We began this series with an essay titled “The smallest market is about to become the largest market.” It maps Maslow’s three-tiered pyramid of human needs - with basic needs at the bottom, social needs in the middle, and self-actualization needs at the top - onto the global economy - with the largest market for products and services addressing needs at the bottom and the smallest market those on the top. It argues that the economy is undergoing a transformation that will result in the pyramid inverting, such that basic needs will eventually represent the smallest market and self-actualization needs, the largest market.
It’s a simple argument with sweeping implications, which I have been busily unpacking. One of the questions it presents us with is: what does the transition look like? Yesterday the economy was a pyramid. Someday it will be an inverted pyramid. Meanwhile, for today and tomorrow and tomorrow’s tomorrows, we are in-between, in a state of becoming, undergoing that geometric transformation: from the pyramid to the rectangle, the half-way point, then from the rectangle to the inverted pyramid. The bottom is shrinking and the top is widening, a little bit every day.
In this post, let’s focus on the middle of the pyramid. If the bottom is shrinking and the top is widening, what about the middle?
In the last ten years, the middle of the pyramid expanded dramatically.
Whereas the struggle to survive once consumed nearly all of humanity’s time, energy and money, technological progress has driven down costs, which now allows a significant and increasing percentage of us to meet our basic needs with relative ease. According to Maslow’s hierarchy, once people have those needs met, they move up to the middle of the pyramid, and focus on their social needs - there is demand.
For all that demand, until recently there was no supply - it was a big opportunity. Go back just twenty years, circa 1990. If you wanted to connect with people, you had to write them a letter, or call them on the phone, or fax them. Or something like that? Actually, how did it work? I don’t remember, I was just a kid. Anyways, it took a lot of effort, so you interacted with fewer people, and mostly just those who were physically nearby.
What if you wanted to start a dating service back then, in those dark ages before the internet - how would you do it? Off the top of my head, I suppose you could advertise singles dinners in local newspapers and then charge admission for whoever showed up. But that’s just… awkward. Today, there’s Tinder and Grouper. They're awkward too but at least they're convenient. Not that I’ve used them, of course.
Fast forward another ten years, to the early 2000s, and email is becoming fairly ubiquitous, chat services are becoming popular, people are using forums, etc. Still, the internet was in its infancy, and websites were pretty basic and utilitarian. Today, there’s Facebook, LinkedIn, Twitter, a dozen smaller networks, and scores and scores of apps that provide social services or social-enabled services.
There has been a revolution. For all the hype, and there’s been plenty of it, often I have to remind myself of the magnitude of it. It’s not as if this market for social products and services grew steadily, year-over-year, over several decades. It exploded into existence, with most of the big businesses built in just the last eight years, although it felt as if it were overnight.
I wonder if, twenty years from now, citizens of the future will look back and marvel. Perhaps we don’t have enough historical context to realize how significant these inventions are in the scheme of civilization’s march through the millennia.
What does this show? Before the internet, the bottom of the pyramid was huge and the middle of the pyramid was small, barely larger than the top, which was tiny. Now, there’s a large market, with big publicly traded and privately held companies, which we all know and whose services we all use. These platforms, in turn, power whole ecosystems of small and medium-sized businesses.
In comparison to the bottom, is the middle of the pyramid a big market?
On the other hand, perhaps we’re too credulous, and this is all over-stated. Facebook, Facebook, Facebook… all anyone - in tech, in the media, especially in our generation - can talk about, as the day is long, is Facebook and Twitter and the rest of it. When a new app comes along that we like, we say, “Oh! Check it out! This is going to be HUGE! They’re going to CRUSH IT!” We’re users, so our perception of size is skewed. We think they are big, but maybe they are just big for what they are, silly little websites and apps, and when put in the context of the global economy, actually quite small?
Maybe it’s a gold rush. We’re all up and leaving. Leaving our homes and moving West. Moving by the wagon. Every train, full. But when we arrive, what if there’s not much gold? You’ll be stuck out there. And broke. That’s okay if you’re in California - you’ll survive, and maybe, eventually, thrive. But it’s dangerous if you’re in Alaska.
