EVERY SPOKEN WORD
65 min read · 12,677 words- 0:00 – 1:41
Why this episode exists: “The Acquired Playbook” from 200+ company stories
- BGBen Gilbert
All right, two episodes in a row from a hotel room. Let's do it.
- DRDavid Rosenthal
[chuckles] Let's do it.
- BGBen Gilbert
[laughing]
- SPSpeaker
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Hm. Is it you? Is it you? Is it you? Sit me down, say it straight, another story on the way. Who got the truth?
- BGBen Gilbert
Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs, and our venture fund, PSL Ventures.
- DRDavid Rosenthal
And I'm David Rosenthal, and I am an angel investor based in San Francisco.
- BGBen Gilbert
And we are your hosts. This episode is something that David and I have been thinking about for a long time.
- DRDavid Rosenthal
Years, in fact.
- BGBen Gilbert
It is called The Acquired Playbook, and it is basically what we've learned from doing Acquired. Like, people often ask us the question: "Okay, cool, you guys have analyzed, like, 200 companies and spent an ungodly amount of hours doing that. Like, what are the takeaways?" This episode is the takeaways.
- DRDavid Rosenthal
It was back in, like, 2018, I wanna say, that we had a major book publisher come to us and be like, "Hey, would you wanna do a book out of Acquired?" And this was the idea we had, and then we were just like-
- BGBen Gilbert
Maybe at some point.
- DRDavid Rosenthal
[sighs] Let's just keep doing episodes instead, but maybe at some point. So consider this the first draft.
- BGBen Gilbert
We don't know if this talk was good yet. We are in our hotel rooms at Capital Camp, and we are about to go on stage and give it, so this is sort of fun. This is the first time we've ever recorded one of these before doing the episode itself.
- 1:41 – 6:53
Sponsor interview: Solana’s origin, scale, and building through crypto winters
- DRDavid Rosenthal
And before we jump in, for one final time this season, a huge thank you to our presenting sponsor of all of our special episodes, the Solana Foundation. And Solana, as you all definitely know by now, is a global state machine and the world's most performant blockchain. And when we say performant, that means that developers can build Web3 applications on top of it with super low transaction fees compared to other infrastructure platforms out there you may know of. And the reason that you can do that is that the Solana blockchain is literally a feat of engineering genius.
- BGBen Gilbert
If only we could talk to people involved in the engineering genius behind Solana. [chuckles]
- DRDavid Rosenthal
You know where I'm going with this. Because it's the last special episode of the season, I am talking to the co-founders of Solana itself, Anatoly Yakovenko and Raj Gokal. We are pumped to close out the season here with you guys. As a quick refresher, can you tell us what the Solana network was built to accomplish?
- SPSpeaker
It's a public blockchain, so it was built as a faster version of Ethereum, and that's kind of a very, very high-level way to talk about it. But our initial vision, like the slide deck and everything in, in those super early days, said that it's blockchain at Nasdaq speed. And the big dream idea is, imagine you have, um, a global computer that doesn't matter where you're at, but this computer perfectly synchronizes all information on it as close to the speed of light as possible. So when news travels around the world, you know, so does the information through this thing. Because if you can get to that speed of light update speed, you're as fast as news, you're as fast as the fastest markets. It doesn't really matter if, you know, Nasdaq has, like, sub-nanosecond whatever trading, because that doesn't trade on news, it's just trading on statistical noise. The other thing about Solana is it's very, very energy efficient. So a single Solana transaction is about, like, two or three Google searches. So if you think of it as using a web service, this is a network that, you know, takes as much energy as a regular web service. In comparison to the proof of work chains, this is, like, a million times more energy efficient. To me and to Raj, this was really important that that was true.
- DRDavid Rosenthal
That's amazing. And we got all into, in our episode with y'all a year ago, into your background as a systems engineer at Qualcomm and leading into the proof of history and how the network is architected. What's happened with Solana since?
- SPSpeaker
Oh, man, a lot of ups, some downs. We've had crazy amount of traction. I think by number of active accounts, we've passed all the other chains.
- SPSpeaker
Yeah, right now we're at two million daily, uh, six million weeklies, and then 18 million monthlies, which is the highest of any blockchain and passed all the other ones about 60 days ago. And last time we spoke, [chuckles] we were basically close to zero.
- DRDavid Rosenthal
In the midst of all this incredible growth, the markets, and in particular, the crypto markets, have changed quite a bit since we spoke last as well. You started Solana in the middle of the last crypto winter. What advice would you have for founders out there?
- SPSpeaker
So bear markets are hard for, like, mid-stage companies because they see their, like, revenues and everything else shrink, but I think they're actually great for seed-level companies that are just small teams of engineers with, you know, running on ramen, that have a bright idea and a lot of energy to go execute on it. Your competitors that are bigger are forced to prioritize and forced to take less risk. For people that are just really hungry to build the next big thing, don't need a lot of funding, and that was our story. We actually had a lot of competitors that raised 100 million rounds, like, with... on a white paper [chuckles] right before we got, like, our little bit of seed funding.
- SPSpeaker
The first seed was a little over $3 million, and that was more or less enough. The next round was, like, 13, but a ton of it got wiped out 'cause most of it came in in Eth. Uh, and before we found a custodian and were able to sell any of it, a lot of that value got wiped out, [chuckles] unfortunately. So it's altogether, like, less than $10 million, I think, to mainnet.
- DRDavid Rosenthal
Wow! For teams out there that are working on applications, what's the best way to get in touch with y'all, and how can Solana help?
- DRDavid Rosenthal
... So we have a Discord, we have a really strong community there. If you're a builder, you should definitely join that one, and also, like, Anchor. There's a lot of groups outside of just our main one. One kind of more fun way to do it would be to join any of the hacker houses. Just show up and start building with a bunch of people face-to-face, and, like, really feel the energy of, you know, working on something together and, like, exchanging ideas and, and seeing things fail.
- DRDavid Rosenthal
Awesome. Thank you so much. It's an amazing feat to be the largest blockchain out there. Super cool. Our hat is off to you.
- 6:53 – 7:40
Housekeeping: disclaimers, Slack discussion, and the 12-theme structure
- BGBen Gilbert
Now, as always, this is not financial advice. Please do your own research. Dave and I do lots of research, but you may come to different conclusions, and we may have financial interests in the things that are discussed on this show.
- DRDavid Rosenthal
Indeed, and speaking of different conclusions, this would be a fantastic episode to discuss in the Acquired Slack. We want to hear what your favorite lessons are from all of these, like, hundreds and hundreds of hours [chuckles] that we've done at this point. This would be awesome. So acquired.fm/slack if you're not already a member. We hang out in there. It's a great, great, great community, as you will hear us talk about in this talk.
- BGBen Gilbert
All right, join the Slack, and then, uh, this is 12 of our favorite playbook themes, but there are certainly more, so I'd love to hear from you. All right, on to the talk.
- 7:40 – 11:46
Lesson 1 — Optimism always wins (Sony founded in 1946 Japan)
- DRDavid Rosenthal
So we thought we would be really clever here with our first one, both because this genuinely is one of our favorite themes, and we thought, "Well, this will be counter-positioned. Everybody's gonna talk about, you know, it's May 2022-
- DRDavid Rosenthal
Doom and gloom.
