the Not Boring Syndicate and Rolling Funds, like Jonathan Wasserstrum’s and Austin Rief’s make it easier than ever for accredited investors to invest in startups. * Peer-to-Peer Lending. On P2P lending platforms like Lending Club, people can lend each other money, boosting returns for lenders and lowering rates for borrowers, albeit at higher risk. * Reg A+. Part of the 2012 JOBS Act, Reg A+ lets businesses raise money from a wider range of investors, both accredited and non-accredited, to fund the business itself, raise investment funds, or invests in specific projects. Fundrise is like a real estate private equity fund for all of us who aren’t ultra-high-net-worth, and Rally Rd. and Otis offer investments in cultural items and collectibles like exotic cars, rare baseball cards, and sneakers. * SPACs. Love ‘em or hate ‘em, SPACs mean that companies are going public earlier in their life than they would through a traditional IPO, giving retail investors more exposure to their upside or downside. * Crypto and DeFi. Another love/hate, crypto and decentralized finance enable decentralized funding of companies and projects (remember ICOs?!?), a currency not reliant on central banks, and, let’s be real, the chance to speculate. In the bull case, crypto will mean that money moves at the speed of information, making investing more seamless, which would accelerate the promise of Business-as-a-Game.As more information, and better tools for interpreting that information becomes available, investment decisions that once required a tremendous amount of time and research require less. As that information becomes more and more legible, and the labor behind the numbers more automated, it becomes easier to think about everything as a potential investment opportunity, and business increasingly becomes a game of capital allocation. Business-as-a-game won’t entirely be about capital allocation. There are things that humans do extraordinarily well, and the people who do those things will be in high-demand on the receiving end of the allocated capital. Our time and skills are becoming more liquid and legible. Just as people completed tasks for Darknet credits in Daemon instead of holding down corporate jobs, we will behave more like players in video games, with our skills on offer to those who need us to complete their quests. In a liquid enough market, that means more earnings potential for us and more efficient resource allocation for the people running Businesses-as-a-Game.  This is kind of dystopian, no?A world in which we operate as characters in a game seems kind of dark, but as technology changes and gets more high-fidelity, norms change with it. Two centuries ago, when farming was the most common profession, it would have been unfathomable to think about a world in which most people sat inside, hit a metal box all day, and rarely touched the product of their labor. Even ten years ago, it would have seemed crazy to do everything over video, or chat cross-company on Slack, or build businesses on YouTube or Instagram or Twitch. But we evolve and adapt. We keep the best parts, throw out the worst, and keep going. Ultimately, I think that business needs to become more gamelike, for three reasons: * First, in time, it will seem barbaric that we didn’t enjoy going to work. As more of our basic needs are met automatically, we should be able to spend more time on things that we enjoy doing.* Second, when our basic needs are met, we will need a sense of purpose. The beauty of games is that they lend importance to the objectively trivial. If we reach a level of abstraction in which we all become investors, sending money back and forth, wrapping it in a game will make it feel more meaningful. * Third, BaaG gives humans more agency than a future in which AI and robots are able to do everything that humans do now, however far in the future that day may be. By becoming part of the game, we can avoid the Wall-E future that I constantly dread.I’m a techno-optimist, which is why I think that the march towards evermore abstraction is generally a positive, but I do think we will need new ways to find meaning as business becomes decreasingly life-or-death. Business-as-a-game is one path. BaaG is also one of the reasons I’m so bullish on tech, and that I really believe many category-leading tech stocks are still undervalued. Companies like Tencent, Shopify, Snap, Stripe, Google, NVIDIA, Unity, Amazon, and many more will benefit tremendously as not just the way we shop, but the way we run businesses continues to evolve and move online. I don’t think that we’ve even scratched the surface of their potential, or that people fully appreciate how big the leading tech companies are going to become. That’s why it’s fun to get a little weird and expand our universe of possibilities.Thanks as always to Dan and Puja for reading some truly terrible first drafts and helping me write something I’m excited (but still nervous) to share with all of you. 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 805 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 15,182 smart, curious folks by subscribing here!Hi friends 👋,Happy Monday! It’s hard to avoid SPACs. Everyone has one, Nikola is looking more and more like a fraud, and Chamath just launched three more. It’s easy to dismiss SPACs as a fad and the companies that they take public as immature, risky, and dangerous. But great companies can go public via SPAC, too, and they increasingly will. When we find one of those, it’s worth doing our homework, which is what today is all about.But first, a word from our Sponsor.Today’s Not Boring is brought to you by… In early June, I wrote: A startup called Public, backed by top VCs like Accel and Greycroft and celebrities and athletes including Will Smith and JJ Watt, built a product that makes investing social and community-forward, allowing people to build followings based on their investing acumen.I don’t know about my investing acumen, time will tell, but I know that we’ll make smarter decisions if we’re able to sharpen our ideas on each other. Like today, for example. Whether you’re bullish on $IPOB, bearish on it, or still figuring it out, I want to hear your opinion, so I’ll be posting and discussing on Public and would love to hear your thoughts over there. You can join the conversation whether or not you buy a single share… although everything is more fun with some skin in the game. (This is NOT investment advice, just an observation 😎) Now let’s get to it… Knock Knock. Who’s There? Opendoor.Home is Where the Startups Aren’tHomes are emotional. Puja and I are having our first kid, a son, in less than a month. We spent this Saturday cleaning up my parents’ house and getting rid of old junk that we hadn’t used for years to make space for all of the new stuff the little guy will need whenever we come visit. As with any cleaning project, we started by emptying one closet and decided to throw out twenty-plus years’ worth of trash and memories from around the house. As we emptied closets we hadn’t opened in years, my mom came up with reasons we should keep that old empty picture frame or half-used can of WD-40, told us that we should just dry clean the sleeping bag we bought in 1998 in case we might want to use it at some point in the future. None of it is rational, but it’s not unique either. Mari Kondo has made a fortune convincing people to let go of things that once held importance but no longer do. And that’s just the stuff. You would have to pry us out of the house itself. Maybe that’s why housing is one of the last major categories that technology has left alone. Sure, companies have tried. Tons of them. The startup graveyard is filled with companies led by entrepreneurs who realized that the way we buy and sell homes sucks, but couldn’t ultimately figure out how to change it. They weren’t thinking big or long-term enough. The companies that have made the biggest impact, like Zillow and Redfin, make it easier to search for houses, but then kick buyers over to agents to go through the offline process, the same way it’s always been done. There’s this Startup Lindy Effect at play in real estate. If the future life expectancy of something is proportional to its current age, and real estate has survived practically unchanged by technology longer than any other industry, then maybe the way it is is the best we can do. That’s why most people’s reaction to a company like Opendoor is, “Cool idea. Won’t actually work.” Opendoor, founded in 2013, lets people transact real estate at the click of a button. It promises to transform a process that has traditionally been “Complex, Uncertain, and Slow” into one that is “Simple, Certain, and Fast” by using technology to make instant offers on homes. At least one person sees the vision. Last Tuesday, Chamath Palihapitiya announced that his SPAC, Social Capital Hedosophia II (IPOB) is merging with Opendoor to take it public at a $4.8 billion valuation.(For a refresher on how SPACs work, check out Juul: The SPAC 2020 Deserves.)So now, without the months of preparation and detailed S-1 that the traditional IPO offers, the question shifts from, “Could Opendoor work?” to “Should I invest in Opendoor?”My gut reaction to that question was a resounding “NO.” There are three things that companies say that make me want to run away as fast as I can:* The Shark Tank Market Sizing. “X thing is a $y billion market! If we get just z%, we’ll be a multi-billion dollar business!” Stop. If anyone in a given industry can say something, it’s not an advantage. * Capital as a Moat. We talked about this in Masa Madness, but the idea of capital as a moat -- raising more money than competitors and spending it to achieve a dominant position -- has been disproven multiple times in SoftBank’s portfolio alone. * “We’re Like Amazon.” This is my favorite. If there’s a business out there that’s losing money, chances are, they’ve said something like, “Well you know… Amazon lost money for a very long time and look at them now!” Bless your heart. If the only thing that you have in common with Amazon is that you also lose money, you’re fucked. Opendoor says ALL THREE of those things. Plus, Opendoor faces opposition from the realtors who still control the vast majority of the housing market and competition from Zillow, a company I respect tremendously that has a massive demand generation advantage. PLUS, Opendoor is a well-funded, SoftBank-backed real estate company, like, you know, WeWork. The New York Times wrote about Opendoor in 2017 and titled the article “The Rise of the Fat Start-Up.” If asset light is in, Opendoor should be out. And yet… the more I dig into Opendoor, the more bullish I get. I think Opendoor at $4.8 billion will be one of those prices people look back at in a couple years and say, “Shit, I was thinking about buying Opendoor when its market cap was like $5 billion and I missed out,” because the things that most companies say about themselves are true for Opendoor.  Amazon didn’t win because it was the first company to sell things on the internet or because it controlled demand. Amazon won because it resiliently put all the expensive and unsexy pieces in place and sacrificed short-term profitability for long-term dominance. Before Marc Andreessen yelled it, Jeff Bezos realized that Amazon had to BUILD. Opendoor is doing the same thing in real estate. Real estate hasn’t been impervious to startups because it’s structurally immovable. It’s just really hard to change, capital intensive, and slow relative to another B2B SaaS business. No one has taken the vertically integrated approach and long view that Opendoor has. Opendoor built the world’s most accurate home pricing model, operates a distributed network of thousands of inspectors and contractors, regularly accesses both the debt and equity capital markets, takes inventory risk, and coordinates among the many parties involved in the home selling transaction. It consciously decided to take on a ton of risk. But as Ben Thompson wrote in Opendoor: A Startup Worth Emulating in 2016: Risk, though, is not only about downside; it’s about upside. More than that, the level of downside risk is correlated to upside risk: Opendoor has many more reasons why it might fail than Zillow or Redfin, but its potential upside is far greater as a result.Being aware of, comfortable with, and prepared for risk is a major advantage. Opendoor laid out its plan from the beginning, identified the key risks, and has spent the last six years eliminating the downside and building structural advantages that increase its upside potential.  It’s difficult to understand the compounding effect of all of the little things that Opendoor does, and why those little things will give the company such a large advantage over competitors. People grasp its downside much better than they grasp its upside. But grasping the upside is what we’re all about here at Not Boring, so here it is:* Opendoor is executing impressively and intelligently on its original plan. * It is capturing meaningful market share in one of the world’s largest markets -- residential real estate. * It has positive and improving unit economics. * The Zillow threat is overblown. Opendoor has a range of advantages over Zillow in iBuying, which are borne out by the numbers. * Opendoor is the most similar company to Amazon on the market. It is spinning a powerful flywheel and controls its own profitability vs. growth lever. Investing in Opendoor today is an opportunity to get in before the rest of the world catches up to something that Opendoor’s founders saw way back in 2003. Opendoor’s Genesis: Everyone Feels the Same Pain Opendoor had the benefit of perfect timing, but it wasn’t luck. It was an idea waiting for just the right moment. On This Week in Startups in 2018, Opendoor co-founder, Keith Rabois told host Jason Calacanis:I had this vision back in 2003 that really was the genesis of the company. The thesis was that you could use data to model the home sight unseen accurately enough to purchase it safely. Back in 2003, Peter Thiel said “Come up with an idea that’s gonna innovate in residential real estate. It’s the largest part of the US economy that’s been unaffected by technology.” What he might not have remembered is that when I joined PayPal, Peter and I had this negotiation about me joining . At the time, I was living on the east coast and owned a property in Washington, DC. Peter basically said, “I’ll see you on Monday” and I was like what are we talking about, I thought I could start in two to four weeks. And Peter said, “Nope, if you can’t start on Monday, forget the whole thing.” So we compromised, and I started on Tuesday instead of Monday, so that gave me Monday to sell my house. Around the same time Thiel asked Rabois for a real estate idea, Eric Wu was having a similarly painful homebuying experience in Arizona. When he was 19 and a student at the University of Arizona, Wu used scholarship funds to purchase his first house, a $112k fixer upper. Wu felt the same pain that Rabois did:It’s not surprising that Rabois and Wu had similarly shitty experiences. Selling a home is universally painful. One in four people would rather attend a funeral than go through the process of selling a home.  But unlike the millions of people who have had similarly rough experiences, Rabois actually tried to start a company to fix the problem and bring liquidity to the housing market. He went searching for $10 million for project “Homerun,” but was only able to secure $5 million. He realized that it had to be all or nothing, so he dropped it, but spent the better part of the next decade biding his time and trying to convince someone to build it with him. Then in 2010, Wu joined Y Combinator with his real estate startup and sought Rabois out as an adviser. At their first meeting, Keith tried to convince Eric to drop his idea, Movity, which provided location-based data to help home buyers make better decisions, and build Homerun with him. Wu turned him down and stuck with Movity (Rabois invested) and sold to Trulia in December 2010.After two years at Trulia, Rabois tried to woo Wu again. This time, he succeeded. A decade later, it was time to turn his idea into a reality.In 2013, Wu built a landing page, opendoorrealty.co, to test whether people would be willing to instantly sell their homes at a discount. Wu told the audience at NFX’s 2019 Proptech Summit that he discovered that there is “a significant liquidity premium for a certain set of sellers.” He talked to ten sellers, and asked whether they would be willing to sell their home for 88 cents on the dollar. Some said yes, and for those who didn’t, he worked his way up until he found an equilibrium. Assessing the opportunity based on price elasticity of the demand curves is in the company’s DNA, and that’s really important. We’ll come back to why a little later. Rabois, then a partner at Khosla Ventures, committed to lead a $10 million Series A for the renamed Opendoor, with Wu at the helm as CEO. At the time, $10 million was a big first check, but both men understood that they couldn’t MVP their way into transforming residential real estate. They needed to do it right from the beginning. Part of doing it right meant recruiting a founding team with necessary experience: * Ian Wong, CTO: Stanford Ph.D. dropout and Square Data Scientist* JD Ross, VP Product: VP, Product at Addepar* Ryan Johnson, VP Operations (founding team): Bain Capital and McKinseyIn its founding team, Opendoor had the real estate, pricing, product, and capital markets expertise necessary to make housing liquid.Sticking to the PlanWith the team in place, Opendoor closed its Series A, led by Khosla, in July 2014. Incredibly, its Series A deck laid out most of the plan that Opendoor is still executing on today. Here’s how it works: * Opendoor uses an Automated Valuation Model (AVM) to algorithmically price homes.* Sellers enter their address, answer some questions, and receive an offer instantly. * Opendoor sends an inspector to confirm the condition and price repairs (and collect data to feed back into the model), before settling on a final price. * Opendoor charges 6% in the form of a discount to cover fees plus a liquidity discount of between 0-6% depending on riskiness. Its average today is 7.3% total (6% + 1.3%).* Opendoor closes with the seller quickly, makes repairs, and sells the home. Originally, it did this through agent partners, and increasingly, it’s bringing that process in-house.Rabois and Wu started the company on the belief that certain customers would be willing to pay a premium for certainty, and that many more customers would take certainty for free. Simply put, the strategy that Opendoor has pursued since day one is: Start with the least price sensitive customers → use them to improve accuracy and lower costs → attract slightly more price sensitive customers → use them to improve accuracy and lower costs → launch new markets with least price sensitive customers → rinse, wash, repeatThis is the first point at which Opendoor starts to remind you of Amazon. In Two Ways to Predict the Future, I wrote that Jeff Bezos had a strong claim for the G.W.O.A.T. (Greatest Worldbuilder of All Time) crown because he saw that everything would be sold online in the future and set out to patiently execute on his long-term vision. While Bezos started with books, which the internet with its infinite shelf space was uniquely positioned to handle, Rabois and Wu started with homes, which the internet has been notoriously bad at handling. As Byrne Hobart pointed out, “Homes may be the single most heterogeneous asset class and product in existence. There are 95m single-family homes in the US, all of which are in some way unique.” So Rabois and Wu picked the most homogenous product within the universe of US residential real estate: newly constructed homes in Phoenix. It’s important to keep in mind how systematic Opendoor has been throughout its life. The Series A deck highlighted three risks -- model accuracy, buying overvalued homes, and capital -- and used its Series A and Phoenix to address each. It used subsequent rounds to de-risk, scale, expand, acquire, and drive down costs. Remove friction, improve margins. For a full history, including links to fundraising articles, check out this Google doc.By the time it raised its last venture round in March 2019, less than five years since it raised its Series A, Opendoor accomplished a lot: * Raised $1.48 billion in equity capital and over $2 billion in debt capacity* Launched in twenty-one markets* Acquired Open Listings and OS National to expand its service offering* Improved pricing, brought down costs, accessed cheaper capital* Purchased and sold billions of dollars worth of homes ($1.7 billion in 2018)* Hit a $3.8 billion valuationIn 2019 alone, Opendoor did $4.7 billion in revenue with positive contribution margins. All of that capital, including SoftBank money, which has often been a kiss of death for its recipients, made Opendoor stronger. Opendoor’s strategy had always involved launching markets, proving and improving the model, de-risking, and launching new markets. Whereas SoftBank money forced companies like Wag to expand before they were ready, Opendoor knew exactly when it was ready to expand and what it wanted to accomplish by doing so. Its focus on unit economics meant that it wouldn’t light the money on fire, and a strong balance sheet meant that it was ready for turbulence. When the Coronavirus hit, Opendoor was prepared. It dramatically de-risked, laying off over 600 employees (35% of staff), paused buying while continuing to sell, and brought its home inventory down from $1 billion to $172 million. CFO Carrie Wheeler pointed out that it sold down without sacrificing margins, which dipped just slightly from 7.1% in Q1 to 6.8% in Q2. Then in the midst of the pandemic, some good news. Last week, after a week of rumors, Chamath announced that his second SPAC, IPOB, was merging with Opendoor to go public at a $4.8 billion valuation. Chamath’s SPACtacular VisionChamath is the voice of the SPAC movement, and CNBC is his pulpit. Last Tuesday, he went on CNBC to lay out his thesis for Opendoor: Residential real estate is a massive market ($1.6 trillion annually) with low customer satisfaction and an inconsistent experience (28% of realtors do the job part time). Opendoor’s model has five tailwinds at its back:* Underbuilding since the financial crisis has led to a supply/demand imbalance* Rising state taxes and elimination of SALT deductions are motivating people to move* 75 million millennials entering the housing market who expect to transact online* WFH is here to stay, so people are moving to higher quality-of-life cities* The Fed signaled that it will keep interest rates near zero at least through 2023The former Facebook exec and Social Capital CEO has high hopes for the company:  The times I’ve come on, I’ve tried to find asymmetric upside opportunities and present them to you. This to me feels like Bitcoin in 2012, Amazon in 2015, Tesla in 2016, Virgin last year. This is an enormous bet for me, and I think that Opendoor is going to build a huge, huge business.After a run-up to $18, IPOB closed the week at $14.60. A healthy run-up, but nothing like high-margin tech IPOs like Snowflake, which more than doubled on its first day of trading. That makes sense, though. With both SPACs and IPOs on the table as viable options, IPOs are for easily-understood companies, and SPACs are for companies whose potential is underappreciated. Opendoor is underappreciated. Understanding Opendoor Chamath clearly appreciates Opendoor’s vision, but there are many who remain skeptical. Here’s the bear case:* It’s a super low margin business that isn’t profitable and may never be.* It’s too capital intensive.