There was no money to be made in gold. The fortunes were made in railroads. In construction. In infrastructure. Good livings were made running general stores, hardware stores and saloons: selling shovels, kerosene, denim, sandwiches, whisky. Food, water, shelter, energy, transportation. The bottom of the pyramid. Stay low, look for scale.
We are capitalists. We are investors and entrepreneurs. We are chasing gold. Where is the next fortune going to be made? We need to know!
If “social” is the gold rush of our age, don’t try to build the next Facebook. Try to build the next Comcast. Sell bandwidth. Or try to build the next Github and sell shovels. Think unsexy. Think infrastructure. Think must-haves.
Don’t git ahead a yerself ye’ lil youngster, there ain’t no gold in ‘dem hills!
On the other hand, maybe there is gold in ‘dem hills.
Well, is there?
The numbers concern me. Let’s add up the value of all of the social media companies.
Facebook IPO’d at $100B, we’ll go with that. LinkedIn is worth $20B. Let’s give Twitter a $10B valuation. There are plenty of others - Pinterest, Spotify, Tumblr, Path, Klout, RenRen, Zynga, Wordpress, Reddit, the big dating sites, etc. Let’s leave the research project of compiling and valuing an exhaustive list to someone else. Instead, let’s clump them all together as “Other”, give them preposterously generous valuations and multiply those by whatever number we need to, to wind up with another $70B. Add all that up and it’s still only $200B - in market value, not revenue! That may sound like a big number, but here’s a bigger number: world GDP is 70 trillion. These businesses are a tiny fraction of the world economy.
Why is that? Is the middle (and top) of the pyramid economically insignificant?
No. There was gold in 'dem hills. Here are three reasons why the middle is economically significant:
First, the social economy is much bigger than just social media. Even before the internet, there were social businesses. Human beings have always had social needs: for connectedness, love, respect, understanding, intimacy, admiration, etc. Needs are needs. They will be met. Technology just makes it easier.
Events, parties, book clubs, meet-ups, plays, operas, symphonies, concerts, bars, nightclubs, churches - all of this economic activity adds up. Lots of small businesses. How big is this market? Hard to say. All of this activity is micro and local, and thus, basically invisible. As platforms like Meetup, Eventbrite, Ticketmaster, Foursquare and even social-enabled payments services, like Square, gain more market share, it will be easier to quantify and track all of this real-world social activity. They will start to surface the who, what, where, when, why, how and how much.
Some giants too. Telecom (communicating), publishing (sharing ideas and information) and media & entertainment (sharing stories and emotions) all cater to social needs. They cater to other needs as well, but I think they are primarily social and should be classified as such.
These giants have a history. As with all old things, it’s easy to forget that once, they were young. Publishing, of course, as a technology, goes back to Gutenberg in the 16th century, but as an industry, began with small publishing houses and ultimately matured into the Big 4. In the 1870s, Alexander Graham Bell invented the telephone, patented his invention, formed the Bell Telephone joint-stock company, which commercialized the technology and quickly became a giant. Los Angeles was the birthplace of the modern entertainment industry, not that long ago, with the golden age of classical Hollywood cinema beginning in the late 1920s and lasting into 1950s. The remarkable phenomenon of the emergence of a global culture, where consumers in far-away lands, with extremely different cultures, somehow acquiring a taste for American stories, was a large part of its success.
We capitalists, we forget. We forget the capitalists that came before us, our economic forebears. Had we been born in their era, had we been asking the same questions - “Where is the next fortune to be made?” - we would have been fortunate to rush to ‘dem hills, to play our part in the formation of these industries. They were so bold, so daring, so visionary. These businesses were young once, and small.
As we disrupt them, as they crumble, we laugh - a haughty scornful laugh. We call them smokestacks. They are ancient. They are conservative. They don’t like change. They don’t want progress. Bookstores? Ha! Download. Records? Ha! Here’s a thousand songs in your pocket. Newspapers?! Use Flipboard.
Anyways, I digress. The point I am making is that the social economy is larger than it may seem, and all of these industries are a part of it.
Also, businesses outside the social economy, at both the top and bottom of the pyramid, benefit from its growth. Airbnb, for example, caters to a basic need: accommodation. But it’s a social-enabled business, that is based on trust and recommendations and “collaborative consumption”. Everest does not primarily focus on social needs, we focus on self-actualization needs, but it becomes an important part of our user's social identities and all sorts of connections happen within our community. Or, another example: transportation is usually classified at the bottom of the pyramid, but when you fly back home to see your parents, that airline company is benefiting from social dollars.