- DRDavid Rosenthal
... There's doom and gloom, it's gonna be good." And then, of course, great friend of the show, Anu Hariharan, came up earlier tonight and alr- already beat the optimism drum. But, uh, we will highlight it once again. So our first lesson from all the stories we've told is that optimism always wins. So, um, uh, for folks here in the auditorium, raise your hand if you know who the people are who are on this slide. Wow, this is awesome! We're getting almost no hands raised. And, uh, for folks at home, bear with... I don't know that we have a single hand up. Wow, this is awesome. Okay, so the person on the left is Akio Morita, and the person on the right is Masaru Ibuka, and they were the co-founders of the Sony Corporation. And, uh, we told this story in about three hours, uh, earlier this year on Acquired. It is, it is amazing, but we thought it would be the perfect story to kick off the night because it's, it's just so perfect for this moment. So, as we said, there's not a lot of reasons looking out at the landscape at the markets right now to be an optimist, but the Sony story reminds us that things were much, much, much worse than they are today in the recent past. So Sony was founded in 1946 in Japan, and, uh, just think about that time in 1946 in Japan. Uh-
- BGBen Gilbert
Like, y- y- you think 2022 in America might be a bad time to start a company or a tough time to start a company? Uh, I don't know that in recent history there has been a worse time and place to try and live your life and do any sort of business, let alone start a brand-new innovative technology firm.
- DRDavid Rosenthal
Right. So these two men decided to start a company, which is crazy in and of itself in Japan in 1946. Even crazier, they decided to start a consumer electronics company. Crazy for two reasons: one, after the war, there w- there was no technology left in Japan, [chuckles] so, like, what were they gonna... what were they gonna make? [chuckles] Their first product was a wooden rice cooker. Uh-
- BGBen Gilbert
There wasn't, uh, a market either because every other technology firm that was making radios and stuff had pivoted to make stuff for the military, which was no longer a customer.
- DRDavid Rosenthal
Yes, no longer existed. Um, the second reason why this was a completely, completely crazy idea was they were gonna make consumer, uh, electronic, electronic consumer products. The GDP per capita in Japan in 1946 was $17, not $17,000. It was $17. [chuckles] So there was no market, there was no technology.
- BGBen Gilbert
And I think after the war, 48% of Tokyo was homeless.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
Like, half the population's homes had been destroyed.
- DRDavid Rosenthal
Yeah, unbelievable. And so, and yet, despite all that, despite... I, I can't even imagine bigger headwinds against them. They built one of the most iconic companies in the world. Uh, it's not an understatement to say that these two men and Sony changed the course of Japanese history, changed the course of world history. And, um, again, we talked about this on the episode, but, uh, Steve Jobs was, was mentioned earlier tonight. Akio Morita was the inspiration for Steve Jobs. Uh, and he actually did this great, great talk at, um, one of, uh... It was, uh, not a WWDC, uh-
- BGBen Gilbert
Uh, an Apple keynote.
- DRDavid Rosenthal
It was at an Apple keynote, uh, after Morita passed away, where he did a tribute to him, and I think, uh, you know, no Morita, no Sony, no iPhone. Um, and so the lesson that we take away from this is, like, you know, even if things are at their bleakest, it's rational to be an optimist, because if you're not an optimist, it's, it's the optimists who drive the world forward. And then, if you're an investor, [chuckles] investing in optimism is the only way that you're actually gonna make outsized returns and build great companies. So it is genuinely the rational thing to do. [chuckles]
- 11:46 – 16:42
Lesson 2 — The Mike Moritz Corollary to Moore’s Law: outcomes keep getting bigger
- BGBen Gilbert
All right, so point one here, or lesson one, uh, touchy-feely, kind of feel good, um, but l- let's back it up a little bit. So we all know Moore's Law. This next lesson, you know, w- we wanted to basically visualize and talk about this trend in a little bit of a different way than, than it's normally talked about. So the, the number of transistors on a chip, we all know this, tends to double every 18 to 24 months, and with some quick compounding math, that means you get a 10X every seven years or so. And as you can see on this graph that we made here, uh, the x-axis is time, the y-axis is the number of transistors on a leading consumer processor. Uh, notice that it's in log scale. You can see every seven years or so, 10X improvement in processing power. And I figured we'd take the sort of greatest hits examples: uh, Intel's 386, 486, Pentium 4, Core 2 Duo, which was in my first MacBook Pro, the A7 in the iPhone in 2013, and of course, the recent Apple M1.... Uh, of course, if you look at it in linear and not log scale, it looks like this. It, it's way too difficult to actually observe any progress, and it seems like basically nothing happened, and then everything happened.
- DRDavid Rosenthal
And this is the craziest thing about Moore's Law and exponential scales: the graph always looks like this.
- BGBen Gilbert
[chuckles] Right.
- DRDavid Rosenthal
In ten years, the M1 is gonna look like nothing happened between- [chuckles]
- BGBen Gilbert
And in 2000, with Pentium 4, it would've looked like this, too.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
It totally- e- every single step along the way felt like this, which is wild. And because of how exponential growth works, you basically feel like you're always at this crazy top, and all this progress just happened. Um, but normally we don't look at charts like this when we're looking at, at processing power, or at least, like, processing generations. Uh, we're used to looking at it for high-growth, durable technology companies when we're looking at stuff like their market cap. So we aggregated that, too. Um, the first thing to note is that there's been a drawdown [chuckles] I don't know if anyone noticed since I made this slide.
- DRDavid Rosenthal
We made these slides a few months ago.
- BGBen Gilbert
[laughing] Uh, but the point still holds. Uh, this is the market cap of all global technology companies over that same time period, starting in 1975. Um, even if you normalize this for the tech bubble and today, you'll see that the outcomes of venture-backed technology companies keep getting larger generation by generation. Uh, it's also worth observing the exact same phenomenon, that basically it seems like nothing happened, save for the, the tech, tech bubble, um, and then suddenly everything happened at once. And the insight is that this graph and the Moore's Law chart with the processors are actually the same thing. This is actually Moore's Law at work, and so we call this lesson the Mike Moritz Corollary to Moore's Law, because we didn't make it up. There's a great story that goes with it. Around the time that Mike Moritz and Doug Leone took over running Sequoia Capital from Don Valentine, Mike looked back on the performance of the past couple of Sequoia funds that had Cisco, Oracle, Apple, these unbelievable venture returns, never-before-seen venture returns. Uh, and they were asking themselves, going, "You know, my God, what have I got myself into? How are we ever going to top this?" Which would be a reasonable and rational way to respond, looking at the greatest returns in history in an asset class and thinking, h- "Okay, well, where do we go from here?" But he realized, as long as Moore's Law continues to hold and computing power continues to get exponentially cheaper, the markets that technology can attack should keep getting bigger and bigger. So to put some more numbers behind this, in 1990, a PC with that 486 processor cost $2,000, and only about 42% of America, that's just of America, used a computer at all.
- DRDavid Rosenthal
Which is, that's wild. [chuckles]
- BGBen Gilbert
Right? That recently. Uh, so today, a smartphone with, you know, literally a million times of the computing power costs $200, which is one-tenth the cost, and over six billion people have one. So of course, this trend led Sequoia to go on to invest in Google, WhatsApp, Airbnb, Meituan, ByteDance, global markets-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... uh.
- DRDavid Rosenthal
But I think this is, like, this insight that, that Mike had originally of, like, "Oh, as long as Moore's Law holds, yeah, there'll be ups and downs in the market, like we've observed in the past year, but technology should always be able to access bigger and bigger and bigger markets if the cost of compute keeps declining."
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
And it's played out.
- BGBen Gilbert
And for those of you in the room who wanna get, like, really pedantic, y- you have to sort of slightly adjust Moore's Law in order to say that it still holds. You change the definition a little bit, but when you look at, like, what Nvidia has been doing with GPUs, the, it is totally fair to say that this, um, 10X improvement in computing every five, six, seven years, that is absolutely still happening, and so therefore, the lessons you should take from it on the macro technology scale are to stay an optimist.
- 16:42 – 22:06
Lesson 3 — Let your winners ride (Sequoia sells Apple; Amazon’s decades of compounding)
- DRDavid Rosenthal
Yep. Indeed, indeed. All right, so number three: we talk about Sequoia a lot on Acquired. They've been involved in so many great winners. They've built such a great, great franchise. But lest you think that they are just pure geniuses-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... they can do no wrong, the lesson number three, which is cue the All-In theme song here, let your winners ride. Uh, this comes from Sequoia's biggest mistake in history, which-
- BGBen Gilbert
Their biggest mistake in history in one of the most successful companies, if not the most successful [chuckles] company in history.