* Most people won’t want to sell their houses online. * Of course it’s done well in a rising market; wait until we see a downturn. * Zillow is a higher-margin business with better distribution. It will eat Opendoor’s lunch. * See, it laid off 35% of its workforce. Just another overfunded SoftBank house of cards. I understand where the bears are coming from. At first glance, Opendoor smells too much like WeWork. And a first glance is all some people will give it, because understanding a business like Opendoor’s can seem opaque and unapproachable, particularly with phrases like SPAC and iBuying in the mix. But it ultimately comes down to one question, which is the same question you need to answer for any business:Will the company be able to generate positive and growing cash flows for a long time? That one question breaks down into three sub-questions: * Is the market big enough that the company has room to grow and cover central costs?* Does the company make money on each transaction and can it become profitable?* Is the company’s advantage defensible against competitors?That’s pretty much it. So how does Opendoor do on each? 1. Is the market big enough? This is an easy one. Real estate is massive. According to Zillow’s research, the total value of US homes is $33.6 trillion. Much of that value is locked up because people don’t sell their homes every year, but according to Opendoor, 5 million homes are sold annually, representing $1.6 trillion per year in volume. That’s twice as big as the used auto market (Carvana has a $28 billion market cap) and 60% more than Americans spend on food (Domino’s alone has a $15 billion market cap). Ok got it, housing is big. No one disagrees that housing is big. But how about iBuying? No one’s actually going to sell their home through an app, right? Wrong. In Phoenix, Opendoor’s most mature market, it already has over 4% market share of all home sales. And the company is growing market share faster in its new cohorts. After 12 months, Phoenix only had 0.8% market share. Its last 15 markets got to 1.3% market share within the first year. As Opendoor gains awareness in new markets, it grows, and as it improves its playbook and gains national recognition, it’s able to scale up more quickly. The company and its new partner, Chamath, believe that if it just executes on this playbook across the country, it can achieve $50 billion in run-rate revenue with 4% market share in 100 markets. Ok ok fine, iBuying is a big opportunity. But anyone with a lot of money can just buy a lot of houses. Can they actually make money? 2. Does the company make money on each transaction? Can it become profitable?iBuying is a low margin business, but Opendoor has positive unit economics. In Phoenix, it generates a 4% contribution margin (CM) on each home, and 3% after paying interest (CMAI) on the money it uses to buy the home. Because the total transaction value is high, that low margin percentage is actually a lot of dollars. It makes $8k per home after interest in Phoenix. Across all markets, it generates a CM of 3.1% and a 1.9% CMAI. It expects those numbers to improve to 5.5% and 4.7% in 2023, respectively. That seems like a small improvement, but at the scale Opendoor anticipates by 2023, every 1% in CMAI improvement is another $100 million that drops to the bottom line, and at a 20x P/E multiple (CarMax is at 21.4x), each 1% represents $2 billion in market cap.Long-term, Opendoor is targeting a 6-8% CMAI as it improves pricing, lowers costs, and adds on high-margin services like title and escrow (82% of customers use Opendoor title & escrow), mortgages, warranties, insurance, and moving. Forbes called title insurance America’s Richest Insurance Racket, because of “antiquated state laws that thwart new competition, allow prices to soar despite declining costs and force almost every home buyer to pay for insurance that most of them will never need.” Opendoor’s purchase of OS National means that it gets to participate in that racket with a captive audience of sellers.When considering additional services, Opendoor’s targets actually seem conservative. The more additional services it attaches, the higher its margins or the lower its price, which would lead to more demand and ultimately higher margins. How about a downturn, though? Even during the Coronavirus-induced selldown, Opendoor was able to maintain positive margins. In A Skeptical Look at Opendoor, though, Twin Oaks Group points out that it’s “inappropriate  to portray Covid as a stress on the single family market when indeed it’s a tailwind.” The author noted that home prices actually increased by 1% in the quarter, and by removing that, Opendoor only saw contribution margins of 2.1% and 0.9% after interest. Fair, Opendoor has yet to face a real downturn, but it’s actually better positioned than competitors or individual home sellers if it does, for a few reasons:* Centralized pricing gives it the best pulse on the market of anyone in it. * Customers are uncertain in a downturn. When customers are uncertain, they should be more willing to pay a premium for certainty. * Home prices move much more slowly than other asset classes. Rental prices have dropped much more dramatically than sales in Brooklyn, which I’m checking daily.* Opendoor only holds houses for an average of 88 days, so their exposure is limited. * The government’s response to recent crises has been to lower rates, which is ultimately beneficial to Opendoor’s unit economics. Ultimately, though, no two downturns are the same. This is a risk to keep an eye on, but I think it’s overblown. Nothing makes me more excited than an overblown bear case. 3. Is the company’s advantage defensible in the face of competition?So if a bear market doesn’t take Opendoor down, what about competitors? Opendoor faces increasing competition from both startups and bigger incumbents in the iBuying market. On the startup side, it faces competition from companies like OfferPad, Orchard, and Knock, as well as a host of regional players. This is where Capital as a Moat comes in. More specifically, Opendoor takes advantage of Cost-of-Capital as a Moat. Because of its track record, short durations, balance sheet, and team, it is able to secure the lowest rates of any iBuyer. That means that all else equal, it can make more money on each transaction than any of its competitors, or put another way, it can charge customers less and still make the same margin. But all else is not equal. Opendoor’s data, algorithm, and scale mean that it can price more accurately than its competitors and remodel at lower costs for a higher ROI. No startup will unseat Opendoor or put much of a dent in its plans. Where it gets really interesting is in the head-to-head battle with Zillow Offers. Zillow vs. OpendoorIn April 2018, after Opendoor had been buying houses for four years, Zillow announced the launch of its own iBuying program. Instead of choosing markets in which Opendoor doesn’t have a presence, Zillow chose to compete head-to head. Each company buys homes in twelve states, but each only has one state that the other isn’t in (Zillow in Ohio and Opendoor in Utah). I’ve been long Zillow since their stock tanked on the Offers announcement in part because I thought that their core product and Zestimate gave them a distinct demand advantage over Opendoor or any other iBuyer. I’m up 142% on Zillow and holding, but I actually think the advantage in iBuying belongs to Opendoor. Here’s why. Running an operationally-intensive business is just so much different than running a pure tech company. I can’t think of any company that has turned an advantage in SEO into a leading vertically-integrated business. Yelp didn’t win food delivery, Kayak didn’t launch Airbnb, and Google Shopping hasn’t put a dent in Amazon’s dominance. Opendoor was built from the ground up to do what it does. It has a culture that’s fixated on driving down costs and passing them on to customers. It’s hard to imagine that a company used to software margins can transform its culture without a tremendous amount of pain. In addition to its culture, Opendoor has a bunch of structural advantages built into its DNA that Zillow will struggle to compete with:* Data. Zillow’s Zestimate, which I love and wrote about in Zillbnb, actually doesn’t have the right level of accuracy on the right things to optimize for iBuying. It’s a good starting point and great for demand gen, but Opendoor has proprietary and unique data that it’s built up from sellers and its custom inspection app over six years. It knows far better, for example, how to price out repairs than Zillow does. * Agents. Zillow uses agents and Opendoor sells homes itself. Because of that, Zillow has structurally higher costs, and it can’t collect the kind of data that Opendoor can, like how many visits it takes to sell a house in a particular microneighborhood. Plus, it can’t offer the seamless experience of self-hosted tours via smart lock that Opendoor can.* Aligned Incentives. Working with agents also creates a principal/agent problem for Zillow. Agents are incentivized to hit a price that clears the deal, whereas Opendoor can hold out to achieve its optimal price target. Zillow undeniably has an advantage in top of funnel demand generation over Opendoor. It’s why I’ve been so bullish. But the more I think about it, the more I realize that that doesn’t matter in iBuying. * CAC is less important than I thought. Because the transaction is so large, the cost of acquiring the customer represents a very small percent of the total transaction value. It’s far more important to get pricing right than CAC. * Opendoor can generate demand through partnerships. Zillow is the largest demand generator in real estate, but there are others. Opendoor partners with Redfin and Realtor.com, for example, and pays each to send it leads. The Redfin deal is particularly interesting. Redfin tried to get into the iBuying game but realized that it was too hard, so it decided to partner with Opendoor instead. * Customers are going to price shop. I don’t have numbers to back this up, but we can think our way into this one. Someone’s home is typically their largest asset. People compare prices when they’re buying a t-shirt; they’re certainly going to shop around for the best price when selling their home. To that end, Zillow’s SEO strength is actually good top of funnel for Opendoor as well. Zillow shows customers that iBuying is a viable option; if Opendoor has the best price, which it should given its data and cost advantages, it will end up winning the deal. These advantages become clear when comparing the two companies’ unit economics. According to iBuying expert Mike DelPrete, Zillow operates its iBuying program at a -2% net margin, while Opendoor operates at a 3.1% margin. Two slides in his 2020 iBuyer Report Preview highlight Opendoor’s structural advantages. * Because it has built up from the hard parts -- including building networks of inspectors and contractors in each market, six years’ worth of data on which improvements drive ROI, and buying more supplies than anyone else -- Opendoor spends around 2% of revenue on home repairs versus Zillow’s 5%. * Because Zillow’s main customers are agents, it can’t cut them out of the transaction, and ends up paying over 50% more than Opendoor on agent commissions. To lower this cost, it would have to risk pissing off the people who pay it the marketing fees that drive the majority of Zillow’s revenue and margin. Worryingly for Zillow, its loss per home increased throughout 2019. It does not seem to be improving efficiency with scale, and it will be interesting to see how long investors let it compete with Opendoor instead of partnering with it. So Opendoor passes all three tests: it’s the leader in a massive market with a clear path to growing profits and has moats that protects its margins from competitors. The advantages that Opendoor has over its competitors are also why I think that the company has a legitimate claim at comparing itself to Amazon. The Bull Case: Opendoor is Amazon for Real Estate At this point, we’ve established that Opendoor has the potential to be a great business in an enormous market practically untouched by innovation. The thing that gets me most excited about the company, though, is how similar it is to Amazon. Many of the skeptics’ concerns that I highlighted above are the same concerns that Jeff Bezos once heard. It’s a low margin business. It just keeps losing money. It’s so capital intensive. eBay has a better business model and lower costs; it will eat Amazon’s lunch. Most people won’t want to shop online, anyway.The criticisms aren’t the only similarities between the two companies. Amazon and Opendoor are similar in four ways: * Customer Obsession* Culture of Frugality* Control Over Profitability* FlywheelsCustomer ObsessionCustomer Obsession is the leadership principle that Bezos credits most for Amazon’s success. Because Amazon is customer obsessed, it’s now fashionable for companies to say that they’re customer obsessed, too. But few live up to it like Opendoor does. Everything that Opendoor does is designed to remove friction, lower prices, and create a better experience for customers. As one example, when asked why he would partner with a competitor like Redfin, Wu said, Customers want choice. The best possible experience is that a customer walks into any funnel and says, ‘Great! What are my options to sell?’ and be fully informed to make a decision both on the economics and the experience. Why not give your customer the option and let them choose? If you start with the customer and walk through the logic, we can all be partners in that.Choice and experience is one part of the customer obsession, but for such a large transaction, nothing is more important to customers than price. In the same interview, Wu said, “If you make the process cheaper and more efficient, the customer benefits.” The company’s employees are willing to make sacrifices to make that happen. Culture of FrugalityIn Amazon’s early days, instead of buying desks for each new employee, everyone, including Bezos, made their own desks out of doors and 2x4’s. Bezos instilled a culture in which people realized that every penny they didn’t spend on themselves, they could pass on as savings to customers. Opendoor is Amazon’s spiritual frugality successor, and it has the best core value I’ve ever come across to back it up: bps for breakfast. The value means that employees need to always be on the lookout for ways to cut basis points (bps) from its costs, because the lower the company’s costs, the lower prices it can charge customers.Wu brought in Amazon executives to help instill that culture. Its President of Homes & Services, Julie Todaro, was the VP of Operations at Amazon. In 2019, the company added Jason Kilar, who held a variety of leadership roles at Amazon, to its board. He’s also made the hard choices to instill frugality into the company’s culture. * Eliminated free lunch* Installed a $120k salary cap in the early years, and have a higher salary cap in place now* Moved from operating in a decentralized manner to centralizing the core businessEarly in COVID, Opendoor laid off 35% of its staff. Critics saw the move as another example of an overfunded, SoftBank-backed company getting over its skis. But given Opendoor’s bps for breakfast culture, I think Wu saw it as an opportunity to get Opendoor’s org structure right. From 2018 to 2020, Opendoor increased the percentage of fully-automated offers made from 41% to 63%, meaning that algorithms could now do the jobs that humans did before. It’s hard to tell someone they’ve been replaced by an algorithm; COVID made it easier. Control Over ProfitabilityA tight grip on costs and deep understanding of the customer gives Opendoor more control over its profitability. Just like Amazon in the early days, I think that most people are missing Opendoor’s massive potential by focusing on its current low margins and lack of profitability. While every money-losing company claims to be like Amazon, this chart from Opendoor’s investor presentation convinced me that it actually is: The chart shows the price elasticity of demand for sellers on the Opendoor platform. When Opendoor charges a 6% fee, sellers convert at 44%. When it charges 10%, sellers convert at 23%. Understanding this curve and how it changes by market, price point, and over time is key to understanding that Opendoor can choose whether it wants to grow faster or be more profitable. This has always been the huge difference between Amazon and the money-burning companies that compare themselves to Amazon: Amazon chooses how profitable it is today to maximize its potential tomorrow, whereas other companies just lose money today and will likely lose money tomorrow. Opendoor chooses to make less money today in order to make more tomorrow. Take Phoenix as an example, where Opendoor has an Adjusted Gross Margin of 7.3%. Based on the chart above, that means it’s converting somewhere near 36%. If it decided to slow growth by a third, from 35% to 23%, Opendoor could generate an additional 2.7% in contribution margin, increasing CM from 4.0% to 6.7%. There’s another vector to consider, too. By growing faster, Opendoor is able to do more volume on both its labor (inspectors and contractors) and materials (it laid over 1 million square feet of carpet last year), driving down those costs. It makes sense for Opendoor to give up some short-term contribution margin today in order to drive down costs, which will allow it to lower prices and generate more demand tomorrow, which will... Wait a second… Amazon and Opendoor’s FlywheelsAmazon and Opendoor obsess over customers and sacrifice comforts to pass on savings to customers not because they’re altruistic, but because doing so creates flywheels that lead to large and growing advantages. Amazon’s flywheel is famous. It focused on the customer experience because having the best customer experience drives traffic to Amazon, which allows it to attract more sellers, which means more choice, and a better customer experience, which leads to more growth. More growth and a culture of frugality mean a lower cost structure, which means lower prices, which also leads to a better customer experience. Once the wheel starts turning, it just keeps building on itself, and Amazon runs further and further ahead of its competition. Opendoor has a similar flywheel to Amazon, which Chamath highlighted both on CNBC and in the investor presentation. As he explains it: * The entire value of Opendoor starts with the ability to make offers, because the more offers they make, the more homes they buy and the more homes they sell. * As they do that, they can win a market, they can refine a playbook, and they can expand with confidence into more and more markets. * As they do that, two things happen:* The first is that they’re able to cross-sell and upsell a whole suite of value added services, and these things have a very good attach rate. They also drive long-term profitability and contribution margin. * All of this scale also allows them to work with their lending partners to secure more and cheaper forms of capital. * Together, all of these things just continue to give consumers more value. It continues to lower costs. And then consumers reward Opendoor with more demand, which then allows Opendoor to make more offers, and then the cycle continues. The more Opendoor continues to execute on its playbook -- the more offers it makes, the lower costs it drives, the better it prices homes -- the further ahead it gets. This flywheel will allow Opendoor to both win against existing competitors and expand iBuying market share as the costs to customers drive down to levels below what they’re paying in the traditional process today. Opendoor’s FutureJust like you couldn’t have predicted AWS by looking at Amazon in 2000, it’s hard to predict what Opendoor might look at in twenty years. But that doesn’t mean we can’t try. Short-term, its plan is obvious because it’s the same one it’s been running for six years: Opendoor will continue to execute on the flywheel by expanding into more markets, lowering costs, and attaching more additional services. To understand whether Opendoor is succeeding against its plan in the short-term, watch its contribution margins. After it’s officially public, it will have to report earnings every quarter, and contribution margins will be the first thing I look for. Medium-term, Opendoor will add services beyond the home sale transaction. It has announced plans for moving, but I wouldn’t be surprised if it started offering ongoing home repairs and maintenance, painting, lawn care, cleaning, and anything else related to the home that does one or more of three things: * Lets Opendoor collect proprietary data to feed into the pricing model* Keeps Opendoor top of mind* Improves the experience of living in a homeLong-term, it can achieve its vision of providing real liquidity to the housing market. Imagine a world in which it’s easier to buy a home than it is to rent. Opendoor could provide low transaction costs, fast turnaround times, easy moves, recommended houses, and more. Opendoor can increase its addressable market by increasing the velocity of home transactions and enable the currently-unattainable combination of home ownership and flexibility. It might also flex its capital markets muscle and unique position in the real estate value chain to create a financial asset that gives investors exposure to city indices, either by syndicating out the equity it holds on its balance sheet or by giving buyers a new form of equity-based financing. I love New York, but I’d love some exposure to markets like Philadelphia, Austin, and Denver right now. Opendoor is best positioned to make my dream come true.Technology has fundamentally transformed every industry except real estate. Opendoor is changing that. When it does, it could be as big as Amazon… if Amazon doesn’t buy it first. Big thanks to Dan and Puja for editing what started as my longest draft ever. They saved you.Disclaimer: This is not investment advice! I have no idea if the stock will go up or down in the short, medium, or long-term. This is just my analysis of Opendoor’s strategy and opportunity.Thanks for listening,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 886 newly Not Boring people who have joined us since Thursday! If you’re reading this but haven’t subscribed, join 14,729 smart, curious folks by subscribing here!Today’s Not Boring is brought to you by…Read on and I’ll tell you how they can send your startup $50k tomorrow.Hi friends 👋,Happy Thursday! This little newsletter and our band of smart, curious people just keeps growing. There are a lot of new folks joining Not Boring every week, which has not yet ceased to be exhilarating. I don’t think it will. Because there are so many new faces, I want to give a quick reminder of what the weekly schedule looks like, specifically what I’m doing with Thursdays.Every Monday, I write a deep dive on a large (and typically public) company. The past few weeks, I’ve written about Twitter, Tencent (x2), Stripe, SoftBank, and Zoom. This upcoming Monday, I’m writing about… 🤫Thursdays are more experimental, and typically focused on smaller companies. Recently, I’ve written Not Boring Investment Memos on OZE and Swaypay, and I plan to do about one deal per month through the Not Boring Syndicate. Sometimes, I have guests come on to teach us about something I don’t know much about, like the Magnolia empire or Ringtones. And sometimes, I go behind the scenes to write about how I’m growing and monetizing Not Boring. Thursdays are Wild Cards. And today, I’m trying something new: a Sponsored Writeup. I want to tell you a little bit about how it works for a couple reasons:* In case other people are figuring out how to monetize their small media business or creative project.