Second, social is more efficient than basic. Yes, the “basic needs” economy is just way bigger than big, so the numbers are staggering. Think about all that goes into it. Agriculture, energy, construction, mining, forestry - these are humongous global industries. Every farmer, every plumber, and on and on - in the whole entire world! In comparison, social services are more efficient. It requires less labor and less capital to build an online global network than to lay fiber optic cable across the Pacific. That doesn’t mean it creates less value. It just means that there’s more consumer surplus, and less profits relative to the value being created.
Thirdly, it’s not size that matters, but rapid value creation. The absolute size of the “social needs” economy doesn’t matter, relative to the rest, as long as that’s where all the surplus is going, growth is coming from, wealth is being created, and profits exist. Coca-Cola, for example, sells products that address basic needs. It exists in that vast portion of the economy at the bottom of the pyramid. Look at its stock chart. It’s basically where it was ten years ago, providing stable dividends for its shareholders. Sure, it’s huge - $188B market cap, two and a half times Facebook’s current value - but would you have rather been an investor in Coca-Cola or in Facebook over the last eight years?
The growth in social came from big businesses.
A capitalist, whether an investor or an entrepreneur, is a fortune seeker, and fortunes require either huge margins or huge volume, and ideally, both. With a small business, you’re unlikely to get either. That’s why, to the capitalist, a thousand small businesses are boring but even one big business is exciting.
There are three exceptions to this, and they all prove the rule. If the thousand small businesses are, or could become, a franchise, that is exciting, from the point of view, of course, of the capitalist becoming the franchiser, not a franchisee. If the thousand small businesses all need the same thing, or even better, things, that is exciting, especially if those things have huge margins or huge volume, and ideally, both, because, of course, the capitalist might be able to build a big business that sells them. And lastly, if the thousand small businesses can be consolidated into one big business, through mergers and acquisitions, then that is, of course, also exciting to the capitalist, who can start a private equity fund.
Small businesses are boring. Big businesses are exciting. Small businesses subsist - they afford their owners a living, or at best, a lifestyle. Big businesses profit - their owners accumulate capital.
Historically, small businesses have comprised the bulk of the economy’s activity, but a fraction of its profits. A sign of progress, of a mature free-market economy, is not only competition, but consolidation. Consolidation allows for scale. Scale creates efficiency, which is either passed on to consumers in the form of lower prices, which creates consumer surplus, or is retained by shareholders in the form of higher margins, which accumulates capital. The less competition in a market, the more likely the latter.
The accumulation of capital is, of course, what capitalism is all about. As that capital accumulates into larger and larger pools of wealth, it seeks returns. So its owners invest in various funds, and those funds have managers, and those managers are rewarded for returning interest on that principal, and they do that by investing in profitable opportunities throughout the economy, which include debt, equity, and other assets. So up and down the risk spectrum, there are venture capital funds, investing in startups, private equity funds, creating efficiencies through mergers and acquisitions, debt funds, investing in corporate and government bonds, and public equity funds, which invest in stocks, etc. etc. etc.
Adam Smith wrote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” In the same way, all of this activity across the capital markets ultimately results in our dinner, if you will, continuously getting better, bigger, and cheaper.
In the last ten years, the middle of the pyramid expanded dramatically. Remarkably, the expansion was consolidated. There were a relatively large number of big businesses created worth more than $100M, and a relatively small number of small businesses. The reason for that is that most of the businesses that were formed to go after the emerging opportunities in the social economy were venture backed, so they had to either fail, get acquired, or become big fast - the one option they did not have available to them was to languish as small boring lifestyle businesses. They just weren’t set up for that.
This particular quality made it especially attractive to capital, seeking return on investment, and capitalists, seeking fortunes by building big businesses. Imagine, for a moment, the opposite scenario, and you’ll see why. What if, in the last ten years, the middle of the pyramid expanded dramatically, but all of the growth came through the formation of millions of hard to scale, hard to consolidate small businesses? It would be far less attractive as an investment space.
