Not Boring by Packy McCormick

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

Welcome to the 1,085 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 11,270 smart, curious folks by subscribing here!Hi friends 👋,Happy Monday! Thanks to all of you for your feedback! I’ve read through all of it, and I’ll be incorporating a lot of your ideas in the coming weeks. One of the biggest pieces of feedback you gave was to either a) shorten the essays or b) give a TL;DR upfront. I’m going to try the latter today with a short summary of the essay in slide form. You can check it out here, and I’d love to hear your thoughts. In Part I, we covered Tencent’s history, its current businesses, and its massive portfolio of investments. Tencent is undervalued based on its current operating businesses and the current value of its portfolio alone. But Tencent’s positioning for the future is even more compelling, and that’s what we’re going to discuss in Part II today. Full Disclosure: I own shares in Tencent after doing research on it for this two-parter.Let’s get to it.Tencent’s DreamsTencent’s critics argue that it gave up on its dreams by focusing on investing instead of product innovation. I disagree. Instead of building any specific product, Tencent is building an organization and ecosystem designed to be massively profitable in the short-term with asymmetric upside.Through its investments, Tencent is in the best position of any company to usher in and profit from the Metaverse, the misunderstood and potentially mega-lucrative evolution of the internet. I’m not the first person to realize that Tencent is in the lead. In his recent Invest Like the Best interview, investor Matthew Ball said, “So if you said ‘who is closest to the Metaverse today?’ the simple answer is not Fortnite or Minecraft, it’s Tencent.” But Tencent’s advantage extends beyond its lead position in gaming, because the Metaverse will be so much more than games. Look closely at Tencent’s portfolio and you’ll find a group of companies across gaming, ecommerce, and social that will bring the Metaverse to fruition and share in its massive upside. Tencent’s structure and strategy -- provide capital and traffic -- is the perfect model to profit from the decentralized, competitive, creator-friendly ecosystem that the Metaverse is likely to be.That’s a big claim, so here’s what we’ll cover to get there:* The Metaverse. What the Metaverse is, which parts of it are here already, and how big the opportunity is.* Tencent’s Strategy. Instead of building everything itself, Tencent invests. Its Capital + Traffic Flywheel is a smart way to bet on the Metaverse because while technologists are nearly certain that it will exist, no one knows exactly what form it will take. * Platform + Content. The Metaverse will comprise the Platforms on top of which it’s built and Content that users interact with for entertainment, socializing, learning, and commerce. Tencent owns leading Platform candidates - Epic’s Unreal Engine (VR), Snap (AR), Spotify (Audio), and WeChat (internet / super app) - plus companies through which people will play, shop, learn, and socialize.* Where Tencent Might Invest Next. Tencent has announced its intention to invest in infrastructure and “Smart Retail,” and it is likely to invest in remote work and collaboration products like Figma and Agora to round out its business offering.* Obstacles. Tencent faces government regulation and well-resourced competitors. This post is fun speculation combined with practical implications. Tencent’s valuation doesn’t properly price the Metaverse opportunity -- it can’t, it’s so early and so speculative -- which means that with Tencent, you get a business that is undervalued today and a free call option on the future. I want you to leave this post with a better understanding of the Metaverse, and an appreciation for the opportunity that Tencent has to make it a reality and profit from its rise. What is the Metaverse?Oh no, not another Metaverse thinkpiece… Hear me out. The term, first introduced by sci-fi author Neal Stevenson in his 1992 Snow Crash, makes the idea sound silly and game-like. It sounds a little like talking about the World Wide Web in the early 1990’s. Like the Web back then, the Metaverse is an important idea in need of a rebrand.So what is it?In The Metaverse, Matthew Ball says the Metaverse will be an always-on, real-time world in which an unlimited number of people can participate at the same time. It will have a fully functioning economy and span the physical and digital worlds. Data, digital items, content, and intellectual property (“IP”) will work across the Metaverse, and many people and companies will create the content, stores, and experiences that populate it.Epic Games CEO Tim Sweeney agrees, adding, “it will be a massively participatory medium of a type that we really haven’t seen yet,” with “ a fair economy in which all creators can participate, make money and be rewarded.”The Metaverse sounds a lot like the real world, layered with digital components at varying degrees of immersion. A participant might walk through a virtual mall and buy a digital Mickey Mouse costume in the Disney store for his avatar to wear, then pop over to the food court to pick something to eat to be delivered to his physical house via Uber Eats, and then pop into a live Beatles concert in the Spotify Performing Arts Center. He can keep the concert going in his AirPods on Spotify when he wants to go for a run in the physical world, racing against his friends in an AR Peloton-like experience.  The whole thing feels seamless - his data and purchases carry across and among physical and digital worlds.Ball, Sweeney, and everyone else I’ve read on the topic agree: the Metaverse won’t happen overnight. There won’t be a clearly demarcated “before the Metaverse” and “after the Metaverse” divide, and it won’t be built and run by one company. The Metaverse will be the result of the evolutionary convergence of many separate tools, platforms, and worlds underpinned by shared infrastructure, standards, and protocols. In fact, Marc Geffen makes the case that the Minimum Viable Metaverse is already here in games, the democratization of ecommerce, the rise of “premium” social media, and the adoption of decentralized, distributed, and remote productivity tech. The Metaverse won’t be any one thing. It’s not just one big video game. It’s not just Second Life. It’s not just a huge shopping mall. It’s not the scene from Wall-E that I like to include whenever I talk about the future.It’s all of those things, and the connections between them, and more. The Metaverse will be a way to blend the physical and digital worlds while allowing us to be fully present in either - it’s the real world, AR, VR, and the internet all rolled into one. With regards to Tencent’s business, three things are important to realize about the Metaverse: * The Metaverse isn’t science fiction, it’s an inevitability even if its final form is unclear. * Games and game engines are important, but they’re just one piece of the puzzle. * Owning large swaths of the Content and Platforms underpinning the Metaverse and of the content and commerce taking place within it will be highly lucrative.Ball believes that even in a conservative case, the Metaverse will be worth trillions of dollars. But it’s impossible to quantify, like trying to predict how big the “net” was going to be back in the early 1990s. We knew it was going to happen, and we knew that it was going to be big, but we couldn’t have imagined exactly what it would look like, or that it would spawn multiple trillion dollar companies and many more multi-billion dollar ones.While we can’t know the exact what or how, the Metaverse represents an unprecedented wealth creation opportunity. And Tencent, through its investments and consolidated assets, is in the driver’s seat. Which brings us back to Tencent’s dreams. Capital + TrafficA strategic decision nine years ago accidentally set Tencent up to create more value from the Metaverse than it does from its entire core business by focusing on investment over organic growth.After reading Part I, Rui Ma pointed me to the Tech Buzz China podcast in which she and Ying Lu discuss Pan Luan’s 2018 piece titled “Tencent Has No Dreams.” In it, he argues that a 2011 decision at a management team offsite caused Tencent to lose sight of its product-focused roots. Back in 2011, Baidu passed Tencent as the most valuable tech company in China, and Pony Ma called a meeting of his top management to chart a new course for the company. In the meeting, dubbed “The Conference of the Gods,” he asked his 16 top executives to list out Tencent’s core competitive advantages. Two winners emerged: capital and traffic. Led by President Martin Lau and his former Goldman colleague James Mitchell, who he brought on as Chief Strategy Officer, Tencent built its strategy on this flywheel of capital and traffic. Attract companies to build on its platform with huge traffic, invest in the winners, give them more traffic, invest more or acquire the winners, generate more traffic, attract more companies, and so on. It runs essentially the same playbook with foreign companies who want access to China.The strategy seems to be working. Since that 2011 meeting, Tencent’s stock has increased nearly 15x, from $44.5 billion to $660 billion. Luan warned, though, that “Hidden behind the ten-fold increase in market value is the investment banking thinking that focuses too much on short-term ROI.” He cites the fact that Tencent missed out on short-term video, kills internal projects quickly based on ROI calculations, and failed to internationalize WeChat. Luan also argues that Tencent’s intolerance of failure leads to a lack of innovation and talent development, painting the picture of Tencent as a place where, “Smart people just make PowerPoints and quarrel with each other.” Luan’s argument boils down to one that’s familiar to the American tech giants: they can’t innovate anymore, so they just copy and acquire. Facebook’s internal projects are flops, so it acquired Instagram and Oculus and WhatsApp and copied Snap Stories. Google can’t create anything new beyond search (remember Google+??), so it acquired Android and YouTube and DoubleClick. But Tencent’s focus on investment over organic innovation is really smart for two reasons. First, building a startup is an exercise in innovation; running a large company is an exercise in capital allocation (recall The Outsiders). At this point, Tencent creating all of its own products would actually be inefficient. The company’s best minds should be focused on building an organization and ecosystem that sets it up to catch the next major wave of growth. Second, investment versus full ownership is the right way to play the Metaverse opportunity. If the Metaverse is going to be decentralized and more profits will accrue to creators, it makes financial sense to spread bets across both platforms and content creators instead of trying to build one central platform, like a WeChat version of the Metaverse. Historically, Tencent has evolved its approach to meet evolving tech trends. It launched QQ to capitalize on the rise of the internet in China and it built WeChat to ride the mobile wave. Now it’s building a portfolio of companies that position it to profit from the shift that has the potential to create more economic value than either of the previous two. Tencent’s Metaverse DreamsThere are two big components of the Metaverse: Platform (where) and Content (what). Tencent owns stakes in more of the components of each than any company in the world. PlatformThe magic of the Metaverse is that it will seamlessly integrate the myriad platforms on which we socialize, work, and consume - merging Augmented Reality (AR), Virtual Reality (VR), audio, the internet, and the physical world. Tencent owns key players in each, including Epic, Snap, Spotify, WeChat, and even physical retail. VR: Epic (Unreal Engine)In Tencent’s Metaverse solar system, Epic is the sun. In many ways, its major title, Fortnite, is the closest thing we have to the Metaverse today. * Looks Like the Metaverse We Think Of: It’s a persistent, synchronous, live virtual world, complete with shared group experiences like the Travis Scott concert.* IP Melting Pot: Competing IP co-exists in Fortnite - you can buy both Marvel and DC skins, NFL jerseys and Jordan sneakers, or be John Wick or Ariana Grande (link)* Cross-Platform: Players can play against each other on competing consoles or platforms - players on Mac, Playstation, Xbox, and Android can all play against each other.* Participatory: In Creative Mode, players can build their own worlds, and Epic has partnered with creators from the community to develop and sell their skins. Epic is running the Traffic side of the Tencent playbook - because all of the players are on Fortnite, it can get consumer-friendly deals out of parties -- like IP holders and game console makers -- that others cannot. Fortnite is just a trial run for a bigger prize, though. It puts Epic’s Unreal Engine in the prime position to become the Platform on top of which many of the virtual components of the Metaverse are built. Game developers, filmmakers, and architects alike use its Unreal Engine to build rich, immersive digital renderings and worlds. Popular game Gears of War, Disney+ hit The Mandalorian, and leading architects Foster + Partners and Gensler all build with Unreal. A shopping mall designed in Unreal Engine, SourceAs more games, movies, cities, and buildings are built on the same engine, it becomes easier to stitch together a full virtual world. And more will build with Unreal and Epic, because the company is practically giving away its best-in-class tools for free. Epic has the lowest store fees of its competitors (12%), the most publisher-friendly publishing tools, and the most open ecosystem. If a competitor wants to work with Epic, Epic will work with it. Epic does all of this in service of the creators, large and small, who it sees as crucial to pulling the Metaverse forward in time, and to creating a massive Total Addressable Market. The more money creators can make, the thinking goes, the more likely they are to create, the more attractive it will be for users to spend time in the Metaverse, and the more lucrative it will be to be the engine building the Metaverse.Tencent owns 40% of Epic, which recently raised at a $17.3 billion valuation, and looking 10-20 years into the future, that 40% stake could be worth more than all of Tencent today. But it’s just one component of Tencent’s Metaverse Platform play. Another crucially important piece is Snap. AR: SnapTencent is Snap’s largest shareholder, with 12% ownership (although no outside investor has voting rights or control). If Epic is a leading contender to build the virtual world components of the Metaverse, Snap is a leading contender to build the AR components, or Mirrorworld. As I wrote in Oh Snap!:Mirrorworld, according to Kelly, won’t take place in Virtual Reality (VR), but rather in Augmented Reality (AR). It will blend digital and physical, layering bits’ infinite possibilities on top of atoms’ realness. Snap is employing the Amazon “First and Best Customer” strategy. It builds products for its own app first - like Lenses, its first AR hit - and then opens up the tools to both its community to create within Snapchat, and third-party developers to incorporate Snapchat’s features into third-party apps. Snap is building a wide-ranging set of products that build off of each other and work together to lead to a future in which Snap powers the Mirrorworld.Here’s a glimpse from Snap’s Partner Summit:Like Epic, Snap isn’t building a closed ecosystem. It’s building the tools that others can use to build and profit from AR experiences, inside or outside of the Snapchat product, so that it becomes the platform on top of which developers build the Mirrorworld. * Camera Kit: Gives any developer the power of Snap’s Camera, the most widely used piece of AR technology in the world. * Bitmoji: Snap owns Bitmoji, which gives everyone their own personalized avatar to use within Snap Games and Minis, and across many external apps, platforms, and OS’s. * Snap Kit: Powers 20 of the top 100 apps in the iOS and Google app stores. * Local Lenses: Allow users and businesses to build digital worlds on top of the physical one. Snap will be a leader in AR and continue to grow as its user base matures, which will put it among the tech giants in terms of valuation. Today, it’s valued at 1/70th of Apple and 1/30th of Google. If it catches up to where the tech giants are today, Tencent’s stake will be worth over $100 billion. (Insert $100 billion in 10 years meme here)Audio: SpotifyThere’s a version of the Metaverse that looks less like Ready Player One and more like Her. That is to say, audio-based. We are decades or centuries away from being able to do everything we need to do in the virtual world, which means that we will still need to spend plenty of time in the physical world. During much of that time, we will plug in via audio. Today, Americans spend four hours per day listening to audio, including one hour of spoken word content. Tomorrow, we will listen to even more, as the lines between conversation and entertainment blur. Spotify, of which Tencent owns 9%, is best positioned to capture that earshare. Spotify currently has 286 million monthly active users and is proving out its ability to deliver them different types of audio content beyond music, including podcasts, and soon, audiobooks. According to CEO Daniel Ek, Spotify has 10-15x growth ahead of it. As I wrote in Earshare, it is investing heavily today to ensure that it owns consumers’ ears as audio grows. In the Metaverse, Spotify will fill the space between - when people are not fully immersed in the digital world, they will be able to continue the conversation with friends who are, interact lightly with AR through audio, or just relax and listen to some music. At 10x where it is today, Tencent’s investment in Spotify would be worth $35 billion.Internet: WeChatTencent’s core asset today is WeChat. As we discussed in Part I, Chinese consumers do everything on WeChat - message, read the news, shop digitally, interact with businesses, communicate for work, pay for things in the real world, and more. With the launch of its Mini Programs, companies are able to build richer experiences within the WeChat ecosystem. In some ways, WeChat is a mini, 2D Metaverse. As Tencent quietly orchestrates the adoption of the Metaverse via its minority investments, it will be interesting to watch how much inspiration the Metaverse takes from the WeChat ecosystem. Snap has already started to look more like WeChat with the launch of its own Minis, and the super app’s influence will continue to shape the way that we build new digital economies.Infrastructure and Smart RetailTencent already owns stakes in the platforms of the future, and it has more cash to spend. The company said that it will invest $70 billion in infrastructure including cloud, AI, cybersecurity, blockchain, 5G, and quantum computing over the next five years. It will also be investing heavily in Smart Retail, further bridging the gap between digital and physical retail through payments and other shopping tech. Together, its infrastructure and Smart Retail investments will help build more of the underlying technology and connective tissue the Metaverse will need. ContentTaken together, Tencent owns stakes in the leading companies building the Platforms on which the Metaverse will be built: VR, AR, Audio, and Internet. Epic, Snap, Spotify, and WeChat are all building true platforms -- on which the majority of the profit is made by creators. For the Metaverse to be interesting enough for people to adopt, creators are key. There need to be games to play, music to listen to, rich social experiences, ways to make money, and things to buy with that money. In other words, there needs to be Content. Tencent’s Platform investments enable content creation, and it also invests in Content creators. Capital and Traffic for the next wave. When you lay Tencent’s investments on top of Geffen’s graphic, its Content play emerges. Tencent owns stakes in four of the companies that Geffen included in his original  graphic (circled in blue): Snap, Discord, Roblox, and Epic. I’ve added more of Tencent’s holdings to the chart to show that Tencent is already a leader in three of the Minimum Viable Metaverse categories, which are the early Content layer: Games, Premium Social Media, and Democratized Ecommerce. Virtual Worlds and Spatial Software (i.e. Games)Games are the first Metaverse Content that many people will engage with, and Tencent is the leading video game company in the world. * Its online games segment did $5.5 billion in Q2 revenue, more than any other company.