* So that we go into this eyes wide open. I need to make money to keep Not Boring going as my full-time thing, and I want to do it as transparently as possible. A few weeks ago, I sent you all an email asking me to tell me about yourselves so that I could figure out how to make money with Not Boring and let potential sponsors know who reads it. The results are in, and you’re an impressive bunch. I put together a Sponsor Deck with some of the stats and rates. You can check it out here.I decided to go the sponsored route so that I can:* Keep it free for everyone. I think newsletters are an incredible way to democratize knowledge. * Keep growing. I put too much damn time into writing each of these to only send to a small group of people. There are broadly two ways that I can make money from sponsorships: * Cost Per Impression (CPM): A company pays me to get its message in front of this group of smart, curious people based on how many people read it, and regardless of whether anyone clicks the button to learn more or sign up or buy. Most of the sponsorships will be CPM.  * Cost Per Acquisition (CPA): A company pays me a certain amount for each person who signs up, subscribes to, or buys its product. For example, if I did a deal with Fictional Shirt Company at $100 CPA, and 90 of you bought shirts after clicking my link, Fictional Shirt Company would pay me $9,000. I’ll do these less often. Typically, CPM deals make more sense because there’s value to a company in getting in front of you even if you don’t buy immediately. There’s an idea in marketing that someone needs to see a product seven times before buying, and while the number might not be exactly seven, it’s rarely one. I’m certainly not going to put on a hard enough sell to bring that number down. I’d rather just expose you to products and companies I like (and often use myself), and if you’re interested, great! Sometimes, though, CPA deals just make sense. After I sent the survey out, and before I made the deck, Nick Abouzeid reached out to me. Nick worked at Product Hunt, AngelList, and was most recently a VC at Shrug Capital. He told me that he was leaving Shrug -- a dream job -- to go work for one of their portfolio companies, that he was interested in sponsoring Not Boring, and that we should chat. When we talked, Nick said that he was going to MainStreet because as one of their investors, he had so much fun telling the people about the product that he wanted to go do it full-time. He offered me a choice: CPM (at the rate I was asking for) or CPA. I chose CPA, because I agree with Nick. In telling you about MainStreet, I’m making money by giving you free money.MainStreet is relevant for both startups and investors: * Startups: MainStreet will get you a bunch of money the government owes you.* Investors: MainStreet is the type of unsexy but practical AI application that will create investment opportunities for years before the machines start turning us into paperclips. Main Street: Free Money for StartupsI’m not going to bury the lede. If you’re a startup, MainStreet will make you money. Here’s how:* You sign up and connect your payroll system. * MainStreet finds tax credits and incentives that apply to your business.* MainStreet sends you money now. You don’t need to wait until April. * MainStreet makes money by keeping 20% of the money the government pays you. If you don’t get anything, they don’t get anything. On average, MainStreet finds its customers $51,000. Instead of waiting until April to get the cash, they can cash advance you what you’re earning real-time at 0% tomorrow -- interest rates are baked into the fees you were going to pay them anyway. It’s free money.No deal with the devil, no gotcha. MainStreet is just solving for the fact that dealing with the government is opaque and annoying, and that most companies don’t want to deal with it themselves. Who is MainStreet for? If you’re a tech company that’s less than five years old and conducts some sort of activity in the US, you’ll typically qualify. It takes about 5 minutes to find out. Just plug in your payroll and credit card details and they do the rest automagically. If you’re a founder, impress your investors. If you’re an investor, help out your portfolio companies. If you’re a startup employee, be the hero by telling your finance team. And if you’re on the finance or HR team, become a revenue driver for the day! Nick was nice enough to give Not Boring readers a couple of extra benefits:* Instant Access: Get your cash within 24 hours vs. a few days* 25% off for life! Instead of paying MainStreet 20% of the money you receive, you only pay 15%If you’re convinced and you just want to go save money now, get to it: We’re also here to learn, so I want to go a little deeper into MainStreet the company. We can’t invest in this one (yet) because they’ve already raised from some great investors and are focused on building, but MainStreet’s story is cool because it seems so simple, but there’s a lot going on under the hood. Rebuilding MainStreetMainStreet has been trying to give people money for no-brainers since the beginning, but it wasn’t always tax credits and incentives. When it launched a year ago, MainStreet offered to pay people $10,000 to leave the San Francisco Bay Area. (I’m sorry SF readers!)MainStreet is founder and CEO Doug Ludlow’s third company. He previously founded Hipster and sold it to AOL, and The Happy Home Company, which he sold to Google. While at Google, he was Chief of Staff for SMB ads, and saw the challenges that small and medium businesses in the country had in attracting talent.  His initial vision was to create 1 million jobs in suburban and rural communities by facilitating the transition to a remote work future, way back in November 2019, before it was cool. MainStreet would recruit and train employees who wanted to move out of SF into a smaller city or town and set up local hubs where remote workers could build a sense of community. He could not have been more right on the trend. When Coronavirus hit, it spurred the migration from cities like San Francisco, and MainStreet got a ton of demand from employees interested in relocating. But the company also received a ton of unexpected inbound: emails and calls from state and local governments trumpeting their incentive programs. Ludlow and his co-founders, Dan Lindquist and Daniel Griffin, decided to rebuild MainStreet to focus on getting startups some of that free government money. Despite the huge COVID-induced demand spike for the old model, the pivot makes sense. Running recruiting, training, and a nationwide network of co-working spaces is not nearly as scalable, profitable, or fun as building a tech-powered way to help companies find $50,000 in their metaphorical couch cushions. It sounds like a blast to get to do that for work every day, but when Nick told me about MainStreet, my first thought was: why won’t a bunch of companies just do this and drive each others’ fees into the ground? This is an awesome product, but is it a good business? After digging in, I’m coming around. DoNotPay for StartupsBack in April, when Coronavirus was fresh and unemployment was skyrocketing, I wrote about one of my favorite companies, DoNotPay.  Do Not Pay is one of my favorite companies that I’ve discovered in the past year. Joshua Browder, a 23-year-old Stanford graduate and the son of Red Notice author Bill Browder, founded the company when he was 17 to help people in the UK get out of parking tickets.Now, the company has expanded to the US, and handles everything from parking tickets to suing people and companies in small claims court. Last summer, it launched a virtual credit card that subscribers can enter when they’re signing up for free trials so that they’re not auto-charged when the trial expires.Just last week, they launched a new product that allows subscribers to claim their unemployment payments at the press of a button. Filing for unemployment has been a nightmare for many. They desperately need the money, but they aren’t able to figure out the forms, the websites are overloaded, and they can’t get through when they try to call in. DoNotPay will handle all of that. It guides them through the claim form via a chat interface, submits the form for them, and in states that require a phone call, calls the unemployment office every hour until it gets through. Once benefits are approved, it also automatically handles the weekly certifications of unemployment necessary to keep receiving checks. It makes a painful process easy.DoNotPay is so magical because it uses software to help people do all of the things that they should be doing but don’t because they don’t know how, they forget, or it’s too much of a pain in the ass. The more capabilities that DoNotPay adds, the more ludicrously cheap its $3/mo subscription seems. It works, because after all of the painful work of onboarding new capabilities and translating them to software, DoNotPay has almost zero marginal costs.MainStreet is DoNotPay for startups. Think about it. Finding, applying for, and keeping up to date with tax credits and incentives is a time-consuming, annoying, labor-intensive process for any company that wants to do it one-off. Breather, where I used to work, is HQ’ed in Canada and is therefore eligible for Canada’s sweet, sweet SRED credits, which essentially paid like 60% of our engineering and product teams’ salaries (don’t quote me on the exact number, but it was that unbelievable). It was an amazing benefit and a main reason that we did engineering there, but it was a pain in the ass. Our finance and legal teams spent weeks applying for and following up on SRED credits. But applying for tax credits and incentives is a job that’s perfectly suited for software. It’s repetitive, boring, and rules-based. Chances are that no one on your small team loves or has time for the process of finding and applying for tax credits, or continuing to update and submit paperwork any time new credits are added or you hire more people. Software loves that shit. MainStreet doesn’t really talk about the fact that it’s an AI company, but Gradient Ventures led its $2.3 million seed round in June. Gradient is Google’s early-stage fund that invests in AI companies. When you think about Artificial Intelligence, depending on where you fall in the “Child to Futurist Philosopher” spectrum, you probably think of movie robots like Wall-E or Goal Seek functions gone wild like Nick Bostrom’s paperclip maximizers. But for now, the most practical applications of AI are being built by companies like MainStreet that use machine learning to automate things that humans either can’t or don’t want to do. A few examples in Gradient’s portfolio: * AllyO automates recruiting workflows* Anvil automates tedious paperwork * Back enables internal service teams to automate employee requests (if AI were sentient, it would have told Back’s founders to pick a more easily searchable name)Boring. None of these companies is building anything hyper-futuristic. What they and MainStreet all have in common is that they help businesses handle repetitive tasks more consistently, and get smarter and more valuable the more they do those tasks and the more new tasks they add. Which brings us back to MainStreet. Today, MainStreet gets you money in a few ways: * R&D Credits: up to $250k/year* Hiring and Company Expansion Credits: up to $1,000 per new hire* Training and Workforce Development Credits: up to $5,000 per employeeOver time, it will add more and more state and local tax credits and incentives, and apply them to your business automatically. Just by having your payroll and credit card hooked up, MainStreet will constantly be on the lookout for ways to take money from the government and give it back to you. Getting all of those credits and incentives onboarded is a schlep -- there’s a lot of manual work people on the MainStreet team need to do to get them set up and to deal with the back and forth with the government entities involved. But unlike your company, which has to do all of that work to get money just for your company, MainStreet scales that upfront work across all of the companies it works with. That’s its compounding advantage over time: * Do the hard work to find and connect credits and incentives manually* Acquire customers and save them money* Automatically scan and apply existing credits and incentives in the system to your company* Add more tax credits and incentives* Automatically scan and apply existing credits and incentives in the system to your company* And on and on… Like Stripe or Agora, MainStreet customers get the benefit of any software improvements or new credits without having to do anything. Unlike Stripe or Agora, the benefit to MainStreet’s improvements is more cash directly in your bank account. In addition to Gradient, MainStreet is backed by an all-star lineup of early stage investors including Ryan Hoover’s Weekend Fund, Shrug Capital, SV Angel, Remote First Capital, Basement Fund, Basecamp Ventures, Backend Capital, and a lot of angels. Its customers, including Sandbox VR, Italic, and Pipe, sing its praises, and I really think you will too. I want to hire a team just so I can use it myself.Just yesterday, MainStreet’s CEO tweeted that the company has now saved startups and SMBs over $15 million in its short life. I’m really excited to partner with MainStreet to give you money. It’s a no-brainer. Be the hero. Get your company its money back. Sign up, connect your payroll and CC, and see how much MainStreet sends your business. If you have any questions or want to be put in touch with someone on the MainStreet team, just reply and Nick will set you up with a personalized onboarding.Links and ListensFor most of Not Boring’s life (it was called Per My Last Email then), the email was mostly links to things I was reading, listening to, and watching. I finally have some space in an email today, so I’m throwing back to PMLE and hitting you with links. 🚙 Self Driving Cars and the Future of Retail | Adrienne AlyzeeAdrienne was in the Write of Passage Fellowship with me. Her piece on how self-driving will transform retail is the most up Not Boring’s alley of any of them. Adrienne is a PM at Tesla, so she has a front-row seat to the future of self-driving, and while the first-order effects are well-covered, this is the deepest dive into the second- and third-order effects of autonomous vehicles. 🐜 Ant FinancialA bunch of people have asked if I plan on writing up Ant Group given that the Alibaba spinoff is massive, competitive with Tencent, and about to go public. I will one day, but maybe not before the IPO, so here are some of the best write-ups, courtesy of Patrick O’Shaughnessy’s thread (a few of which are written by Not Boring readers!):* Ant Group (Part I): The Pivot| Longriver* How Ant Can Dominate A Post-COVID World | Ian Kar | Fintech Today* The Ants Go Marching | Rishi Taparia* Ant Group: The Biggest IPO…Ever? | Rui Ma & Ying Lu | Tech Buzz China* Ant Financial: The World’s Largest Financial Services Firm | Marc RubensteinIf you make it through all six and still want me to write it up, let me know! 📈 S-1 BonanzaSpeaking of companies going public… Mario Gabriele’s S-1 Club has been on 🔥 writing about the wave of tech companies going public. * Palantir and the Chaos Dance* Snowflake and the Data Blizzard* Unity is Manifesting the Metaverse (I wrote part of this one)📕The Almanack of Naval Ravikant| Eric JorgensonLiking and quoting @naval on twitter is a meme at this point, but there’s a reason things become memes. Naval Ravikant, the co-founder and Chairman of AngelList, is a well of wisdom, one of the most prolific early stage investors on the planet, and his company, AngelList, is a sleeping giant (I’m going to write about this soon). My friend Eric Jorgenson created a Naval-approved, Tim Ferriss-forwarded “Navalmanack” of Naval’s best insights from a decade worth of tweets, podcasts, and essays, and the whole thing is free on the site (or available to purchase on Amazon).🎧🎮 Epic Games | Acquired PodcastIf you liked my Tencentessays, you’ll love this Acquired episode on Tencent’s most fascinating and Metaverse-ushering portfolio company, Epic Games. I don’t think I’ve missed a single Acquired episode; they’re source material for so much of what I write. I would love to hear what you think about the sponsored post format. Let me know in the comments or by replying to the email. I’m going to keep experimenting, and your feedback will help me get it right.Thanks for listening, 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 870 newly Not Boring people who have joined us since last Tuesday! If you’re reading this but haven’t subscribed, join 14,377 smart, curious folks by subscribing here!Hi friends 👋,Happy Monday! I hope all of you had a great weekend and got to spend some time away from Zoom. It’s Monday now, though, and Mondays mean Zoom.Because we all live and work on Zoom, everyone talks about it. We talk about Zoom fatigue, sure, but we also talk about how expensive Zoom’s stock is and whether or not it has any moats that will protect the business after COVID passes and competitors catch up. What we don’t talk about as much is what the company should do about it. Today, we’re going to change that with the first Not Boring Case Study. But first, a word from our sponsor. Today’s Not Boring is brought to you by… BarrelLast year, when people still gathered in person, I went to a Write of Passage meetup in NYC. I spent most of the night talking to a couple of people, one of whom was (and still is) Peter Kang. Peter told me that he ran a creative and digital marketing agency called Barrel. Said it was doing well, didn’t brag. Then I got home and looked it up. Peter was being humble. Barrel is a 32-person team of designers, developers, strategists, and producers who have worked with clients like Barry’s, Dr.Jart+, Bare Snacks, ScottsMiracle-Gro, Rowing Blazers and many more to build their Shopify sites and marketing strategies across email, paid, and SEO.You know how I feel about companies forking their dollars straight over to Google and Facebook with shitty creative and unoptimized campaigns. Please don’t do that. Work with Peter and the Barrel team. Now let’s get to it.Zoom’s Blank CheckYou Think You Know ZoomZoom has grown spectacularly during COVID. It is the best video conferencing software on the market and is perfectly designed for viral growth. Its numbers are mind-blowing, and it deserves to be one of the best performing stocks in the world.Having said that… $ZM (the stock) is also incredibly expensive. Worse, many, yours truly included, worry that Zoom has no moat. It me ^^No moat means that Zoom is open to attack from all angles. * Google can increase the size of the Meet button until it takes up the whole calendar.* Microsoft can do the Microsoft thing and bundle video with Teams.* A wave of startups can come in and pick off verticals. At best, the argument goes, Zoom will have to lower prices to retain customers. At worst, it will lose them to free, bundled, or more use case-specific competitors. Easy come, easy go. But I’m coming around on Zoom’s long-term prospects, if it makes the right moves in the coming months, because I think it may have stumbled into a truly brilliant strategy. Before we get there, though, we’re going to start with a case study. Today, you’re Zoom’s CEO, Eric Yuan. * Your company has put up historic numbers because of your single-minded focus on the customer and your product’s quality and virality.* Competitors are coming at you from all sides, and you’re easy to attack because you haven’t built moats around your business. * Your stock is expensive by any measure.I’m going to ask you to give me your ideas after the case study before giving you mine. Here’s the question you need to answer: What do you, as Zoom’s CEO, do to maximize long-term shareholder value? Zoom Case StudyZoom’s Unprecedented AscentYou’re all familiar with Zoom the product at this point in the quarantine, but you might not know as much about Zoom the company. Compared to my recent profiles on Tencent and SoftBank, the Zoom story is dead simple, because the company has focused on customer happiness through product and engineering to the exclusion of almost everything else. In 1995, a Chinese engineer named Eric Yuan went to Japan to see Bill Gates speak. He was so inspired that he decided then and there to move to Silicon Valley. He applied for his H1-B visa and was denied eight times before the US granted him a visa on his ninth attempt. When he arrived in the States, he went to work for an early video conferencing software company, WebEx, where he served as a founding engineer then VP of Engineering for nine years. The company IPO’d in 2000 and Cisco acquired it six years later for $3.2 billion in cash. He stayed on at Cisco in the same role for four years, but became increasingly unhappy. As he explained to Bessemer partner Byron Deeter: Every time I talked to a WebEx customer, I felt very embarrassed, because I did not speak with a single happy WebEx customer.He realized small tweaks wouldn’t fix WebEx, so he pitched the Cisco execs on rebuilding it from the ground up. When he failed to convince his new bosses, he left to start his own thing. After leaving WebEx, according to the Acquired podcast, “a whole cadre or basically anyone who had ever worked with Eric immediately gives him money, just blank check, to back him to work on whatever he’s going to do.” He started building SASB, a consumer application built on top of video chat, but he quickly realized that building an application on top of a crappy product wouldn’t make customers happy. He knew what he needed to do: rebuild video chat from the ground up. History doesn’t repeat itself, but it rhymes. Just like critics scream that competitors will topple Zoom today, everyone told Yuan that his idea wouldn’t work because video conferencing was too crowded even then. But he did what he does -- talked to customers -- and realized that if none of them were happy with their current solutions, there was room for a product they’d actually like. He founded Zoom in April 2011. Turns out happiness mattered, particularly at that moment in time. On the Acquired podcast, Zoom investor Santi Subotovsky, pointed out that enterprise SaaS purchasing decisions moved from the IT department to the end user around that time. When the purchasing decision is made by the people who have to use the product, the battlefield moves from sales to product quality. And Zoom had the best product, even in its earliest days. In August 2012, the week Zoom launched, famed tech journalist Walt Mossberg wrote, “my verdict is that Zoom.us is a very good product with lots of practical uses.”Source: All Thing DA less well-known trendspotter, My Mom, started singing Zoom’s praises in 2013. She facilitates large group meetings with participants from across the globe, and couldn’t stop raving about Zoom. She gave the same review that so many have since: “It just works.” Unfortunately, she wasn’t able to get an allocation in Zoom’s $6 million January 2013 Series A, its $6.5 million September 2013 Series B, its $30 million February 2015 Series C, or its $100 million January 2017 Series D. Sequoia led that one, at a $1 billion valuation, back when $1 billion meant something. At the time, Techcrunch wrote:Zoom, which has over 400 employees, will likely expand with the massive new investment, but Yuan wasn’t going to commit to anything just yet. He describes himself as “a conservative entrepreneur” and he will bank the money and invest in the parts of the company that require it, as the time is right.When Zoom filed its S-1 in April 2019 to announce its intentions to go public, Yuan’s conservative stewardship of the company jumped off the page. Zoom’s profitability was a welcome anomaly in a year dominated by IPOs from cash-burning companies like Uber, Lyft, Slack, and Beyond Meat. Alex Clayton highlighted Zoom’s 82% gross margin and 5% operating margin in his excellent Zoom S-1 Breakdown:Investors proved how much they loved a profitable IPO when Zoom went public on April 18, 2019. Priced at $36, its shares popped as high as $66 on IPO day before closing at $62. Its market cap jumped from $9.2 billion to $15.8 billion in one day.That day, Yuan told Bloomberg News, “The price is too high.”It’s gotten a little higher