The first industries required lots of capital and provided an attractive returns on investment were all basic needs businesses. First, there were the seafaring merchants. To finance these ventures, they had to invent joint-stock companies and insurance, and it is to these inventions that the City of London traces its lineage as a modern financial center. Then, skipping over a few chapters, there was the railroad industry in the 1870s. Capital from British and French investors flooded into New York, giving rise to that city as a financial center, to finance the railways.
The social economy is still much smaller than the basic economy, but it is getting larger and providing more opportunities for capitalism. It has always employed countless small businesses. In the 20th century, at least three giant global industries emerged - telecom, publishing, and media & entertainment - that addressed social needs. As people had more surplus to spend on these needs, more dollars also went to basic services, like transportation and accommodation, but these dollars, even if they are hard to quantify, should also be classified as part of the social economy. In the last ten years, many of the biggest fortunes were made in social, as new startups emerged to both disrupt the old giants and to create entirely new industries. Those new startups created market value rapidly and became big businesses, resulting, as we have already noted, in a dramatic expansion in the market and, just as importantly, in excellent returns for the winners, both investors and entrepreneurs.
The growth in social came from big businesses. If it had not, it would have been far less exciting to capitalists, both investors and entrepreneurs. If, in the same period, there were more opportunities to form big businesses at either the bottom or top of the pyramid, capitalists would have gone elsewhere.
Is it still worth investing in the middle of the pyramid?
The whole economy keys off of return on investment.
Where is the next fortune to be made? Where is the next big business to be created?
These are two questions that capitalists ask.
We have surveyed the social economy. Ten years ago, it was much smaller. Now it’s so big that people are quitting the internet just to get some fresh air. So much was created in so little time. There is an over-abundance of supply.
Facebook dominates the landscape. It is a creative monopoly and it is entrenched. Network effects protect the social graph from disruption.
Facebook created nearly an order of magnitude more wealth for investors than the nearest big social businesses, and it’s hard to see where the next entrant of that size, or even the next size down, will come from.
That’s why I am bearish on the middle of the pyramid. I don’t think it will shrink or that growth will stop, I just think it will slow down and under-perform the bottom and the top. I think most of what can be done, has been done - for now.
Ten years ago, this market entered a phase of rapid creation. Everywhere capitalists looked there was a new fortune to be made, a new big business to be founded, a new product to be invented, a new market to be created. Maybe this is hindsight playing tricks on me, but I remember, as an avid teenage consumer, eagerly awaiting the next big website or app that would create something totally new for me. There was this sense back then that the internet, then mobile, when the iPhone came along, was a wide-open opportunity, a blank canvas. Now, there are less opportunities, and they are, on the whole, less obvious, more crowded, and smaller - so the bar is much higher for capitalists seeking their next fortune.
This market is exiting its creative phase and entering its disruptive phase, and in the meantime, there will be a bit of a lull. Everything is still so new, so it’s hard to come out with a competing offering that does the same thing dramatically better or more cheaply. Also, in a market where all the biggest businesses are networks, network effects will protect the incumbents.
In the periphery, there will still be plenty of innovation and investors will still make bets, they’ll just be playing a different game. Big companies will need infusions of fresh talent and new features, so they will acqui-hire (effectively outsourcing HR and R&D to startups), and if a startup poses enough of a threat, especially to a core business, they can afford to pay as big a premium as they need to acquire them.
After an acquisition, game theory logic takes over. If the acquirer is the largest player in a market, they’ll shut down their acquisition because they don’t want to disrupt their own business. If the acquirer is one of several large players in a market, they may choose to disrupt their competitors to gain market share, even if margins will be smaller when they’ve forced them out, because they’ll effectively be shrinking the market by squeezing profits out - that’s what all disruptive services do. Or, of course, if the acquisition can supplement the value of an existing offering, or replace an existing offering, without reducing revenue, the acquirer will just integrate it.
Who becomes valuable in this sort of environment? Either people with existing relationships with corporate development teams, who have insight into what corporate buyers need - because, on the margins, much of the trick will be convincing corporate buyers that the startup in question is actually valuable or threatening, and enough to pay a premium for - or, really savvy product teams who can keep launching consumer applications one step ahead of everyone else, with enough of a lead to build some sort of barrier to entry.