- DRDavid Rosenthal
Yes, and, uh, I think this is probably the single biggest mistake, period-
- BGBen Gilbert
In investing history
- DRDavid Rosenthal
... in investing history.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
I don't see- I don't think there's any way that it can't be, definitionally. Uh, so let's go on to the next slide. Now, to be fair to Sequoia, they're playing on the stage where they could make a mistake that it was the single biggest in history, so they're doing something right. But, uh, so the story goes: one day in the late 1970s, I think it was 1977, uh, Nolan Bushnell called up, uh, who was the CEO of Atari, called up Don Valentine, his main venture investor, and Atari was actually the very first Sequoia Capital investment after Don started the firm. And he said, "Hey, I've got this young kid that's been working for me here at Atari. Uh, his name's Steve Jobs, and he started a company, and I think you should meet him, and I think you should take a look at him." And, uh, Don talks about this in the way that only, only Don can. Says that, uh, Steve came in, and he, quote, "looked like Ho Chi Minh." [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
And, uh, and I think this was during the phase where he wasn't showering, so, like, he smelled really bad. [laughing] But, uh, they funded him anyway. Uh, Don invested 150,000 in Apple Computer in 1977, and then 18 months later, they had an opportunity to realize one of the greatest venture returns of all time. They made a 40X on that investment. They sold their shares for $6 million before the IPO, and they completely cleared out their position in Apple.... And of course, we all know what happens since. [laughing] And, uh, we, uh, the next slide, we, uh, we, we just for fun, we, we, so we put on where, [laughing] where our friends Ted and Todd over at, uh, at Berkshire, uh, with Warren's approval, started buying and, uh-
- BGBen Gilbert
You have the hare beating the, uh, or you- the, the tortoise certainly beating the hare on this one.
- DRDavid Rosenthal
The tortoise beat- beating the hare indeed.
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
And, uh, yeah, I think they did better than, than Sequoia did on this one.
- BGBen Gilbert
So now, you know, because we use one gigantic, global, most successful technology company of all time to illustrate this, we figured we'd pick another example, too, just to show it's not an isolated incident. So, uh, Amazon IPO'd at $8 per share, and just for fun, I want to point out that subsequent run-up there in the dot-com bubble to $120 a share, then, of course, that crash from the dot-com bubble. So 2001 to 2003 there, uh, looks like a pretty amazing buying opportunity. But actually, that's a ludicrous statement because every year for the next two decades was a great buying opportunity in this company. And so what are we illu- illustrating here? If you had held that Amazon IPO share for 13 years, you would have a nice 10X from the beginning of this graph to the end of this graph. But you really should have continued to hold.
- DRDavid Rosenthal
[chuckles]
- BGBen Gilbert
If you zoom out here, so you can see the, the little crosshairs there illustrate, uh, where the previous graph ended, basically any growth of the stock before 2012 just looks cute. And, uh, you know, at that point in 2012, I think we all would have described Amazon as a mature company. Uh, it was almost 20 years old. If you had just held for another 10 years, then instead of that 10X in 13 years, you could have had a 170X. And of course, the difference between those two on an absolute dollar basis, you know, whatever you invested at IPO, is incredibly meaningful.
- DRDavid Rosenthal
Incredibly meaningful. And, and, uh, so the key insight this, and, and letting your winners ride and, you know, when to let your winners ride and when not, it's not your growth rate in any given year that matters. Frankly, that doesn't matter at all. Uh, what matters is how many years of growth do you have left? Like, that is the ultimate question. And in the case of Amazon, in the case of Apple, if you have decades of growth left, again, that, that's all that matters. [chuckles]
- BGBen Gilbert
It leaves you in this interesting place where you're thinking, "Well, okay, do I always continue to hold?" Um, and this is why venture capitalists tend to be totally obsessed with market size. Because it's this idea that, like, you basically need to be able to run forever, or decades and decades and decades and continue to grow, and those markets continue to be this globally addressable, m- absolutely massive opportunity. Because th- the compounding-- the funny thing about it is, all of the value tends to show up in the out years. And the trick is figuring out, like, "Okay, when am I in the out years?"
- DRDavid Rosenthal
Yep. [chuckles]
- BGBen Gilbert
And so there's this great, uh, l- like everything in, uh, in start-ups, there's a great Paul Graham quote to go along with it. Of course, he remarked in December 2020 that an astonishing ninety-nine point nine eight of Amazon's growth had happened since IPO. And, uh, I, I just love this, 'cause it... I, I, I actually printed it out, and I have it at home. It reminded me, like, how much-
- DRDavid Rosenthal
Oh, you did tell me that.
- BGBen Gilbert
Yeah. Uh, just how much running room Amazon had ahead of it after its IPO.
- 22:06 – 29:07
Lesson 4 — Nothing can stop a will to survive (Nvidia + Zoom founder mindset)
- DRDavid Rosenthal
All right, number four, [chuckles] one of our very favorites. I love this picture of Jensen Huang showing off his Nvidia logo tattoo that he has on his shoulder. [chuckles]
- BGBen Gilbert
I think it's from the Tegra 2 processor line. Like, name a more badass tech CEO than Jensen Huang.
- DRDavid Rosenthal
I think he might be more badass than Elon. I, I mean, they both wear leather jackets.
- BGBen Gilbert
There you go.
- DRDavid Rosenthal
So our number four lesson is: Nothing can stop a will to survive. And the reason that we put Jensen on this slide, one, is because his will to survive is unparalleled. Uh, we'll tell the story in a minute. Um, but two, we actually started our two-part series on Nvidia with this great quote from him, which is that, "My will to survive exceeds everybody else's will to kill me." [laughing]
- SPSpeaker
[laughing]
- DRDavid Rosenthal
So one of the key things that we realized, looking back on all the stories that we've told, um, we kind of have a formula at Acquired. It just happens to be, like, the best formula of all time, and it's Joseph Campbell, and it's The Hero's Journey. And all the great companies, whether it's Apple or Amazon or Nvidia or TSMC, they're all the hero's journey. And the thing about the hero's journey is you face adversity along the way. You're fighting a dragon, it looks like you're gonna die. And, uh, the thing about company building is that, unlike fighting dragons, game over only happens when you decide to quit as a founder. Like, you, you can't get eaten by the dragon. Like, the market can turn against you, but the market can't actually eat you. There is always, always a way to survive. It's just a question of: Do you have the will to do that? And, uh, the Nvidia story just illustrates that better than anybody. So when they were funded, Sequoia funded them, uh-
- BGBen Gilbert
Shocking.
- DRDavid Rosenthal
Shocking, right? [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
It was, uh, Jensen, uh, and a couple of his buddies from Sun. Jensen was at LSI Logic, and, uh, his two co-founders were from Sun. This amazing technical team, this new market, graphics accelerating and gaming on PCs, giant wave led by Doom and home adoption of PCs. This was like a, you know, great team to pursue it. Can't-miss investment.
- BGBen Gilbert
No-brainer venture bet-
- DRDavid Rosenthal
No-brainer
- BGBen Gilbert
... which is why the venture capitalists bet on everyone over and over and over and over again.
- DRDavid Rosenthal
Which is the problem with no-brainer venture bets. Everybody thinks they're no-brainer venture bets and tons of competition emerges.
- BGBen Gilbert
I think eighty separate companies making graphics cards got funded?