* It owns Riot Games, which makes League of Legends, the most popular esports title in the world by over 4x as judged by Twitch streams and 40% of Epic Games, which makes Fortnite (350 million players). Unreal Engine is Platform, Fortnite is Content. * It owns 1.5% of Roblox, which has 164 million users and is played by half of people under age 16 in the United States.Matthew Ball talks about games as the “on-ramp” experience for the Metaverse, the thing that will get early adopters to try it out. Tencent owns that on-ramp, and the titles that will keep people engaged and immersed in early versions of the Metaverse. Democratization of Ecommerce For the Metaverse to become more than just an immersive game environment, it will need to support a functioning economy. For that to happen, people will need to be able to sell things in the Metaverse, which is to say, in a seamless way across the digital and physical worlds. Try on a shirt with AR, buy a digital version for your avatar, and have the physical version shipped to your door. Tencent owns stakes in some of the leading ecommerce companies in the world, many of which “arm the rebels” instead of vertically integrating, with publicly stated plans to add more:* WeChat allows companies to easily set up stores and experiences that reach over a billion customers, and WeChat Pay lets people buy things online or in the real world. * Paystack powers digital payments in Africa, Khatabook does the same in India, as do Gojek in Indonesia and SeaMoney in Singapore. Seamless payments will be crucial to power Metaverse stores. * Pinduoduo’s Customer-to-Merchant and social commerce models are reshaping ecommerce in ways that may work even better in the Metaverse than they do on mobile. Tencent’s current portfolio and future investments in Smart Retail will continue to blur the lines between digital and physical shopping. They will be crucial in defining the shape of the Metaverse economy, and its assets stand to benefit from the Capital and Traffic Flywheel across its Metaverse Platforms. Premium Social MediaThe Metaverse will let friends, family, and colleagues from across the world gather in immersive environments even more easily than walking next door. It will also let strangers with shared interests find and engage with each other. Tencent has an impressive portfolio of Premium Social companies: * Tencent owns 50.1% of Huya and and 38% of Douyu, China’s versions of Amazon’s game streaming product, Twitch. Game streaming mechanics may underpin broadcast activities beyond gaming.* Discord, of which Tencent owns ~2%, bills itself as a “place to talk and hang out.” It represents a proto-version of persistent hangouts in the Metaverse.* Snap is both a Platform and a Content play, and is a more intimate social network in which young users mainly interact with their closest friends instead of strangers.* Tencent owns ~5% of Indian education platform, Byju’s, the most valuable online learning company in the world.Like a party or a new social network, people will only hang out in the Metaverse if their friends are there. As the Metaverse comes into focus, these Premium social communities will continue to merge with the other aspects like ecommerce and gaming, making many of the things we do more social. We’ll go to the mall, movies, or concerts with friends, just like the real world pre-Corona. Through its Capital and Traffic approach, Tencent has built a portfolio of internal and external products, platforms, and services that perfectly position it to own the Platforms on which the Metaverse is built, and the Content with which Metaverse users will engage to play, build communities, learn, and shop. So what is it missing? Where Tencent Might Invest NextThe one area from Geffen’s map in which Tencent is underweight is “decentralized, distributed, and remote productivity tech,” particularly compared to Metaverse competitors Microsoft and Google. Assuming that remote productivity will be an increasingly important component of the Metaverse, I expect that remote productivity tech will be a main area of focus for Tencent in addition to previously announced infrastructure and Smart Retail plays. If I were doing corp dev at Tencent, here are a few companies I would be interested in: * Figma. The collaborative design tool that I use to make all of the beautiful graphics in Not Boring would be a strong addition to the portfolio because it is both a work collaboration tool and a potential on-ramp for people to design new worlds and experiences in the Metaverse. People use Figma to synchronously co-create shared environments, like WFH Town.* Agora. Tencent brazenly copied Zoom with VooV, which it launched in 100 countries on March 20th. Agora, which went public in June, allows anyone to embed video or voice in their applications. I think that the future of video will look more like use-case specific video environments versus everyone using Zoom, and Agora is both a good way to play that trend and a way for Tencent to spread into thousands of products as a Platform.  * Zapier. When I wrote that Google should acquire Slack, Schlaf replied that Zapier is more strategic because “it’s plumbing and glue. It ties together a whole ecosystem of applications, services, and developers.” In a Metaverse defined by the connection among platforms, worlds, and content, its connective plumbing may be even more important. * Remix Machines. In The Generalist, Mario Gabriele cited a wave of products unbundling the Microsoft Office Suite with slicker UI and more collaboration. Many of the companies he discusses, like Notion, Coda, Roam, Airtable, Causal, Canva, Projector, Kapwing, and Webflow are well-suited for the Metaverse, which will be largely multiplayer as opposed to one-to-one or solo. Many of these companies are too early in their lives and their trajectories are too steep for them to sell to one of the American tech giants that would swallow them whole. Tencent’s more passive investment approach is likely preferable to the companies. Within the Tencent portfolio, they can get access to capital, traffic, and a seat in the early Metaverse. Obstacles to Tencent’s Dream Tencent’s success in the Metaverse is not a foregone conclusion for three reasons: * Government. Tencent is a Chinese company, and the Trump Administration recently issued an Executive Order to prevent people in the US from using WeChat, which the Administration views as a security threat. Were Tencent to take a leading position in the Metaverse the government would very likely intervene. This is one of the areas where Tencent’s structure is advantageous. It’s impossible to imagine the American government (or Indian government, or many other governments) allowing its citizens to spend the majority of their waking hours in the Metaverse by Tencent™️, but it will be harder to prevent people from spending time playing Fortnite or League of Legends, interacting with the world through Snap’s AR, or listening to music on Spotify. Even still, world governments could force Tencent to divest ownership in businesses operating in their countries. Even the Chinese government has been an impediment to Tencent’s dream when it imposed restrictions on in-game purchases in 2018, driving Tencent’s stock down 20%. * Competition. Tencent will face opposition from bigger competitors and new entrants alike who have their own designs on controlling the next big platform shift. Facebook bought Oculus to own VR. Microsoft owns Minecraft and the Hololens, and may own TikTok, which is already stealing attention from Tencent’s properties. Google is gunning for cloud gaming with Stadia and won’t give up its place as the home page for the internet easily. Amazon is the world’s largest ecommerce business and its largest cloud provider, owns Twitch, and is the best of the bunch at developing new business lines. Apple is currently engaged in a battle with Epic over its 30% app store fee, and has shown that it is willing to play hardball to hold on to its hard-won place in the content ecosystem. * The Metaverse is Uncertain and Likely Distributed. Ultimately, no one company will own the Metaverse, and it’s important for Tencent to work with competitors, as Epic has done, in order to maintain its advantage. It will have to convince the other major tech companies that accelerating the arrival of the Metaverse will be positive sum for all of them, and then work arm-in-arm with competitors to convince regulators across the world that what they’re building, and how they’re building it, is good for society. Tencent’s OpportunityDespite the obstacles, investing in Tencent is the best way to invest in the Metaverse. It is the only way for you and I to invest in Epic, which many believe to be the most important Metaverse builder. If it ends up being more AR than VR, Snap will do well. If audio plays a larger role, Spotify will do well. If it blends multiple media, all three will boom together. Even if another giant or startup builds the infrastructure, many of its Content plays stand to benefit from a richer digital / physical economy. If Tencent can nudge its portfolio companies to work together, it will accelerate the Metaverse’s development and solidify its own leading role. Even if it can’t, many of its bets stand to perform well independently, and the likelihood of one or more massive winners is high.And if the Metaverse doesn’t emerge at all? If we continue to use the internet in the way we do today for the next century? Tencent owns a portfolio of companies that stand to benefit from the simple straight line continuation of existing trends towards more gaming, ecommerce, audio, digital communication, and digital healthcare. The more we do online, the better Tencent does. This feels like the kind of opportunity that most of us missed to buy a basket of Apple, Amazon, Google, and Microsoft in the early 2000s, buffeted by a massive, profitable, and growing core business. Ultimately, Tencent is an undervalued portfolio of many of today’s top internet assets and a free call option on a new world. Get Smart on Trends Early With Gen Z VoiceGen Z Voice is like having a cool younger cousin who tells you which products all his friends are into. I read whatever Tom writes so my old ass can catch the next Fortnite or Snap early, so I'm pumped that Tom wanted to sponsor today's Not Boing. Sign up here - it's free, and it will keep you young.That’s all for this week, see you on Thursday!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 928 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 10,185 smart, curious folks by subscribing here!Hi friends 👋,I want to celebrate Ten k subscribers by going deep on the only company with the right name for the occasion, Tencent. Tencent is the Chinese conglomerate behind the recently-banned WeChat, and one of the world’s most successful investment funds. There’s so much to say about this company that I’m breaking it up into two parts: * Part I (today): Tencent’s history, its business, and its portfolio, including a bonus goody for the investing nerds out there: a link to a spreadsheet I made with the current value of 102 of Tencent’s investments. * Part II (Thursday): Where Tencent is headed - it’s building new cities in China, and it’s going to be at the center of building a whole new world. This post isn’t meant to be political or to pass value judgments. It’s just an assessment of a fascinating company that most of us know far too little about. Favor: if you enjoy this post, please click the little heart button to like it - it helps more people discover my writing - or share it with your most Sinocurious friend. Let’s get to it. Tencent: The Ultimate OutsiderTencent is the most important company that many Americans know the least about. When President Trump signed an August 6th Executive Order banning WeChat from the United States, a lot of people said, “What’s WeChat?” Even those who knew about WeChat know very little about the octopoid company behind it. Let’s fix that. You should leave this two-part essay with a better understanding of what Tencent does, what it owns, and why it’s one of the most significant companies in the world.The Chinese pager-based internet service that Pony Ma launched in 1998 is now the world’s seventh most valuable company, right ahead of Berkshire Hathaway and right behind its bitter rival, Alibaba. As of Friday, Tencent is worth $628 billion.In China, Tencent is like Facebook, Nintendo, Shopify, Netflix, Spotify, Slack, and PayPal rolled into one. Its flagship product, WeChat, has 1.2 billion users, and those users spend more time in the app every day than Americans spend on all social media apps combined. People use WeChat to message friends, shop, read the news, play games, pay for things in physical stores… pretty anything you can do on your phone, you can do on WeChat. Tencent turned the profits from its social networking, ecommerce, and gaming cash cows into a global investment portfolio that includes many of the world’s most popular video games, the fastest-growing internet businesses in China, meaningful stakes in Tesla, Spotify, and Snap, and a portfolio of international startup unicorns second only to Sequoia’s. It even financed A Beautiful Day in the Neighborhood. Americans don’t know much about Tencent because, in addition to being Chinese, it’s really fucking complex. It’s both one of the most profitable operating businesses in the world and one of the most ambitious investment funds. Tencent has been dubbed “The SoftBank of China” and “The Berkshire Hathaway of Tech.” Neither description does it justice. While it gets less hype, its performance puts SoftBank’s to shame. It’s going to be one of the most important companies in the world for decades to come. Today, in Part I, I’m going to explain Tencent in four sections: * What is Tencent? An entrepreneurial story just like the ones you hear in the US, with all of the highs, lows, and near-deaths. An improbable journey from pager-based internet service to the giant holding company it is today.* The Outsiders. William N. Thorndike’s 2012 book, The Outsiders, about eight of the most successful CEOs in US history, provides a framework for thinking about Tencent’s business. CEO Pony Ma shares all of the important characteristics with the eight that Thorndike wrote about.* Tencent’s Operating Businesses. Tencent’s core business makes money in six main ways, and each of its business units rivals in, both scope and revenue, massive, standalone public companies.* Tencent’s Investment Portfolio. There’s no great public source for all of Tencent’s 700-800 investments, so I created a database of 103 of its biggest and share insights around where it invests, in which types of companies, and the unfair advantages it has as an investor.  The founding stories of Apple, Google, Microsoft, Facebook, and Amazon are canon for the type of people who read Not Boring. They’re part of modern American mythology. It’s time for us to get to know Tencent.What is Tencent?Note: I’ve used Julia Wu’s summary of Wu Xiaobo’s book, Matthew Brennan’s presentations, and the excellent Acquired podcast on Tencent to piece together Tencent’s history. We’ve been conditioned to think of massive Chinese technology companies as shady, government-controlled businesses out to steal your data and try to take over the world. It might surprise you, then, that Tencent started out like a lot of US startups: as an entrepreneurial itch that one 26-year-old nerd had to scratch with the help of some friends. Ma Huateng was born at the right time and moved to the right place. Ma was born in the Hainan province in 1971 and moved to Shenzhen when he was 13. In the late 1970s, Chinese President Deng Xiaoping designated Shenzhen as a special economic zone as part of his “reform and opening policy.” Ma, whose family name meant “horse” and whose nickname, appropriately, was Pony, grew up in the one capitalist place in communist China. Ma was prodigiously smart. He scored high enough in college entrance exams to go anywhere in the country, but stayed close to home, attending Shenzhen University. The school didn’t have the astronomy major that Ma was most interested in, so he settled for his second choice: computer science. He was a natural. Ma regularly won student hacking contests, and built graphical user interfaces before they were a thing in China. While interning at one of China’s leading tech companies, Ma built a stock market analysis tool with a GUI as a side project, and sold it to his employer for 50,000 Chinese Yuan (CNY), or about 3 years’ salary. If this were a novel, the fact that Pony Ma’s first product combined tech and finance and his first taste of wealth came from an M&A transaction would be called foreshadowing. After college, Ma spent five years at a pager company, where he was exposed to the latest technology (pagers!) and became a manager. But Ma was living a second life in the early online chatrooms. He joined the growing FidoNet community, participating in and then hosting early internet bulletin board systems, where he met future billionaires like Xiaomi’s Lei Jun and NetEase’s Ding Lei. Inspired by Lei’s early success with NetEase (which today is worth $65 billion), in 1998, Ma left his job and convinced his friend, Zhang Zhidong, to start a company with him. They planned to combine the internet and pagers, which were popular in China at the time, to build a mobile internet on which people could send email, news, and more. Sticking with Ma’s equestrian nomenclature, they named the company Tengxun, which means “galloping message.” Tencent is the anglicized version of Tengxun. As Tencent was building its pager-based internet, Ma noticed the Israeli internet communication tool and Instant Messenger competitor ICQ, which sold to AOL in 1998, and decided to build a version for the Chinese market. Creatively, he called it OICQ, and built distribution and features necessary to serve customers who didn’t own personal computers, but increasingly accessed them in internet cafes. OICQ took off, and Tencent abandoned the pager internet. Users quadrupled every three months. After nine months, OICQ hit one million users. But this was pre-AWS (or Tencent Cloud) and servers were expensive. Plus, AOL sued Tencnent to change OICQ’s name. They were running out of money, so Ma launched a dual-track process to either sell the company or raise money. Tencent was aiming for 3 million yuan in a sale ($431k at today’s exchange rate), but the highest offer it received was for 600k yuan ($86,327). The lack of demand turned out to be a pretty lucky break. Today, it’s worth 1,454,929x its 3 million yuan asking price. With no acquirer, Ma sold 40% of Tencent to early US-based Chinese venture investor IDG Capital and Yingke, a fund led by Chinese billionaire Li Kashing’s son, for $2.2 million. But it wasn’t out of the woods.Soon after, AOL won its lawsuit, forcing Tencent to change the name of its flagship product. It chose QQ. Server costs continued to increase as the company crossed 100 million users with no revenue model. Tencent