since then, because it was prepared for the unprecedented.Zoom is OvervaluedOn May 11th, I wrote a piece called While Zoom Zooms, Slack Digs Moats. I was perplexed by the fact that Zoom was up 106% since the first COVID case was reported on January 21st while Slack was only up 33%. Welp, here we are four months later, and Zoom is now up 399% since the start of COVID while Slack has dipped, and is only up 15%. Listen to me at your own peril! Since I wrote that piece in May, Zoom has somehow accelerated. It reported absolutely absurd numbers on August 31st: * Q2 revenue of $664 million, up 355% YoY. * 458% YoY growth in companies with more than 10 employees * 130% Net Dollar Expansion Rate (how much it grows revenue from existing clients)* 2,079% YoY Free Cash Flow growth, from $17.1 million to $373.4 million That huge spike you see in the chart above on the right side of CEO Eric Yuan’s face is the market reacting to those earnings. The price shot up so much the day after earnings that it briefly passed even the most out of the money call option strike prices. Zoom deserves its success. It’s a spectacular company, with a potent combination of growth and profitability. In Software-as-a-Service (SaaS), there’s something called the “Rule of 40” that says a company is doing well if its growth rate + profit margin add up to over 40%. This past quarter, Zoom’s added up to 411%. Zoom 10x’ed the Rule of 40 🤯But it’s possible to be both incredibly excellent and incredibly overvalued. You can’t judge whether a stock is expensive by its share price or enterprise value alone, you need to look at how its price or enterprise value compares to its revenue and earnings (multiples) and how those multiples compare to similar companies (comps). Zoom is expensive by nearly any measure. On the earnings side, it’s trading at a Price to Earnings (P/E) multiple of 489x, second only to Tesla (and Shopify, which is not yet profitable) among the largest 75 companies by market cap. Looking at revenue, its Next Twelve Months Enterprise Value / Revenue (NTM EV/Rev) multiple is 37.6x. According to TIKR, the average for comparable software companies is 8.4x. For comparison: Slack trades at 14.1x, Microsoft trades at 9.5x, and Apple trades at 6.2x. The two highest I found aside from Zoom are Zscaler at 27.7x and Okta at 26.6x. But there’s a good reason that Zoom’s stock trades at higher multiples than comparable companies: it’s growing much faster. Even if it looks expensive based on its revenue projections for the next year, it might not look so expensive based on revenue in three or five years if it keeps doubling. That’s what the Zoom bulls say. Sure, Zoom is expensive now, but it’s going to keep growing its market share in video communications while the total video communications addressable market continues to grow.Bears have one consistent answer: Zoom has no moats. Zoom has No MoatsWhen I wrote that (for now!) ill-fated piece in May, my argument was that, “Zoom traded moats for speed.” The same reason that so many people were able to start using Zoom so easily -- you can join a Zoom with just a link -- is the same reason that Zoom is in trouble. There are two questions to ask regarding Zoom and moats:* Does Zoom have moats? * Does it really matter? We’ll handle the second first. Moats are important for any company that wants to sustain profitability over time. They’re massively important for companies that are mostly valued based on future earnings, like Zoom. The higher your multiple, the more the future matters. It’s valued at $109 billion today because the market believes it can sustain and grow earnings for many, many years to come. To do that, it needs moats. “Moat” does not mean “advantage” or “something a company does better than its competitors.” Here at Not Boring, we subscribe to the Hamilton Helmer School of Moats. In 7 Powers, Helmer defines moats as “barriers that protect your business’ margins from the erosive forces of competition.” Advantages are static, moats are dynamic. A company can have an advantage today and lose it to the forces of competition over time. Everyone agrees that Zoom has an advantage today, but does it have moats?  After Zoom’s tremendous Q2 earnings and the subsequent pop, Morning Brew COO Austin Rief asked what Zoom’s moats are, and got a lot of responses: Brand was the most commonly-cited moat, followed by product, or the idea that “it just works.” I’ll take each in turn.Brand. “Zoom is a verb! Like Google!” this argument goes. That’s true, and it’s not necessarily a brand moat. When’s the last time you Instant Messaged a friend on AIM? The Helmer definition of Brand is “The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.” Think Tiffany’s. It can sell the exact same product as Zale’s for 4x the price because that Tiffany Blue box means something to people. If Google Meet catches up and offers an “objectively identical offering,” and puts a big blue link to it right in the calendar, and offers it for less than Zoom, most people are going to go with Google Meet. Product. Superior product isn’t a moat. Once more, for those in the back, superior product isn’t a moat! A superior product is an advantage. Moats are needed to protect that advantage. Google, for example, turned a superior product into network effects - the more people who use Google, the more searches it handles, the more likely it is to give you the best results.In What Comes After Zoom?, Benedict Evans compares Zoom to two other companies that won in crowded spaces by building superior products: Dropbox and Skype. But a superior product didn’t protect either company. Evans wrote that two things happened to Skype, which did the same thing for VOIP that Zoom has done for video:* Its product drifted for a long time and user experience declined. * Everything has voice now, so voice is a commodity. He argues that the same thing will happen to video, and that the companies that win the next phase of video won’t be the ones who ask, “How can I make the tech better?” The tech will be a commodity. The winners of the next phase will be the ones who use video to build experiences that solve particular user needs.Without a moat, Zoom is open to attack from those companies. In The Verticalization of Zoom, JJ Oslund highlights all of the companies that are taking advantage. Each thing that we did on Zoom in the beginning of quarantine -- game nights, school, casual hangouts, dating -- is getting its own app.Although Zoom has an API and SDK, most of these new companies don’t build on Zoom. Akarsh Sanghi, who recently launched a video streaming platform for lifestyle creators called Reach.Live out of YC, told me that all the new YC companies are building on the same stack:“React application on the client side, typescript, hasura, Postgres, WebRTC and Agora APIs for the video player.” Everything is adding video, and Zoom isn’t involved. Its competitive advantage is showing the earliest cracks. Oslund wrote about this too, in The Unbundling of Zoom, in which he describes the landscape of APIs that are making it easier than ever to build video chat applications. Because of the rise of video APIs like Agora, companies that are trying to build verticalized product to steal little bits of demand from Zoom don’t need to start from scratch every time. They plug in reliable video in a few lines of code, and spend their time and resources on building out a user experience that resonates with their specific group of target customers.  Until now, the fact that Zoom “just works” has been its defense against bigger competitors. Now, though, Agora is arming the rebels and giving everyone video that “just works.” The rebels are mounting the first serious attack on Zoom’s castle.But Zoom has a massive lead and a fully-stocked war chest. What it does in the coming months and years will determine whether it goes the way of Skype or makes its $109 billion valuation look cheap.  So What Would You Do? Here’s where Zoom is today: * Rule of 400! Zoom’s growth and profitability are historically strong. * Dubious Moat. At best, Zoom has weak moats and is open to attack from competitors big and small, which could slow growth and erode margins. * Expensive Stock. Zoom is more expensive than nearly every comparable company on a PE or NTM EV/Rev basis. This isn’t someone else’s champagne problem, it’s yours. Remember, you’re Eric Yuan for the day.  What do you do to maximize long-term shareholder value? We’re trying something new today! I want to hear what you would do if you were Eric Yuan. Fill out this short form with your thoughts:Party Like It’s 1994Blank Check was the first movie that made me want to be rich. I was seven when the movie came out in 1994, just old enough to appreciate the power of a million dollars.If you haven’t watched Blank Check in 26 years, this will jog your memory.Blank Check Trailer, Recut with the Requiem for a Dream ThemeFor our purposes, what’s important is that a kid got a blank check and spent $1 million really quickly on way more than $1 million worth of stuff. Now $1 million in 1994 is like $1.748 million today, but what Preston was able to buy with $1 million is truly astonishing: * A castle in Austin, TX which has a current Zestimate of $4,657,416* A go-kart racetrack* Jewelry for his adult girlfriend* Night on the town in a limo* Massive wall of TVs* State-of-the-art home office* Mr. Macintosh speech system * Unlimited snacks* A $100k party* And more! All in all, that’s about $5 million worth of stuff for $1 million. When the villain, Carl Quigley, gets a hold of Preston, he stares him down and asks, in shock, “How could you spend a million dollars in six days?” Easy answer, Carl. Preston realized that the market was somehow overvaluing his dollars and spent it before anyone realized that they were giving him like an 80% discount on everything. I tell you all of this not only out of a sense of nostalgia, but because Zoom is Preston Waters right now.Zoom is an excellent company with extremely strong product and engineering chops and a stock price that essentially gives it a blank check. By focusing on short-term profitable growth, Zoom has stumbled into a brilliant position:* Abandon moats in exchange for growth via superior product and distribution* Grow share price to an inflated level* Use valuable stock to buy moatsZoom is one of the fastest companies ever to reach a $100 billion market cap, behind just Google and Facebook. Both of those companies have aggressively used their valuable stock to neutralize threats and fuel growth through acquisition. Zoom needs to do the same. How Blank is Zoom’s Blank Check?Eric Yuan is rational. Remember that he said Zoom was overvalued on the day it IPO’d. I’d imagine he thinks it’s overvalued today, too. The difference between what he thinks his company should be worth and what the market values it at today is his “Blank Check.”Let’s say that, because of its breakneck growth, Zoom does deserve a higher NTM EV/Rev multiple than any of its competitors. Remember that Zscaler was the next highest at 27.7x. Let’s give Zoom something like 30x. The difference between its 37.6x multiple and 30x is 7.6x, which represents about $22 billion in EV. Zoom should go on a $22 billion Preston Waters-esque spending spree. Instead of houses, limo rides, snacks, and TVs, Zoom should acquire moats. Because potential targets realize that Zoom’s stock is expensive, as well, they’re unlikely to treat $1 worth of Zoom stock and $1 worth of cold hard cash the same. The market would be friendlier to a secondary offering. So Zoom should sell new shares and raise at least half of that $22 billion Blank Check in cash. For simplicity’s sake, let’s all agree that Zoom has $22 billion of cash and stock to spend on acquisitions, k? Good. Now what should it buy? It’s Fantasy M&A time, y’all! WebEx ReunionZoom needs to buy Agora. It’s a bigger threat than Google or Microsoft, it would give Zoom moats (switching costs and scale economies), and it would be a reunion.There was something in the servers at WebEx in 1997. That year, two talented engineers joined the video conferencing pioneer as founding engineers: Eric Yuan, who you’re now acquainted with, and Bin “Tony” Zhao, the co-founder and CEO of Agora. Zhao left right around WebEx’s IPO in 2004, for the same reason Yuan would leave seven years later. He said that after releasing the audio streaming product he worked on at WebEx, he "started receiving so many complaints: their session was cut off, the quality was bad, and so on.” While at Chinese social media company YY, Zhao realized that:If someone could provide an easy integrated API to support that capability, application builders everywhere would have less barriers in using real-time audio and video in their apps. This would open up a world of possibilities and use cases.He was that someone. In 2013, Zhao left YY to start Agora, which bills itself as the “Real-Time Engagement Platform (RTE-PaaS) for meaningful human connections.” Agora offers a Software Development Kit (SDK) and Software-Defined Realtime Network (SD-RTN) that developers access through its Application Programming Interface (API) to build video communication into their products. Got it? In English: Agora lets developers easily add real-time or broadcast video into their products with a few lines of code. You can think of it like Stripe for video. Developers can add video to their product as easily as they add payments, allowing them to focus on their own unique differentiators. As a result, a new wave of startups is solving specific customer needs with video by plugging in Agora.Agora’s customers include well-funded companies like Michael Phelps-endorsed therapy platform, Talkspace, and a16z-backed events platform Run The World. Neither Talkspace nor Run the World is a threat to Zoom on its own. The threat to Zoom is that thousands of companies plug Agora into their products and offer a better experience for the thousands of use cases that people use Zoom for today. This is where Zoom’s lack of moats hurts. Customers can leave easily when a new product better suits their needs. That’s true for more niche uses like therapy and events, but also for Zoom’s core focus areas like work and education.When new entrants don’t need to build the tech from scratch, they can spend all of their time and resources building better experiences for every use case, work and education included. The move is offensive as well as defensive. By buying Agora, Zoom can set its sights beyond the office into a wider variety of use cases, without having to build a single use case-specific feature. Agora might also be Zoom’s ticket to the Metaverse.As I wrote about in Tencent’s Dreams, I don’t think that any one company will own the Metaverse. Instead, it will consist of interoperable products built on top of a number of key platforms: Epic for virtual worlds, Snap for AR, Spotify for Audio, and maybe, Zoom/Agora for video. An Agora acquisition would: * Neutralize the threat represented by the Verticalization of Zoom * Allow Zoom to participate in the upside of the Verticalization of Zoom * Give Zoom a better foothold into the new use cases and the Metaverse by becoming the platform on top of which thousands of companies build video-based productsImportantly, acquiring Agora would allow Zoom to build moats. Agora gives Zoom an API product, like Stripe. API products have at least two strong moats: * Switching Costs: Once you build your product on top of Agora, you’re unlikely to rip it out and switch to a new RTE-PaaS solution.* Economies of Scale. Just as Stripe can develop features and capabilities to serve edge cases and spread development costs over millions of customers, Zoom/Agora would be able to spread the cost of developing increasingly cutting edge video features over thousands and eventually millions of customers. The best part? Zoom could acquire Agora for about a third of its Blank Check. Agora, which went public in June, traded up 145% on its first day as a public company, and has stayed relatively flat since. It currently has a $4.9 billion market cap. At a rich 50% premium, Zoom could acquire Agora for $7.4 billion dollars and keep $16.6 billion free to buy more moats.Moat Shopping With its biggest threat neutralized and $16.6 billion left on that check, Zoom can get creative. Here are three routes it can take: Triple Down on VideoZoom can do to video companies what Tencent does with ecommerce ones: give them capital and traffic. It can invest in or acquire top video-based applications and give them distribution to Zoom’s hundreds of millions of meeting customers. Plus, backed by Zoom and Agora’s engineering teams and data centers, the companies would be able to accelerate the technical capabilities of their products.   A few targets include: * Loom would fill a hole in Zoom’s offering by giving customers access to seamless, asynchronous video messaging. Loom recently raised $28.75 million in a Series B led by Sequoia, a Zoom investor, and Coutue, an Agora investor, which valued the startup at $350 million. Zoom would likely need to spend about $1 billion to buy Loom. The video messaging history creates switching costs.* Whereby is a lighter-weight Zoom for SMBs. Yuan cited problems moving non-enterprise accounts onto Zoom quickly during Coronavirus, because enterprises and small businesses have different onboarding processes. Whereby, beefed up by Zoom’s tech, could become Zoom’s solution for more casual use cases, allowing it to optimize the flows for each type of user. Whereby is cheap. It was recently raising at a $15 million cap, and Zoom could probably snatch it up for under $50 million.* Icebreaker. Eric Yuan is all about delivering happiness to customers, and Icebreaker is the most delightful video chat experience I’ve had during quarantine. Icebreaker is perfect for social gatherings for which Zoom is an awkward solution. Icebreaker has raised $7.2 million, and Zoom could acquire it for around $50 million. * Hopin or Run the World. One of the areas in which Zoom falls shortest is in large events. Teachable built its own custom solution for it’s Share What You Know Summit (which you should attend with me). Hopin and Run the World are two purpose built solutions that would give Zoom a product to cross-sell to existing enterprise clients and use to lure new ones. Run the World has raised $15 million from a16z and Founders Fund, and Hopin recently raised $40 million from IVP and Salesforce. It would have to spend $75-150 million to acquire one of these two.Total Price Tag: ~$1.25 billionMoats Acquired: Switching Costs, Economies of Scale Owning Video: PricelessRemote Productivity SuiteGoogle and Microsoft are waging constant war on Zoom’s territory with Meet and Teams Video. But Zoom’s rich now, too. It should go on the offensive and acquire productivity tools to build out its own remote productivity suite. I’m waiting for somebody to bundle these tools together, and Zoom would be an interesting dark horse. * Loom. Loom fits here too. Zoom should just buy Loom. Loom by Zoom is fun to say. $1 billion. * Airtable. Airtable is a cloud-based spreadsheet and database tool that was rumored to be raising at a $3 billion valuation in April. Bundling Airtable with Zoom would increase switching costs. Zoom could acquire the company for $3-5 billion. * Notion. Notion is a workplace productivity and collaboration tool that was the buzziest on the market before Roam came onto the scene. Like Airtable, bundling Notion with Zoom would increase switching costs. Zoom could acquire it for $2.5 - $4 billion.* Figma. Figma is the collaborative design tool that I use to make all these sweet graphics, by myself. It’s a delightful product, and Kevin Kwok wrote about why Figma wins here. Figma is the leader in products that skip the hub, like Zoom or Slack, and allow people to work together right in the product. It raised $50 million from a16z at a $2 billion valuation in April, and would cost at least $3-4 billion to acquire. It would give Zoom strong network effects.* Calendly. Zoom’s biggest weakness against Google is that Google can put a big Meet button right in its calendar. While it will be difficult for Zoom to get people to switch calendars, it could control Calendly, the scheduling tool. It’s the next best thing, and it hasn’t raised much outside capital so could likely be had for under $100 million.* Miro. Miro is a collaborative whiteboarding tool that is another early favorite of My Mom, and that has a Zoom integration coming soon. It’s not a strong moat, but the ability to whiteboard and save notes within Zooms increases switching costs slightly and could be a strong Pro feature. Miro raised $50 million in April, and would likely cost around $250-300 million.A Zoom collaborative productivity suite would have high switching costs and network effects, and cement Zoom’s position as the leading remote communication and collaboration tool for businesses. Total Price Tag: ~$10 billionMoats Acquired: Network Effects, Switching CostsWild CardsThere are three other companies that Zoom at least needs to look at, although they’re a little more out there and don’t fit neatly into either of the buckets above:* TikTok. Zoom is seemingly the only company not involved in the bidding war for TikTok’s US assets. It couldn’t do it alone, but Zoom could potentially be the tech half of a bid with a financial sponsor. TikTok is the only product that’s been more viral than Zoom, it’s video-based, it attracts young users, and it has high switching costs and network effects. And I know, I know, Oracle “won the bid” to be TikTok’s US tech partner, but I’ll believe that when I see the TikTok on-prem db. Until then, this is still anybody’s ballgame. * Roam Research. Roam just raised $10 million at $200 million, but I have smart friends who think it’s still very cheap, and one who thinks it will be worth more than Google. I’m including this note-taking tool in Wild Card instead of Remote Productivity Suite because it has a steep learning curve and would be more interesting as a purely financial buy until it becomes easier to use or Zoom builds or buys technology to automatically transcribe meeting notes to Roam. * Slack. It pains me to say this, but after another ho hum earnings, Slack’s market cap is at $14.6 billion. Zoom would need to pay a significant premium -- I wrote that I don’t think Slack sells for less than $40-50 -- so it would have to overspend its blank check, but if nothing else, Slack has moats. Slack’s network effects and switching costs would help lock Zoom’s customers in, and Zoom could help Slack with its growth problem. I’d love to see this team take on Google and Microsoft (if Google doesn’t buy Slack first).So Would They Do It? We all did this case study together, so we know that Zoom should acquire Agora and a handful of other companies. But will they? Generally, M&A is not in Zoom’s DNA. It completed the first acquisition in its history in May when it acquired encryption company Keybase to bolster its security. In fact, partially because Zoom is nouveau riche, it’s completed the fewest acquisitions of any technology company worth over $100 billion, and the second fewest per years of existence to Taiwan Semiconductor. But there are signs that Yuan realizes that he needs to get spendy. In June, Zoom hired its first Head of Corporate Development, Colin Born, who previously ran Corp Dev at Qualcomm, GoPro, and Cypress Semiconductor. In July, he doubled the size of Zoom’s corp dev team by hiring an analyst. Yuan’s not wasteful; I don’t think he would build out a Corp Dev team to sit on their hands. I think Zoom is going to start acquiring companies. A big question is whether they’ll expand Zoom’s product offerings and build moats, like the ones I highlighted, or if they’ll target businesses that strengthen the core product, like Keybase.Assuming that Eric and Colin read this, and decide to go the route we suggested here, I’ll address three Agora-specific concerns.First, Agora is dual-headquartered in both Shanghai, China and Santa Clara, California. In April, Zoom faced scrutiny for potentially routing data through servers in China, and they may be loathe to risk corporate contracts over concerns.Second, Agora is one of the only companies on the market as expensive as Zoom, at a 33.0x NTM EV/Rev multiple and an eye-popping 4,840x PE multiple (Agora just became profitable in Q1).Third, and most importantly, Yuan has always been focused on business clients and on providing an excellent experience. Would he be willing to risk defocusing the company and handing over so much control of the user experience to third-party developers? Those are valid concerns. Zoom’s success has come from relentless focus on the customer, the tech, and the product to the exclusion of competitive threats. It’s worked so far. But an advantage today is not the same thing as a moat. Zoom needs to protect its business far enough into the future to grow into its massive valuation. For the sake of shareholder happiness, Yuan should put a big number on his Blank Check and hand it to his former co-worker, and some new ones, too.Thanks to Dan for once again editing and saving all of you from reading my terrible first draft. Thanks for listening,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 890 newly Not Boring people who have joined us since Monday! If you’re listening to this but haven’t subscribed, join 13,842 smart, curious folks by subscribing here!Hi friends 👋,Happy Thursday! We have a little early Fall treat: the first-ever-back-to-back Not Boring Investment Memo. This one has a little something for everyone: * Angel Investors: A high-potential ecommerce software play that I think can become an important piece of the Modern DTC Value Chain.