- DRDavid Rosenthal
Yeah, it was seventy or eighty separate companies making graphics cards all got funded, which sounds quaint today, but that was a lot [chuckles] back then. And then it gets even worse-... Intel came after the graphics card industry and decided that they were gonna integrate graphics into the motherboard, which they had done with, you know, sound chips and networking chips and everything else. Like, how many people have a s- dedicated networking card in their PCs these days? [laughing] You know, nobody.
- BGBen Gilbert
So, so put yourself in Jensen and Nvidia's shoes here. You just got funded. It's not a, a lot of capital. A zillion other people just got funded with the exact same amount of capital that you have. Uh, we don't have this in our sort of discussion here, so I'm, I'm freewheeling, but, um, it's worth knowing that Nvidia's original approach to how they wanted to render graphics on cards was actually b- basically wrong. It was novel, but it was, like, not the way that everyone else decided to go, and so it was difficult to program for. It was-
- DRDavid Rosenthal
That's right. They used quadrilateral angles, ah, qui- quadrilaterals as polygons instead of triangles as polygons. [chuckles]
- BGBen Gilbert
Yes, which is-
- DRDavid Rosenthal
Not a good idea
- BGBen Gilbert
... not as efficient as a three-sided shape. Anyway, uh, had, had a lot of merits. So not only are you not on the same footing as everyone else who you're competing against for a pure commodity on a thing that takes 18 to 24 months to ship, you are a step behind 'cause you've burned a bunch of capital chasing the wrong approach first.
- DRDavid Rosenthal
Yep, totally. So what did they do? Uh, Jensen laid off 70% of the company, and they did two completely crazy things that if you're not just focused on survival, like, you wouldn't do these things. One, he decided that the only way they were gonna win and survive was in this brutal commodity industry, was by shipping six months ahead, shipping new technology six months ahead of their competitors. And the way they did that was they decided they were just gonna YOLO it. [chuckles] So they designed all of their chips in software emulation, as opposed to what everybody else did, which was they'd work with their foundry partners, and they'd get some prototype chips made, and they'd send them over from Asia-
- BGBen Gilbert
They'd test them
- DRDavid Rosenthal
... and they'd test them out. They'd make sure they worked. Nvidia said, "No, we, we don't have time for that."
- BGBen Gilbert
They literally only ever ran the chip in software, and then once that passed, sent it to the production run.
- DRDavid Rosenthal
And then the other thing that they did, which we didn't talk about this as much on the episode, is, uh, of course, you're gonna have a lot of errors and defects by doing this. So, like, a large percentage of those chips... Like, the chips worked sort of in aggregate, but, like, a lot of functions that you would wanna call as a game developer just didn't work. [chuckles] So they were like, "Ah, it's a feature, not a bug. We're gonna go simplify your life as game developers." [chuckles]
- BGBen Gilbert
So they would ship them broken, and they would just disable that. They would make it so that you couldn't access that in software, and then they would go around all the developers and say, "Yeah, you just actually don't wanna use that blend mode." [chuckles]
- DRDavid Rosenthal
Trust us.
- BGBen Gilbert
Trust us. Like, uh, "I, I feel like instead of all 24 blend modes, those eight are just gonna be really good, so you should figure out how to write your, your games using just those eight blend modes." And like, I can't imagine, unless you are actually forced with your back up against the wall, to decide, "Sure, I'm gonna only ever emulate my chips before running a production run, and sure, I'm gonna ship them broken and then tell the market to deal with it." Like, the- these are, uh... I mean, I guess it goes back to the necessity is the mother of invention. There was a lot of necessity. [chuckles]
- 29:07 – 33:21
Lesson 5 — Strength leads to strength (reflexivity and compounding resources)
- DRDavid Rosenthal
All right. Number five.
- BGBen Gilbert
[exhales] Strength leads to strength. So there's a chance that we picked this one mostly just so we could show Marc Andreessen on this very, very large screen, uh, on the cover of Time magazine at the height of the dot-com mania, on a throne, uh, barefoot. [chuckles] Uh, simpler times.
- DRDavid Rosenthal
I feel like there needs to be some sort of, uh, similar image for 2021.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
There we go.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
I have to think about what that is.
- BGBen Gilbert
Yeah. We'll have a little contest later.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
Uh, so longtime Ac- Acquired listeners will know this one well. This really starts with the idea of reflexivity. So if you go acquire new resources, your company, um, you know, if you go get more capital or that next most important customer, uh, or a, a, a great key hire, you bring in the right executive to your team, you are now, by definition, more valuable than you were before you acquired that resource. And so the question becomes, well, how do you leverage your now more valuable asset into getting the next resource and becoming even more powerful, even more successful? And an extreme example that, uh, I always think of about this comes from a conversation that I had right here at Capital Camp last year, uh, with Michael Mogensen, which was, if you looked at Tesla's market cap in 2020, you would say that there's no way they're worth that, and that would be a very reasonable thing to say. But what they definitely did do is use that share price to sell new shares, uh, at very little dilution and raise over $10 billion of cash to the balance sheet that year. So whatever you thought they were worth, they're definitely worth more now because they have a fresh $10 billion in cash, and they know how to use it. So it really comes down to sort of the ability to uniquely marshal resources-... And to bring it back to Marc Andreessen, in 2009 when a16z raised their Fund One, they came out swinging. For folks who were sort of observing the tech industry at this point, they raised three hundred million dollars for Fund One.
- DRDavid Rosenthal
In 2009.
- BGBen Gilbert
In 2009. So Marc and Ben knew this principle very well. Uh, they realized when, "We made this huge splash, we've got this big brand. People already think we're, like, a top venture firm just 'cause we did this crazy thing out of the gate. How do we solidify that position?" So the very next year, they raised a six hundred and fifty billion dollar fund. It- million.
- DRDavid Rosenthal
Million. [chuckles]
- BGBen Gilbert
Million.
- DRDavid Rosenthal
[chuckles]
- BGBen Gilbert
Sorry, I forgot what decade it was. [laughing]
- DRDavid Rosenthal
We're not in 2022 yet.
- BGBen Gilbert
No.
- DRDavid Rosenthal
[chuckles]
- BGBen Gilbert
But, I mean, as you can tell, like, they, they've basically kept going with this mindset of-
- DRDavid Rosenthal
Just yesterday, they raised another four and a half billion dollar crypto fund.
- BGBen Gilbert
And they're at somewhere between thirty and forty billion under management now, uh, in, in what? Thirteen years since founding. They, they basically never, uh, took their resources and, and took that as, like, a static notion of like: "Oh, good, now we can, you know, do some interesting things with this." They basically always s- looked at everything they had and say, "Okay, we're in a strong position. How do we get stronger? How do we do more faster and, and compound what we have?" So I think there's really something to just always thinking, "Okay, I, I just got more valuable, and that puts me in a position to get even more valuable again," and always just be really thoughtful and super aggressive about seizing that next opportunity.
- DRDavid Rosenthal
The other example that we have to mention on this one from, uh, the Acquired canon is literally the OG, OG, OG American capitalist business, which is Standard Oil, did this... ran this playbook to a T.
- BGBen Gilbert
It's like the OG-
- DRDavid Rosenthal
John Rockefeller was-
- BGBen Gilbert
When you say OG, like, he's, like, actually a gangster. [chuckles]
- DRDavid Rosenthal
[chuckles] He does. He may, he may actually have been a gangster. Uh, you know, he was never satisfied. No matter how big Standard Oil got, it was never big enough.
- BGBen Gilbert
No matter what competitor he would acquire into the fold, uh, uh, by whatever means necessary, or no matter what railroad, uh, he just did a, a-
- DRDavid Rosenthal
A deal
- BGBen Gilbert
... a deal with, um, he would always use that to say: "Okay, tomorrow morning, I wake up, and we figure out how to use my, my new, more valuable company."
