Ride It to the Sky

I recently read The Power Law by Sebastian Mallaby. There is a section about how Thomas Perkins, the founder of Kleiner Perkins, approached venture capital. His strategy was to “identify the white-hot risks, then find the cheapest way of going after them.” Essentially, determine where the startup might fail (e.g. is there a foundational technical breakthrough that’s required? Some complex operational execution? A question of market demand? etc.), and maniacally focus on solving for that singular element in the most economically efficient way possible. I very much like this approach to investing and company building. Constraints (i.e. the limited amount of money one has in the bank) force focus and ruthless prioritization.

In the past decade tech entrepreneurs have experienced remarkable market conditions. Money from venture capitalists was seemingly infinite. This created a series of bad behaviors that entrepreneurs will have to unlearn. Mainly, it enabled founders to do too much shit at once without truly understanding and focusing on what was most important to make their business actually work (i.e. what is the white-hot risk?). My strong preference for company building, particularly at the early stages, is to singularly focus on the thing that is mission critical and to tackle that in the scrappiest way possible. I, like every other entrepreneur, have made the mistake of trying to do way too much on more than one occasion. The times things worked best were always when we had a crystal clear focus on the absolute most important thing to accomplish and focused all of our resources and attention towards it.

The recent market turn is going to create new constraints for entrepreneurs. Capital will be much harder to come by, and this will be a forcing function for leaders to do less. Ultimately, I think this is a very good thing. Many founders will struggle to adapt – these are new market conditions for a lot of people and new is always difficult. But those that do embrace these newfound constraints and zealously hone in on the white-hot risks are going to emerge having built industry-defining iconic companies. They will likely build better companies faster in this capital-scarce market than they would have in the capital-abundant one. Call me old-fashioned, but I’m excited about this return to normalcy. In the long run I think it will produce better outcomes for everyone in the ecosystem.

I left GroupMe/MSFT at the end of 2013. I haven’t been involved with it for a long while now, but around a year ago I caught up with someone who was familiar with how the product was doing inside Microsoft. I was absolutely shocked to learn how popular the app still is. There were roughly 25M MAU, nearly 100m total users, and 13m DAU. Practically every college student in the country uses it. And roughly 10 engineers were supporting the entire operation.

I was shocked because the product hasn’t really evolved in the past decade. There are seldom any updates, and it has really just been in maintenance mode. It’s an incredible asset that for some reason has not been usurped by competitive messengers. It’s sticky. And fun #)

When people ask me about my GroupMe experience I like to say that building something in consumer is 90% luck and 10% executing against that luck. I actually think the luck variable for success in social may actually be closer to 95%. So many amazing teams tackle problems in social but their products never make it and if they do they’re usually a blip – they pop and then fizzle with no staying power.

Another thing I believe about consumer applications that make it is that they capture lightning in a bottle, and there is very little a team can do to fuck things up. Once the lighting is captured, even if you try to deliberately sabotage the thing, you can’t prevent it from growing. We sold GroupMe to Skype, and from what I’m told this was absolutely the case at Skype early on. It was a mess, but that product was going to catch fire no matter how dysfunctional things were. Twitter was the same way. And when I joined tumblr, there was very little the team could do to prevent its success. Constant downtime was never a deterrent. When you strike the chord it’s nearly impossible to dampen the vibration.

This isn’t to say that the early teams behind these companies were not good or deserving. They were. It’s hard to build new things and that alone is a feat. But it is to say that luck is critical, and that when you tap into something powerful it assumes a life of its own that you really can’t control. That’s the beauty of social. When something works, it really works. It’s the one place where product market fit means that even if you try, you cannot destroy your creation.

Marc Rebillet is one of my favorite new artists I discovered in the past several years. His energy is infectious, he exudes nothing but positive vibes and fun, and he’s a musical improvisational genius. Normally he does solo live shows that he streams on YouTube (you can check them out here) where he messes around for an hour wearing nothing but a robe and some boxer briefs. It’s quite a shtick to say the least. But where he really begins to shine is when he improvises with other talented musicians. The first time I really saw this was in this video of him, Reggie Watts, and Flying Lotus.

Earlier this week I stumbled on a new collaboration he did with Reggie Watts and Erykah Badu. It’s exceptional. If you want a taste for what it’s all about, start watching at the 17:50 mark (for around 10 minutes), and then again at the 34:30 mark.

I am a huge fan of musical improvisation. My favorite live bands, Phish and The Disco Biscuits, all focus on group improvisation. There’s something uniquely incredible about a group of people making something out of nothing, listening and riffing off one another, and having both the patience and courage to explore uncharted territories together. But when it works, when the group gives it enough time to breathe and evolve, something magical happens. Something spectacular is extemporaneously created out of absolutely nothing.

There are several things I love about this segment with Marc, Erykah and Reggie. First, they’re all remarkably talented musicians in their own right. Second, they are so authentically themselves. They give approximately zero fucks that there are cameras recording them. They just exist in the moment, bringing their uniqueness to the melting pot. And last, this really exemplifies the power of group improvisation. They begin with a prompt – a monkey shaped instrument that makes animal noises – and they fully embrace the weirdness, exploring the motif as they voyage across a whole slew of different musical genres. They’re patient and fearlessly explore where the moment takes them. For me, that’s the purest thing about music, and it’s the thing I enjoy the most about it. Because when it works, magic is real.