* Ecommerce People: A better checkout experience that helps your customers share your product, increases conversion, and lowers CAC.* Business Nerds (all of us): A look at an early stage company and an explanation of alternative payments and the Google/Facebook duopoly.They’re longer than a typical investment memo — which you’ve probably come to expect from me at this point. That’s because I want everyone to come away with some new knowledge and a little glimpse into the future courtesy of the stories of the founders who are shaping it. And if you’d like to invest too, great. Today’s Not Boring is brought to you by… TrendsThere are a few things I love more than anything else besides my family and friends: business deep dives and notebooks. Not kidding. Told Sumeet about my obsession here. Of course, Trends went ahead and did a deep dive on all the notebook companies (think Moleskin) this week. They just keep dropping business content that feels like it’s made for me, and they’re giving Not Boring readers a $1 trial to see if it’s made for you, too. No risk, high reward. Plus, when you sign up, you help keep Not Boring free. Try it out:Now let’s get to it.Not Boring Investment Memo: SwaypayMeet SwaypayWhether you like it or not, you’re an influencer. Every time you post a pic in your new kicks or answer the question, “Where’d you buy that dress?!” you’re influencing people’s purchasing decisions. Because it’s historically been hard to wrangle, track, and direct small amounts of influence, until now, you’ve done it out of the kindness of your heart. That’s very nice of you, but it causes a couple problems: * You don’t get any value from your influence other than nebulous social capital. * Brands are forced to pay Facebook and Google to acquire customers. As a result, according to reformed VC Chamath Palihapitiya, “Startups spend almost 40 cents of every VC dollar on Google, Facebook, and Amazon.”Swaypay wants retailers to pay you instead of paying Google, Facebook, and Amazon. Its mission is to bring financial empowerment back to retailers and shoppers alike by rerouting the billions of advertisement dollars back into shoppers' pockets as savings directly at the point of sale. When Swaypay’s CEO, Kaeya Majmundar, first walked me through the deck, I wrote in my notes, “Fucking love this mission.” I also love the investment, for five reasons:  * The Product is Already Magical. Swaypay already makes good on its promise of a frictionless experience. I went from homepage to discount to checkout in 15 seconds.* Ecommerce is Growing. This is a recurring theme here at Not Boring, because the shift towards ecommerce is massive. Swaypay is well-positioned to ride the wave.* Strong Early Traction. After a successful beta, Swaypay has 60 retailers on board for its Q4 launch and is targeting 200-300 by end of year.* Swaypay is Ecommerce Robinhood. I believe that anything that takes money from Facebook and Google and gives it to shoppers and retailers will win. * Kaeya and Team. Kaeya has been in ecommerce since going on Shark Tank at 19 (video below, of course) and has been on both the seller and platform sides. She’s building a high-quality team with super relevant experience.Product: Frictionless Savings for SharingSwaypay is the first payment method that plugs into eCommerce storefronts and lets shoppers convert their “sway,” or social influence into currency for online purchases. Swaypay believes that there is tremendous untapped value in bringing influencer marketing downstream to the 99% of people who have small amounts of powerful social capital, or sway, that they have not been able to exercise. To make the long-tail viable requires clear value and a frictionless experience. That’s what Swaypay is building: * Clear Value: Discount on items shoppers are buying anyway based on sway. * Frictionless: Discount applied via Swaypay checkout button in the checkout flow. The product is dead simple. Shoppers shop online like normal and when they get to the checkout page, they’re presented with the Swaypay Checkout button next to the regular checkout button. When a shopper clicks the button, they’re prompted to enter their Instagram handle, and given a discount based on their sway. The shopper checks out, the discount is applied automatically, and they have 30 days to post on Instagram and share the link through Swaypay or they have to pay back the difference. You know what, let me just show you. Let’s say I was planning on having a few too many drinks tonight and wanted to buy some hangover prevention. I head to Akalo and… Did you catch that? That’s not a company demo. I just did that myself. Within 15 seconds (the max gif length), I found a product and got a 35% discount based on my Instagram handle. I tried it on another site, Made au Gold, and it was just as easy, but I only got a 15% discount. I guess I’m more valuable as a hangover influencer than as a women’s socks influencer. Makes sense… The product is kind of magic. And retailers seem to agree. Here’s a reply that Swaypay’s VP of Growth, Maggie, got to a cold outreach yesterday: Retailers respond to Swaypay because by offering discounts in exchange for social sharing, they can increase conversion at checkout, acquire new shoppers while generating margin on the first sale, and drive stickiness by working with shoppers. The shopper wins, the retailer wins, Google and Facebook lose (a little). Currently, Swaypay works with Shopify retailers and Instagram posts. In the next couple of quarters, Swaypay will diversify into other ecommerce platforms (like BigCommerce) and more social channels (like TikTok). It also plans to implement a public-facing SwayScore that travels with shoppers wherever they shop. If you remember Klout, it’s like that but way better. Klout gave users a score based on their Twitter activity, and monetized by letting brands run campaigns in which they rewarded high-Klout users with prizes. The only thing I ever got was a four-foot-tall plush GEICO Gecko. Swaypay, on the other hand, lets users monetize directly through discounts on things they were going to buy anyway. In the future, Swaypay will introduce Live Receipt, a Venmo-like feed of users’ purchases that will let people monetize even more directly through affiliate payments. It’s like Pinduoduo embedded into storefronts, gamifying the shopping experience and allowing friends to buy together in exchange for bigger discounts. Business ModelToday, Swaypay’s business model is straightforward. Retailers pay Swaypay 5% on every transaction that goes through Swaypay. Here’s how it works: * I see a $100 shirt on shirt.com * I check my Swaypay discount: 40%! * I buy a shirt for $60* Shirt.com pays Swaypay $5* I have 30 days to post a picture of myself wearing the shirt to Instagram* If I post, I keep the discount and Swaypay keeps the $5* If I don’t post, I pay back my discount, and Shirt.com still pays Swaypay $5 because it helped convert meOn its roadmap, Swaypay plans to monetize in at least two additional ways:* Recurring: Today, brands need to get permission from each user who posts a picture using their product to re-use that content in campaigns. Swaypay gets that permission automatically in exchange for the discount. Swaypay retailers will pay for content usage rights for all of that UGC. * Transactional: Swaypay will take a richer affiliate-like cut on sales generated through its native environments - the store directory on its site, its own app, or on Live Receipt.If Swaypay is successful in convincing merchants to install its checkout button and expanding its product line once they’re in, the opportunity is massive. The Growing Ecommerce Market Since the start of COVID, ecommerce penetration has doubled. I’ve written about this before. When the pandemic began, we bought 16% of our things online. Now, we buy nearly 34% of our things online. Shopify has been one of the biggest beneficiaries of retail’s move online. It grew its Gross Merchandise Value (GMV), the total amount of all goods purchased on stores powered by Shopify, 73% between Q1 and Q2, to $30.1 billion. Within that universe, to start, Swaypay is targeting the brands that have the shoppers most likely to share content in exchange for discounts. Namely, it’s targeting emerging DTC ecommerce brands serving social media savvy Gen Z and Millennial consumers. Once it has the young users on lock, it plans to swim upstream and reel in the big fish. L'Oréal is already excited.Luke Weston, Chief Digital Officer at L'Oréal Luxe and an early Swaypay believer, says: Social media influence is critical to all DTC brands, but has long been an untapped currency largely because it’s painful to wrangle. And I know first hand that rings true for any sized ecommerce company. Swaypay is the first model I’ve seen that has real potential to remove all the barriers and create a win-win scenario. It’s not worth spending time calculating TAM here because ecommerce is so huge, but suffice it to say, it’s hundreds of billions of dollars. Within that, the checkout flow is a great place to sit. It’s why I’m so excited about Stripe (which Swaypay uses). Because ecommerce is such a big market, there have been many attempts to do pieces of what Swaypay is going. There are platforms and agencies like Tribe that match influencers with brands, and there’s a growing number of alternative payments solutions that offer customers a different way to pay at checkout. No one currently does both, and that’s where Swaypay’s magic lies. By sitting at checkout and offering regular people discounts for using their untapped sway, Swaypay can increase conversion and lower acquisition costs without asking anyone to change their behavior. The idea makes so much sense that it’s surprising it hasn’t been done before. I asked one of Swaypay’s investors why not, and she pointed to two things, in addition to Shopify’s success:* Nano-influencers are becoming more important as big name influencers get more expensive and Gen Z looks to more authentic sources. * Affirm proved that third-party checkout solutions are viable. This point can’t be overstated. This is the main answer to the question, “Why now?” * For the action to be frictionless, it needs to sit in the checkout flow. * Previously, it was hard to imagine a retailer giving their valuable checkout space to an unproven startup. * Max Levchin, the founder of PayPal, used his own social capital to convince retailers to try his new “buy now, pay later” solution, Affirm. * Affirm worked. By giving shoppers 0% interest rate payment plans, Affirm increases conversion rates, which helps retailers’ bottom lines. Solutions like Affirm, Klarna, and Afterpay proved the market, and are attracting eye-popping valuations.* Affirm was valued at $2.9 billion in April 2019 and announced plans to go public.* Klarna raised at a $5.5 billion valuation last summer, from investors including Snoop Dogg. * Afterpay, which is public, has seen usage increase 30-40% and its market cap increase by 142% YTD to $15 billion. Now is the perfect time for Swaypay, and its early traction is proving out the thesis. Early TractionBefore doing a full build, SwayPay ran a beta with companies from Kaeya’s Shark Tank network and ecommerce contacts. The beta was small but the numbers were strong: * Five retailers and 200 transactions representing $14k* 13% of the retailers’ transactions went through Swaypay* 12% increase in conversion* 2x lift in shopper Instagram posts. More importantly, average engagement on Swaypay posts was 9% compared to ~2% average influencer post engagement.A picture is worth a thousand stats. Here’s a recent Swaypay post from a shopper with 700 followers - the picture perfect (pun intended) shopper for Swaypay...too small for existing platforms but high value to retailers in the aggregate. She got 12% engagement within 3 hours of posting.Swaypay also generated an early TikTok proof point when it went viral on Kaeya’s TikTok account here and here, generating 1M views on an account that only had 18 followers at the time. The TikTok drove over 300 members to Swaypay’s waitlist.With early proof and a v1 of the product built, Swaypay is fully focused on onboarding new retailers. Recently, the company brought in Maggie Braine to lead growth, and Maggie is bringing structure and contacts to the retailer signup process. Already, Swaypay has 60+ retailers representing $120M in annual revenue signed up for its Q4 launch. A few are live in the wild right now. You can check out Swaypay for yourself on: Madeaugold.com, Cortexbeauty.com, Akalo.co, Aeris.one, Meetaila.com, or Swaypaymerch.com (its own play store). Swaypay is targeting 200-300 retailers by the end of the year, and much of the money from the pre-seed extension will go towards acquiring and onboarding retailers and beefing up the engineering team to handle the anticipated influx.I strongly believe that this is just the beginning, because Swaypay is stealing from the rich and giving back to the rest of us.Swaypay is Ecommerce RobinhoodI already told you how much I love Swaypay’s mission, but I’ll repeat it. By taking the money that usually goes to Facebook and Google -- up to 40% of every dollar that startups raise -- and giving some of it back to shoppers and retailers, Swaypay is like an ecommerce Robinhood.I touched on this idea in Shopify and the Hard Thing About Easy Things. Far too often, the money that companies spend on digital marketing is just lit on fire. All the companies are competing for all of the same shoppers using higher bids as their only advantage. Swaypay flips that on its head. It amplifies an existing behavior - people telling friends about the things they bought - and rewards shoppers for doing so. It’s a modern vehicle for word of mouth. Every friend I can tell about my cool new shirt is someone that my favorite shirt company doesn’t need to pay Google or Facebook to acquire. It can take the money it saves and do two things: * Reward me for sharing in the form of discounts, payments, or gifts.  * Invest in improving the product or doing other things that build a sustainable advantage.And it’s not just me. Swaypay believes that the ubiquity of social media has given everyone sway that brands are becoming increasingly eager to tap into. Swaypay exists to facilitate this value exchange by:* delivering a frictionless experience for retailers and shoppers* quantifying each shopper's social influence to keep the system cost-effective and scalableIt’s combining viral marketing tactics with old-fashioned mass media in a way that yields much more reliable and cost effective outcomes than trying to go viral alone. The goal is to arm businesses with a repeatable, scalable, and cost-effective way to get their brands to self-distribute across the internet. It turns each audience member into a potential influencer, extending the reach of any campaign, even one started on Facebook or Google, and driving down customer acquisition costs. Part of Swaypay’s brilliance is that as its retailer customers’ products spread, Swaypay spreads with it. Every time a shopper checks out on a merchant’s site, the Swaypay brand is there. Every time they share a post and tag Swaypay, Swaypay gets more visibility. Swaypay spreads when its retailers succeed by tapping into the small networks of ordinary people. The power of ordinary people to drive sales is a lesson that Kaeya learned in the Tank. The Team: Shark Tank-Tested, Retail ApprovedKaeya is a born entrepreneur. When she was just a sophomore in college, she went on Shark Tank with her invention, BZBox. After standing strong in the face of tough feedback from the Sharks, she landed a deal with Lori Grenier. Her experience on Shark Tank sparked Kaeya’s passion for social commerce. She became fixated on figuring out how most effectively leverage social media to drive sales. She spent the next three years parlaying the Shark Tank exposure into “micro consumer product brands selling things like skincare, pillows, jewelry, apparel, you name it on Shopify storefronts.”Kaeya and her team experimented with each brand, testing every which way to use social media to drive sales until one idea stuck: treating social media posts as currency. That planted the seed for Swaypay.Kaeya even braved reality TV again on Project Runway: Fashion Startup to pitch a new product, ZipTank, which she describes as “a basketball jersey that doubles as a bag with a zipper on the bottom.”Instead of an investment, she ended up with a job offer from one of the judges, Christine Hunsicker, who exited her first company to Yahoo for $850M and is now the Founder and CEO of CaaStle, which allows any retailer to rent its clothes as-a-subscription, a la Rent the Runway. Kaeya took the job with one goal in mind: to immerse herself in the inner workings at a hyper growth retail tech startup and fast track learning how to build her own.She spent the next two years as a Product Manager at CaaStle, working directly for their CTO to build a new product. But Kaeya’s an entrepreneur. Early in 2019, she left to build Swaypay. To make Swaypay a reality, Kaeya has recruited an amazing early team:* Maggie Braine, VP of Growth: From J.Crew to Bulletin, Maggie has spent the last 10 years working in large corporations and growing early stage start-ups from inception to launch, in leadership roles across multiple departments. She’s helped take a pre-seed company through a $7M Series A, built a wholesale tech platform from the ground up, successfully orchestrated the business model pivots of three start-ups, secured a pre-launch portfolio of 500+ accounts for a B2B retail tech company and exceeded revenue goals by 75% within her first 6 months in her last role. She’s a traditional retail veteran turned innovative retail tech expert.* Naveen Bhavnani, Lead Engineer: Naveen has over 10 years of full stack development experience in web technologies with significant exposure to ecommerce. He worked at industry giants (Infosys and Samsung) then jumped into his first startup as a Principal Engineer at CaaStle where he met Kaeya. Swaypay is Backed by Great Investors Still early in its life, Swaypay has already attracted some amazing investors. Anthemis and Barclays’ led the pre-seed round (of which this opportunity is an extension) through the Female Innovators Lab. Anthemis is an early stage fintech investor that backed Carta, which I wrote about as an example of a Worldbuilder, along with some of my favorites like Betterment, Messari, Pipe, Rally Rd., and StockTwits. Swaypay also has angels with relevant experience onboard, like Jeremy Voss (early Snapchat), Andrew Gluck (DTC Investor & NextGen Commerce Expert), and Rajiv Kapoor (ex-Marketo).Risks Early stage investing comes with major risks, and Swaypay 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 Swaypay-specific risks:* The biggest risk to Swaypay is that retailers don’t want to give Swaypay valuable checkout page real estate for its checkout button. * The second biggest risk is that shoppers don’t checkout with Swaypay, that the savings aren’t worth them posting pictures of their purchases to social media. * The economics may not work out - the discounts shoppers require to share products may be more than the retailer is able or willing to give. * Shopify, PayPal, or even… FAST might come out with a competitive product. * People may only be willing to share once or twice. * People try to figure out how to game things for a discount. * Social platforms might become saturated with product endorsements (this would be a good problem to have).There are certainly risks that neither I nor the Swaypay team is currently aware of that could sink the business.The OpportunityLed by a brilliant, high-energy founder, Swaypay is: * Attacking a big problem -- merchants spend 40% of their money on paid acquisition for too little sustainable advantage* In a rapidly growing market already worth hundreds of billions of dollars* With a frictionless product that aligns with the way young customers shop and share. It has massive ambitions: to become more ubiquitous than PayPal. And it has a roster of merchants excited to launch with Swaypay in Q4. If Swaypay works, it both naturally spreads as customers shop and share, and creates high switching costs, as more of a business’ payments go through Swaypay. It has the potential to become an important piece of the Modern DTC Value Chain.Plus, it’s just fun to use, and there’s a power in that delight. I’m already looking forward to checking my SwayScore and getting more than a gecko in return. If you’re an accredited investor interested in learning more and potentially investing in Swaypay with the Not Boring Syndicate, you can join at the link and I’ll send you the deal with more information, including terms and a deck. If you’ve already joined the Not Boring Syndicate, you’ll receive an invite to the deal shortly.And if you’re a retailer, you should work with Swaypay and stop giving Facebook and Google all your money. Disclaimer: Startup investing is very risky. You should do your own diligence and don’t invest any money you’re not comfortable losing.Thanks for reading, Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 1,301 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 13,507 smart, curious folks by subscribing here!Hi friends 👋,Happy Tuesday! I hope you enjoyed the Labor Day Weekend. In case last week seems oh so long ago, a little refresher: tech stocks were on an all-time tear until Thursday, when the music stopped and prices tumbled. The Financial Times did some digging and discovered that an old Not Boring favorite was behind the market’s rise and fall. That’s right… SoftBank is at it again. Brought to you by… Teachable: Share What You Know SummitFun fact: I started this newsletter in May 2019 as an assignment for an online writing course I was taking. That course was built on my favorite Passion Economy platform: Teachable. Smart people have made over $850 million teaching what they know in courses built on Teachable, and in two weeks, the company is hosting a three-day Summit to share everything that successful creators — including Not Boring favorites Li Jin, Tiago Forte, and Ankur Nagpal — have learned about turning their knowledge into money. I’ll be there taking notes.Tickets are $29 this week, and