An app comes to mind. Brewster is my favorite contacts app. It integrates with all of my social accounts and contacts databases, so it keeps my contacts up to date, displays them beautifully, suggests people to stay in touch with, and keeps me informed of updates in my network. It’s far better than the alternatives, so it offers more value. It is getting better with every update, so I am sure that someday, not yet, I’ll say it is dramatically more valuable, but for now, it is at least a noticeable and appreciated improvement in my life. It does not offer less cost, because the cost of Brewster is the same as the cost of the alternatives, which is free. So, is Brewster disruptive? Not yet, at least not in the classic sense that they are offering dramatically more value for less cost (or, more value for dramatically less cost). Another way of putting it: it’s not disruptive because there’s nothing to disrupt - I am not currently paying for any contact management services, so it is not displacing any purchase. Brewster’s competitors are part of larger offerings that I am paying for, that I won’t stop paying for, no matter how good Brewster gets: for example, Apple’s Address Book is a competitor, in a sense, but it is part of a much larger value proposition, an operating system and device. Is Brewster creating a new market? No, the market for contacts organizers already exists.
If Brewster is neither disrupting or creating a market, what is it? It is making an incremental improvement to an existing market. They are clearly an acquisition target. Their team probably costs a million dollars a year or so to run. That’s capital efficient enough for them to make sense as an investment if their investors get in at a low enough price (I have no idea what they raised or at what price, but let’s say $3M on a $4M-pre) that any acquisition over $20M is a good outcome, especially if it happens relatively quickly, say, within three years (with the numbers I just threw out, a $21M exit price would be 3X on a post money of $7M, returning 100% a year on capital). The investment thesis is pretty straightforward, because there are lots of very obvious potential acquirers with lots of cash and contacts are an important feature set for them.
It’s interesting to think about what it would take to make Brewster a viable independent business. What premium features would they need to introduce, how valuable would they need to be, how much would they need to charge for them, and how many people would need to be willing to pay, for them to build a monthly subscription business large enough for them to make $1.5M a year in revenue? That's roughly the minimum they’d need to keep the business running, given my best estimation of their costs and the 30% cut that Apple takes, unless they can get around that. Then, how much would they need to grow in order for them to make enough profit that their investors have an outcome that justifies their initial investment? Risk capital is expensive, in exchange for illiquid patience, it expects a high return. To get the same 3X, they’d need to generate $21M in profits and instead of re-investing it into the business, pay it out as a dividend. (That’s obviously not what they’d do in that scenario, because if they were able to generate $21M in profits, they would in fact have created a new market, for paid contact organizers, and depending on how quickly they were growing, they could either re-invest the profits, or seek an acquisition at some multiple.) The bottom line is that Brewster would have to achieve wonders as an independent company to result in the same outcome for investors as an early, easy acquisition.
Going back to the acquisition scenario: turning $3M in capital into $9M in 3 years. This is great for a small fund, but it’s not great for a big fund. It’s too capital efficient. You’d have to do 100 Brewsters to deploy a $300M fund. How many Brewster-like opportunities are there? Acquirers can only acquire as fast as they can. Even if they have plenty of cash on their balance sheets, there is only so many deals they can do in a year. So, smaller funds have emerged, deploying less than $100M, investing in 30 or so apps with Brewster-like investment profiles, but there aren’t that many of them, because there’s only so much acquisition demand at the end of the tunnel to absorb all the supply they’re creating.
From a capital markets perspective, the problem with all of these scenarios is that they don’t cater to the traditional venture capital model. They are less risky, small wins.
The iconic traditional funds were built on $100M, $1B and > $1B exits, and their biggest wins were independent companies which gave them liquidity through an IPO. Only a few companies in any portfolio would achieve those outcomes, but they would return the fund.
Will there be any opportunities on that scale to address social needs in the next few years? There may be one or two, if that. Not enough to build a thesis for a fund around.
(I could be wrong, of course. Even if investors agreed with me, it’s up to entrepreneurs with great ideas to prove them wrong. The problem is that it’s far easier to prove investors right. If they’ve got a big idea, show it to them.)
I’ll pick a winner: Glide. Add it to my shadow portfolio. I think it could be big. How big is less clear to me. But I think it could hit the $100M+ range.