was back on the market. It approached Chinese search company Sohu and Yahoo! China. Neither was interested. Then, in 2001, the South African firm Naspers (literally) walked in the door and offered to invest at a $60 million valuation. So that Ma didn’t lose majority ownership, IDG sold 12.8% of its 20% and Yingke sold its entire stake for an 11x gain (not bad!), giving Naspers 32.8% of the company for $19.68 million. Today, that investment is worth $205 billion, good for a 10,436x return!With Naspers’ money in the bank, the Tencent team turned its attention to monetization. In 2002, a product manager discovered the Korean company sayclub.com, which monetized by allowing users to create personalized avatars. Tencent built its own version, QQ Show, and within 6 months, the product had 5 million users paying 5 yuan (a little less than $1) per month. As Julia Wu points out, the ability to personalize an avatar was such a hit because under communism, Chinese people had been “dull and collective” in their personal representation. Tencent also launched a “red diamond membership” for 10 yuan per month, for VIP status, monthly virtual gifts, and discounts in the QQ marketplace. This is a really important piece to understand. In the US, as we talked about in If I Ruled the Tweets, social media monetizes through advertising. In Asia, it mainly monetizes through digital gifts, subscriptions, and purchases. To this day, “Value Added Services” generate more than 3x the revenue for Tencent than “Online Advertising.” Avatars were big business. In 2003, Tencent hit a $100 million run rate and moved beyond messaging by building a portal, like a Chinese AOL. The team also realized that a lot of its users were chatting on QQ while playing games in internet cafes, so it added games to the QQ platform, both by acquiring small studios and building games in-house. Within a year, games added another $50 million in annual revenue. With monetization booming, Tencent IPO’d in 2004  at a valuation of 6.22 billion HKD, or $790 million USD. Cue Motley Fool headline: if you had invested $10,000 in Tencent at its IPO in 2004, you would have $7.9 million today. Oh, you didn’t invest in Tecent at its IPO? Damn. To be fair, it’s a very different company today than it was then, thanks to two 2005 hires: Martin Lau and Allen Zhang.After completing its IPO, Tencent hired the Goldman Sachs investment banker who took it public, Martin Lau. Lau had the pedigree - Chinese-born, undergrad at Michigan, engineering masters at Stanford, and MBA at Kellogg - and a skillset that was complementary to Ma’s. Lau became the English-speaking face of the business, taking on a role that the shy Ma hated, and the master capital allocator. In the beginning of his tenure, Lau focused on acquiring studios to grow its scorching games business as the Chief Strategy Officer. By the next year, Ma promoted him to President. Tencent also turned its attention to competitive threats to the portal business, including Microsoft’s increasing presence in China via MSN. To combat the threat, it acquired competitor Foxmail in 2005 to build QQ Mail. The product was successful, but more importantly, Tencent acquired the developer behind Foxmail, Allen Zhang. With Lau and Zhang on board, Tencent grew rapidly via desktop games and the QQ platform. Its revenue jumped 15x from $200 million in 2005 to $2.9 billion in 2010. But 2011 was the year when Zhang and Lau really made their mark. In 2010, early in the rise of mobile, Zhang noticed the popularity of Canadian messaging company called Kik, and convinced Ma to let him build a Chinese version for Tencent. The next seven years changed the trajectory of the company.2011: Working around the clock with a small team, Zhang launched Weixin in January. English speakers know it as WeChat. (They’re actually two separate products - Weixin serves Mainland China and WeChat serves the rest of the world, but we’ll refer to the two interchangeably as WeChat.) After early competition with Xiaomi’s Mi Chat, WeChat pulled away by tapping into QQ’s existing user base, and then launching “Friends Nearby,” which was like an early version of Tinder. WeChat began adding 100k users per day.2012: WeChat hit 100 million users. It took 433 days to hit that mark. By comparison, it took QQ ten years, Facebook 5.5 years, and Twitter 4 years. In April, WeChat launched the Moments newsfeed and Official Accounts, allowing publishers to distribute content and businesses to distribute products and services. By the end of the year, it had 300 million users. 2013: Tencent launched WeChat Pay to enable payment through the platform. 2015: WeChat crossed half a billion users. 2017: WeChat launched Mini Programs, allowing businesses to build full-functionality apps within the WeChat platform. Companies like Pinduoduo build on top of WeChat and tap into all of its customers’ existing social and professional networks. Mini Programs turn WeChat into a “super app,” and are the inspiration behind Snap Minis, which we covered in Oh Snap!. WeChat, for all intents and purposes, is the mobile operating system in China.Back to Lau. While Zhang was building WeChat, Lau was busy acquiring games, laying the foundation for the next stage of growth. Two investments in 2011 and 2012 were particularly important. In 2011, Tencent acquired 92.8% of US game studio, Riot Games, creators of League of Legends for $400 million (they acquired the remaining 7.2% in 2015). The next year, in 2012, it acquired 40% of Cary, NC-based game company, Epic Games for $330 million.Today, Epic and Riot are two of the gems in Tencent’s gaming portfolio. League of Legends is a cornerstone of a gaming division that brought in $5.5 billion in Q2 alone. As we will explore in “Tencent’s Future,” Epic may also be the engine (pun intended) that drives the next massive phase of Tencent’s growth and puts it at the center of a new, virtual world. Over the past decade, Lau and his team have acquired or invested in over 700 companies, funded by the massive pools of cash Tencent’s gaming division and WeChat spit off.WeChat has over 1.2 billions users today. And those users are incredibly engaged. WeChat users in China spend an average of four hours per day in the app, more time than US users spend on all social media apps combined. 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 monetizes WeChat mainly through transactions instead of ads.So putting it all together, what is Tencent? Tencent is a Chinese holding company that is the world leader in gaming and runs the largest messaging, social networking, and mobile payments platform in China. It uses the cash flow from those businesses to invest in the next generation of massive companies in China and around the globe. Tencent combines the diversification of an old school conglomerate with the growth and decentralization of an internet-native business into a company that may become the largest in the world.From its roots as a product company, Tencent has become the best capital allocator of any non-investment company in the world. It’s running The Outsiders playbook to perfection.The OutsidersIn 2012, William N. Thorndike unintentionally wrote the guide to understanding Tencent’s dominance: The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.In it, Thorndike explores the things that eight CEOs -- including Warren Buffett, The Washington Post’s Katharine Graham, Teledyne’s Henry Singleton, and Capital Cities’ Tom Murphy -- did differently that made them more successful than their peers.How does he measure success? You really only need to know three things to evaluate a CEO’s greatness: the compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market (usually measured by the S&P 500).By that measure, Pony Ma has been one of the world’s most successful CEOs. Since Tencent’s biggest competitor, Alibaba, went public in September 2014, Tencent has returned 305% versus:* 182% for Alibaba* -48% for Baidu * 68%, 141%, and 10% for the S&P 500, NASDAQ, and Hang Sen Index, respectively.Over the past six years, Tencent has outperformed the index that tracks the largest companies in Hong Kong’s stock market by 30x.Why has Tencent outperformed? For the same reasons that Thorndike highlighted in The Outsiders eight years ago. Pony Ma and Tencent share the characteristics common among the most successful CEOs, and take some to extremes. Outsider CEOs were private, ran decentralized organizations, and masterfully allocated capital to the opportunities, internal or external, with the highest potential to drive their stock’s performance. Pony Ma is the ultimate Outsider! As a result, he’s now China’s richest man with a net worth of $56.2 billion. And the business that he built is a master class in capital allocation, as we’ll see by breaking Tencent down into its two main businesses, which often interact with each other: Operating Businesses and Investments.Tencent’s Core BusinessesTencent’s core business makes money in six main ways: * Payments* Subscriptions (like video and music)* Social ads* Media ads * Games* CloudHere’s a breakdown of how revenue maps to business lines from a 2017 presentation by China tech analyst, Matthew Brennan:  All clear? Ok good, moving on. JK, it’s super complex. Let’s break it down by looking at Tencent’s Q2 results, converted to USD:* Social Networks. Instead of ads, Social Networks includes Value Added Services revenue like subscriptions for video and music and in-game purchases. It has 114 million paid video subscriptions and 47 million paid music subscriptions. * Online Games. Games are Tencent’s biggest business. Tencent has 17 separate franchises that have exceeded 10 million daily active users, not including Epic Games’ Fortnite, in which it has a large, non-controlling stake.* Online Advertising - Media. It includes ads on Tecent Video’s properties, as well as in Tencent’s various other digital, news, and video media properties. * Online Advertising - Social and Others. This segment looks the most similar to US social media companies’ monetization. One of the biggest drivers is companies paying for ads in WeChat Moments, and analysts highlight the fact that WeChat still has a relatively light ad load and room to grow.* FinTech and Business Services. Tencent’s second largest segment, it includes all of TenPay, the largest online payments platform in China encompassing WeChat Pay and QQ Pay, as well as WeChat’s wealth management business. When consumers and businesses buy from businesses on WeChat, via Official Accounts and Mini Programs, the fee Tencent takes is captured here, as does the fee Tencent takes when people use WeChat Pay to pay offline and across the web. * FinTech and Business Services also includes its cloud business. Although it didn’t break cloud revenue out separately in Q2, it was a $2.4 billion business in 2019.To give you a sense for Tencent’s scope and scale, here’s how Tencent’s business lines compare to entire industry-leading companies based on Q2 revenue. * Tencent’s Payments business is nearly as big as PayPal’s entire business, and it generated five times as much revenue as Shopify in Q2. * Its subscription revenue alone is 62% of Netflix’s. * It has some catching up to do in Social Ads, where it generates only 12% as much as the leader, Facebook, although it did generate more than 3x as much social ads revenue as Twitter. * Its small media ads business is bigger than the New York Times. * Games revenue is 64% higher than the world’s most valuable standalone gaming company, Nintendo. * Breaking cloud out of Payments and Business Services, based on last year ($600 million per quarter), it’s far behind AWS in cloud, with only 6% of the revenue.It’s difficult to wrap your arms around Tencent, and as a result, the company likely trades at a discount to its more focused American counterparts. If you applied the same Q2 revenue multiples at which each of the businesses in the chart above is currently trading to the corresponding Tencent business segment, its operating businesses alone would be valued at $538 billion, 86% of the company’s current market cap.And that’s before you get to the part of Tencent’s business that excites me the most, its expansive portfolio of investments.Tencent’s Investment PortfolioDid you know that Tencent owns 5% of Tesla, 12% of Snap, and 9% of Spotify (including a stake through Tencent Music)? Those stakes are worth $15.4 billion, $3.9 billion, and $4.2 billion, respectively, and they barely scratch the surface. In The Outsiders, Thorndike wrote, “CEOs need to do two things well: run their operations efficiently, and deploy the cash generated by those operations.” In Q2, Tencent generated $5.4 billion in operating profit. Job 1: ✅  It’s how Tencent deploys the cash generated by those operations that’s so fascinating, though. Two of Pony Ma’s top lieutenants, President Martin Lau and Chief Strategy Officer James Mitchell, are ex-Goldman bankers. As one VC told the Financial Times: “When you put a basketball player in the room, you know what they’re going to do. If you hire Goldman Sachs bankers, you know what they are going to do.”The analogy is a bit of a stretch, but the answer is clear: they’re going to do M&A. On its most recent earnings call, Martin Lau said:Our M&A strategy has always been trying to invest in up and coming companies which have a great management, who have innovative products, and at the same time, they have synergies with our existing platforms. We now have more than 700 companies.More than 700 companies!There’s nowhere online to find all of Tencent’s biggest investments, their ownership stake, and the current value of the investments in one place… so I built it. I have only 103 of the 700 investments in there, but I think I have all the big ones, and it’s absolutely fascinating. When you add the current value of just those 103 investments to the operating business value based on standalone business comps from the previous section, you land at a 15% higher valuation than Tencent is trading at today. The math is rough and not meant to be investment advice, but it’s helpful in thinking through how to build a complete picture of Tencent.In Tencent’s Q2 earnings report, it mentions that the fair value of its investments in listed (public) investee companies, excluding subsidiaries (companies of which Tencent owns more than 50%), is $102.6 billion as of June 30, 2020. If you add that number to the $538 billion operating businesses value from the last section, you get $640 billion, almost exactly in line with Tencent’s current market cap of $628 billion. So far, so good.But that $102.6 billion is just part of the portfolio - the publicly listed non-subsidiaries. When you include investments in private companies, based on most recently announced valuations and some rough estimates, I get a current portfolio value nearly twice as big, at $187 billion. And that’s without 600 of the (likely smaller) investments that Tencent claims to have made. Tencent is a really hard business to value accurately for a few reasons: * Just in its operating business, it does a lot of different things.* In addition to the operating business, it’s also a venture fund, a late stage fund, a private equity fund, and a hedge fund. * Startup outcomes are so unpredictable, even with Tencent’s muscle behind them. But I have a sneaking suspicion that its venture investments are worth somewhere north of zero, so let’s take a closer look at its entire portfolio. Where does Tencent invest?Tencent’s investments are split fairly evenly between China and International. Of the 103 Tencent investments I’m tracking, 54 are in China and 49 are international. Including acquired subsidiaries, the current value of investments by country break down like this: Tencent uses the cash it generates largely in China to diversify away from China, which is particularly important given that, even with its largest companies, the Chinese government can be hard to predict. In 2018, for example, a government game review process slowed the growth of Tencent’s gaming business in the country and tanked its stock over 20%. Just this morning, it announced an investment in French gaming company Voodoo, and gaming analyst Daniel Ahmad pointed out that Voodoo’s ad-based games would get around Chinese regulations requiring reviews of any games that monetize through in-game purchases.What does Tencent own?Tecent’s largest holdings include investments in some of the largest and fastest-growing gaming, music, and technology companies.Tencent’s top 10 holdings span: * Familiar names like Tesla and Snap, * Chinese ecommerce giants Meituan Dianping, JD.com, and Pinduoduo (Turner Novak on Pinduoduo)* China’s largest digital bank, WeBank, * TikTok competitor Kuaishou, * Beike, a Chinese Zillow which just went public last week in the largest US IPO of a Chinese company since early 2018,* Sea Ltd, the Singaporean gaming, ecommerce, and payments company that looks like the Tencent of SE Asia (Julie Young on Sea)* Epic Games, the US gaming company, Fortnite creator, and owner of the Unreal Engine (Matthew Ball on Epic Games)By my count, Tencent has 83 companies worth more than $1 billion dollars in its portfolio. 52 are unicorns, private companies worth $1 billion, which places it in the number two spot right behind #1 Sequoia Capital, which has invested in 109 according to the Hurun Global Unicorn Index, and ahead of third place SoftBank, which has 51. (In a January speech, Lau said that that company has 160 companies in its portfolio worth more than $1 billion, which would put it #1.)At home, Tencent’s biggest investments are in ecommerce, and it plans to double-down on “smart retail” given the success of its WeChat Mini Programs. Abroad, almost half of the value of the portfolio is in gaming companies. In both its Chinese and international strategies, Tencent has unfair advantages, and those advantages shape what types of businesses the company invests in. How do they do it? ChinaBusinesses in China run on WeChat. They can communicate with customers on Official Accounts, get distribution through group chats, build entire functioning products with Mini Programs, and accept payments through WeChat Pay. WeChat is Tencent’s unfair advantage in China. It’s the top of Tencent’s acquisition funnel. Three of Tencent’s four largest holdings - Meituan Dianping, JD.com, and Pinduoduo - are Chinese ecommerce businesses that run on top of WeChat. Tencent uses data from WeChat to source investments, and then provides preferential placement to its investees’ Official Accounts and Mini Programs within WeChat. For example, when Tencent invested in JD in 2014 to take on Alibaba’s Tmall, Reuters wrote: The deal gives JD.com a headline slot on Tencent’s WeChat app that dominates China’s smartphones, an entry into eBay-style consumer-to-consumer shopping and a backer with the muscle to help it make the most of a logistics infrastructure that Alibaba lacks.Today, Tencent’s investments in JD.com, Meituan Dianping, and Pinduoduo are worth $68.5 billion.No one else has the transaction data or the ability to boost a company’s distribution the way that Tencent does with WeChat. This will continue to be an advantage - in just three years, there are over 1 million WeChat Mini Programs. Tencent can cherry pick the best, invest, and practically guarantee their success.  