When I was little my dad used to sing the Dooley Wilson song As Time Goes By. It starts:

You must remember this

A kiss is just a kiss

A sigh is just a sigh

The fundamental things apply

As time goes by

I am not an overwhelmingly sophisticated financial investor, nor am I an expert market prognosticator. I like things that are simple and easy to understand. The past decade of technology investing and valuations has not been simple or easy to understand. But it looks like that is changing now.

As software began to eat the world, many companies made the proclamation that they were software companies. Companies sell things. The type of company you are largely comes down to what you sell and provide to customers. For instance, software companies sell software. As technology became more pervasive, companies and the market largely confused other types of companies for software businesses. But software eating the world means that many industries will be inexorably transformed by technology – they will create more efficiency, move faster, have better margins, etc. – not that they themselves will become the software industry itself.

One of the things that confused me over the recent bull run was companies and investors valuing things that were not software companies like software. Insurtech is one example. Insurance companies sell insurance policies. The promise of insurtech is that companies can use technology to generate better underwriting and risk systems that create more efficiency and better user experiences in the delivery and management of the policies they sell. But at the end of the day, the core thing insurtech does is sell insurance. And at the end of the day they should and likely will be valued like their insurance counterparts in the public markets. And if they don’t have better margins and a superior customer experience, then the promise is unfulfilled.

You can extend this to many other industries that have been inflated by the illusion of being tech companies. In a segment of fintech, online lenders sell money. They’re in the business of providing people loans. They will be valued like other companies whose core business is selling money. Same goes for companies that sell physical things. If your core business is selling shoes or mattresses, you will be valued like other companies that sell shoes and mattresses. You are likely not a software company (unless they are digital shoes and mattresses!), but hopefully you use technology to deliver a superior product and service to customers, and have a significantly better margin profile. If you do not, the narrative is fiction.

I think what we are seeing and will continue to see is the market come to this realization. Not everything is a tech company, and if tech is the thing that differentiates your business from competitors in your industry, then it better actually manifest in the business. This is not to say that exceptional companies and businesses won’t be built and aren’t already built in tech-enabled industries. They are and will continue to be. But it is to say that it’s important to internalize the new market dynamics which are finally becoming more simple and easy to understand.

At the end of the day, a kiss is but a kiss, a sigh is but a sigh, and the fundamental things apply as time goes by.

Earlier this year I finally read Carlota Perez’s Technological Revolutions and Financial Capital. It had been on my shelf for over a decade. It’s a masterpiece. It’s super academic, but so insightful. I understand why people are obsessed with her work and underlined nearly half the book. (Here’s a book summary if you have not read it.)

While reading it I kept asking myself, “Where are we in the Information Age?” and “What comes next?” The Information Age is weird. We’ve experienced multiple crashes and frenzies, software and computers have come so far and changed so much of our lives, yet software is still eating the world. In some ways it feels like we are approaching the end of the Information Age (I think this is mainly because so much mainstream and visible innovation in software these days feels boring and on the margin), but it also feels like we are just at the beginning. We have yet to see what AI and crypto will do to the society, and those are just the obvious contenders for the next stages of this epoch. Ben Thompson wrote a nice piece about this, and Perez herself has shared her opinions, too.

I respect your view. Theories belong to the public. But I see the present as the 1930s, the turning point of the IT surge. We have had 2 frenzies and we have not yet had a golden age. The power of AI, IoT, 3D, robots, blockchain is there to be shaped https://t.co/FybfqgLJLM

— Carlota Perez (@CarlotaPrzPerez) March 31, 2019

As to the question of what comes next, obvious contenders are Climate/Energy – the implications of limitless energy by unlocking nuclear fission and fusion are vast – and Life Sciences – genetic engineering will change the world and humanity many times over. Both of these areas seem nascent, but are on the precipice of boundless innovation because cataclysmic events accelerate the pace of progress. The climate crisis is catalyzing investment in clean tech and energy creation and distribution, and the global pandemic has shown the world the importance of mRNA and all of the biological science that goes along with it.

A final thought I had was how the Exponential Age impacts Perez’s theories of technological revolutions. It seemed intuitive to me that because technological innovation is rapidly accelerating then the time periods for Perez’s technological revolutions to take place would shrink, but that has not been the case. In fact, it feels as if it may have the opposite effect. The Information Age is still going and showing no signs of coming to an end. Perhaps because technological change compounds and creates the conditions for even more innovation – and we haven’t even seen the impact AI will have on this cycle. Perhaps the Exponential Age won’t lead to an acceleration of individual technological revolutions, but simultaneously overlapping ones. It’s not inconceivable that we see an overlap of the Information Age, Energy Age, and Life Science Age within this century. The technologies that propel each of these revolutions are all interconnected. Needless to say, if you look at things a certain way then future is always exciting.