- 33:21 – 36:25
Sponsor break: Mystery and the business of employee engagement experiences
- DRDavid Rosenthal
All right, for our next sponsor, we have Mystery. This is so cool. I feel like Mystery has really, like, come out of in some ways and grown out of the Acquired community and built just a juggernaut. Mystery has built the leading online platform for team events and employee engagement. You know all those Zoom happy hours you've been doing with your team for the past few years, the Netflix parties or whatever, and how they really, really are not fun? Mystery fixes that, makes them awesome. It is magical! Like, you have to experience it to understand. So we are gonna do a Mystery for the whole Acquired community. This is gonna be great. This might be the largest Mystery ever, [chuckles] and they've done some really, really large ones, trust me. So on Thursday, July 7th 2022, we are going to do an Acquired Mystery event for everyone. Ben and I will be there, and you can sign up and join at trymystery.com/acquired. And in true Mystery fashion, what we are doing will be a surprise, but I can promise it will be really, really, really awesome. At this point, I think Mystery has got to be the largest or one of the largest online event operators in the entire world, or if not close to it. They manage events for hundreds of thousands of employees at companies like Amazon, Microsoft, Apple, Tesla, McKinsey, Uber, Twitter, Ford, Stripe, Starbucks, Fidelity, Convoy, Modern Treasury. The growth has been astounding, and what's even cooler, it's actually been accelerating as the market has turned in the past few months, and companies spending smartly on employee engagement has become even more important. Before Mystery, you had to deputize some poor team member to do these events, to plan them. It was a thankless job with no upside, on top of your main job. Nobody wanted to do it. Mystery takes over one hundred percent of that. It is their full-time job. They are best in the world. Before Mystery, companies would spend all this money on team events, employee engagement, and it was just like going into a black hole. You didn't know if it was helping your team be more engaged and happy, or even hurting, God forbid, or had no impact. You had no idea. With Mystery, they actually use software and surveys to measure [chuckles] the impact of these events. Imagine that on your team. Imagine that, understanding the impact of your spend on these things, on your employee engagement, your workforce morale, and based on the data and the results they get, they can then actually tailor the events and make them even better for your team. So it's just like, it is a no-brainer to do this. So Thursday, July 7th, you sign up in advance and then, and then go to trymystery.com/acquired. You can also get their awesome three events for the price of one for your team, special deal for the Acquired community. This is going to be super cool. Sign up, we'll have a blast, and, uh, this will be a great way to close out the season. Thank you, Mystery. All right, number six. This is
- 36:25 – 39:50
Lesson 6 — It’s never too late (waves of tech + Morris Chang founding TSMC at 56)
- DRDavid Rosenthal
another one that is, uh, near and dear to my heart. It's never too late. Uh, and there are actually two meanings, uh, to this lesson. One is also another great Marc Andreessen, um, piece of wisdom. So there's a great, uh, famous quote of his from a interview, I think this was in 2014, that he did, um, where he said: "I came out here in 1994 to Silicon Valley, and the Valley was in hibernation. My big feeling was I just missed it. I missed the whole thing. It had happened in the '80s, and I got here too late, and Silicon Valley was over." And obviously, that was completely not true. [chuckles] And, um, what's cool about this is that, like-
- DRDavid Rosenthal
... Silicon Valley and technology moves in waves. It's related to Moore's Law. Every time there's a 10X in computing, there's a new market, there's a new paradigm, there's a new technology that gets created. And so, yes, Marc was right. He missed the PC wave. It was too late for that, but he was right on time for the internet wave. And as long as Moore's Law holds, if you work in technology, if you invest in technology, if you build technology-enabled products, it's never too late. [chuckles] You are always right on the cusp of the next generation that's coming. The other meaning of it's never too late, uh, folks who are viewing the video and here, here in the auditorium will notice we have not Marc Andreessen on this slide, but Dr. Morris Chang, the founder of TSMC. And so this is, I think, the other lesson that, um, that I've really taken from Acquired, which is that, uh, uh, on the- in this vein, which is that Morris Chang was fifty six years old when he founded TSMC, and TSMC is today, I believe, the 11th most valuable company in the world.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
And it's so easy, you know, the flip side of the coin of there's always another generation, there's always another wave of-
- BGBen Gilbert
And, and we should say, and it may be the thing keeping geopolitical tensions at rest.
- DRDavid Rosenthal
Right. [chuckles]
- BGBen Gilbert
Like, it, it may be the force that nobody wants to destabilize, and therefore, we have peace. Like, i- it's not just a company.
- DRDavid Rosenthal
But it's easy to think, you know, if you listen to, to Marc or that there's always another wave, that's for young people. Like, it's, it's Steve Jobs, it's Mark Zuckerberg, it's Vitalik Buterin, it's these young kids who get these new waves of technology. And the reality is, that's just not true. It's just a mindset. Like, you have to be willing to dive in and do it, and you can do it at fifty six years old [chuckles] and still build the 11th most, most valuable company in the world.
- BGBen Gilbert
Wh- when we were doing this, um, you know, putting this together, I was arguing with David that, like, this isn't novel. You know, th- this is only novel recently. Like, if you think back to what venture capital was in the, the '60s and '70s, it was funding veterans of the Ciscos of the world, uh, and, and, you know, the, the Fairchilds of the world, who had designed, you know, five chips before, to go start a new company and build the sixth chip of their life, you know, in their fifties.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
And it's only the advent of the internet with cloud computing, with, you know, super low cost to start a company, that there has been this wave of, uh, very young founders creating these consumer internet companies. But that's actually a blip in history. Like, the, the- it's, it's funny that now the pendulum has swung so far to the lore being, "Oh, these young hotshot founders," that we have to even make this crazy point of, wow, a fifty-six-year-old can start an important world-changing company.
- DRDavid Rosenthal
Yep. Yeah, the Trader Seight were, you know, not in their twenties. [chuckles]
- 39:50 – 45:50
Lesson 7 — Don’t mistake options for cash flow (venture as options, but a multi-turn game)
- BGBen Gilbert
Yes. All right. This is a familiar face that many of you will recognize. Uh, point number seven is: don't mistake options for cash flow. This is from our episode with Michael Mogerson, who we mentioned we met here last year at camp. So what do we mean by don't mistake buying options for investing in cash flow? Well, there's this word, 'investing.' It's come up a lot this week. It is used for multiple purposes. This is sort of an overloaded word, and classically defined, investing, in the Ben Graham sense, is that you are looking at a series of cash flows, uh, that a business generates from today into the future. You apply some discount rate, you value those, you know, cash flows, uh, at what they're worth in this present day. And you look at things like characteristics of the business, like potential margin expansion or their growth rate, and you make all sorts of assumptions, uh, based on, again, the cash flows that you know to exist today, and you try and come up with some price that that business is worth, and you try and put some money in and invest at that price.
- DRDavid Rosenthal
But, Ben, that doesn't sound at all like what we do. [chuckles]
- BGBen Gilbert
[chuckles] No! David and I are professional seed-stage venture capitalists, and people call what I do investing, but while it's the same word, it doesn't involve literally any of the things that I just mentioned, you know, in that, that previous comment. I- i- it is funny to me that, that it is, it is called investing. Like, it is- it's typically just a founder and an idea on a napkin. So how can you make any assumptions about the cash flows? And-
- DRDavid Rosenthal
And then we're like, "Well, that founder and that idea is worth twenty million dollars." [chuckles]
- BGBen Gilbert
Oh, it's so funny to me that, that people think it's complete voodoo math, how, uh, how venture capitalists come up with, with valuations. This is where I think that the, sort of Michael's comment and his, his, his thoughts on this, um, make a lot of sense, because once you admit that there is no DCF and you stop trying to say: "In what world is that worth twenty million dollars or ten million dollars or seventy million dollars at, at-," an idea stage which we've seen recently. Well, then, if you're willing to let that go, and you meditate and take your deep breath and say, "Okay, well, how do we price this thing then, if it's not based on, you know, classic investing DCFs?" Really, venture capital in the early stage is not at all cash flow-based investing. It's actually options investing. And as you sort of think about it that way, the, the world starts to make more sense, because how do you value an option? Well, you look at the range of potential outcomes and the probabilistic likelihood of that option and the entire range of, of outcomes, which is actually what venture capitalists are doing, whether they're cognitively thinking about it that way or not. You're basically saying, "What's the chance that this is a billion-dollar company or a hundred billion dollar company or zero?" And of course, this leads to the idea that you need diverse portfolios rather than just investing in single large companies, because this range of potential outcomes is so wide that you need to find ways to sort of smooth that risk while still benefiting from the potential of an asymmetric return.