International Whereas Tencent’s China portfolio is top-heavy with ecommerce unicorns, its international portfolio includes everything from an 86-year-old American music label, Universal Music Group, to 7-year-old Brazilian neobank, Nubank. Its’ biggest investment category, though, is games. It owns stakes in the companies behind popular titles including League of Legends (Riot Games 100%), Fortnite (Epic Games, 40%), Clash of Clans (Supercell, 81.4%), PUBG (Bluehole, 10%), Path of Exile (Grinding Gear Games, 80%), Call of Duty, Overwatch, Starcraft, and Candy Crush (Activision Blizzard, 5%). It even owns 1.3% of Roblox, which lets kids build their own games, and 2% of Discord, a chat platform used mainly by gamers. Tencent invests in international game companies and distributes their titles to the Chinese market. This is Tencent’s unfair advantage: companies essentially need to partner with Tencent or Alibaba to operate in China. This is true beyond games, too. The Canadian version of Dunkin Donuts, Tim Hortons, wants to expand into China, so it recently took on an investment from Tencent. Tencent invested in Universal and Warner Music Group in part to control the licensing of their catalogs in China. In addition to strategic investments in games and music, Tencent makes venture-style investments in fast-growing companies that have the potential to win large markets. 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 Bydu, food delivery app Swiggy, and fintech darling Khatabook, among others. In the US, Singapore, and Indonesia, it has invested in the companies building super apps most similar to its own core product, WeChat -- Snap, Sea, and Gojek. Tencent’s international portfolio is large, diverse, and complex, with bets at all stages, in all categories, and for all sorts of reasons. As a result, I think that investors undervalue it. But while the world catches up, Tencent keeps zooming further into the future. The real magic in the portfolio is just beginning to bloom. It’s that future that has me most excited about the company. Tencent’s FutureWe’ve gone on quite a journey today, covering Tencent’s history and what it’s up to today, including its core operating businesses and how it invests the massive profits that those businesses generate to participate in the internet’s growth at home and around the world.In Part II on Thursday, we’ll get our crystal balls out and talk about what Tencent’s investments tell us about the future, and how the company has positioned itself to sit at the center of the next world: the Metaverse. That means we get to explore some hairier subjects, like the influence of the Chinese Communist Party, Epic’s fight with Apple, the threats to its current business and long-term mission, and much, much more. Thanks Dan and Puja for editing, Sid for input, Turner for investment accounting help, and Julia Wu, Matthew Brennan, Ben Gilbert, and David Rosenthal for excellent background info.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 367 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 9,255 smart, curious folks by subscribing here!The Hard Thing About Easy Things“Amazon is building an empire, and Shopify is trying to arm the rebels. So maybe some of our customers might compete with Amazon, at some point, but that would be like super cool, and we’re not there yet.”-- Tobi Lütke, Shopify Founder and CEOShopify’s stock keeps doubling and doubling, so everyone wants to know its secret. The most fun explanation is Shopify CEO Tobi Lütke’s claim that the company is “trying to arm the rebels.” But it’s not true, really. By giving everyone access to the same tools, Shopify isn’t arming the rebels as much as it’s profiting off the chaos created by arming everyone. Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up. By making Direct-to-Consumer (“DTC”) easier, software like Shopify increases entropy and lowers the probability that any specific company will generate sustained profits. Tobi borrowed the phrase “arming the rebels” from a geopolitical strategy in which a big, powerful country, safely separated by miles and oceans, supports rebel forces fighting for change in a smaller, poorer, less powerful country by giving them money, arms, and implied support. Think the US backing the Contras against the Sandinista Government in Nicaragua or the Soviet and Cuban support for anti-apartheid forces in South Africa. If you want to put on your tin foil hat, think the US funding Osama bin Laden and the Afghan Arab fighters in the Soviet-Afghan War.  Shopify is an amazing company full of great people, but Shopify isn’t really arming the rebels. When every rebel is armed, none really is. It’s like when you played GoldenEye 007 as a kid. Getting the Golden Gun the hard way was dope. Everyone getting the Golden Gun with a cheat code made the game suck. When everyone has the same plug-and-play tools, the profit flows away from the rebels, and towards the arms dealers, forcing rebels to devise new guerilla tactics to take back profits.Arming the rebels involves picking one side and backing it. Armed rebels often win. Apartheid ended. The Sandanistas lost. The Soviets withdrew from Afghanistan, and then the Soviet Union fell.Shopify’s merchants, on the other hand, are still in the midst of a bloody battle for customers and profits. So what is Shopify doing?Shopify -- and Stripe, Big Commerce, Google, Facebook, FedEx, UPS, Flexport, Anvyl, Boxc, Kustomer, Returnly, Alibaba, and hundreds more ecommerce infrastructure companies -- is arming everyone. Using off-the-shelf software and services, anyone with an internet connection and a credit card can set up an online store and sell things to people. In many ways, that’s a great thing. Particularly in a period of high unemployment, starting an ecommerce business is one potential way to keep paying the bills. Extremely low upfront costs and easy-to-use tools mean low barriers to entry.This has major drawbacks for DTC companies that want to achieve scale and profitability, though: First, low barriers to entry mean more competition, and everyone running around with arms means chaos. It means that it’s a great time to be an arms dealer, and a tough time to be a rebel. Second, now that nearly every piece of the value chain has become modularized, the battle has concentrated in one place: marketing, via paid acquisition and brand, the only moat left for the vast majority of DTC companies.Looking at the DTC landscape as a battlefield on which thousands of well-armed rebel groups compete lets us explore a few things: * Why everyone gets rich in ecommerce except the DTC companies themselves* Porter’s Five Forces and Value Chains* Who competition is good for* What DTC brands can do to succeed in an increasingly chaotic space* The Innovation → Software → Curation Cycle that impacts most industries(Note: I know, I know, DTC is just a channel, etc… but I’m using it loosely here to refer to all CPG-esque ecommerce retail businesses)Let’s kick things off with a paradox. Why Does Everyone Get Rich in Ecommerce Except the DTC Companies?Let me let you in on a little secret that the ecommerce industry is very excited about: COVID pulled ten years of ecommerce penetration growth into three months.When the pandemic began, we bought 16% of our things online. Now, we buy nearly 34% of our things online. That’s the kind of hockey stick growth investors like to see, and the ecommerce infrastructure companies’ valuations are skyrocketing accordingly. In just the past two weeks: * Shopify crushed earnings. 97% YoY revenue growth, led by 148% growth in Merchant Services Revenue (payment processing and transaction fees that go up when overall spend to Shopify merchants goes up). Crossed $31 billion in Gross Merchandise Value.* BigCommerce, a Shopify competitor, went public and popped 292% in its first day of trading. * Square announced Q2 revenue of  $1.92 billion (up 64% YoY) on a 50%+ YoY Gross Payment Value increase. Ecommerce stocks have popped over the past six months, too: * Etsy is up 169.7%* Shopify is up 118.8% * Square is up 83.1% * Paypal is up 65.1% * Amazon is up 53.4% (to a $1.5 TRILLION market cap) * eBay is up 44.3%. * Even UPS, which delivers so many DTC products, is trading at all-time highs. Wow - hot space! The whole world is moving online. There must be a ton of hugely successful ecommerce brands, too, right? Ummm…DTC as we know it was born when Andy Dunn founded Bonobos in 2007. Then came Warby Parker in 2010, Harry’s in 2012, and Casper in 2014. As Len Schlesigner writes in HBR, “The direct-to-consumer startups’ rise was enabled by an environment of abundant venture capital, low competition, and above all, the advertising arbitrage that could be exploited on under-priced social media platforms.” These early DTC companies were genuinely innovative. They used new technology to invent a new business model. By cutting out the middleman and selling directly to end consumers on their own websites, DTC startups could lower costs, build relationships, and increase lifetime value through repeat purchases. Investors were e-nam-ored! Bonobos raised $127mm in VC, Warby Parker raised nearly $300mm, Harry’s raised $475mm, and Casper raised $355mm. But while funding came easy, strong exits have been harder to come by. Two of the big VC-backed DTC companies have gone public in the past three years. Casper’s last private valuation in March 2019 was $1.1 billion. It IPO’d at a $470 million market cap in February 2020, and is currently trading near a $350 million market cap. Blue Apron, which raised $200 million in private markets, reached a peak valuation of $2 billion in June 2015. Its market cap is currently $120 million, a 94% decline. Casper and Blue Apron were too easy to copy. According to CNBC, there were over 175 mattress-in-a-box companies as of last summer. When Amazon filed a patent for “prepared food kits,” Blue Apron’s stock price plummeted 11% in one day. Increased competition led to more expensive customer acquisition. Well-funded and thirsty for growth, Casper and Blue Apron turned to paid spend and discounts to acquire customers. I know a lot of people who ate free for months by signing up for each meal kit company’s free trial and then canceling and moving on to the next. Scott Galloway pointed out that Casper’s economics would have worked better if they sent you a free mattress stuffed with $300 in cash. Of course, in typical Prof G fashion, that math is hyperbolic and incorrect -- the $761 COGS plus $300 cash would mean a loss of $1,061 per mattress, while Casper only lost $349 per mattress at the time of its IPO -- but the point stands. Without a differentiated product, forced by their capital structures to grow, and faced with a wave of Shopify-armed competitors, Casper and Blue Apron had no choice but to unprofitably spend their war chests to acquire customers. The razor industry is the exception that proves the rule.Razors have really been the only ecommerce category that has had multiple meaningful exits. First came Unilever’s $1 billion acquisition of Dollar Shave Club. Then P&G bought women’s grooming company Billie for an undisclosed amount. Harry’s nearly had the biggest exit of the three when Edgewell bought it for $1.37 billion. I’m biased because Puja worked there, but the fact that the FTC opposed the deal on antitrust grounds is, if anything, proof of Harry’s success. There’s a reason razors are the exception that proves the rule: you can count with your fingers the number of factories in the world that make high-quality razor blades -- P&G owns one, Edgewell owns one, Harry’s owns Feintechnik, and there are like two or three more in the world. That’s it. Because of limited and hard-to-obtain supply, first-movers in razors had a huge advantage. The unique value chain leads to unique outcomes. In The New Consumer, Dan Frommer made a chart of all the billion-dollar DTC exits. Somehow, despite massive secular shifts and a lot of noise about rising ecommerce penetration, the DTC products themselves have produced only one billion dollar outcome: Dollar Shave Club (two if you count Harry’s). How can you harmonize those two seemingly contradictory ideas? It comes back to what happens when all the rebels have access to the same weapons, and of course, to Michael Porter. Five Forces, Value Chains, and DTCBack in the 1980s, an HBS professor named Michael Porter wrote two foundational strategy texts. In 1980’s Competitive Strategy: Techniques for Analyzing Industries and Competitors, he introduced his Five Forces. In the 1985 follow-up, Competitive Advantage: Creating and Sustaining Superior Performance, he introduced the concept of the value chain. Both are as relevant today as they were then. Porter’s Five Forces describes an industry’s competitive dynamics by looking at … five forces: Competitive Rivalry, Supplier Power, Buyer Power, Threat of Substitution, and Threat of New Entry. Oversimplified: the weaker each of the five forces is, the better your competitive position.Porter’s Value Chain insight is that:“Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product."Breaking a company’s value chain into its discrete components allows you to think about how the whole business fits together -- what should the company build, what should it buy, where should it differentiate, where is it OK to use modularized or commoditized inputs, and how is each component linked to the others? Getting the combination right means sustained profits. Value chain analysis and the Five Forces explain the DTC landscape today and provide strategic frameworks support to the Hard Thing About Easy Things. First, let’s look at the DTC value chain, the set of discrete but linked activities companies perform to deliver products direct to consumers.Back in 2013, Harry’s integrated R&D, Manufacturing, Retail, and Marketing by designing its own products, buying its own razor factory, selling directly to consumers from its own website, and building a referral engine from day 1 to drive tens of thousands of signups. It is able to create and capture profits because it has a differentiated value chain. Think about the value chain for a DTC company today, though. Over the past decade, companies have sprung up to build software that allows anyone to do each of the unique things that Harry’s did in-house. There are so many high-quality, modularized inputs, that one person with a computer can spin up a company and start shipping product in under a week. One more time, just to be clear: you don’t need to know anything other than how to use a few pieces of software to start a DTC brand. If I were a rebel starting a sunglasses company, let’s call it Rebel Sunglasses, and didn’t want to go through Amazon (the empire), here’s what I would do. 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. Not all companies do it this way, of course. Many do their own R&D, set up their own supply chain, lease their own warehouses, and acquire customers in novel ways. Some roll their own tech stack to make sure that their tech meets their companies’ unique needs. But the fact that competitors can easily launch a DTC product means that any one brand’s strategic position, and ability to generate profits over the long-term, is weakened. To understand why, let’s take the second tool out of Porter’s toolkit: the Five Forces. By giving all of the rebels and incumbents access to the same weapons, Shopify and the rest of the DTC-enabling software and services make the environment more competitive, and weaken the ability of any individual company to become profitable, particularly at meaningful scale and over a long enough time frame to exit.Rebel Battle RoyaleLet’s go back to my hypothetical company, Rebel Sunglasses. Big things have been happening while you read the past few paragraphs: I launched successfully, used that success to raise money, and used that money to build a big team and acquire a lot of customers. I sold a lot of sunglasses, and proved that customers do in fact like less expensive, well-branded sunglasses delivered directly to their door. But as Biggie and Puff predicted: mo’ money, mo’ problems.Attracted by my success, More Rebellious Sunglasses launched using the same tools and supply chain that I did, and then MOST REBEL SHADES followed them with the same playbook. Each company stole my look, copied my website pixel-for-pixel, and even priced their products exactly the same as mine. To add insult to injury, Rebel Visors launched a line of visors that, although not an exact ripoff, do the same thing for customers: keep the sun out of their eyes. All of a sudden, my current and potential customers have four choices: three sunglass companies and a visor company. We’ve all built the same value chain, and we can all move just as quickly. I add new colors, they add new colors. I drop my prices, they drop their prices. I plug in Affirm so customers can buy my sunglasses on credit at a 0% interest rate, theyfollow suit. This is Entropy Theory to a “T”. Shopify and the ecommerce infrastructure tools create chaos, and that chaos will reign until a company comes in to wrangle it. This is what Shopify’s Shop app may try to do, and certainly what Amazon does on a larger scale. For companies that don’t want to rely on Amazon, there’s only one place left to compete: paid acquisition. Rebel Sunglasses, More Rebellious Sunglasses, and MOST REBEL SHADES turn to Google to find new buyers, competing for keywords like “Stylish Sunglasses.” We even compete with Rebel Visors for “Keep Sun Out of My Eyes.” AdWords get more expensive for all of us. Then, we all go to Facebook to bid on 18-35 year old American males who live near the beach and like White Claws. Same thing happens - more competition means more expensive customer acquisition, but it’s the only thing we can do to grow. What’s worse, because my competitors’ marketing teams are run by mom and pop founders, inexperience and optimism drive up the prices I need to pay. It’s like playing Black Jack at a table full of drunk amateurs.This is why 40% of venture dollars go to Google and Facebook - when every piece of the value chain is modularized and easily copied, companies are forced to compete by outspending each other to acquire customers. It’s also why it’s so much better to be the companies arming the rebels than to be the rebels themselves. Who wins and loses here? * Shopifywins - there are now four paying customers instead of one, and we’re all spending money to grow the market. Shopify takes a subscription fee and a cut of revenue.* Google and Facebook win - we’re all spending a ton of money on ads. * UPS, FedEx, and USPS win - we’re fighting to bring customers online, and more customers shopping online instead of in store means more shipping. * All of the tools and services in the DTC value chain win - more competition means that each of the rebels needs more powerful weapons. * Customers win slightly - they have more choice on the surface, but we’re all offering the same thing, and because we’re paying so much to acquire them, we don’t have room for major discounts now that venture capital isn’t bankrolling us as heavily.* Sunglass and visor companies lose - by fighting against each other, we erode profit margins and enrich suppliers.  