going up to $39 on Friday, so get in now. If you want to start or grow an online or content-based business, this will pay for itself thousands of times over.Now let’s get to it.Masa MadnessBefore I wrote this newsletter, I worked for a company called Breather, where part of my job was running our real estate team. We were responsible for finding and negotiating leases on office spaces that we would design, build, and rent out to clients for shorter time periods. As we moved upmarket (longer rentals in bigger spaces), we increasingly competed with WeWork for both spaces and clients. It sucked.Every space we looked at, WeWork looked at. For a space that would typically cost $65/sf, they would offer $70/sf. When brokers brought WeWork potential customers, they would pay up to 100% of one year’s rent as a commission. If a customer asked for an expensive buildout, they would do it. Different WeWork locations would even compete with each other for the same customer by offering lower prices.We ran our underwriting model to understand if we could do the same things that they could to acquire spaces or customers, and we couldn’t figure out how to make the numbers work. Because they didn’t. And they didn’t have to. Because WeWork was backed by SoftBank. Dunking on SoftBank became de rigueur when the market realized what all of us in the industry already knew - that WeWork’s unit economics were terrible because they were trying to use capital as their moat. And it wasn’t just WeWork. Wag. Brandless. Katerra. Uber. Compass. Bloomberg called SoftBank “the Pied Piper of Unicorns” as it lured startups to giant pools of money in which they drowned.After WeWork’s downfall, the man behind the madness, Softbank CEO Masayoshi Son, or Masa, admitted that maybe he’d made some mistakes. He feigned contrition. Along with the company’s first quarterly earnings loss in 14 years last November, Son told investors, “My investment judgment was poor in many ways and I am reflecting on that.” And it kinda seemed like he meant it. Masa and SoftBank have stayed relatively quiet by their standards. It announced that it would unload more than $50 billion of legacy assets including stakes in T-Mobile US, Alibaba, and its own Japanese telecom business to shore up its balance sheet and buy back shares. Conservative move. Nice. The market bought it. SoftBank shares recovered from the 2,687¥ ($25.25) level post-earnings loss in November to as high as 6,932¥ ($65.16) in late August. Then last Friday, the FT dropped a bomb. Masa and his team of profligate spenders were behind the massive runup and subsequent crash in tech stocks. The Son of a bitch had done it again. Hard Truth About SoftBankAfter I wrote about Stripe last week, one of my favorite anonymous alt accounts on Twitter goaded me:My brain doesn’t normally work like that. I’m an optimist. But when I saw that SoftBank was behind the public market tech pump and dump, I knew I had my target. It’s easy to look at SoftBank’s moves and think, “Fuck these guys,” particularly after my experience competing against WeWork. That was my first reaction when the news dropped. SoftBank distorts the markets it plays in. It has had some spectacular private market blowups. And now, it’s messing up the public markets, too.Because SoftBank is so nakedly ambitious and takes such big swings, it’s extremely polarizing. Most recently, SoftBank’s Vision Fund went from “This is going to change the world” to “They’re ruining venture capital” to “See! This guy is an idiot” in the blink of an eye. As a result, there’s not a lot of nuance in the conversation around the company. That’s what I’ll try to bring today, by covering the three ways to look at SoftBank: * Bullish: Masa has a vision that no one fully appreciates and trades at a discount* Neutral: Masa is Lennie from Of Mice and Men for Tech Companies (I’ll explain)* Bearish: Masa is just a WallStreetBets Trader with a lot of other people’s moneySoftBank is a reflection of its founder. Masa is optimistic and hyperbolic. He is a mix of finance and technology, but is much better suited towards the latter and gets himself in trouble (with a couple of very notable exceptions) when he goes too far towards the former. In a 2014 interview with Charlie Rose, at a time when both men’s reputations were cleaner than they are today, Masayoshi Son compared himself to Steve Jobs. “If Steve is art and technology,” he said, “I am finance and technology.”  Masa’s history, and SoftBank’s, is a decades-long progression from one end of that spectrum to the other. The further it veers from technology into finance, the riskier it becomes. Masa often sees only the upside while ignoring downside risk - a valuable characteristic in a technology entrepreneur and a liability in a financier. It’s easy to root against Masa without knowing his story, but hard to root against him once you do. Meet MasaBorn in a fishing village in Japan in 1957 to a family of Korean immigrants, at a time when being an immigrant in Japan was not a good place to start, Masayoshi Son came into the world with a chip on his shoulder. The Japanese government forced Son’s family to change its surname to a Japanese one, Yasumoto. Masayoshi hated it. Luckily, he was gifted enough to make his own name for himself.When he was sixteen, Masa cold called the founder and president of McDonald’s Japan, and receiving no response, flew to Tokyo and sat in the man’s reception area until he gave in and agreed to meet with the precocious teenager. During those fifteen minutes, he gave Masa two pieces of advice: * Learn English. * Study computer science. Ever impatient, Masa moved to the US that same year. He dispensed with high school quickly.I went to school at Serramonte High School. I had spent three months in Japan as a freshman in high school, so I entered Serramonte High School as a sophomore. After one week, I was promoted to a junior. After three or four days as a junior, I was promoted to a senior. I was a senior for another three or four days, then I took an exam and graduated. The result was that I finished high school in the United States in two weeks. Then I went to Holy Names College for my freshman and sophomore years before transferring to Berkeley.Wanna guess what he studied at Berkeley? Economics and Computer Science. There it is: Finance and Technology. He started his career on the tech side of the spectrum.While at school, he patented an electronic translator with a professor, Forrest Mozer, and sold the patent to Sharp for around $1 million within a year. He also imported hit arcade games, like Pac Man and Space Invaders, from Japan, tweaked the software to make the games US-friendly, and made at least a million dollars doing that, too. He made game software, too, and sold his stake in that company, Unison World, to his associate in that venture for close to $2 million. None of these companies would be his life’s work, though. After selling those businesses, he moved back to Japan as a young millionaire, changed his surname back to the Korean “Son,” and spent about a year and a half thinking. In a 1992 interview, a decade into the SoftBank’s life, he told HBR:I spent all my time just thinking and thinking, studying what to do. I went to the library and bookstores. I bought books, I read all kinds of materials to prepare for what I would do for the next 50 years. Then I had about 25 success measures that I used to decide which idea to pursue. One success measure was that I should fall in love with a particular business for the next 50 years at least. He launched SoftBank, the company he still runs today, in 1981 -- 39 years ago. SoftBank started its life as a distributor of PC software at a time when computers were viewed as toys in Japan and when software was sold on disks in stores. Within one year, he grew SoftBank’s sales from $10,000 to $2.3 million. Six months into the new business and already restless, Masa launched two magazines simultaneously - Oh!PC and Oh!MZ. He wanted to own both software and content in the growing computer space. Over the next decade, Masa grew SoftBank’s sales to $354 million. Flush with cash, Masa transformed SoftBank in the 1990s, taking the first steps towards turning it into a finance company:* 1994: Went public on the Tokyo Stock Exchange at a $3 billion market cap. * 1995: Bought US-based tech media company, Ziff-Davis, and Comdex, which threw events that were the SXSW of the day. * 1996: Launched a venture fund; Invested $100 million for 35% of Yahoo! and created Yahoo! Japan in a JV. * 1999: Turned SoftBank into a holding company.In the late ‘90s and 2000, SoftBank’s venture fund made over 100 investments in startups, the most successful of which is one of the best venture investments of all time. Masa personally led SoftBank’s $20 million investment in Alibaba, and gradually built up the position to 34% ownership. Of the meeting that led to the investment, Alibaba CEO Jack Ma told the WSJ in 2000: We didn't talk about revenues; we didn't even talk about a business model. We just talked about a shared vision. Both of us make quick decisions.When Alibaba IPO’d in 2014, the investment was worth $60 billion, a 3,000x return. This is one of the few times that Masa’s finance side paid off, and like a gambler hitting his number on the roulette wheel, gave him the irrational confidence, and bankroll, that would get him in trouble down the line.Back in 2000, fueled by the dot-com bubble, Masa briefly became the world’s richest man. He told Charlie Rose, “For three days, I was richer than Bill Gates. For three days, we were a $200 billion market cap.”Then, the bubble burst, and Masa lost more money than anyone in the history of the world. SoftBank’s market cap tumbled 99% to $2 billion, and Masa’s net worth followed suit, plummeting from $70 billion to $600 million.  Masa had leveraged profits from his technology operating business into financial investments. At first, it worked tremendously well, because the late 90s were a great time to be a techno-optimist. Then it failed spectacularly, because the early 2000s were a terrible time to be a techno-optimist. Despite his nauseating losses, though, Masa remained optimistic and aggressive. He foresaw that just as the ‘90s were about the rise of the internet, the mobile internet would be the next wave. But he didn’t have a mobile play and he’d (temporarily) learned his lesson about arms-length investing, so he set his sights on acquiring and operating Vodafone Japan. In 2005, before buying Vodafone, Masa flew to Cupertino to meet with Steve Jobs, bringing with him a sketch that he’d drawn himself of an iPod phone. He wanted Jobs to make it. Jobs told him, “We’re actually working on this already, so I don’t need your sketch, but since you’re the first person to come and see me about this, I’ll give you the exclusive rights in Japan.” With the iPhone rights up his sleeve, Masa convinced a banker at Deutsche Bank, Rajeev Misra (remember that name), to loan SoftBank the $20 billion it would need for the acquisition. The bet paid off. SoftBank rebranded Vodafone Japan as SoftBank Mobile and launched the iPhone in Japan in 2008. It acquired Sprint for another $20 billion in 2013 to go deeper on mobile. From a low of 418¥ ($3.92) in late 2008, SoftBank’s share price more than 10x’ed over the next six years, peaking at 4,370¥ ($41.08) on September 14th, 2014, the day that Alibaba IPO’d, driven by three things: Yahoo! Japan, the Alibaba investment, and SoftBank Mobile. Riding high on his operating wins, Masa geared up for his most ambitious bet yet. The Vision FundIf you’re familiar with SoftBank, it’s probably because of the Vision Fund. It’s the most ambitious and controversial venture capital fund ever raised, and it massively distorted the private startup market. After nearly two decades operating, Masa was ready to get back to investing.When Masa met with Saudi Crown Prince Mohammed bin Salman (“MBS”) in September 2016, he offered him a $1 trillion gift. “Give me $100 billion,” he said, “and I will give you back $1 trillion.” Masa laid out his vision for an AI-powered future, and his plan to both bring it into being and profit from its existence through the Vision Fund. MBS was sold. After 45 minutes, he agreed to invest $45 billion. Eight months later, in May 2017, Masa launched the Vision Fund with $28 billion of SoftBank’s own capital, $45 billion from the Saudis, $15 billion from the UAE’s fund, Mubadala, and $1-3 billion each from Apple, Qualcomm, Sharp, Foxconn, and Larry Ellison’s family office. The fund is unique not only for its size, but for its term as well. Whereas most venture funds have a 5-10 year time horizon, the Vision Fund has a 12 year time horizon with a two year extension. Masa controls a lot of money for a long time. To run the Vision Fund, Masa brought in Rajeev Misra, the Deutsche banker who gave him the loan to acquire Vodafone Japan. SoftBank set out to make investments in companies that would bring about an AI-powered future in which humans live harmoniously with machines. It was meant to be the financial manifestation of SoftBank’s 30-Year Vision, as laid out in this insane 2010 presentation.Far from focusing on AI investments, however, SoftBank built a portfolio of capital intensive, atoms-based companies. When you have $100 billion to deploy, it’s tempting to invest in the kinds of businesses that can consume a lot of cash, even if those are the worst businesses to invest in. Over its first three years, SoftBank invested in 86 companies, including:* $18.5 billion WeWork * $9.3 billion in Uber * $8.2 billion in ARM Holdings (about 25% of SoftBank Group’s full ownership of the company) * $5 billion in NVIDIA * $2.5 billion in Flipkart * $2.3 billion in GM’s Cruise * $1.9 billion in PayTM* Investments in Compass, Katerra, Oyo, Opendoor, and other real estate companies The knocks on the Vision Fund are manifold: * Aggressive Overbids. The Vision Fund is notorious for offering companies multiples more money at higher valuations than they were planning on raising and threatening to invest in competitors instead if they said no. If a company set out to raise $250 million, Masa asked them what they’d do if they had a billion. This elbowed out other investors and inflated private market valuations for startups. * Self-Markups. In order to show gains on its investments, SoftBank invested in follow-on rounds at higher valuations. Since no one else was willing to pay what they were, they were artificially setting prices higher than the private, and eventually public, markets were willing to bear.* Capital as a Moat. The Vision Fund stuffed money down its portfolio companies’ throats under the assumption that the best-funded startup could outspend competitors and win winner-takes-all markets. Having capital as a moat, though, meant businesses ignored real, sustainable moats. SoftBank brashly poured billions of dollars into “tech-enabled businesses” with large CapEx requirements, like WeWork and a dog walking company, Wag, and pushed them to grow fast. That’s how we found ourselves in the situation we did at Breather, faced with a competitor that pursued growth to the exclusion of unit economics. In many cases, though, not only was more capital not a moat, it actually actively harmed the recipient. Companies like WeWork, Wag, Brandless, Compass, and Uber abandoned the strategies and tactics that got them to where they were, pivoting to unsustainable spending in order to grow. Each of those companies has faced massive difficulties, with many having to lay off hundreds of employees and sheepishly emphasize that they’re now focused on strengthening unit economics and achieving profitability.Many of the Vision Fund’s investments were simply bad investments, and many were good companies fatally wounded by SoftBank’s money and attention. Masa was a better entrepreneur than many of the entrepreneurs he invested in, and a worse investor than many of the investors he crowded out.Last July, SoftBank announced that it planned to do it again, and bigger, with the $108 billion Vision Fund 2, focused (for realsies this time) on AI investments. In the middle of fundraising, though, the wheels started to come off of Vision Fund I. In September, just weeks away from going public, WeWork’s embarrassing S-1 and subsequent revelations of mismanagement tanked its IPO. In May of this year, due to a WeWork writedown and Uber’s post-IPO underperformance, SoftBank announced a $17.7 billion loss in the Vision Fund for the Fiscal Year ended March 31, 2020, wiping out any other SoftBank Group profits and causing a $13 billion loss for the parent company.Masa placed some of the blame on the “Valley of Coronavirus” that many of the Vision Fund’s unicorns fell into. He also halted plans to raise outside capital for Vision Fund 2, moving forward with only the $38 billion that SoftBank Group invested into the fund off of its balance sheet. In March, pushed by the activist hedge fund Elliott Management, it announced plans to sell $41 billion worth of assets (it recently announced it would actually do $50 billion) including part of its stakes in Alibaba, Sprint/T-Mobile, and SoftBank Mobile to shore up its balance sheet by paying down debt and buying back shares. That plan is underway. On July 30th, it approved a $9.6 billion tranche of buybacks, half of the nearly $20 billion it will repurchase. On August 3rd, its stock hit 6,932¥ ($65.16), higher than it’s been since the dot com bubble burst twenty years ago. It seemed that Masa had learned his lesson -- that it’s impossible to brute force your way to victory -- and was retreating before his next big push. And then last Friday, the FT reported that SoftBank was up to its old tricks again. The 555 FundNot content to just blow up private market valuations, SoftBank spent the last couple of months pouring fuel on public market caps. In the process, Masa has moved squarely from technology to finance, and from visionary to mercenary. After plummeting early in COVID, tech stocks have been on a tear. Some of the move has been warranted -- we have been spending more of our lives and money online, and tech companies are benefiting. But the moves have been too big, too fast. Tesla is up 800% YTD. Zoom is up over 300%. Apple is up 125% with a market cap over $2 trillion. Whispers rippled across Wall Street trading desks that a “NASDAQ Whale” was behind it all. Until Friday, no one thought to connect a recent announcement out of Tokyo to the move. On August 10th, along with reporting quarterly profits of $12 billion and highlighting the Vision Fund’s $2.8 billion quarterly gain, Masa announced the creation of a $555 million fund to invest in tech giants like Apple, Amazon, and Facebook. Scratch that. Turns out 555 was just a placeholder name and not the fund size. That number is closer to $10 billion, and growing. “555” is slang for “Go Go Go” in Japanese gaming culture, and go go go it did. Over the spring and early summer, the fund bought $4 billion worth of shares in companies including Amazon, Microsoft, Netflix, and Tesla. Then on Friday, the FT reported that SoftBank was the “NASDAQ Whale” behind billions of dollars of call option trades on the tech giants. Those trades fueled a massive rally in tech stocks, and last week’s steep decline. Even with $10 billion, though, you can’t typically move markets. So how’d the 555 Fund do it? * Bought $4 billion worth of shares in major tech companies. * Bought $4 billion worth of call options on $30 billion worth of those same companies’ shares.$4 billion is a lot of stock to buy in just a few companies, but it’s not unusual. $4 billion in call options, however, is an extraordinary amount, because call options can give their owners exposure to more shares for less money. With $4 billion, SoftBank was able to gain exposure to $30 billion worth of shares. Here’s how:Call options give the buyer the right to buy a stock at a given price (the strike price) on a certain date (expiration). As an example, Apple is trading at $120 today. With $1,000, I could either buy:* Eight shares of Apple stock (😴), or* 1,000 calls on Apple stock at a $170 strike price expiring on October 16th for $1 eachThe latter gives me more leverage to make money and to move Apple’s price.Whether I buy shares or call options, the most I can lose is the $1,000 I invested. But if the price goes above $170, I can make a lot more money, and the person selling me the option can lose a lot more money, by trading calls. If the price goes to $200, I make $29,000 ($200 - $171 * 1,000). If the price somehow goes to $250, I can make $79,000. My gains and her losses can go infinitely high since stocks have unlimited upside. If the price goes to $250, I’d generate a 108% return by buying the stock, but a 79x return with calls! This is why WallStreetBets traders with small accounts love options trading, and why the lottery is called the “poor tax.” They give you a small chance to turn a little money into a lot. The downside is equally dizzying for the call seller, and not nearly as fun. So instead of taking that risk, she “hedges,” either by buying shares of Apple today so that she can just give those shares to me in case the price is above $170, or by buying calls herself to neutralize her exposure. By buying either shares or calls, she pushes up their price. In either case, I win. Now with $1,000, I can’t actually move the market. But with $4 billion of calls, SoftBank is effectively forcing sellers to buy tens of billions of dollars worth of stock, which can push the market faster in the direction it’s been trending anyway.This is an incredibly Masa way to trade. He’s not passive; he likes to alter the markets he plays in. In the private markets, with a $100 billion fund, he can bully companies and send valuations soaring above reasonable levels. The public markets are much bigger, though. Buying $4 billion of Apple shares would barely make a dent on the company’s $2 trillion market cap. Buying $4 billion worth of calls, though, particularly during the slow summer months when a lot of traders are vacationing, gives Masa leverage to move the markets and make beaucoup bucks in the process.It’s a quick way to make up losses if it works. So far, it’s working. Over the weekend, the FT reported that as of last week, SoftBank was actually up $4 billion on the trades, even after Thursday and Friday’s decline, although they haven’t sold the positions yet and are at-risk if tech stocks tumble further this week. In just a couple of months, between the rise in the underlying stock prices and the options premiums, the 555 Fund has made up a good chunk of the Vision Fund’s losses. Options are a very dangerous game, though. Masa, and Rajeev Misra, brought in a host of ex-Deutsche Bank traders and bankers to help run SoftBank Investment Advisers, which manages both the Vision Fund and the 555 Fund. In October, efinancial careers reported that many of those people are the same ones who tanked Deutsche Bank with bad derivatives trading.Notably, the ex-DB team is largely made up of credit and derivatives traders, not tech equity investors. With this latest move, Masa has gone from technology to finance all the way to financial engineering. So what does it all mean? Is SoftBank good or evil? Should investors be bearish or bullish?The Bull CaseMasa has a vision that no one fully appreciates, and you can buy SoftBank at a massive discount to book. For those of us who were introduced to Masa through the Vision Fund, it’s easy to look at his tactics and hate him, his company, and everything he stands for. But watching Masa’s interviews and learning more about his story, I’ve come to appreciate him. He’s kind of adorable, and I genuinely think he wants to make the world a better place. Plus, he’s been right before: * His $20 million check into Alibaba was one of the best tech investments of all time.