- DRDavid Rosenthal
It also completely explains why venture capitalists are so obsessed with TAM. It was one of the things when I first got into the industry, I was like: "Why does everybody care so much about the TAM? Like, aren't there other aspects that you should care about?" Well, that's what's most sensitive to the valuation of the option. [chuckles] It is the, uh, the magnitude of the outcomes that, uh, that are possible. Like, you can, you can then debate the probable weighting of it, but, uh-... the higher the magnitude of the outcomes, the more valuable the option is gonna be.
- BGBen Gilbert
Right. If I think there's some X percent chance that this thing becomes the next Apple, what should I pay for it now? That is actually the question you are asking, rather than DCF-ing your way to something there. But of course, it's, it's sterile, uh, and kind of terrible to talk about people's life's work as buying an option, so there's an important corollary to this.
- DRDavid Rosenthal
Yes, and this is from our friends over at Altos Ventures, and in particular, Ho Nam, uh, and he makes this great point. He actually just remade it on Twitter the other day, which is, yeah, okay, like, you probably should think about valuations and venture capital investing more like options than you do thinking about investing pu- in public companies on a cash flow basis. But don't mistake startups for lottery tickets. [chuckles] These, these may be options to you from an investing standpoint, but these founders are real people with families, and lives, and bank accounts, and employees. And the other, um, the other thing that is fundamentally different about venture capital investing versus, say, public market investing, is it's a multi-turn game, [chuckles] not a single-turn game. And so how you behave and how you treat these founders, even if it's clear that your option is gonna expire worthless, you don't know what those founders are gonna go do, go do next. You don't know who their friends are. You don't know who they're gonna talk to. You don't know what the other investors around the table might think about the way you behaved or didn't behave during that period of time. So it's this interest- I think these two dynamics really explain the culture in Silicon Valley a lot, which is you're doing options-based investing, but it's a multi-turn game.
- BGBen Gilbert
Yeah. And in practice, nobody's actually just doing one or the other. Everyone's style of investing is somewhere on the spectrum here, because other than the pure play value investors who are, you know, looking at the, the, the book value of a company, or the seed stage investors or the pre-seed, like me, uh, who are looking at a napkin sketch a- and a founder with an idea, or sometimes even no idea, most people are actually in the middle. So most people have to blend some notion of: What are the chances this could be big, and how big, with the idea that, hey, they're actually generating revenue and sometimes even, you know, cash flow as a startup, and I actually can apply some, um, multiple to that. And obviously, the multiple can, uh, can change rapidly on you, and then you have to adapt. But, um, everybody's doing a little bit of one and a little bit of the other.
- 45:50 – 50:35
Lesson 8 — Focus on what makes your beer taste better (AWS and the power of unregulated utilities)
- DRDavid Rosenthal
All right, for our next lesson: Focus on what makes your beer taste better. So we've brought up, uh, this little vignette on a whole bunch of episodes on Acquired, but this is an image of Jeff Bezos at the 2008 Y Combinator Startup School, which was a l- which is a, um-
- BGBen Gilbert
Which is a moment in history.
- DRDavid Rosenthal
A very important moment in history. So YC at least used to, I don't know if they s- they still do, it's probably virtual now-
- BGBen Gilbert
Yep
- DRDavid Rosenthal
... would put on these physical events in Silicon Valley.
- BGBen Gilbert
I went to one in the Bill Graham Civic Auditorium.
- DRDavid Rosenthal
That's right. I went to one, too. Um, and they would bring founders and, you know, luminaries to come and talk and inspire the next generation of founders and basically to inspire applications to YC. And so in 2008, Bezos came, and this was right after AWS had launched, and he used it as a, uh, marketing opportunity to market to all of these startups and future startups about why they should build on AWS instead of rolling their own infrastructure.
- BGBen Gilbert
Which we should say, this strategy worked ludicrously well. Like, AWS got probably a five-year lead on cloud by piling people on the plane from Seattle, going down to the Bay Area, evangelizing like crazy to all these startups.
- DRDavid Rosenthal
To all these tiny startups, who, in that very room at the 2008 YC Startup School, a startup that had not even been built yet was Airbnb. The three Airbnb founders were at that YC Startup School, and that's why they decided to apply to YC that year, and the rest is history.
- BGBen Gilbert
Worked for Bezos, and it worked for YC, too.
- DRDavid Rosenthal
Indeed. But if you go watch the talk, which I highly recommend-
- BGBen Gilbert
Great talk
- DRDavid Rosenthal
... it's really great, um, Jeff uses this sort of, uh, odd analogy for AWS, where he talks about European beer distilleries, beer breweries, around the turn of the 20th century. And you're like: "All right, Jeff, where, where are you going with this?" And, uh, the point, the analogy he makes is electricity had just been invented, and this was this massive boon-enabling technology for consumer, you know, products, CPG, like, like beer. Uh, they could now brew vastly more quantities of beer than you could before using electricity. But the first breweries to adopt it, they built their own power generators. They made their own power. And, uh, that, you know, worked fine for a few years, but it was super capital-intensive, required all this operational labor to run the power generators. And then the utilities companies came along, and the next generation of breweries, they didn't make their own power. They just rented it from the utility companies, and they, you know, ran roughshod over the first generation of breweries to use power because guess what? Whoever makes your electricity has no impact on how your beer tastes. Literally, making it yourself does not make your beer taste better.
- BGBen Gilbert
But it does raise your cost structure.
- DRDavid Rosenthal
It does raise your cost structure. And so Jeff's argument to all of these startups was, you know, "Focus on what makes your beer taste better." So there's two lessons here. [chuckles] One is what he's arguing, that as a startup, you should focus solely-- not just a startup, any company, you should focus solely on the attributes of your product that your customers are gonna care about. Everything else, your infrastructure, doesn't matter.
- BGBen Gilbert
Outsource.
- DRDavid Rosenthal
The second, [chuckles] perhaps more important takeaway from this, if you look at what Bezos did, not what he said, is that being a utility company is an exceedingly, exceedingly great business. [chuckles] And particularly being an unregulated utility company.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
And, uh-
- BGBen Gilbert
I mean, that's the reason that Amazon became a profitable business.
- DRDavid Rosenthal
It absolutely is. And, and not just Amazon. If you think about, you know, Square-
- BGBen Gilbert
And I should say profitable company, you know, they, where they've piled up too much cash to reinvest all their cash flows.
- DRDavid Rosenthal
But if you think about this model of, like, what is an unregulated utility company in technology?... it, it can be so defensible and powerful. Like, that's what Square is, that's what Shopify is, that's what I think two-thirds of our sponsors on Acquired are. [chuckles] You know, that's what Vanta is, Modern Treasury, Vouch, uh, even Mystery, all of... You know, if you can provide a critical, mission-critical piece of infrastructure that other companies can use, that they need, but doesn't make their actual beer taste better, it's a great place to be.
- BGBen Gilbert
Outsource it. I was thinking about this, um, just to go off script again 'cause it's fun up here. I, I think the- this is actually the same thing as, like, the economic theory of specialization of labor, but applied to businesses. Where it's basically well understood at this point that, um, GDP tends to go up when people get really good at a thing, focus their time on doing that thing, and then turn to their neighbor, who's good at a different thing, to provide that service back to them, rather than everybody doing everything for themselves in their lives. And this is just that on a business scale.