There’s a reason powerful countries arm rebels, and a reason platforms do the same: it’s a whole lot easier than getting in the trenches and fighting each fight yourself. Shopify and the other ecommerce tools have an added advantage. Unlike governments, who need to use their own taxpayers’ dollars to support foreign rebels, Shopify gets paid by every side. Shopify has good intentions, but it’s more akin to a war profiteer than a rebel-armer.The Sunglass Wars are a fictional example of a real battle that plays out every day. Unlike tech companies, which spend a lot of money upfront and then make a lot of money by selling a differentiated product with low marginal costs, DTC brands’ upfront spend proves out what works and then sends out pheromones to new entrants. This isn’t just a hypothetical. Away, the luggage company, has raised $181 million, most recently at a $1.4 billion valuation. It was noteworthy not just because of its fantastic growth, but because it got profitable very early. That success, of course, attracted copycats, like Monos. According to LinkedIn, Away has 481 employees. Monos has 24. Away needed to do the hard work to understand what customers want, develop product, educate consumers, figure out merchandising, and even work with the FAA to get suitcase batteries approved. Monos just needed to look at everything Away did, copy it, and buy some ads. Notably, Away is built on Spree Commerce and has a big team building and maintaining its website; Monos is built on Shopify and I can’t find any engineers on their LinkedIn. The websites look and feel the same. And it’s not just Monos. July, Arlo Skye, Roam Luggage, and Paravel all do the same thing, as do countless cheaper knockoffs. After tens of millions of dollars and the hard work of 481 employees, the only unique weapons that Away has against Monos are brand and bank account. It’s forced to compete with a copycat on the level playing field of keyword bidding and trade margin for growth. So What’s a DTC Brand To Do? The Arming of Everyone means that massive scale is likely out of reach for any one DTC company. There won’t be another Nike or Coca-Cola built direct-to-consumer. But there will be thousands or millions of small, profitable DTC businesses built online in the coming years that will make their owners very comfortable, and in some cases, rich. When all of the rebels are armed, and empires like Amazon and Walmart have scale that new entrants can’t compete with, there are only a few places where startups can win. The first question to ask is whether you want to go venture-backed or bootstrapped. Neither choice is right or wrong, but everything you do needs to align with the choice that you make and your desired outcome. BootstrappedNine times out of ten, the answer should be bootstrapped - don’t raise VC, grow slowly, get profitable before all of your credit cards are maxed out. If you’re targeting small niches that you know how to reach without giving all of your margin to Google or Facebook, you can build a really nice business. If you’re starting from scratch without an audience, focus on high-margin, high Average Order Value (AOV) products that give you a lot of room for costs and let you achieve profitability without reaching a scaled customer base. If you have a built-in audience that trusts you, you can sell that audience anything that fits your brand and what fans expect from you. Kylie Cosmetics is the canonical example. Kylie Jenner leveraged her massive following to enter the crowded cosmetics space and become a billionaire (kinda, almost). JoJo Siwa sellseverything from bows to dolls to juice boxes to her tween fans. Linear Commerce is a response to overcrowded markets and expensive paid acquisition, and it’s not just for celebrities. Most bootstrapped DTC entrepreneurs should build an audience before they build their first product.Venture-BackedIf you want to raise venture capital, you need a really good reason besides “to spend money acquiring as many customers as possible via Google and Facebook.” You need to spend that money developing differentiated tech or IP, or a brand that captures a very particular audience that you can sell to an incumbent. Differentiated Tech or IPEight Sleep is a sleep fitness company that has raised $70 million, which should set off alarm bells after reading the Casper section. But Eight Sleep sells more than a mattress, it sells a tech-enabled a sleep system, including a mattress, automated heating & cooling, sleep tracking, and HRV monitoring. Eight Sleep spent its venture money building tech and has five patents that it has used to build a differentiated product to compete on features, not price.Casper and Eight Sleep’s branded search results tell the story. When someone searches for “Casper mattress,” the first thing they see is a set of ads for competitors’ products. Casper even has to pay for its own link to show up when someone searches for it. That’s because when someone Googles Casper, what they really mean is “a mattress-in-a-box,” and competitors are willing to spend money to entice the customer to buy their mattress-in-a-box. When you search for “Eight Sleep mattress,” though, the page is clean. The organic link appears first on the page, and there’s not an ad to be seen. That’s because Eight Sleep’s product is differentiated enough that if I’m searching for it, it’s because I want the Pod sleep system, and a Nectar or Purple mattress won’t do the trick. Brand That Captures a Particular AudienceThe other venture-backable approach is building up a specific audience in hopes of selling it to an incumbent that struggles to reach that audience. This is the approach that minted Dollar Shave Club its $1 billion exit to Unilever, and on a smaller scale, the reason that P&G bought Bevel, which was aiming to be the “P&G for people of color” for $40 million. At this stage of the DTC game, Bevel’s $40 million exit is more typical than Dollar Shave Club’s now that each of the big CPG companies has made its splashy early play to acquire the DTC skillset and are buying brands mainly for their audiences.In this approach, companies need to build a product, experience, community, messaging, and ethos that resonates strongly enough with certain customers that they aren’t tempted to buy the knockoff version. If they need to decide between profitability and acquiring a target customer, these companies should choose acquisition, as long as they are able to retain and grow with those customers. Expect to see multiple $10s-to-low-hundred-millions acquisitions that help aging brands acquire Gen Z customers in the next few years. Ultimately, when everyone is armed with the same tools, differentiation, brand, and audience/community matter for DTC brands more than ever. We’re All Armed Rebels NowThis cycle holds across industries and verticals: * Innovator does something innovative. * A brave few try to copy the innovator.* Someone builds software to let everyone do that innovative thing. * The innovative thing is no longer innovative. * Everyone does what the innovator did, making it hard to stand out and shifting the battleground to audience-building and brand. * Curation becomes important. * Next innovator comes along and does something innovative, and the cycle starts again.It’s happening in newsletters, where Substack gives writers an easy way to try to become the next Ben Thompson. It’s happening in video games, where Epic Games is building the tools and literally giving them away for free to expand the Total Addressable Market. It’s happening in AI, where OpenAI is giving everyone GPT-3 to build on top of. Substack, Epic, OpenAI, and Shopify don’t need to pick the winners. They benefit from their customers spending their own time and money to bring audience to their platform. They sit back and happily take a cut. It also happened in video, when YouTube made it easy for anyone to become a creator. Then TikTok came along, and became the curator, and is capturing the massive value that comes with wrangling all of that entropy. The best way to make money in a war is to sell weapons to everyone. It creates its own demand. If the enemy has the best weapons, you’d better have them too. Once everyone is armed, the next opportunity to make money is to bring order to the chaos. I’m long Shopify -- arming everyone while convincing each of them that they’re the rebel is great business -- and I’m on the lookout for the curation innovation that lets the best DTC companies go around Facebook and Google and rise to the top. Thanks to Puja and Dan for editing and helping me sound like less of an idiot on ecommerce.If you enjoyed this piece, help spread the word by sharing it on Twitter, LinkedIn, or wherever you talk ecommerce with your rebel friends.Quick note: this week, we’re not going to have a Thursday edition. See you next Monday!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 1,315 newly Not Boring people who have joined us since last Thursday! If you’re reading this but haven’t subscribed, join 9,130 smart, curious folks by subscribing here!JoJo's JuiceA guest post by Ali MontagAudience is the New STEMIn the late-2000s, career advice for young people sounded ambitious. Study math. Learn to code. Take engineering classes. Get a job in Silicon Valley. Apply for Y Combinator. Make it big. Make a difference. The hacker-coder image of a 20-something, idealistic Mark Zuckerburg—that was success. Tech was The Dream. But the dream needed to be financed. The answer? Ads. "The best minds of my generation are thinking about how to make people click ads." Jeff Hammerbacher, a 28-year-old Silicon Valley engineer told Business Week in 2011. The attention economy was born. Then, our career advice for young people started to shift. Businesses were built on top of Instagram. Elections were won on Facebook. Brands were launched on YouTube. Suddenly, the most valuable skill became commanding an audience. Who follows you? How loyal are they? What can you promote to them? The advice became: Build a community. Grow a following. Share a message.The best minds of my generation are thinking about how to make people click “Subscribe.”  One result is the rise of linear commerce—audience-centered brands built to sell products. Linear commerce drives many of the fastest growing consumer brands today. Here’s the definition of linear commerce, from 2PM’s Web Smith: “The lines of demarcation between media and commerce are fading ... Brands will develop publishing as a core competency, and publishers will develop retail operations as a core competency.” Last time, we took a look at Magnolia, a linear commerce company selling home goods out of Waco, Texas. Magnolia’s Chip and Joanna Gaines rose to fame through HGTV’s Fixer Upper, and built a sprawling business on top of their Southern, middle-aged audience. This week, we’ll look at the business of JoJo Siwa. Siwa uses her audience on YouTube, TikTok, and Instagram—which she started building as a 12-year-old on the Lifetime show Dance Moms—to sell millions of dollars worth of merchandise to children and their parents. Jojo’s WorldIf you’re not familiar with the JoJo Siwa empire, let’s break it down. Media:* 11.6 million followers on YouTube* 26.9 million followers on TikTok* 9.7 million followers on Instagram* 903 million views on her first music video, released in 2016 at age 12* A talent management deal with Nickelodeon that includes an animated show about her dog, The JoJo & BowBow Show Show* A 52 city live concert tour in 2021. Commerce:* Hairbows. Siwa’s line with Claire’s has over 7,000 varieties* A line of children’s clothing with Target called JoJo’s Closet* A line of toys with Build-A-Bear* Birthday party decor at Michaels* Dolls. Lots and lots of dolls* A line of fruit juices called JoJo’s Juice* $30 per month toy subscription boxes* $19.95 monthly hairbow subscription boxes* 16 published children’s books* Merch. The merch is never-ending. JoJo Siwa’s YouTube channel is awash in glitter, rainbows, and high top sneakers. It’s fun. It’s loud. It’s age-appropriate for her audience, which ranges from age three to nine. Siwa’s YouTube popularity sold 40 million of her signature hair bows in 2018. In a 2020 interview, Siwa said her brand has sold 80 million hair bows over the last four years. Each bow costs ~$10. That’s big business. So how did Siwa turn a two-season appearance on Dance Moms into a merch machine?Step No. 1: Build an audience. Siwa began gaining traction in 2015 with a boost from cable TV. “JoJo’s YouTube and Instagram followings were thriving thanks to Dance Moms. She also had a signature look: the bows and the Lisa Frank-esque color-vomit fashion sense,” according to Rolling Stone.Step No. 2: Get licensing deals. Siwa’s first licensing deal in 2016 was a line of hair bows for Claire’s. The bows were sold as a test in a few stores. “The test took off immediately,” Julie Splendoria, Claire’s senior global license buyer, told Rolling Stone. The sales caught the attention of Nickelodeon. In 2017, Siwa signed a multi-year talent deal with Nickelodeon, allowing the cable franchise to manage all aspects of the licensing of her brand.  Nickelodeon brought global distribution and direct connections to brand partners like Target, Walmart, Michaels, Payless, and Build-a-Bear. 500 people at Nickelodeon contribute to managing the JoJo Siwa brand, Siwa said in a March 2020 interview. Nickelodeon also promotes Siwa to its own audience. Here’s where the linear commerce flywheel really starts to turn. “[Siwa’s] live appearances drive sales of her branded products,” according to Viacom, the parent company of Nickelodeon. “Last summer, bow sales increased by 40% in Chicago after she performed at SlimeFest and 60% in the Anaheim area after VidCon.” Both events are owned by Viacom.Last but not least, there are the events Siwa creates for herself. Siwa sold 506,184 tickets for her 2019 DREAM tour, a live concert series performed across the country, netting $26.9 million according to Billboard.And, of course, Siwa never neglects her YouTube channel (which prominently features her merch.) More concerts, TikToks, and YouTube videos mean more followers—more followers means more JoJo Siwa hair bow sales. It’s a classic linear commerce business. But the business is unique for one critical reason: Siwa’s audience is children. And the business of selling to children is tricky. For one thing, children have increased privacy regulations. Congress passed the Children’s Online Privacy Protection Act, known as COPPA, in 1998 to protect the identities of children under age 13. It prevents ad targeting and is enforced by the FTC. The rules apply to any websites or platforms that “collect, use, or disclose personal information from children.” Kids under 13 aren’t allowed on Instagram. YouTube was fined $170 million in 2019 for COPPA violations. TikTok was fined $5.7 million for COPPA violations.  Brands can’t target digital ads at kids. Kids can’t sign up for newsletter campaigns. Kids don’t listen to podcasts. Kids don’t watch much TV. Kids don’t read news or magazines. What kids do is watch a lot of YouTube. “YouTube is the most popular babysitter in the world,” Eyal Baumel, the CEO of a YouTube celebrity management company, told Forbes. The licensing agreement with Nickelodeon helped Siwa dominate this market, growing her audience of kids online while placing toys on the shelves of the stores parents shop. Ryan Kaji, the 8-year-old star of Ryan’s World, and YouTube’s top earner two years running, has a similar licensing deal with Nickelodeon and pocket.watch (a portfolio company of Viacom) to develop toys for Walmart, Target, and more.Creating content for kids is also tricky. How do you make content that continues to be relevant to five-year-olds when you yourself are aging? Siwa, now 17, is often asked when she’ll be too old to keep making videos for kids. Even Kaji, still in his single-digits, is asked the same question. And there’s a deeper question about the toll of kids running linear commerce businesses. The business is entirely dependent on the audience. The audience is entirely dependent on the creator. What if JoJo turns 18 and decides she’d no longer like to wear neon pink hair bows? What if she decides she’s tired of the barrage of negative comments below her videos? Lessons for GrownupsSilicon Valley is obsessed with growth, virality, scale, and influence. Adults on Twitter marvel at the rise of TikTok stars like 16-year-old Charli D'amelio, 19-year-old Addison Rae, and other members of the LA Hype House. “What were their strategies? What can we learn from their growth?” adults muse. Brands see dollar signs. Retailers see partnerships. Spotify sees new podcast ideas. Parents have no grounds to argue against it; their kids’ earning potential is higher on TikTok than it could ever be at a nine-to-five job. But these kids are just kids. And other kids are watching. American children were three times more likely to aspire to be YouTube stars than astronauts, according to a 2019 survey."Every time I go to schools, the most said thing from 90% of kids is, 'I want to be a YouTuber,'" the YouTuber DeStorm Power told Business Insider."They want to be social-media stars."Today, with kids stuck at home, uncertain when they’ll be able to go back to school and isolated from their friends, relationships with creators like JoJo Siwa matter. Math textbooks, science experiments, and history lessons feel far away. YouTube is right there. The pressure to “be a star” is immense.What will be the repercussions of adults confirming that audience-building is the most valuable skill kids can develop? What will be the experience of the millions of kids who never go viral? Billion dollar brands will be built. But what will be the cost to everyone else? Adults operating companies or managing brands can learn a valuable lesson from Siwa. The flywheel she’s created to turn YouTube videos, TikTok dances, and live concerts into merchandise sales is enviable by any consumer products company. It’s the same strategy media businesses like Food52 use to sell skillets, and magazines like Hodinkee use to sell watches. It’s why Buzzfeed sells muffin tins, and why the Wall Street Journal sells a wine subscription. Grow thine audience. And then sell things to them. But when it comes to children, it’s worth asking: What ambitions are we modeling? For Siwa at least, the merch business is exactly what she wants to build.“I love what I do, but I think a lot of people are in it at such a young age, and they didn’t really have the choice, and they don’t genuinely love it,” Siwa says. “I genuinely love it.”Major thanks to Ali for sharing her knowledge with us! If you like Ali’s style and want to read her weekly book reviews, you should really subscribe to Letters From Home and Away.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 1,309 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 8,888 smart, curious folks by subscribing here!We have a referral program! Share your unique link to win stickers, t-shirts, and fame!Hi friends 👋,Happy Monday! We’re bringing back an old favorite format today: Fantasy M&A! Let’s get to it. Acquisition in the Key of G SharpBack in 2013, when he was just starting Slack, WIRED asked Stewart Butterfield, “What’s your ambition?” Stewart: (Straight Faced): “Be the next Microsoft.”This essay is about how he can achieve that ambition. Welcome to M&A CountryOn Friday afternoon, the internet lit up with rumors that Microsoft might buy the most exciting company on the market: TikTok. It doesn’t seem like a natural fit. Microsoft is the 45-year-old purveyor of such office productivity mainstays as Word, PowerPoint, and Excel while TikTok is a short-form video app for Gen Z and Young Millennials. The deal spent all weekend on-again-off-again after, on Friday night, President Trump suggested that the United States would ban TikTok altogether instead of allowing a sale to go through. His reasoning? “We are not an M&A country.” With all due respect to the Art of the Deal author, mergers & acquisitions drive growth at many the nation’s largest companies and provide founders and employees the most capitalistic realization of the American Dream. The United States is very much an M&A country. While Microsoft is distracted with the biggest acquisition in company history, Google should strike at its heart by making its own largest acquisition ever. I feel like I’m walking my daughter down the aisle right now, giving my baby away, but it’s for the best:Google should buy Slack.