* Yahoo! Japan was a major success. * He nailed the timing of the mobile revolution. * Convincing Steve Jobs to give him the exclusive rights to sell the iPhone in Japan before he even owned a wireless carrier is one of my new favorite business stories. With rose colored glasses on, you can even squint and see the Vision Fund as genius. 10x Genomics has doubled its market cap as a public company, the world has woken up to ByteDance’s value two years after Masa invested, and y’all know how I feel about Slack. Sure WeWork has been a dog and Uber is struggling, but maybe Masa just got a little carried away, and they’re just fun stories for the media to pile onto. If just a few of the 86 investments become breakout successes, he might yet be able to return the fund, and even if he doesn’t, the management fees on $72 billion ($100 billion minus SoftBank’s own investment) are nice steady cashflow. He set the twelve year time horizon for a reason; technology bets can take time to pay off. And the 555 Fund, despite messing with the market, is up! He’s wrestled gains from the jaws of defeat yet again. If it blows up, assuming they’re not trading on margin, they’ve only lost $4 billion in options premium, a relative drop in the bucket. But the upside is massive. It’s actually kind of smart. If you subscribe to the idea that Masa’s still got it and is among the world’s most visionary operators and investors, there’s a case to be made that SoftBank is just hitting an early rough patch on the road to a massive opportunity. People underestimate how big an impact technology is yet to make; Masa does not. If he needs to be the villain for a couple of years while everyone else catches up to his vision, so be it. Plus, because people think that Masa might be insane, SoftBank trades at a steep discount to the book value of its assets. Before it started selling off part of its stake in Alibaba, for example, its ownership of Alibaba was worth more than SoftBank’s entire market cap. When Elliott Management took a $2.5 billion position in SoftBank in February, they did so because they believed that the company could close that gap. And SoftBank is playing ball with Elliott, agreeing to the $20 billion worth of share buybacks the hedge fund demanded. In the bull case, when you buy SoftBank at its current 11 trillion yen ($104 billion) market cap, you’re getting a deeply discounted portfolio of assets plus the potential upside if Masa is right in his vision of the future. He’s been right before. The Neutral CaseMasa is like Lennie from Of Mice and Men, loving his investments so much that he crushes them.The night before my wedding, my great friend and groomsman Nick got up to make his speech. In it, he compared my high school dating life to Lennie, a character in John Steinbeck’s novel, Of Mice and Men. Lennie was a simpleton. He loved his rabbits so much that when he pets them, he invariably crushes them to death. I didn’t harm any rabbits, but Nick argued that when I had a crush on someone, I would get so excited that I couldn’t play it cool. In the Neutral Case, Masa is Lennie, and tech / tech-adjacent companies are the rabbits. * He couldn’t help himself but to turn SoftBank’s profits into investments in exciting new startups that matched his vision for an internet-powered future in the runup to the dot com crash. * He overfunded companies through the Vision Fund not to mark up his own valuations and crowd out other investors, but because he was so excited to see what these potentially revolutionary companies could do if money was no issue. * He wasn’t trying to manipulate the market via the 555 Fund, he just so strongly believes in the potential of technology companies that he wants long and leveraged exposure any way he can get it. Masa and SoftBank aren’t evil or manipulative, this argument goes, they’re just really, really excited and they don’t know their own strength. Time will tell if their enthusiasm and approach are warranted.The Bear CaseSoftBank is just a WallStreetBets Trader with tens of billions of other people’s money.Remember that strategy that I told you about earlier? The one in which you buy call options in big volumes to force the fund writing the calls to buy the underlying stock, driving up prices? If it sounds at all familiar, that may be because it’s the same one employed by the Robinhood traders on the now-infamous WallStreetBets subreddit.During COVID, one of the persistent themes in the market has been that retail traders, like the ones on WSB and people who trade on Robinhood more broadly, have been moving the markets with their dumb trades. According to this theory, that’s why Tesla’s stock has run up, why Apple popped after it announced stock splits, and why SPACs like Virgin Galactic (SPCE) and Nikola (NKLA) have seen their shares rise in ways that don’t make sense given the underlying numbers. Turns out, though, that people had the right crime but the wrong culprit. This is exactly what SoftBank’s 555 Fund has been doing, on the largest names in the world. When it works, it works really well; if you get the timing wrong, you lose it all. In the Bear Case, this is just the latest example of Masa’s overeagerness to risk it all. Viewed in this light, SoftBank’s selling its most valuable assets to fund risky bets seems negligent at best. When I was younger and dumber, in 2013, I bought Tesla at $29, Facebook at $19, and Apple at a price I don’t want to think about. The market was booming, and I didn’t want to miss out on maximizing my gains, so I sold those stocks and rolled them into call options. Instead of a portfolio of stocks that would make me look like a genius today, I ended up with $0 on those trades. In selling stakes in Alibaba, T-Mobile, and SoftBank Mobile to bankroll a tech options hedge fund (run, I might add, by a bunch of former credit traders who ran their bank into the ground), SoftBank is doing the same thing on a much bigger budget. The Bear Case is not that SoftBank loses this 555 Fund money. Assuming they have $8 billion invested and half of it is their money, even if they lose 50%, they’ve lost $2 billion. Not the end of the world. The Bear Case is that this move signifies a few worrisome things: * Masa has an increasingly big risk appetite. Not content with Vision Fund gains or even price increases in the big public tech stocks, he’s making risky bets for the chance to achieve outsized gains. He may continue to sell off core assets to take on more risk. * Masa wants easier, faster wins. You can’t double $4 billion in a few weeks investing in startups. Options trading is one of the only ways to do it. He’s impatient and getting sloppy.* Masa’s shifting from technology to finance, and Masa kind of sucks at finance. Other than the Alibaba investment, nearly every good thing that SoftBank has done has been when Masa focused on the operating / technology side of the business instead of the finance side. The question that investors need to ask themselves is: do I want to invest in SoftBank if it’s just a very big alternative asset manager that invests in the same big tech companies I can on my own? Anyone with a Robinhood account can buy calls on Tesla. Why take on all of the other risk associated with investing in SoftBank to get to the same spot? If I want to invest in a tech holding company, why not invest in Tencent, which has accumulated a more impressive portfolio, has proven its ability to add value to its investments, and has both a vision and a plan for bringing about and profiting from a tech-powered future? And if I want to invest in an alternative asset manager, why not invest in Blackstone, which is also publicly traded, has a better track record, and launched its own, more disciplined, tech growth equity fund? Plus, SoftBank lacks the subtlety to manipulate the markets in secret. Whether in private markets or public, when there’s a big, head-scratching inflation in prices, SoftBank is always standing right there, holding the bag. So Am I A SoftBank Bull or Bear? I came into this piece with an axe to grind. I expected to tear SoftBank apart, had the Bear Case written in my head, and was going to leave it at that. Ultimately, I think that Masa is just an unrelenting optimist. Optimism is an incredibly important characteristic in an entrepreneur. Only an extreme optimist would lose $69 billion, then fly to California with a sketch and a dream, convince Steve Jobs to do a deal on spec, convince a bank to loan him $20 billion, and create a legitimate challenger to Japan’s biggest telecom company. But naked optimism is a detriment in finance, and even venture investing. It lets you get swept up by people like Adam Neumann, who have more charisma than sense. And it allows you to YOLO trade call options on some of the world’s most heavily traded stocks without covering your downside. I probably wouldn’t bet on Masa the Investor. There are very few people I’d want to back more than Masa the Entrepreneur. Whether SoftBank is a good investment or not, to me, comes down to whether it continues to move towards Masa’s finance side, selling operating assets in the pursuit of higher, faster returns, or whether it rolls up its sleeves and starts making its vision come true with more than its checkbook. I’m staying on the sidelines for now, but I’ll be watching with fascination instead of contempt. And, I never thought I’d say this, but I’ll be rooting for Masa. I hope he can pull this off: Thanks for listening,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 936 newly Not Boring people who have joined us since last Monday! If you’re listening to this but haven’t subscribed, join 12,206 smart, curious folks by subscribing here!🎧 To get this essay straight in your ears: Stripe (Audio) or on SpotifyHi friends 👋,Happy Monday! The subject of today’s essay, Stripe, is a company I’ve been wanting to write about for a long time. So many smart people are so bullish on the company that I thought they must be missing something. I came away even more impressed by Stripe and optimistic about its ability to transform money on the internet. Speaking of internet money… my friends at The Hustle are Not Boring’s first ever Sponsor! I’m excited about this one, because I read Trends religiously. Trung Phan’s newsletter report has been critical in thinking through how to turn Not Boring into my real job.Trends is offering Not Boring readers a $1 two-week trial, which gives you access to all of their in-depth industry research reports and an excellent community of entrepreneurs. Show them the love and help keep Not Boring free by signing up for a trial at this link:Let’s get to it. Stripe: The Internet’s Most Undervalued CompanyStripe is a payments company that describes itself using the word “infrastructure.” It doesn’t get more boring than that in tech, and yet, Stripe is fanatically adored. People love the company’s co-founders, the charming, intellectual Irish brothers Patrick and John Collison. Its mission is audacious: to increase the GDP of the internet. Engineers rave about its simple-to-use product that makes something as complex as payments just work.And yet... Stripe is underrated. Because everyone loves Stripe, the company is under analyzed. Ben Thompson hasn’t written a Stripe-centered piece since 2017. Sure, there are plenty of product comparisons: Stripe vs. Adyen, PayPal vs. Stripe, Stripe vs. Braintree vs. Square. CB Insights did an excellent deep dive on its history, funding, and offerings earlier this year. There are interviews and podcasts with the Collison brothers galore. The Information did one with Patrick on Saturday. But there is very little in the way of strategic analysis on the company, because writing good things about Stripe just feels cliché. As a result, most people know that Stripe is an incredible company, but very few know why Stripe is an incredible company. So I dug in, looking to write a balanced take. I searched high and low for a bear case for the company -- so many once-gleaming unicorns have faltered recently that I wondered if Stripe didn’t also have some fool’s gold at the end of its rainbow. But clichés exist for a reason, and I came away even more impressed and excited about its future. Stripe is undervalued. The company’s recent $36 billion valuation was a steal and its strategy is underappreciated.Let’s analyze Stripe.What is Stripe? Stripe’s mission is ambitious: to increase the GDP of the internet. Here’s how it describes itself:Stripe is a technology company that builds economic infrastructure for the internet. Businesses of every size—from new startups to public companies—use our software to accept payments and manage their businesses online.But before it was an “economic infrastructure” company, Stripe was simply an easier way for startups to accept payments online with a few lines of code.Stripe’s founding story is well-documented. In 2010, two prodigious brothers from a small village in Ireland, Patrick and John Collison, dropped out of MIT and Harvard, respectively, to start Stripe. It was their second company. They sold their first, Auctomatic, for $5 million in 2008, when they were 19 and 17. While running Auctomatic, the Collisons realized that, despite PayPal’s success and banks’ participation, accepting payments online was too hard. They felt that with more businesses starting online, engineers would decide which payment tools to use, not finance people, and built a product that engineers loved. To this day, everything from their products to their communications are designed to delight engineers. Stripe’s first product was simple. Copy a few lines of code. Start accepting one-off payments. Since then, Stripe has expanded its payments offering to include: * Connect. Payments for platforms. Booking.com accepts payments from travelers and pays out hotels using Stripe. * Billing. Subscription and invoice payments. Were I to make this newsletter paid, Stripe would handle collecting money each month from those of you kind enough to subscribe.* Terminal. Offline payments for online native brands. Warby Parker uses Stripe for both online and in-store purchases. Unlike Square, Stripe doesn’t have a salesforce knocking on bodegas’ doors. This, like everything else Stripe does, is a product for internet businesses, just the ones who happen to have a physical presence, too. * Stripe Payouts. Payments to service providers, sellers, or freelancers. StyleSeat pays out hair stylists instantly for the jobs they’ve completed. * Stripe Issuing.  Virtual or physical cards for specific uses. Postmates gives its couriers cards that they can use only at specific merchants to purchase items that their customers order, and Clearbanc issues one-time virtual cards to its lending customers to be used only for online ads. Because of Stripe, internet businesses barely have to worry about payments. Typically, Stripe charges 2.9% of total value and $0.30 for each transaction. After paying banks and credit cards, Stripe’s take rate is typically somewhere between 0.5-1% of the transaction value. Clearly, Stripe succeeds when more people buy more things online.  Stripe is evolving, though, to leverage the relationships it has with customers and the massive amount of data it sees to expand into higher-margin products. * Corporate Card. Company credit cards that compete with AmEx and Brex. Stripe automatically provides limit increases based on growth and offers rewards aimed at startups and engineers. * Capital. Loans for growing businesses. Stripe is able to see its customers’ revenue from the Payments side and costs from the Corporate Card side, and give them access to capital based on their performance. Stripe can lend next-day. * Radar. Fraud and risk management. Because it has so much data, Stripe is better able to prevent fraud and prevent legit customers from being flagged as fraud. * Sigma. Custom reporting.Sigma lets users pull insights directly from their Stripe data instead of having to purchase Looker or another data analytics tool.* Atlas. Company incorporation. Atlas makes it easy for companies anywhere in the world to establish a Delaware corporation and a bank account. I used it for Not Boring, and it was cheap, fast, and easy. In a decade, Stripe has gone from accepting payments, which is now a commodity business, to providing an increasingly comprehensive suite of products that make it easy to start and run an online business.In Stripe’s July website redesign, the first in over three years, Stripe went back to an old description of itself: instead of “The new standard in online payments,” it calls itself “Payments infrastructure for the internet.” Small copy changes on its website point to larger strategic priorities. Stripe shifted from focusing solely on engineers via a self-serve product by building out a sales function for larger or less technical accounts. Can you tell the difference between these two home pages, from December 2016 and August 2017? Instead of “Explore the Stack” and “Create Account,” its new buttons read “Create Account” and “Contact Sales.” Engineers who want to just copy and paste some code are still welcome to do so, but now so are the larger companies with more complex needs and purchasing decisions.Some of the biggest and fastest-growing companies use Stripe -- clients include Salesforce, Amazon, Shopify, Slack, and Zoom -- not because they don’t have the engineering talent to build payments products, but because a company dedicated to payments like Stripe (or competitors like Adyen) can focus on all of the local integrations and edge cases that add up to a faster experience, higher acceptance rates, and less fraud. In many ways, working with large companies today is a way to improve the product for countless companies yet to be built. It’s also a defensive play against competitors and a way to accumulate the data Stripe needs to continue to build products that benefit all of its customers. While it sells to corporates, Stripe's long-term vision is predicated on the companies around the globe that will launch, grow, and compound in the decades to come. As an example, Stripe has retained its soul and commitment to new companies by launching Stripe Press in 2018 to publish books that can inspire and guide hopeful entrepreneurs. Yup, a payments company published these beautiful books, each containing stories and lessons meant to educate and inspire. Stripe Press is more strategic than it appears on the surface -- it celebrates entrepreneurship and craft, both encouraging people to start companies and attracting the type of employees that Stripe needs to attract in order to build the best products. The internet economy is already 10-15x bigger than it was when the Collisons launched Stripe a decade ago, and it has ridden that growth to become the second most valuable private startup in the US. But it is still deeply undervalued.  Stripe is UndervaluedLast September, I tweeted that Stripe could be worth more than Goldman Sachs in two years. At the time, Goldman had a market cap of $76 billion and Stripe’s valuation was $22.5 billion. Today, Goldman’s market cap is a hair lower at $72 billion, while Stripe’s April Series G extension valued the company at $36 billion post-money. Just four months later, $36 billion looks like a steal. In fact, were it public, Stripe would be worth more than Goldman today.Here’s the logic. Stripe announced its $600 million round on April 16th, in the beginning of the Coronavirus pandemic. Since then, ecommerce has absolutely exploded. As we discussed in Shopify and the Hard Things About Easy Things, ecommerce penetration has more than doubled since the pandemic began. Before, we bought 16% of things online; now, we buy 34% of things online. That has been a boon to ecommerce companies, and Stripe’s payments competitors’ stock prices reflect that growth. Since April 16th, PayPal is up 88.5%, Adyen is up 103.4%, and Square is up an astounding 150.5%.On average, those companies have grown 114.1% since Stripe raised at a $36 billion valuation. Applying that same growth rate, Stripe’s valuation would be over $77 billion, or $5 billion higher than Goldman Sachs’ current market cap.Is it fair to assume that Stripe would perform as well as its competitors during the pandemic? It’s really hard to say, because Stripe isn’t public and doesn’t disclose much in the way of financial information, but we can do some back of the envelope checks. * Stripe is the most heavily online company of its competitors. In fact, its underdeveloped offline product is one of competitors’ main selling points against it. But it’s a good time to be very online. Square, which has a large point-of-sale business, actually saw a decline in Q2 payments volume, revenue, and profits. * Stripe is likely growing faster than its payments competitors. Given that the vast majority of Stripe’s business is online, Shopify is probably a better comp than its omnichannel payments competitors. While PayPal Q1 Total Payment Volume increased 16% from Q1 to Q2, Adyen and Square decreased by 7% and 11% respectively. Shopify grew its volume 73% from Q1 ‘20 to Q2 ‘20. * Stripe is likely processing more payment volume than competitors. In its September 2019 funding announcement, Stripe said that it processes “hundreds of billions of dollars.” In the most conservative interpretation, let’s say they processed $200 billion in transactions in 2019. At 73% growth, Stripe would be at around $350 billion in Total Payment Volume, larger than both Adyen and Square, and nearly halfway to PayPal. If you assume “hundreds of billions” means $400 or $500 billion, Stripe may have passed PayPal already.* New businesses are launching on Stripe. As of August 10th, Patrick Collison tweeted that businesses launched on Stripe since the start of the pandemic have generated $10 billion in revenue. Pandemic-fueled growth seems to be accelerating. On May 20th, he tweeted that businesses started on Stripe during the pandemic had generated $1 billion in revenue. Assuming March 1st as a rough pandemic start date, they did $1 billion in new revenue in two months, and $9 billion over the next three months. While it’s not scientific -- it can’t be without public numbers -- it feels almost conservative to say that Stripe would be worth more than double its last valuation if it were a public company. But Stripe also faces some challenges in the short-term that may prevent it from reaching its long-term potential. The Stripe Bear CaseOften, when something seems too good to be true, it is. So I asked Twitter to help me uncover Stripe’s weaknesses:This is the bear case for Stripe: Payments is a commodity business and Stripe faces competition on every side - vertical solutions, more international players, cheaper options, and products more closely integrated with the banks - meaning that it will need to compete on price, particularly with larger customers, compressing its margins.More specifically, the responses fell into a few categories: Payments is a Commoditized SpaceThe biggest knock on Stripe is that the payments space is increasingly commoditized. Ten years ago, it was revolutionary to let companies accept payments online with some code. Now, a lot of companies do it. While Stripe probably wouldn’t disagree with the general categorization, I think it would argue that its data and scale allow it to build a differentiated and superior product. Stripe is ExpensiveCommoditization generally means that companies need to compete on price. And some people think Stripe is too expensive. Its merchant account competitors are often a few basis points cheaper, which adds up for large companies.Stripe handles this in three ways:* Lower fees for bigger customers.* Focus on smaller clients who prioritize ease and brand over price at the margins.