- DRDavid Rosenthal
Totally.
- 50:35 – 58:10
Lesson 9 — Scale up or niche down (Brooks’ focus and NYT’s global scale; avoid the middle)
- BGBen Gilbert
All right. The next one is one that is, uh, near and dear to my heart, and, uh, I had a lot of fun illustrating this, so bear with me on some of these visuals. So this one is, uh, scale up or niche down, and I wanna start first by talking about niching down. So, uh, this photo is, uh, uh, ripped with love from Brooks Running's website. It's a great Berkshire company. We had Jim Weber, the CEO, on stage with us for our arena show a couple weeks back in Seattle. So for folks who don't know, uh, Brooks is a pretty special company. Back in 2002, when Jim came in, uh, they weren't, frankly. Um, they were everything to everyone. They didn't just make running shoes, they made everything shoes, including twenty dollar shoes that you would wear at a family barbecue. And they made all sorts of apparel for all sorts of sports. Um, the company was losing money, I think five million a year in the red. They were doing about sixty million in revenue, but obviously not able to, to capture a lot of value out of that. And so when Jim came in to turn the company around, the first thing he did was decide: we are going to be a running company, and we are going to be a running company for performance runners, for people who care about their running. And so immediately went to a bunch of their distributors, big box stores, slashed entire product lines, so they went from sixty million in revenue down to thirty or something like that. They got rid of all their unprofitable, uh, uh, product lines. They got rid of anything that wasn't performance running. Uh, they, they blew up their whole distribution channel, and they started caring only about these performance running shoes, focusing on R&D, and really investing in building brand with runners. Well, I'll save you the whole story and just flash forward twenty years. It worked. They grew slowly at first, but then over time, um, it, it really started to pay off, and they really started to be known as one of the best running shoe companies in the world. In fact, they're, they're one of the top couple at any big marathon that you'll see when they take the high-speed cameras. Brooks, Brooks, Brooks, Brooks, and of course, some ASICS and some, um, some newer brands, too, and, and of course, the, the, the new crazy Nike shoes. But they just realized, we are not going to beat Nike. Like, we are not going to beat Nike at the everything game, so we have to niche down and play a different game. So I mentioned that sixty million to thirty-ish million in revenue. Last year, they did close to one point two billion, and had a great year last year through the pandemic, are- and are continuing to ride this wave of running becoming one of the, the largest and fastest growing, um, athletic apparel opportunities in the world.
- DRDavid Rosenthal
It's such an amazing compounding story and Berkshire story. They've been growing at thirty to forty percent a year for, like, the last twenty years. It's amazing. [chuckles]
- BGBen Gilbert
Duration.
- DRDavid Rosenthal
Duration.
- BGBen Gilbert
So it also works to scale up. So a quick case study: we did an episode on The New York Times a couple years ago, and while every mid-sized newspaper in the US was going bankrupt, thanks to disruption brought by the internet, The New York Times became gigantic and a healthier business than ever. And the Times saw the idea to be sort of the one national brand and one of the few trusted global brands in the space. The internet, as we know, can be brutal to people caught in the middle because it enabled everyone in the world to access any reporting, basically for free, pretty easily. And so then whoever has the best reporting in the world on global or national stories, of course, sort of gets all of the traffic, and everyone in the middle is stuck. So this obviously has an enormous cost associated with it. You know, you need to basically hire all the best reporters, you need to have the most reporters, you need to build out, I mean, massive technology investments. The, The New York Times is truly a technology company at this point. So super high fixed costs. So you've got to believe that you're actually going to be able to operate at that global scale to justify all of these fixed costs. So the point here is, sure, you can niche down, sure, you can scale up, but you really don't want to get caught in the middle. Now, on the media side, it's kind of funny. You've got these tiny little businesses like Acquired, Stratechery, uh, our good friends at Colossus. The internet, while being extremely punishing to the middle, also enables these, these deep niches to form. It's sort of this interesting barbell effect, where if you keep your cost structure low and you're super, super focused on a niche, you can aggregate all the people who are weird on the internet about your niche in the entire world, and basically aggregate them together and create community of people who like three-hour business technology podcasts. And I, I think, like, it, it's important to realize that this may not happen overnight. Like, for Acquired, it's taken seven years for us to get to a quarter million subscribers. But if you're just, like, repeatedly loud and specific about the value proposition that you can bring to people by following your media publication, people find their way. You know, time and enough distribution and enough content kind of does its thing. So I, I, I always sort of focus back on-... I, I'm glad that we didn't decide to be, y- y- you know, a mid-scale media company. [laughing] And it's really like, all right, it's, it's, it's you and I and some microphones, and The New York Times can have that market.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
So, uh, a couple other points here. I don't think this is unique to media. I think media was the first to experience this sort of squishing in the middle, but it's gonna happen to everything. The, the internet is still rippling out in all of its effects. I mean, you, you can see it in venture capital for sure.
- DRDavid Rosenthal
For sure.
- BGBen Gilbert
You've got big funds like Sequoia and Andreessen that get massive, and then niche funds, especially for the early stage, emerge, and there's great opportunities for small funds who are, are very focused. Those caught in the middle are in a tough spot, and they're super undifferentiated. And you can imagine this happening with universities. Uh, Harvard and Stanford brands are gonna be just fine.
- DRDavid Rosenthal
Mm.
- BGBen Gilbert
Like, those will continue to probably grow in value as they're able to address more and more people using the internet. Obviously, that happens slowly, 'cause no one wants to devalue their brand, but as that becomes more and more widely accepted, I, I think those brands will just continue to get more powerful. Um, you could imagine this happening in a bunch of other industries, too, besides just media, capital, education. So as a final little illustration at this point, uh, I just wanna pull up a couple of, uh, [chuckles] of market cap slides. So in 1997, there were three companies in the, uh, uh, top 10 in the world that were technology companies. Today, it's eight of the top 10. What happened between then and now? Well, the internet penetrated the whole world, and obviously, the returns to scale got massively concentrated here, where you can see that, uh, [chuckles] the, the, the most valued companies in the world, not only are they technology internet companies, they're much more valuable than they were before. So there's this sort of counterintuitive thing, that the internet was a decentralized network. It started as servers at universities, and then somehow it massively concentrated the returns to scale for the platforms that underlie everything that we do all day, every day. And on the flip side, it also enabled the viability of the long tail. It's not, you know, that w- that we have 30 mid-sized retailers in the US anymore the way that we used to. Not at all. There's Amazon, and then there's... How many merchants are there on Shopify now? We've got something like two million Shopify merchants and over 30 million Amazon sellers. Uh, the platformification that the, the internet sort of brought really enabled viability of the long tail at the same time.
- 58:10 – 1:01:04
Sponsor break: Modern Treasury and “APIs to move money” infrastructure
- DRDavid Rosenthal
All right, and for our final sponsor of the episode, we have, as always, our good friends over at Modern Treasury. Modern Treasury is by far the best way to manage your company's payment operations. Their platform allows you to move money within your product using code and not manual finance operations. This is huge. With their APIs, you can move money within your product, which is pretty important for just about anything you would wanna do these days. [chuckles] And gosh, having worked with so many companies, so many marketplaces, especially over the years, this was a nightmare [chuckles] on the back end for marketplace teams of having to manage ledgers, bank accounts, moving money, keeping custody. It was very, very, very difficult. Modern Treasury abstracts all of that, all of that away and enables you, just by integrating their API and managing everything through their best-in-class web apps, you can take all of that complexity of banking rails off of your team's hands and let them do it, probably far better than you ever could, honestly. It's just an incredible company, and it's so cool. They're such a part of the Acquired community. We did our reverse interview LP show with them a few years ago, back when they were a tiny, tiny little company doing $10 million per month in money that they were moving on the platform. Well, fast-forward to last fall when we first started talking about working with them as a sponsor, they were moving $100 million a month on the platform, and now they are moving billions of dollars every month on the platform.