(Full Disclosure: I own shares and call options on Slack. It’s my biggest position.)A Google/Slack combination — I call it G Sharp — bolsters both companies’ offerings in the productivity and collaboration battle against Microsoft today, and more importantly, sets the combined company up to own the future. Ultimately, the acquisition comes down to three main things: * Slack needs distribution and patient capital. Google can help. * Google needs growth outside of Search and a boost in the Cloud. Slack can help. * Slack fills the biggest hole in G Suite’s offering. Together, Google and Slack would own the work productivity and collaboration market for young companies, setting them up for Office-level dominance as those companies and their employees grow. Plus, because Microsoft Office is so dominant, this deal likely wouldn’t trigger the regulatory scrutiny that comes with doing M&A as Google, Apple, Facebook, or Microsoft in 2020.In this M&A country of ours, Microsoft and Google, with combined market caps of $2.5 trillion, are the biggest buyers. Each company aggressively spends income from its respective cash cow to bolster its offerings, diversify its revenue streams, and hunt for the next big growth engine, but each takes very different approaches to M&A.Microsoft uses M&A to build a portfolio of standalone businesses that are profitable and growing today that might help bring in future Office 365 customers.Among Microsoft’s biggest recent acquisitions are professional network LinkedIn for $26.2 billion, engineering network GitHub for $7.5 billion, and Mojang, the maker of the popular worldbuilding game Minecraft, for $2.5 billion.As unnatural as it seems, a $40-50 billion TikTok acquisition fits within that strategy. Unlike a Facebook acquisition, TikTok won’t become TikTok by MICROSOFT. It will remain independent, drive meaningful growth for a company that brought in $143 billion in 2019, and potentially bring the cool kids over to Office at some point. The #excel hashtag is surprisingly popular on TikTok. Google, on the other hand, uses M&A for two main things:* To bet on moonshots that have a small chance of becoming massively impactful and carrying the company after Search revenues fade away. * To pour fuel on the fire of its fastest-growing businesses.Google’s moonshots, which it calls “Other Bets,” are so out there that the company restructured itself in 2015 to separate them from the core business, creating Alphabet as a holding company that owns Google and Other Bets. They’re fascinating for what they might become -- bets include life extension, self-driving cars, internet balloons, cities, and drone delivery -- but they’re even more fascinating for what they tell us about the way that Google thinks. They’re happy to lose $1 billion per quarter on Other Bets today for the chance to build tomorrow’s next big thing. We’re not talking about Other Bets today, though. The Google/Slack deal is the other kind of M&A - it would pour fuel on the fire of Google’s fastest-growing business: Google Cloud.The marriage of Google and Slack would create the most powerful kind of combination in tech: the best product and the best distribution into the most important customers. The Battlefield: Product v. DistributionThere’s this debate in tech about which wins: product or distribution. Is it more important to have a) a great product or b) a great way to get your product in front of potential customers? If you use Google Calendar, you’ve likely noticed this battle playing out on your screen.Zoom, the video conferencing software, has exploded during the pandemic. Google, which has its own video conferencing, Meet, got jealous and fought back. Google owns some of the most valuable real estate in tech -- people’s Calendars -- and it’s tired of Zoom using that real estate to direct people to its competitive product. In late April, Google also dropped the pricing hammer, making Google Meet free for everyone. Where Zoom limits people to 40 minute meetings on the free plan, Google gives them an hour, and it’s not even enforcing that limit until October. Zoom has the better product, but it’s just so easy to schedule a Meet, and plus, it’s free. Anecdotally, distribution seems to be winning. I’ve gone from 90% Zooms / 10% Meets early in the Quarantine to 10% Zooms / 90% Meets over the past couple of months. Zoom vs. Google is important, because it shows us that Google is willing to use its distribution might to win the office, and because it mirrors another battle happening for the enterprise -- Slack vs. Microsoft Teams. Slack vs. Teams Microsoft Teams is flexing its reach into Office users’ computers in an attempt to extinguish Slack’s growth. The market is reacting as if Microsoft’s plan is working, but look a little deeper and Teams looks more defensive than offensive. Slack, launched in 2013, makes the best workplace communication product on the market -- fast, well-designed, playful, and open to thousands of integrations. While it has recently built out an enterprise sales team, much of its growth has come from bottoms-up adoption. A technical person in a company uses it in another context, brings it to the company to test on a small team for free, and then expand to the rest of the company and a paid account. That go-to-market strategy is predicated on building a product that people love enough to advocate for. (For a deeper dive on Slack’s business model, see While Zoom Zooms, Slack Digs Moats.)Microsoft, on the other hand, launched its competitor, Teams, in 2016, as the result of a reactive internal hackday, and it shows. The product seems like it was built with a simple mandate: give the over 1 billion people who use Microsoft Office or Windows something good enough, for free, that they never try Slack. It’s distribution over product.More concretely, Microsoft installs and auto-starts Teams on existing Office users’ computers. Two weeks ago, Slack brought an antitrust complaint against Microsoft in the EU, claiming that “Microsoft has illegally tied its Teams product into its market-dominant Office productivity suite, force installing it for millions, blocking its removal, and hiding the true cost to enterprise customers.” My wife, Puja, still uses a Windows laptop. Every time she turns on her computer, Teams starts up, even though she never installed it and doesn’t use it. It’s the PC equivalent of Google’s growing Meet button. As a result of its aggressive intrusion, Teams has grown from zero to 75 million Daily Active Users (DAUs) in under four years. The last time Slack reported DAUs in September 2019, it had only 12 million. But as Slack wrote in a blog post, Not all daily active users are created equal. Microsoft is myopically winning the battle and losing the war. It’s putting up big numbers right now by giving a free product to older buyers who don’t know any better. That’s a major difference between Zoom vs. Google Meet and Slack vs. Microsoft Teams. With Meet, Google is actively competing against Zoom for the same customer, whereas Microsoft is just trying to keep its existing customers from switching to Slack. It won’t be able to steal existing Slack customers. As I wrote in the piece on Zoom vs. Slack:Once a team has onboarded to Slack, it’s really hard to leave. As a company’s Slack usage approaches 100%, it becomes possible to replace e-mail, those awkward texts from your boss, and even meetings with Slack.Since I wrote that piece, Slack introduced Slack Connect, which allows different organizations to collaborate and work together. The move potentially deepens its moat by building cross-organization network effects, eating away at email’s dominance, and becoming the central artery for professional collaboration and communication. As Ben Thompson wrote in The Slack Social Network: Not only can you have multiple companies in one channel, you can also manage the flow of data between different organizations; to put it another way, while Microsoft is busy building an operating system in the cloud, Slack has decided to build the enterprise social network. Or, to put it in visual terms, Microsoft is a vertical company, and Slack has gone fully horizontal:Microsoft’s positioning against Slack is defensive. It knows that there are better products out there, and that the closed Office ecosystem won’t win head-to-head product battles, so it’s trying to make sure its customers never even look elsewhere. Slack’s press release on the antitrust complaint gives the company’s (obviously biased) perspective on why Microsoft feels threatened enough by Slack to try to stop it with Teams: * “Slack threatens Microsoft’s hold on business email, the cornerstone of Office, which means Slack threatens Microsoft’s lock on enterprise software.”* “Slack ... is a gateway to innovative, best-in-class technology that competes with the rest of Microsoft’s stack and gives customers the freedom to build solutions that meet their needs. We want to be the 2% of your software budget that makes the other 98% more valuable; they want 100% of your budget every time.”The way we collaborate and communicate at work is changing, becoming more entropic. Office is yesterday, Slack is tomorrow. Slack is built for the early adopters, tech employees, and young people who will become old, big budget-controlling people one day. The Compounding Power of Young UsersOn a long enough time horizon, Slack has already beaten Teams. It’s true for the same reason that I’m so bullish on Snap, and it’s a really important concept to understand broadly. If you can acquire the youngest users, retain them as they get older, and continue to attract the new cohorts of young users, you will win over time. It’s the Compounding Power of Young Users. Microsoft knows this. It’s how they got to where they are in the first place. When Excel came out in 1985, it wasn’t the 50-year-old Managing Directors using the product, it was the 22-year-old Analysts. As those Analysts became Excel whizzes, got promoted, switched companies, became Managing Directors themselves, and forced their own Analysts to use Excel, the product gained ubiquity. The same is true for Word, PowerPoint, Outlook, and even Windows. Start with the youngest users and grow with them as they age. That’s why Microsoft acquired Minecraft and Github, and why they’re pursuing TikTok. The market doesn’t fully grasp this concept, or isn’t patient enough to put its money behind it. It views the opportunity set as stagnant, when really, it’s dynamic. Slack’s current customers are startups and small businesses full of young and tech savvy people. These people aren’t going to suddenly switch to Teams when they turn 50. Slack will become the new paradigm. Slack just needs to retain these people, keep them engaged, and continue to acquire every new startup and small business that pops up. The market rightly yells at Slack to acquire enterprise customers, but it also misses the fact that it’s already acquired tomorrow’s enterprise customers. This is why I’m bullish on Slack whether it gets acquired or not. As I wrote about, they’re built for steady growth and high retention. The market wants what the market wants though, and Microsoft’s moves are putting a damper on Slack’s stock performance. While Zoom has popped 273% YTD, Slack has only grown 31%. The most oft-cited reason for Slack’s sluggishness is that investors are worried about Teams. Slack needs two things in its fight against Microsoft: * More patient capital that understands The Compounding Power of Young Users.* Distribution power to win as many young users today as possible. Google has both of those things. G Sharp vs. TeamsGoogle and Slack (“G Sharp”) fit perfectly together. * They have the same target customer in the enterprise -- growing tech companies and small businesses -- Google just has more of them. * G Suite has 6 million paying customers, Slack has 122k. * Google has Chat, but it does not have a real workplace communications solution beyond Gmail. * Slack fills in G Suite’s major hole. Google owns the backbone of startup email, Gmail, and Slack owns the backbone of startup internal communications today and external communications tomorrow. * Google gives Slack immediate distribution and confidence that they’re not afraid to use it. Bundling software and forcing it down users’ throats is what Microsoft does best, much to the chagrin of antitrust regulators. Together, Google and Slack can beat Microsoft at a modern, user-friendly version of its own game. I’m no designer, but I mocked up one of many ideas for distributing Slack through Google: In addition to reminding people to move conversations to Slack at every opportunity, Google can bundle Slack with G Suite. Overnight, Slack could nearly 50x the number of companies using the product, cutting off Teams and securing users that the company will grow with. From Slack’s perspective, a Google acquisition would solve its major growth impediment and help it do what it does best - acquire and grow with young companies. But at a price tag of between $30-50 billion, would Google do it?Google is the UAEOne way to think about Google is like a tech version of 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. Search revenue is Google’s oil - it’s making them rich right now, but one day, that well will dry up. The company is constantly on the lookout for the thing that will keep the growth alive after the Search revenue slows to a trickle. There are signs that we might be approaching Peak Search already.Google never made less money in a quarter than it did in the same quarter the previous year… until Q2 2020. Google generated $38.3 billion in Q2 2020 revenue, down from $38.9 billion in Q2 2019. The biggest culprit? Search revenue, which dropped by nearly 10%. Google Search is one of the greatest cash cows in history, and outside of the pandemic, it’s still growing. Over the past 10 years, Google ad revenue has grown at a 16.9% Compound Annual Growth Rate (CAGR). Growth did slow from 22% in 2018 to 16% in 2019, but for context, it grew ad revenue by more than Slack’s entire market cap in 2019. It will be many years before the search ad well runs dry for Google. In the meantime, the company is investing its Search revenues in businesses that show the potential to grow faster than 17% per year and carry the company into the future. Using acquisitions to expand its capabilities within its best business segments is in Google’s DNA.The history of Google is the history of an ingenious page ranking algorithm paired with a brilliant business model, some strong internal product development, and a whole lot of smart acquisitions.Since 2001, the company has made 236 acquisitions, making it the second most acquisitive of the five largest tech companies, only six behind Microsoft, which had a 14 year head start. Alphabet CEO Sundar Pichai and Microsoft CEO Satya Nadella are such aggressive buyers, you could call them the… Indian Matchmakers. (I’m writing this with a Rakhi on my wrist, happy Raksha Bandhan!)Google acquisitions have become some of the company’s most successful products, and among the most widely-used in the world.* Android (2005): Google bought Android for $50 million fifteen years ago. Today, Android runs 74% of the world’s smartphones.* YouTube (2006): Google bought YouTube for $1.65 billion, a number that people thought was crazy at the time. YouTube brought in $3.8 billion in revenue in Q2 alone.* DoubleClick (2008). Google acquired DoubleClick for $3.1 billion to build out its display advertising network. Network Member Properties, which DoubleClick helps power, did $4.7 billion in Q2 revenue.Software acquisitions are what Google does best, and these days, it’s turning its $121 billion acquisition cannon on software acquisitions in its fastest-growing segment: Google Cloud. Growth in the CloudGoogle Cloud is the fastest-growing segment of Google’s business. While Google’s Search revenue fell, its Cloud business grew by 43% YoY, from $2.1 billion to $3 billion in the second quarter. Slack would immediately add nearly $1 billion in annual top line revenue to Cloud by rolling into the G Suite business segment.Google Cloud is made up of two parts: * Google Cloud Platform (“GCP”) is Google’s cloud computing services product, like Amazon’s AWS or Microsoft’s Azure. GCP is for developers. * G Suite is the much catchier name for what the company used to call “Google Apps for Your Domain.” It’s a suite of collaboration and productivity apps, including Gmail, Meet, Chat, Calendar, Drive, Docs, Sheets, Slides, Forms, and Sites. G Suite is for businesses.Google used acquisitions to build G Suite, a veritable Frankenstein of acquired technology: * XL2Web (2006) and DocVerse (2010) --> Sheets* XL2Web, DocVerse, and QuickOffice (2012) --> Docs* Tonic Systems (2007), DocVerse, and QuickOffice --> SlidesUnder the leadership of former Oracle exec Thomas Kurian, Google Cloud is looking to get spendy to catch up to AWS and Azure. At an event in February 2019, Kurian said, “You will see us accelerate growth even faster than we have to date. You will see us competing much more aggressively as we go forward.” Just four months later, Kurian made his first big move, acquiring analytics startup Looker for $2.6 billion to become part of the GCP offering. Looker is the crown jewel in a recent Google Cloud acquisition spree. Of Alphabet’s last thirteen acquisitions, six are for Google Cloud. Google’s new focus is unsurprising. Like Greek gods, the tech giants are battling in the clouds, and for good reason. The market is huge -- Allied Market Research estimates that the cloud services market will reach $927 billion by 2027, nearly quadrupling from its current size of $265 billion -- and it requires such huge upfront investments to compete that only a handful can pay the entry fee. Cloud is also the ultimate grow-with-your-clients space. As a result, the big three are doing everything they can to attract young clients -- free coworking, partnerships with incubators, prizes, and hundreds of thousands in free credits. These companies aren’t being altruistic. Once a company builds on one cloud or another, they’re likely sticking with that cloud for the rest of their lives. Unlike Microsoft, which breaks out Intelligent Cloud and Productivity and Business Processes (where Office sits) into separate business units, Google houses G Suite and Google Cloud Platform together. Google realizes that both products are selling the same idea to the same people at the same companies. The better G Suite is, the more compelling the offer is to the CTO, and the more likely it is that Google wins the business. Currently, G Suite offers a lot. The biggest hole in the entire offering is chat. That’s where Slack comes in. G Sharp: The Modern Office SuiteTogether, Google and Slack could finally build the Microsoft Office killer. It won’t be a quick death -- Microsoft is too ingrained in too many companies that are too slow-changing -- but within ten years, by growing with today’s most innovative companies, G Sharp will be the default workplace collaboration and productivity suite.Today, many startups run their companies mainly on G Suite (although, notably, most still build their product on AWS): * Buy the domain from Google Domains * Set up the first firstname@company.com email address on Gmail * Schedule the first meetings on GCal * Start collaborating on their business plan in Docs. * Anxiously watch real-time users in Google Analytics.* Build out the first dashboards in Looker (technically GCP, not G Suite). With so much in Google already, users make do with the products in G Suite that aren’t quite as good as competitors’. * Meet is good enough to preclude Zoom when it comes bundled, for free, with G Suite. * Sheets is good enough for everyone except for a few people on the finance and BI teams, for whom the company buys a couple of Office 365 licenses. (I genuinely love Excel and still use Sheets for most things, like the charts in this piece.)