* Generate more revenue and cost savings for customers through superior product.Stripe isn’t Everywhere Businesses Want to BeFor global companies, Stripe’s spotty international coverage is also an issue. While Stripe accepts payments from people in 195 countries, it only allows businesses in 40 countries to accept payments. Adyen positions itself as a more global solution, and as a result, has more large corporate customers including Uber, Microsoft, eBay, and Spotify. Stripe is moving quickly to remedy this, and realizes that it’s a hole in its offering. It’s also acquiring and investing in international payments companies, like Paystack in Africa, where it has no coverage. Customer ConcentrationLarge customers and partners are an issue for Stripe right now because they have more negotiating power. By one estimate, even before the pandemic, Stripe was generating $350 million in revenue from Shopify alone. That number has likely nearly doubled since January. That gives Shopify a lot of power over Stripe - the threat of spinning up their own payments solution on the back-end to match its front-end Shop Pay solution keeps Stripe’s take rate with Shopify razor thin. If Shopify leaves, that’s a material hit to Stripe’s revenue. Stripe’s strategy, however, is focused on the long tail. It has millions of customers (including 1 million via Shopify) compared to ~3,500 for Adyen. It likely makes its margins on the long tail, while keeping prices low for big companies like Shopify for two reasons: 1) to keep Shopify away from competitors and 2) to collect the massive data from Shopify transactions that it can use to improve the product for all of its customers. Light on IntegrationsStripe is also light on integrations - it doesn’t come integrated with third-party accounting software out of the box, for example - and on vertical-specific features. Until recently, it didn’t have a point-of-sale solution, and Square, Adyen, and PayPal all market against Stripe highlighting that weakness.  Competitors with better integrations can steal customers who need those integrations from Stripe, force its margins down, and arrest Stripe’s long-term trajectory. Stripe’s competitors break into a few different categories:* Merchant Accounts. Companies like Adyen and Visa’s Authorize.net are individual bank accounts for each business that typically have lower fees at high volumes.* Direct Competitors. PayPal’s Braintree is directly competitive with Stripe’s payment processing products. Plaid Payments (owned by Visa) offers a competitive product abroad with tighter bank integrations. * Vertical Solutions. Companies like Toast offer products designed to solve more of a company’s need within a specific industry. Toast gives restaurants point-of-sale tools, online ordering, and even payroll management designed specifically for that use case. * SMB Solutions. Square gives SMBs a full suite of tools, from its original POS product to online payment processing to online storefronts in addition to building direct relationships with end users through the Cash App. * Do it Yourself. Startups like Finix and Moov.io give companies the tools to build their own payment solutions in house. On certain individual features, Stripe falls short of its competitors. Stripe’s bet is that by integrating more of the products that businesses need in one easy-to-implement, constantly improving solution while racing to fill gaps, it will be able to acquire and retain customers and move them to higher margin products. It’s hard to take a Stripe bear case too seriously, because there is no way that the Collisons haven’t thought much more deeply about the challenges it faces than anyone else in the world. Even most of the people who responded to my tweet to offer bear cases responded with caveats like, “I’m so bullish on Stripe, but if I had to build a bear case…” The first response I received was from Cameo CEO Steven Galanis, who said:Stripe is explicitly organized to move quickly, and it fills gaps in software, hardware, and internationalization almost daily. This year alone, it has added five new countries, with plans to add more through the rest of the year. Despite the real challenges it faces, I could not be more bullish on the company. Y’all know how I feel about a good strategy, and Stripe’s is brilliant. Stripe’s StrategyThe bear case for Stripe largely exists in the present, whereas its strategy is built to compound the impact of a growing internet economy over a long time horizon. When Ezra Klein asked Patrick Collison which working CEO he admires most in a 2016 interview, he replied: The way in which Jeff Bezos has been persistently and continually able to use time horizons as a competitive advantage is something I have deep respect for. 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.Stripe similarly uses time horizons as a competitive advantage. It began by serving an overserved segment of the market -- engineers at startups -- with a product that traded features for simplicity and speed. And it’s grown with them. Like Slack and Snap, Stripe takes advantage of the compounding effects of young users. At an increasing rate, startups become big companies, and young people become decision makers. While incumbents and other competitors focus upmarket, on the most lucrative opportunity in the present, Stripe focuses on compounding over time.  In his 2019 Stripe Sessions keynote, Patrick Collison said that: Our strategy is very deliberately to serve both ends of the continuum (startups and enterprises), and every point in between. This ensures we can provide the most powerful functionality to the youngest companies in the world, and that we can provide the most forward thinking technology to the largest and most established.It is both moving upmarket and riding its growing customers upmarket, and is building out more features to capture more revenue from each. The high-end of the market is actually less profitable for Stripe’s core payments product (recall that large customers negotiate lower fees), but becomes more profitable as those companies buy more products from Stripe. It seems to be working -- 94% of enterprise customers use multiple Stripe products, and 84% use Stripe in multiple countries. That builds a double compounding advantage -- Stripe’s revenue grows both as its customers’ revenue grows and as they buy more Stripe products. The thing that I’m most excited to see in Stripe’s S-1 is its net dollar expansion -- how much more customers spend with Stripe each year. This strategy relies on building moats around its business so that customers don’t switch to a competitor before becoming more profitable. Stripe, consequently, is a world-class moat builder. In 7 Powers, Hamilton Helmer writes about the seven moats that a business can leverage to make itself “enduringly valuable.” The case studies in the book highlight companies that use one or maybe two of the seven to build moats that sustain profits over a long time period. * Netflix takes advantage of scale economies and counter positioning.* Facebook and LinkedIn build network economies. * Oracle has high switching costs.* Tiffany’s has a powerful brand. * Pixar’s “Brain Trust” is a cornered resource.* Toyota’s Toyota Production System demonstrates Process Power.Stripe has all seven. Scale EconomiesThe quality of declining unit costs with increased business size.Netflix is celebrated for spreading content development costs over such a large user base that it can develop new shows and movies for much less per subscriber than any competitor can. Stripe does the same thing for payment processing products. On Invest Like the Best, John Collison told Patrick O’Shaughnessy: This really is a scale business, and you can just go arbitrarily deep in improving the product in all sorts of incredibly detailed ways that would never be worthwhile for any individual business.As one of many examples, Patrick Collison tweeted that Stripe built a machine learning engine “to automatically optimize the bitfields of card network requests” that will generate an incremental $2.5 billion in revenue for Stripe customers in 2020. I have no idea what a bitfield of card network requests is, but Stripe has enough customers that it’s able to make little optimizations like this that add up to huge numbers much more cheaply than competitors could, or customers could themselves. They can provide better performance for the same price. Network EconomiesThe value realized by a customer increases as the installed base increases.There is debate about whether or not Stripe has network effects, but it does: Data Network Effects. This is related to, but subtly different than, Stripe’s economies of scale. Economies of scale allow Stripe to work on edge cases because they are able to spread the cost of building niche solutions across millions of customers, many of whom will benefit from Stripe’s having built a solution to a very specific problem. Stripe’s network effect comes from more users giving Stripe more data to use to detect fraud and improve acceptance rates. If I commit fraud on one website that uses Stripe, the other companies that use Stripe benefit from that information. Multiply that across billions of transactions, and Stripe has a treasure trove of data that any startup would have a nearly impossible time replicating. Counter-PositioningA newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.This is deeply related to the compounding effects of young users. Banks provided most of the payments infrastructure for the early internet economy, and selling into finance teams at large companies was in their DNA. While competitors targeted finance teams at large companies in a long, complex sales cycle that ended in long, complex integrations, Stripe let thousands and then millions of developers integrate their product quickly, no meetings required. While others focused on sales and marketing, they focused on product. Competitors couldn’t react, both because they couldn’t risk alienating existing clients, and because they couldn’t build excellent products. On a 2018 podcast, Patrick Collison told Tim Ferriss: If they [startups] can create a product that is so much better than the status quo that they start to get organic traction, once you attach a real sales and marketing engine to that, it’s going to be really frickin hard for a big company to effectively compete because this organizational transformation to being good at software is just profoundly hard.It’s easier for a product company to build a sales and marketing function than for a sales and marketing company to build a product culture.Stripe is clearly an excellent product company, and it attached a sales and marketing engine years ago. But it’s a very Stripe sales and marketing engine that focuses on quality content and audience expansion versus paid acquisition. If you want to see this for yourself, try searching things like “payment processor,” “online payments,” etc… I tried everything I could think of, and except for branded search (“Stripe”), Stripe was the only one of its competitors that doesn’t pay for search ads, because Stripe has always focused on building organic traffic through well-written content.Counter-positioning gave Stripe a multi-year head start on product and written communication. Along with its product, Stripe built a brand. BrandThe durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.In my search for contrarian takes on Stripe, I spoke to someone at a large ecommerce company about how they chose their payment processing tool. He told me that they went through a process with both Stripe and Adyen, and that the products had practically identical features. His point was that Stripe isn’t that special. “So which did you choose?” I asked. “We went with Stripe.” That’s the power of brand. When the decision is neck-and-neck on features, you go with the one with the stronger brand. So how does a company that essentially collects a tax on all payments build a glowing brand? Stripe does it in four ways, all designed to build loyalty early in a company’s life. * Build an Excellent Product Experience. It’s impossible for a software company to build an enduring brand with a weak product. Stripe’s just works and adds delightful (read: revenue-generating or cost-saving with no additional dev work) features over time. * Publish Great Content. Patrick McCkenzie, a Stripe employee better known as @patio11, said that, “Stripe is a celebration of the written word that happens to be incorporated in the State of Delaware.” Its API documentation is loved by engineers the world over. Stripe also publishes technology-related books and documentaries under Stripe Press, and an engineering magazine, Increment. It seems a bizarre move for a payments processing tech company, but both show a commitment to progress, expertise, and a passion for high-quality communication and craftsmanship to potential customers and employees alike. * Help Companies Get Their Start. Atlas allows companies to incorporate seamlessly. In the US, it makes a long, annoying, expensive process seamless. In other parts of the world, it makes the impossible possible. Over 15,000 companies have used Atlas to incorporate, one in four of which said they would not have started their company without Atlas. Additionally, Stripe bought Indie Hackers, a community for early stage product builders, to increase the probability that those young companies succeed and grow. Atlas and Indie Hackers expand the Total Addressable Market and build loyalty early. * Smart, Passionate, Public Employees. In an era when so many employees, even those at startups, are disgruntled with their employers, it is remarkable to see so many “Stripes” praising their employer so consistently. From the onboarding to the culture to the mission, Stripes seem to genuinely enjoy working together to grow the GDP of the internet. Stripe has attracted some incredible talent, and encourages them to publish their own thoughts on both related and unrelated topics freely. That sends signals to potential employees and customers that these are knowledgeable people you want to work with. In a head-to-head battle, Stripe will win on brand.  Switching CostsThe value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.Once a company uses Stripe, switching to a competitor like Adyen isn’t technically difficult, but it does require prioritizing resources to make it happen. One person I spoke to mentioned that they wanted to switch because Stripe’s customer support is spotty, but that they haven’t done it yet because of other, more pressing priorities. In many cases, switching payment solutions is a bigger risk than it’s worth. Imagine that you sell a subscription product, like a paid newsletter. You collect your subscriber’s information once, and then every month, Stripe collects money from the subscriber and sends it to you. Now imagine you want to switch to a new provider. That would require going back to all of your subscribers and asking them to re-enter their credit card information. Many won’t re-enter their info, and you lose those subscribers and their revenue. Switching costs increase as companies use more Stripe products. If my corporate card is with Stripe and I take loans from Stripe Capital, is it worth lowering my spending limit and losing access to next-day loans to save 10 bps in fees? For many companies, it’s generally a better financial decision to stick with Stripe.Cornered ResourcePreferential access at attractive terms to a coveted asset that can independently enhance value.Cornered resources can include very tangible things like patents or property rights, but Stripe’s cornered resource is that excellent people want to work together there. This point is directly related to some of the things we discussed in Brand, and also to the company’s co-founders. The Collisons seem to inspire genuine respect and loyalty from otherwise cynical people. I don’t want to work for anyone, but Stripe is the one company for which I would seriously consider working. I’ve heard a variant of that idea from people who either wouldn’t work for anyone but Stripe or wouldn’t leave their current role to go anywhere except Stripe. PayPal and Adyen, while both seemingly well-run companies, don’t seem to inspire that same fervor. Over years and decades, the effect of hiring the best people and setting them loose on big problems together compounds and lengthens Stripe’s lead. Process PowerEmbedded company organization and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment.Stripe’s process power comes from the way that it works, its clear written communication, the people who work there, and the speed with which it works. Stripe is an engineering company that focuses as much on the quality of its internal tooling as it does on the quality of its communications. A culture predicated on written communication and a dedication to internal tooling allows Stripe to work effectively remotely. It has more than 2,800 employees in 50 offices worldwide, and 22% of its engineering population is remote. Being good at remote is more important now than ever.Stripe also prioritizes speed. In his Invest Like the Best interview, John Collison said that, “When a paradigm changes, speed is of the essence. And speed is a defensible trait in companies.” Clear company objectives, powerful internal tools, and written communication combined with an exceedingly high caliber of employee allow Stripe to move faster by pushing decision making down in the organization. As a result, Stripe publishes updates to its core API 16 times per day. Its product gets better at an accelerating rate because of a series of linked decisions that would be nearly impossible for competitors to match. This ties back into Stripe’s overarching strategy of compounding growth -- the more turns, the more compounding. (@Patio11’s Two Years at Stripe essay is chock full of examples of things that contribute to Stripe’s process power.)Stripe’s 7 Powers work together to build moats around a business that is reliant on acquiring young customers, keeping them as they grow, and expanding the capabilities it offers them. As one example, Stripe’s Brand allows it to attract top talent, which is its Cornered Resource, which gives it much of its Process Power. While competitors can match Stripe on certain features and put downward pressure on price in the short-term, Stripe will win in the long-term, because its linked actions and accumulating advantages are nearly impossible for any competitor to match. Stripe’s FutureStripe is undervalued today relative to its public peers, and its strategy sets it up to capture multiples more value in the future than it is today. So there are two questions: * Why isn’t Stripe going public? * What is Stripe building towards long-term? Last week was an S-1 bonanza. Unity, Snowflake, Ant Financial, Asana, Desktop Metal, Amwell, GoodRX, and JFrog announced that they were going public, joining Palantir and Airbnb, which had already filed confidential S-1s. Stripe, worth more than all of them except for Ant on the private markets, is a glaring omission. So why isn’t it going public? Elon Musk has said that he isn’t taking SpaceX, the only private US startup with a higher valuation than Stripe, public until it’s doing regular trips to Mars. Stripe isn’t going to Mars (although I’m sure it will power payments there one day), but it has a similarly big vision. Since its private market investors are likely aligned to Stripe’s time horizon, and with no financial pressure to go public, the company is optimizing for the freedom to make long-term decisions that may not make sense to the public market in the short-term.In an interview with The Information this weekend, Patrick Collison said: As for any sort of IPO, there are core pillars of the product and the functionality we want to build for customers that we just haven’t finished. At some point, it’s likely we’ll either seek to [go public] or have to, but it’s just not a focus right now.Plus, it simply doesn’t have to. Stripe’s $600 million April raise brought cash on its balance sheet to $2 billion. Stripe has only raised $1.6 billion, suggesting that either it is profitable now, was very profitable at some point, has been able to borrow large amounts of money, or some combination of the three. Its recent executive hires are the types of hires a company makes before it goes public. On August 5th, it hired Mike Clayville from AWS as its Chief Revenue Officer to lead its enterprise efforts and six days later, it hired Dhivya Suryadevara away from GM as its Chief Financial Officer. Suryadevara made $6.76 million last year at GM, most of which was in equity, suggesting that Stripe had to back up the truck. If Stripe isn’t going public, what do those moves mean combined with everything else we’ve discussed? In the short-term, Stripe is clearly going to move aggressively to fill holes in the map and its product in order to better serve enterprise customers. AWS is a canonical example of a product that pursued the same strategy as Stripe -- get into startups early and grow with them, while also moving upmarket to serve large enterprise clients. GM is a complex international business with a large lending arm. Longer-term, Stripe is building not just the infrastructure on top of which money moves -- what it calls the Global Payments and Treasury Network -- and the platform on top of which companies are built. It is moving to own every piece of the journey. What can it do then?* Provide access to increasingly large amounts of non-dilutive capital. * Make equity investments in businesses based on its data, a la Tencent. It already has an increasingly active venture arm. * Understand the economics of any internet industry better than anyone in the world and suggest where budding entrepreneurs might build. * Augment or replace large portions of finance teams with software, improving profits for its businesses. * Forecast with a greater degree of accuracy than any internal model for a more complex and wide-ranging set of companies than something like Facebook’s Prophet. * Advise governments on how to leapfrog the banking system. Africa is a noticeably large hole in the map, and one that Sqaure’s Jack Dorsey was planning on  physically inhabiting himself until his board stopped him.* Facilitate M&A among and between customers. * Take companies through the entire journey, from incorporation to going public. Regarding that last bullet, I wouldn’t be surprised to see Stripe acquire Carta to build a robust secondary market for startup equity that competes with the notion of going public. One more potential reason that Stripe isn’t going public might be that it’s planning to change the way that going public gets done. One of Stripe’s biggest points-of-failure right now is that it’s built on top of existing banking and economic infrastructure. It’s hard to imagine that Stripe will remain content to pass on hefty bank and credit card fees to customers. How much more creative leverage would entrepreneurs unlock if they got ~2% of their revenue back to spend on more productive uses? To that end, Stripe was an early supporter of crypto project Stellar, and I expect to see much more activity either in crypto or other areas that enable Stripe to rebuild economic infrastructure from the ground up. While Stripe has long touted its desire to work with the existing system, it started calling itself economic infrastructure for a reason -- it wants to improve the way we transact at a more foundational level. Building the economic infrastructure for the internet, and ultimately the Metaverse, is a massive responsibility. I wouldn’t trust Mark Zuckerberg with it. But Stripe possesses another cornered resource - the Collisons themselves. Their demonstrated thoughtfulness, appreciation of nuance, and dedication to intellectual rigor make them the most appropriate stewards of a new economy. Sadly (since there’s almost no equity I’d rather own), Stripe is not going public any time soon. It is at the very beginning of a decades-long journey during which it will compound the internet’s growth, and compound with it to become one of the world’s most valuable companies. If Stripe is successful, it will transform the economy, and I’ll be here telling everyone to appreciate it even more. Thanks to Dan and Puja for editing, and to Michele for help with the research!  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