- BGBen Gilbert
It is one of these, like, maturity of the internet things, where first you can move bits, then you can move text, then you can move images, then you can move videos. Then you could programmatically do things like place calls with people like Twilio using APIs, and now you can use Modern Treasury's APIs and user interfaces, for non-technical folks, to literally move money around, and they're so deeply integrated with all these banks that, like, it just works. It's pretty cool.
- DRDavid Rosenthal
It's super cool. So customers like Gusto, Marqeta, Revolut, Pipe, TripActions, ClassPass, BlockFi, LedgerX, Gusto, [chuckles] all the way through to Web3 companies and crypto, all use Modern Treasury and their banking rails to move money around within the apps. So if you're building a fintech app, we used to say, "You definitely need Modern Treasury." The odds are it's impossible that you don't already know about Modern Treasury if you're building a fintech app. But even if you're not building a fintech app, the ability to integrate money and money movement into pretty much anything these days is mission critical, so go check them out. You can learn more at moderntreasury.com/acquired, and when you get in touch, just tell them that Ben and David sent you.
- 1:01:04 – 1:03:12
Lesson 10 — Don’t be talent, own the business (Oprah, Taylor Swift, and owning rights)
- BGBen Gilbert
Thanks, Modern Treasury. All right, coming down the home stretch, staying on the media theme. So we did this episode on Oprah, uh, two years ago now, and, uh, and Harpo Studios, and it was so great. And, um, what, uh, our big takeaway from that was a line that was said to Oprah right as she was starting her own show and made a momentous business decision, which was, "Don't be talent. Own the business." And, uh, [clears throat] the sort of way that I like to think about this is if you wanna be a millionaire in the media business, you should work really, really hard. You should own your craft. You should become must-see content, totally unique, the opposite of a commodity. You should be Steph Curry, Leonardo DiCaprio, you know, what have you.
- DRDavid Rosenthal
... If you wanna be a billionaire in the media business, you should do all of those things, and you should never, ever, ever, ever give away the rights to your content, [laughs] or sell the rights to your content. Uh, and that's, that's what Oprah did. We also told the Taylor Swift story earlier this year. You know, Taylor started as just another country music artist, and then just another pop artist. Uh, and, uh, and then in the past few years, she's completely changed the whole structure of the industry by figuring out ways to get back the rights to her original music, which is an incredible story. Um-
- BGBen Gilbert
And, and this is fairly unique for media, right? Like, for content, it's- this is easier to do than if you were, uh, say, a basketball player.
- DRDavid Rosenthal
Yes. Yeah. It's, it's hard for athletes to do this, at least in their sports, like-
- BGBen Gilbert
Like, athletes can own their personal brand, and they can leverage that into building something on the side, but the thing that they do, they're playing within someone else's game. The interesting thing about content is, you can always just make it your own game because the internet enables this distribution.
- DRDavid Rosenthal
Well, and that's, that's the last, you know, cool thing about this, which is that thanks to Substack, podcasting, YouTube, TikTok, Instagram, it, you know, it's never been easier. You don't need NBC. You don't need Universal Music Group. Uh, in fact, they might hold you back. Uh, anybody can publish anything on the internet.
- 1:03:12 – 1:05:13
Lesson 11 — Be loud and proud about your intentions (long-term strategy filters the right stakeholders)
- BGBen Gilbert
All right, this one is reasonably self-explanatory, uh, but it's another Bezosism, and so, uh, I wanna bring up, in the very first shareholder letter in 1997, uh, he wrote, "Because of our emphasis on the long term," and people probably might know how to recite this by heart at this point, "we may make decisions and weigh trade-offs differently than some companies. We will focus on growth with an emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model." This is absolutely Bezos's way of basically saying, "If you're not on my bus, get off, 'cause this is what we're doing." They stayed true to their word for 20 years without turning a profit. Uh, as we talked about earlier, you could argue they still wouldn't be profitable today if it weren't for AWS. Uh, they've reinvested every dollar of the retail business for two decades. There is zero chance that they would've been able to execute the strategy that they did if it weren't for their ability to be loud and proud about their intentions. And a- as we sort of drift toward the, the close here, uh, I'll be a little bit less bashful about Acquired-specific examples. I've wanted to highlight other businesses, but this one's sort of too close to home. We're obsessed with this idea of treating our audience like they're smart, and this wasn't the fastest path to growth, because I think we could've listened to what everyone told us. "Podcast episodes need to be a half hour. Podcast episodes, you know, need to drop every single week, so you keep this content cadence." But we wanted to be weird on the internet about something, and we wanted to basically be unabashed about it, and so I'd say that the people that we get to interact with now in the, in the community, and all the folks that we met here who, who mentioned, "Oh, I've listened to the show," uh, we ended up with exactly the listeners that we wanted and the people that we wanna spend time with, because there's a long game to play if you're saying, "If you don't wanna be on the bus with us, that is fine. Please get off as soon as possible."
- 1:05:13 – 1:07:57
Lesson 12 — Have fun: joy as an unfair advantage (work harder, market easier)
- DRDavid Rosenthal
Indeed, which is the perfect lead-in to our final lesson from seven years of Acquired. Uh, speaking of getting on the bus, we all need to do that to go to [laughs] -
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... the party. Uh, and what are we gonna do at the party? We're gonna have fun, and that is what this is all about. If you can find something that you can do with your business, with your life, where you have, genuinely have fun doing it, and for other people who do the same thing, it's work, you are gonna run farther and longer and faster and better than everybody else. And then there's actually another, uh, takeaway to this. So we, we put the, uh, an image of, of us and our, our friends Patty McCormick and Mario Gabrielli at our, at our arena show the other week up here. Uh, it was just such a blast. This whole thing, this whole journey has been so fun. Um, but one, you're gonna work harder than people for whom this is work. Uh, and Bill Gurley makes this great point in his Running Down the Dream talk, which we've talked about on Acquired. Everybody should go watch that on YouTube. But the other point is that it's so much easier to evangelize and grow and market and have people attracted to whatever it is you're doing if you genuinely have joy [laughs] in doing it. Uh, and, and joy is not something you can really fake. [laughs] So, um, that's our biggest lesson. We, we have had such a blast doing these past seven years. We've gotten to meet amazing folks, like Patrick and Brent, the whole Capital Camp team, and, uh, we're just so thankful.
- BGBen Gilbert
All right, listeners, hope you enjoyed our talk from Capital Camp. Please let us know your feedback, acquired.fm/slack. Would love to hang out with you in there and hear some of your favorite themes from all the playbooks over 200-ish episodes? I actually didn't count exactly, but it's a lot.
- DRDavid Rosenthal
I didn't either. It's... I think it's well over 200 when you include all the LP episodes.
- BGBen Gilbert
Yeah, it's 250 when, with those.
- DRDavid Rosenthal
Ah, wow!
- BGBen Gilbert
So we definitely skipped a lot. I had 18, and David made me trim it down to 12, so I'm curious if some of the ones that we didn't talk about are ones that, uh, that you wanna bring up.
- DRDavid Rosenthal
I originally wanted 10, and Ben was-
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... fought too hard, that I gave him two extras.
- BGBen Gilbert
Yes. Well, thank you so much for being with us, uh, this season and on these special episodes. It's been an awesome six months. We're super pumped for the next six months, and we have some great stuff planned. With that, our thank you to the Solana Foundation, to Mystery, and to Modern Treasury, and we'll see you next time.
- DRDavid Rosenthal
We'll see you next time.
- SPSpeaker
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Uh. [upbeat music]
Episode duration: 1:07:57
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