* Slides is good enough to make most presentations, and Keynote comes free on MacBooks anyway for the occasional external deck. The one thing that’s missing is a channel-based messaging tool to serve as a hub for the company’s communications. Today, the first non-G Suite product that most startups sign up for is Slack. If G Suite and Slack came bundled, there is almost zero need for a company to look beyond Google to get up and running. At that point, why not buy the upgraded bundle that gives you all of that for the price of Google Cloud Platform? G Sharp would become what Microsoft Office was in the 80’s - the one-stop productivity and collaboration bundle. G Sharp would easily facilitate cross-company collaboration and productivity better than Office can. The combination is horizontal and vertical. Slack Connect would serve as the cross-organization hub, and facilitate the usage of G Suite tools - shared Docs for partnership agreements, shared Looker dashboards to track progress, Rimeto directories for the teams to get to know each other, Meet for video conferences. Instead of each company having to buy Office 365 licenses to collaborate, they would either both already be on G Sharp or buy an all-inclusive G Sharp Connect package. Additionally, Slack is an open platform that already works with 2,200+ apps. If there’s anything that a company needs to collaborate -- either internally or externally -- it’s all in one place. Importantly, a Google/Slack combination would create a better user experience. As just one example, Google recently added an “Email” option within Google Docs. As email becomes less relevant, particularly for collaborative docs, wouldn’t it be nice to be able to share to Slack directly from inside the Doc? It’s a little thing, but dozens of small improvements like it would add up to such a seamless user experience that it would be very hard for customers to leave. Slack is the missing piece in G Suite’s efforts to overthrow Office, and a more complete G Suite + GCP bundle is Google’s best chance to steal cloud services market share from AWS. One acquisition gets Google closer to capturing two of the biggest prizes in tech.Why Wouldn’t This Happen?I’m getting excited about this deal happening already, but there are a few reasons it might not happen: * Slack is going to want a hefty price tag. In early June, before earnings, Slack’s market cap crossed $22 billion, and Slack bulls and insiders understand that as a sticky workplace collaboration SaaS business in an increasingly remote world, its best years are ahead of it. I don’t think Slack sells for less than $30-50 billion, which is 3-4x more than Google has ever paid for an acquisition. * Given that the prize is Microsoft’s $1.5 trillion market cap, I think Google will be able to get past the sticker shock. * Amazon might get there first. In June, Slack announced a partnership with Amazon in which Amazon will move hundreds of thousands of employees onto Slack and Slack will increase its usage of AWS and use Amazon’s Chime for voice and video. The move was seen as a way to team up against Microsoft Teams and potentially as the early stages of a courting process that could end in Amazon acquiring Slack. * The multi-year partnership might make a Google deal a little hairier, but Slack and Google are simply a better fit than Amazon because of Google’s distribution into Slack’s target customers and its existing G Suite product. * Stewart already resigned from a big search company once. After selling his photo-sharing company, Flickr, to Yahoo!, Butterfield resigned as soon as his four years were up with a memorable resignation letter highlighted in this 2014 profile. It’s hard to picture the billionaire once again selling to a big search company. But that same profile contained the reason that Butterfield might roll Slack up into Google. The author, Mat Honan, wrote: Stewart Butterfield is a Worldbuilder. Everything he’s said in that 2014 profile has come true so far, except for one thing: Slack isn’t yet 80’s-era Microsoft. But it can be, if it teams up with Google to take down today’s Microsoft.This time, Stewart will be more than the Senior Director of Product Management he was at Yahoo! post-acquisition. With Google’s resources behind him, Stewart will be tasked with redefining the new, open, collaborative way we all work in a post-COVID world.Big thanks to Puja & my brother Dan for editing this into shape. As a thanks, I’m shouting out his new company, Parade (he doesn’t know I’m doing this). If you’re in the market for women’s underwear, head over and show Dan your thanks - without him, this would have been painful!We’re getting SO CLOSE to our 10k subscriber goal! If you enjoyed this post, I’d really appreciate it if you shared with your smartest, most curious friend. 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 513 newly Not Boring people who have joined us since last Thursday! If you’re reading this but haven’t subscribed, join 7,815 smart, curious folks by subscribing here!Hi friends 👋,Happy Thursday! One of the things we’re trying to do with Not Boring is to build out a toolkit that gives forward-thinking companies and investors the things they need to succeed. Often, it’s new ways of thinking about strategy. Last week, it was money. This week, it’s talent. And let’s face it, the way that top companies hire can be boring. Today’s guest post is here to change that. A couple of months ago, my friend Taylor texted me after reading my post, A Pause: Black Lives Matter. The gist was, “Great that you’re writing about systemic racism, but a good friend of mine is actually doing something to fix it. You guys should talk.” Taylor introduced me to fellow Duke grad Reuben Ogbonna. Reuben is an educator and founder of The Marcy Lab School, which “prepares low-income students of color for full-time careers in fast-growing tech professions” through an immersive one-year program. Reuben is also a force - he’s one of those people that you meet and get jealous of immediately because you know they’re destined to do big things.Reuben and I hit it off immediately, and we’ve since had a series of conversations that have been among the most fun and thought-provoking I’ve had, covering everything from remote education to community to Stripe’s documentation. He provided feedback on and context for Hamilton & Disney’s Education Flywheel. Taylor’s initial assessment of the writer/doer dynamic was spot on - I sometimes write about the future of education, Reuben is building it every day. Today, though, we’re putting Reuben in the writer’s seat. During our last conversation, Reuben mentioned that his biggest focus right now is placing his students in engineering roles at growing tech companies, either directly or by working with funds to place Marcy Lab graduates in portfolio companies. There are a lot of Not Boring readers in a position to make that happen. So I asked Reuben to write something that does three things: 1) Educates us on the state of education, from an insider’s perspective. 2) Explains the work that he’s doing at The Marcy Lab School and why it’s important.3) Shares the opportunity to hire Marcy Lab School grads with people looking for well-trained, highly-skilled, determined, diverse engineering talent (read: every tech company). If that sounds like you, get in touch with me or Reuben by replying to this email or emailing Reuben directly at reuben@marcylabschool.org. Let’s get to it.Expanding the Talent PipelineWhy Non-Traditional Talent is a Competitive Advantageby Reuben OgbonnaOn September 27, 2010, Peter Thiel announced what would later become the Thiel Fellowship on the stage of TechCrunch Disrupt. He committed to awarding $100,000 dollars to 20 promising college students to incentivize them to drop out and pursue an entrepreneurial endeavor. For the past decade, he has funded approximately 20 college dropouts per year, including the likes of Dylan Field of Figma and Vitalik Buterin of Ethereum.Since then, a number of venture funds have emerged around the thesis that college campuses are prime recruiting grounds for start-ups that could deliver outsized returns. Funds like DormRoomFund and Contrary place early bets on young entrepreneurs and provide them with the network and coaching necessary to turn their ideas into viable start-ups. Their investments include Brooklinen and DoorDash (two of my quarantine essentials!).This brand of fund tends to have a certain irreverence for our higher education system that I have come to respect. Their existence implies a belief that college’s unique value proposition is its ability to select not to develop potential entrepreneurs. They invest capital on the belief that a college diploma is not a prerequisite for success in the world of entrepreneurship. I particularly enjoy this bold declaration from 1517 Fund, named for the year when Martin Luther nailed his Ninety-five Theses to the door of All Saints Church in Wittenberg, Germany. These funds source deal flow from a predictable set of colleges: typically those in the nation’s top 25. This strategy is understandable, as the prevailing wisdom is that these colleges are home to our country’s best and brightest young minds. Thus, limiting top of funnel recruitment to these schools will yield the best return on investment. However, I would argue that by having a singular focus on our nation’s most elite universities, funds are missing out on the leaders that are best equipped to solve some of the world’s most pressing problems, particularly those that are facing underserved communities.College Admissions is BrokenIn March of last year, Felicity Huffman became the face of the largest college admissions scandal in recent memory, sparking a national debate about the equity and efficacy of our country’s higher education system. We began to ask “who actually gets to attend our nation’s most well-resourced institutions and why?” This is a question that the National Bureau of Economic Research had been investigating for twenty years prior to Huffman’s arrest. In a paper titled, Mobility Report Cards: The Role of Colleges in Intergenerational Mobility, researchers from Stanford, Brown, and Berkeley highlighted the correlation between household income and admissions to our nation’s top universities. Children of families in the top 20% of income earners account for 70% of students attending elite (“Ivy plus”) universities while those from families in the lower quintile of earners represent only 3.8%. Students whose parents are in the top 1% of the income distribution are 77 times more likely to attend an elite college than those whose parents are in the bottom income quintile.We have been conditioned to view an 18 year-old’s admittance to a top-10 university as purely a signal of their intelligence, potential, and ambition and a leading indicator of their likelihood of launching a successful venture. However, we do not often consider just how much one’s success in the college admissions process can be attributed to familial wealth, access, and influence. No matter how much talent, curiosity, and intelligence exists in low-income communities, they do not stand a chance against the advantages that wealth affords, with respect to SAT prep, admissions counseling, feeder high schools, and familial networks.What this means is that every year, budding scientists, student leaders, and prodigious entrepreneurs with all of the potential in the world will be overlooked for opportunities that would otherwise allow them to actualize it in the market.The Need for ChangeFor the past decade, I’ve been able to witness “the college problem”, first hand. I’ve worked as a math and computer science teacher, instructional coach, and school leader in some of the highest performing low-income public schools in the country. I’ve been fortunate to help countless students gain admission to the schools of their dreams. And I have seen many of these dreams deflated as students come to terms with financial aid packages that make it infeasible or impossible to attend. In these cases, students are forced to choose between the lesser of two unpleasant options:* Close the gap financing their education with a precariously high amount of student loan debt. Our country’s $1.6 trillion student debt crisis is well-documented; though, we often do not talk about how it disproportionately impacts Black borrowers. Across all institutions, Black borrowers default on these loans at a rate of 32%. Among those who fail to complete college, the rate increases to 55%. This is largely driven by the fact that Black graduates hold approximately $50,000 in student debt upon graduation, compared to the national average of $30,000.* Make the financially prudent decision to forego their dream school in favor of the more reasonably priced local option. The tradeoff is that their local state or city university likely does not offer the support, career development, and networking opportunities that their financially out-of-reach dream school affords. They often have graduation rates and average starting salaries that are significantly lower. Thus, these students fail to reach their potential due to a completely different set of factors.This data supports a growing narrative that I have experienced personally: college is broken and it is underserved communities that experience its negative impacts most acutely. This is what inspired me to begin seeking out new solutions.A New Option: The Marcy Lab SchoolIn March of  2019, we launched The Marcy Lab School. We are a Brooklyn, NY-based non-profit company with two goals (1) to build a viable alternative to traditional college for high-potential young adults from underserved backgrounds and (2) to create a pipeline of diverse talent to the tech sector, in hopes of producing the next generation of start-up entrepreneurs from Black and brown communities.We recruit young adults who would otherwise commit four years to collegiate studies at a traditional university and ask them to spend one year with us in an accelerated study program. During our yearlong, full-time program, students are immersed in a curriculum that includes:* Computer Science Fundamentals* Foundational Principles in Software Engineering* A Social justice and professional readiness curriculum that we simply call Leadership Development.This training is followed by a three-month apprenticeship where fellows have the opportunity to apply their learning in a “real-world” context as a contributing member of an engineering team that is shipping software at scale. This is their opportunity to showcase their ability to learn, adapt, and add value to teams working on complex problems. Our curriculum is grounded in theory but drives toward practical application. It is continually informed by the needs of our target industry. Our program is designed to foster autodidacticism, create lasting bonds between students, and point them toward big problems in the world while emboldening them to create new solutions to solve them. Our ResultsIn our first Fellowship year, we have seen astounding results. Of our inaugural Fellows:* 55% are women* 100% are Black and/or Latinx* 100% are from low-income households. Our Fellows have accepted job offers to build software at startups, non-profits, and publicly traded tech companies. Thus far, they are earning average salaries of $93,000 per year to do so.Our work has been funded by a diverse group of stakeholders, including JP Morgan, Lyft, Lenovo, and the Mayor of New York City - institutions that are all invested in the success of this overlooked student group and in the fight for greater diversity in tech.We are looking ahead to next year, where we will grow to serve nearly three times the number of Fellows as we did this year. We will be doubling down on distance learning as a strategy to more efficiently scale our impact and expand into new markets.A Success StoryMeet Mark Griffith. He is the son of hardworking West Indian immigrants. He is a gamer, a hardware nerd, and an incredibly empathetic human being. He is one of our inaugural Software Engineer Fellows.Mark graduated from a selective public high school here in New York City. He was a stellar student who engaged in extracurricular activities that fed his interest in technology. During his senior year, he was admitted to his dream school, Drexel University. He even received a partial scholarship. However, at an all-in cost of $70,000 per year, he still would have had to take out approximately $30,000 in student loans per year in order to attend. Wary of the financial strain that this would have put on him and his family, he decided to postpone college matriculation.Mark spent two years out of school, somewhat aimlessly searching for a pathway into a meaningful career. He found us in May of 2019 and began his fellowship that following September. Motivated by an insatiable curiosity and a desire to succeed for his family, Mark approached his fellowship with an inspiring amount of ambition and discipline. From building an app that used NLP to help users find Reddit communities based on their Spotify library to experimenting with WebGL to create 3D games, he viewed every project as an opportunity to stretch his learning boundaries. An aspiring entrepreneur, he was never afraid to take on the Product Manager role for his group projects.Over the past twelve months, he has developed the skills and mindsets that would make him an invaluable asset to any growing engineering organization. Last week, he landed his first full-time software engineering role. Had he chosen to attend Drexel University back in 2017, he would be $120,000 in debt, preparing for a semester of courses on Zoom. Instead, he will be getting paid $102,000 per year to build scalable APIs for a growing company with 4.6 million users around the world. Why You Should Partner With UsIf you’re a founder or VC and, like the funds I mentioned in the beginning of this essay, your portfolio’s early talent pipeline is solely reliant on graduates from the elite universities, you are missing out on talent like Mark. You are putting yourself at a competitive disadvantage. Among his many gifts, Mark brings two traits to any organization that hires him (1) a level of empathy and understanding for a diverse cross-section of potential users and (2) a level of grit, competitiveness, and determination that can only come from a desire to lift oneself into a new position in life. In order to land this position, Mark had to outperform 32 of his peers from institutions such as Stanford, Berkeley, Cornell, and NYU. I am confident that he will do so again in the next phase of his career, when he might be competing against these same peers for funding or market share.The AskIf you are a VC investing in world-changing startups or a founder growing a team to solve meaningful problems at scale, I would love to talk with you. I want to work with you to kickstart a pipeline of outstanding engineering talent from underrepresented backgrounds that will add immediate value to your start-up or portfolio companies. Moreover, you will be investing in your company’s future. In the long run, these individuals will grow into your team’s engineering and product leaders. Or they may take the lessons they learn in hypergrowth and engineering for scale and point them at novel challenges that only they are suited to solve and you will have the privilege of funding the start-ups that emerge from these solutions. If you are bold and forward thinking enough to share this vision with me, I encourage you to reach out directly at reuben@marcylabschool.org or on Twitter @reuben_ogbonna. I’d love to connect with you and introduce you to some of our Fellows directly!Reuben Ogbonna is the founding Executive Director of The Marcy Lab School, an innovative post-secondary education model seeking to address inequity in higher education and the tech sector by training the next generation of engineering leaders from underrepresented backgrounds.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 826 newly Not Boring people who have joined us since last Monday! If you’re reading this but haven’t subscribed, join 7,579 smart, curious folks by subscribing here!Already subscribed and want to climb up the Verified Not Boring leaderboard?Juul: The SPAC 2020 Deserves SPACs are hot right now. First, in the markets, and then, of course, among business writers. Matt Levine, Alex Danco, Byrne Hobart, Anuj Abrol, and more have written about SPACs recently, and they’ve done a great job explaining what they are. I’m throwing my hat into the ring, too. This is Not Boring, and the best way to learn about SPACs is by playing Fantasy SPAC on what would be the least boring SPAC to date: Juul. Party Like It’s 2018Let’s travel back to December 2018. Altria, the sterilized, market-friendly name for the Marlboro-maker formerly known as Phillip Morris, has just invested $12.8 billion in three-year-old e-cigarette giant Juul, valuing the company at $38 billion. The investment makes Juul the third most valuable private startup, right behind two Softbank-backed companies, $72 billion Uber and $47 billion The We Company, and ahead of Elon Musk’s rocket company, SpaceX, at $31.5 billion, and one half of my favorite fantasy merger, Airbnb, at $31 billion.Big private funding rounds were so common in 2018 that many wondered aloud whether the IPO was dead. The Atlantic wrote about The Death of the IPO, for example, in November 2018. With easy access to large sums of private capital, the argument went, why would companies subject themselves to all of the regulations, disclosures, and headaches associated with going and being public?Led by Uber, the buzzy startup IPO made a comeback in 2019, as Uber, Lyft, Zoom, Beyond Meat, Slack (technically a direct listing), Pinterest, Peloton, Medallia, Datadog, Crowdstrike, and more offered shares to the public for the first time. But many of 2018’s largest private unicorns are still private. Some are doing better than others.The Good: In April, Stripe raised $600 million in a round that valued the payments company at $36 billion. SpaceX captivated the world when it launched astronauts into space in late May, and is currently raising money at a $44 billion valuation. Early in July, Palantir filed to go public (confidentially, of course). The Down Rounds: Softbank owns the majority stake in a trimmed-down, scaled back $8 billion WeWork that’s once again promising it will be profitable next year. Airbnb raised $1 billion in debt from Silver Lake amidst Coronavirus troubles, and the attached warrants valued Airbnb at $18 billion. And what about Juul? For a brief moment last year, after Uber’s IPO and during WeWork’s failed attempt, Juul was the most valuable private startup in the United States.Then, on Halloween 2019, Altria wrote down the value of its investment from $12.8 to $8.3 billion. In January, it took another $4.1 billion charge, bringing the value of its stake to $4.2 billion and Juul’s valuation to $12 billion, a 68% fall. But there’s good news for Juul: if 2018 was the Year of Private Market Froth and 2019 was the Year of the Unicorn IPO, 2020 is the Year of the SPAC. And a SPAC may be the only way for Juul to go public.A Juul SPACquisition is the most 2020 deal imaginable. I’m not saying it should happen - there’s a non-zero chance that selling Juul stock to retail investors through a SPAC is the thing that finally convinces the Devil to reveal that he/she won a bet with God and has just been fucking with us for the past few years. But it makes just enough sense to propose a Fantasy SPAC, and a Fantasy SPAC is a great way to learn some fascinating things:* What the hell a SPAC is* What happened to JUUL* How Juul is like Peloton’s evil twin* Why a SPAC should target Juul* Who the ideal Sponsor for a Juul deal would beThe Year of the SPAC… wait, what’s a SPAC?If you’re reading this newsletter, you’ve probably heard of a SPAC, and you probably kind of understand it but don’t really understand it. A Special Purpose Acquisition Company (“SPAC”) is a blank-check company that raises money from the public markets and then has a certain amount of time (typically two years) to acquire an actual business.  Here’s how it works: * Well-respected investor, operator, or group of investors and operators (“Sponsors”) announce the SPAC, how much they’re raising, and (sometimes) for what.* i.e. Not Boring Acquisition Corp is selling 100 million shares at $10/share to acquire a majority stake in an unprofitable, high-growth US technology business. * SPAC sells shares to public market investors and trades on public markets, without actually having a real operating business. It has two years to use its “blank check” to acquire a minority or majority stake in a private company.* SPAC finds a target company to buy and makes an offer. Target company accepts. * Deal closes, and the SPAC turns into shares in the acquired company, which then trades on the public market without having to IPO. * Sponsors often get founders shares and warrants to buy the stock cheaply, and make a lot of money. SPACs have been around since the 1990’s, but recently, SPACs are on fire. According to SeekingAlpha:So far this year, 48 SPACs have raised $17.1 billion, representing 40% of all dollars raised in the 2020 IPO market. More SPACs have gone public than any other sector, leading healthcare (45 IPOs; $11.1B), technology (14; $4.0B), financials (7; $2.2B), and industrials (6; $4.3B).As Danco points out, SPACs have three advantages over traditional IPOs that make them well-suited for the kind of uncertain market we’re in today:* Price Certainty. A SPAC looks more like an acquisition than an IPO. Two parties negotiate the price up front, and that’s the price. No long underwriting process.* Speed. The IPO process can take well over a year, which leaves a lot of time for things to go wrong - either at the company, in the markets, or both. WeWork certainly would have benefited from a faster process (although the longer one saved investors). * Brand Halo. Well-respected sponsors can lend their trustworthiness to a company. SPACs aren’t just good for uncertain markets; they’re good for uncertain businesses, too. SPACs allow companies with an otherwise difficult path to IPO to access public market liquidity as easily as getting acquired. To whit, the three highest-profile SPACs of 2020 acquired Draftkings, Nikola, and Virgin Galactic. What do those companies do? Draftkings is a daily fantasy sports, sports betting, and online casino app that faces regulatory uncertainty in terms of which states will legalize online gambling and betting, and at what tax rates. Draftkings is the least risky of the big three because it has customers and makes money.Nikola is an electric truck company with zero revenue and no product that went public via SPAC and hit a market cap near $30 billion by drafting on retail investors’ love of Tesla. Virgin Galactic is Richard Branson’s human space tourism company that earned $238,000 in Q1 2020 revenue from “providing engineering services” and hit an $8 billion market cap in February, good for a casual pre-product 8,000x revenue multiple. Part of the reason that SPACs have been so successful is that the retail investing maniacs on the WallStreetBets subreddit love SPACs. I first invested in Draftkings when it was Diamond Eagle Acquisition Corp, and a friend who frequents the penny stock subreddits told me that it was going to explode when the deal closed and the ticker switched from DEAC to DKNG… and he was right.These SPACs work in part because of the reasons Danco laid out, and in part because they feed frenzied retail investors exactly what they’re looking for: stocks that are too risky to go public via traditional channels. SPACs were in the news again last week because famed activist hedge fund manager Bill Ackman just launched the biggest SPAC of all time: the $4 billion Pershing Square Tontine Holdings (PSTH.U). Rumors are swirling that Tontine is eyeing a minority stake in one of 2018’s big private unicorns, like SpaceX or Airbnb. That got me thinking: what about a company that was valued higher than either of those two in 2018? What Happened to Juul?You know Juul. As recently as a few months ago, it was hard to walk down a single block in New York without seeing at least one person puffing a slender black or silver stick and exhaling mango vapors into the air. The product was ubiquitous, attracting hardcore smokers looking for a satisfying way to quit and curious teens looking to look cool. That was a problem. If there’s one thing regulators hate (rightly), it’s companies marketing nicotine or alcohol to kids. Just ask Four Loko. Juul’s arc should be familiar to anyone who’s been reading Not Boring for a little while. It’s the Gartner Hype Cycle. Launched in 2015 by Pax Labs, Juul sales skyrocketed 700% to over $322 million by 2016. By 2017, the company had already sold 1 million units, and that December, Juul raised $112 million. Things got choppy in 2018. Early in the year, the FDA began cracking down on the sale of Juul to minors, and in June, San Francisco became the first major US city to ban Juul. Undeterred, the company raised $1.2 billion at a $16 billion valuation in July. In the fall, as Juul passed 70% of the US e-cigarette market, the FDA seized documents from Juul’s headquarters. Juul responded by volunteering to stop selling its sweet and fruity flavors in stores. Then, amidst all of the regulatory turmoil, Altria stepped in. The cigarette maker, threatened by e-cigarettes’ rising popularity, invested a whopping $12.8 billion in Juul at a $38 billion valuation. “We have long said that providing adult smokers with superior, satisfying products with the potential to reduce harm is the best way to achieve tobacco harm reduction.”-- Howard Willard, Altria CEOSurprisingly, instead of a Nobel Peace Prize for Medicine, Altria won a lifetime supply of headaches. In 2019, the FDA, Senate, House of Representatives, and US Attorney’s Office were all investigating Juul. Then China halted Juul sales and India banned vaping, cutting off the two biggest smoking markets in the world. Juul halted the sale of sweet and fruity pods online, and laid off 500 people.After all of that, Altria’s Halloween 2019 writedown of its Juul investment, from $12.8 billion to $8.3 billion, came as no surprise. Nor did its January announcement, one quarter later, that it was writing down the investment by another $4.1 billion, to $4.2 billion. Juul and Altria also modified their original agreement - instead of providing marketing and distribution to Juul, Altria will be providing legal and regulatory support.In the four weeks ended January 25th, the company’s in-store sales fell 25% compared with the same period a year earlier, according to Nielsen. And all of that before Coronavirus - a respiratory disease from which smokers are more likely to die than non-smokers and against which the best defense is to not exhale our germs onto each other. Try Juuling through a mask. Things look bleak, but remember this arc from Oh Snap!? Juul has gone through the first half of the Gartner Hype Cycle.Sometimes companies recover and emerge from the Trough of Disillusionment. Snap has. Other times, though, they drop all the way to oblivion. Sometimes, the product was a fad, a Meme Startup without a second act. Juul doesn’t suffer from poor product-market fit, though. If anything, customers love it so much that the government feels it needs to step in to protect them from themselves. Peloton’s Evil TwinOne of the past year’s most successful IPOs, Peloton is almost as addictive as Juul, but regulators aren’t trying to stop it. Peloton makes its customers healthier, using high-energy classes, star instructors, and good old fashioned competition to keep customers working out.Peloton’s magic is that it sells customers expensive hardware upfront, and then sells them a monthly subscription to fitness content. The bike costs $2,245 and the All-Access Membership, obligatory for the first year, costs $39/month. It’s high AOV hardware plus software subscription. Once someone has invested in the bike, they’re not going to cheap out on the $39 subscription. Juul is Peloton’s evil business model twin. I remember talking to a friend at a hedge fund about Juul a couple of years ago. His fund purchased aggregated credit card data to inform trading decisions, and he told me he’d never seen anything like Juul. People bought Juul pods so consistently and often that the company behaved like a subscription business with low-to-negative churn. Here’s how Juul’s business model works: * Pay $50 for a Juul device. * Pay $20 for Juul pods, the little plastic things that hold the nicotine juice. * Pay $20 for Juul pods* Pay $20 for Juul pods* Pay $20 for Juul pods* Pay $20 for Juul pods* …. forever* Pay $20 for Juul pods.Juul, too, sells more expensive hardware upfront and then essentially generates sticky subscription revenue for years and years. Despite the fact that a Juul costs just 2% of what a Peloton bike does, Juul customers can actually end up spending more than Peloton customers over five years. How sticky are Juul customers? The company found out when it tried to appease regulators by pulling its sweet and fruity flavors, including its most popular, mango, from US shelves. Retailers got creative and started importing mango pods from Canada. Customers who were used to paying $20 for a four-pack of Juul pods happily paid $30 - $50 for the North of the Border Mangoes. Juul pods had almost no price elasticity of demand - because they’re addictive, customers are willing to pay almost anything to get them. That’s the type of sticky cashflow that investors love to buy, and why smart investors like Tiger Global poured so much money into the company despite regulatory and moral risks. A company like that will survive until the government shuts it down, and the product, in one form or another, will survive even that. Juul’s business model is solid, its problem is regulation. It did an evil thing by marketing its product to teens, and it needs to make amends. The company needs to work with regulators, continue expansion into friendlier markets, and wait for the US, Chinese, and Indian governments to come around to its arguments that e-cigarettes are safer than cigarettes, and that Juul’s products are safer than competitors’ knock-offs. To do that, it needs cash. In February, the Wall Street Journal reported that Juul had raised $700 million in debt, to keep it afloat and allow it to make long-term decisions. (Wait, what about the $12.8 billion it raised from Altria? It paid $2 billion in employee bonuses and returned all but $1 billion of the rest of the money to investors. Whoops!) Debt is certainly one way to fund a company with a ravenously loyal customer base that would inevitably face too much scrutiny, including around its recent slowing performance, to go public via a traditional IPO. But it’s 2020, and debt is nowhere near wacky enough. A SPAC Should Acquire JuulJuul is a high-risk target. There’s a real chance that the company isn’t around in two years. But that risk is why a SPAC’s Sponsor and Investors might get the deal of the century, and why a SPAC is the only way to take Juul public. A deal stands to benefit all of the parties involved: the Sponsor, Juul, Altria, and the Investors. The SponsorIn Juul, the Sponsor has an opportunity to acquire a large stake in what was recently the most valuable private company in the United States at a deep discount, and take it public with almost no downside. SPAC Sponsors (Ackman is a notable exception) typically receive founder’s shares worth 20% of the acquisition amount for a nominal fee (like $0.05 to buy a $10 share). The Sponsor, and public market investors, also receive warrants, which allow the holder to purchase more shares by a future date at a specified price. For setting everything up and attracting capital, the Sponsor receives a piece of the company (the 20% founders’ shares) that makes them money even if the deal goes poorly, and warrants that pay off if things go well.The Sponsor will be negotiating with Juul from a position of strength. Juul’s valuation has plummeted by more than two-thirds in under a year, it is battling regulators and angry parents, its reputation is deeply tarnished, and it has no other means of accessing public markets. That means that a Sponsor could end up with founders’ shares and warrants in one of the stickiest, fastest-growing businesses in history for less than a third of what it would have cost them a year ago. It’s too tempting not to try.JuulIt would be really hard to take Juul public via traditional IPO, but the company will continue to need cash as it fights regulatory battles and works towards getting its products on more shelves. Going public would give Juul access to bigger pools of capital. A SPAC might be the only way to do it, and investors have never been hungrier for a deal like a Juul SPAC.Juul is at a regulatory low point that makes the company hairy and uncertain. The company is being made an example of while more harmful cigarettes and less popular e-cigarette products roam free on bodega shelves. There is strong demand for the product, though, and it is likely healthier than cigarettes, so there is a compromise to be made with regulators in the coming years. Through a SPAC, Juul would just need to find one Sponsor who sees the business’ potential versus needing to convince a series of institutional investors in a traditional IPO roadshow. Once Juul and the Sponsor strike a deal, the company will have a powerful ally in its battle with regulators and its campaign to convince the public that it does more good than harm. AltriaAfter two consecutive writedowns, Altria seems like it would be more than happy to get out of its shares. Currently, Altria is not allowed to sell. As part of Altria’s investment in Juul, the two sides agreed to a “standstill agreement” which says that Altria can neither buy more of Juul or sell its shares for six years. Juul should be able to let Altria out of the agreement, though, if it does a SPAC deal, and I can only imagine that Altria would be OK getting out of a portion of its shares for the right price.Investors Now is the perfect time to take Juul public. The WallStreetBets crowd and Robinhood traders are bidding up shares of SPACs and anything with a good meme attached to it. Juuling is a meme among the same type of people who frequent WSB, and I think a stock trading under the JUUL ticker would go crazy.More than the frenzy, though, investors would get the opportunity to buy an incredibly sticky business at a deeply discounted price. Juul makes a product that people love, and repurchase over and over again. If it can get past regulatory hurdles (a big if), it has a model similar to Peloton’s, which public market investors, who don’t need to tie their name to a company as publicly as private market investors do, will love. Of course, this deal is risky! Regulators are coming after Juul hard, the company is hated by parents, educators, and many others who believe that it is ethically bankrupt, and the time and money it spends fighting legal battles is time that competitors have to catch up or pass them. Normally, I’d view this risk as a bad thing, but in this market, investors seem to love risk for its own sake. With a SPAC, they’re doubly rewarded for taking the risk in the form of the warrants that SPAC investors receive. For example, the warrant might allow them to buy more shares for $10 in the future, even if the price rises to $30. Taken together, this means a SPAC might be able to acquire Juul cheaply, sell shares to a market that has never been more friendly to meme stocks, and retain upside in the form of warrants and cheap founder shares if Juul is able to regain the momentum that made it the most valuable private startup in the world for a brief moment last year. So which Sponsor is crazy enough to acquire Juul? I have some thoughts, which I dropped in the comments, and I’d love to hear yours. Join the conversation: Unfortunately, I don’t think the Devil is going to let 2020 end until someone steps up and makes this deal happen. Luckily for whoever is crazy enough to try, Juul represents an opportunity that is tailor made for 2020 SPAC-ing. It’s definitely not normal, and it might not even be moral, but if Juul can get past regulatory concerns, there’s actually a great business hiding under all of the red tape. A SPAC offers enough upside to the Sponsor that someone should step up and try. If there was ever a time for this, it’s now. The WallStreetBets crowd is going to go mangoes for this one. 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