Anyways, what is Glide? They describe themselves as a video walkie-talkie. You broadcast video messages to your friends, which they can watch and respond to at any time. I use it to stay in touch with my mother instead of exchanging text messages or phone calls. Unlike Facetime, you don’t need to be on WiFi, so you can use it anywhere, and you don’t both need to be using it at the same time - it’s asynchronous. When both people are using it at the same time, it’s nearly synchronous. It makes me smile! It brings me closer together than I’ve previously been able to be with people that aren’t physically nearby.
I am not privy to any of their numbers, of course, but I think they’re growing at an amazingly fast rate. It’s a viral product. To use it, I have to bring in others. I think I’m responsible for bringing almost twenty of my friends into it. I use it regularly. Always weekly, sometimes daily, sometimes throughout the day - it varies. So they’ve got growth and engagement.
Monetization is tough. But honestly, I don’t think it matters if, and this is the crux of it, if they are defensible. How much time and money would it cost to release a competing offering? Is there any technology that’s particularly hard to build? Any IP? Do network effects matter? My guess is that, depending on how viral they are, network effects can protect them from other startups that try to do the same thing, but it probably can’t protect them from Google or Apple or Facebook, because they already have distribution. At that point, the questions become: how much do these companies want to enter this market, how much easier would it be for them to acquire Glide than build it themselves, and how badly do they not want their competitors to have it? Under the right circumstances, with the right timing, they could create a frenzied auction environment and sell for silly money. Ideally, this would happen after they’re in the 30M+ user range. If it happens sooner, the outcome will be smaller.
If Glide had a clear and obvious path to monetization, it could be a tremendous independent business and see a much bigger outcome, but I can’t think of a path for them there (again, doesn’t mean there isn’t one).
Here’s one more example.
Goodreads, a social network for books, which was backed by True Ventures (a relatively small fund) and recently acquired by Amazon for $150 million. That’s a great exit, given that the startup only raised $2.75 million.
Back in July 2011, I wrote a blog post calling for a Goodreads for movies. A social network for movies makes sense. A few months after writing the post, I began advising a startup called Seenth.at, which had designed a gorgeous product. Unfortunately, it wasn’t able to raise money. Neither IMDB, Flixter or any of the existing players in the movie are investing heavily in the opportunity. There are two startups that I am aware of in the space, MovieLaLa and Letterboxd.
I use Goodreads, but I think the product could have been, say, three times better. The question is, if it had been, how much would it have changed the exit value? Would it have been less than, equal to, or greater than three times more valuable to Amazon?
If somebody gets the “social network for movies” idea right, and it is three times better than Goodreads, maybe they can sell for even more than $150M. But I think that it would take extraordinary execution for that idea to jump an order of magnitude and become worth near or north of a billion dollars.
There could be several scenarios which look like this - big acquisitions, with anything over $100M being a home-run. Will there be enough of these companies to build a fund around social needs? No. That was the last five years, I don’t think it will be the next five years.
If I am, indeed, suffering from hindsight, then perhaps there are just as many, if not more, opportunities to build big businesses in social as there ever were, and I'm just not seeing them, because they haven't been built yet. For example, another one just came to mind - social commerce is big. You have new entrants, like Luvocracy, trying to re-orient our buying habits around our friend's recommendations. But I think this is just another exception.
Another exception is Google Glass. It’s a new platform, so it’s hard to say how big of a company could be built on a successful application, and whether there will be opportunities to create new applications that powerfully address social needs in ways that weren’t possible before. There’s no denying that it’s an exciting technology and I think that KPCB, A16Z, and Google Ventures were smart to set up a fund around it. They’re going to get all the deal flow for now. Other investors probably shouldn’t compete with them yet, at least at this early stage, because they have an insider advantage. The opportunity is still wide open for entrepreneurs, though, so go for it, if you have a vision.
Come to think of it, there may be quite a few “another exceptions…”, and maybe that's how investors will invest. They won't have a thesis around social, but they'll be opportunistic when they see something promising - like Benchmark's $13M investment in Snapchat. That sort of activity doesn't shake the larger argument that most of the opportunities in the next few years or so will be found elsewhere.
The overall posture, then, towards investing in social startups will be, and should be, bearish. Ironically, this does not have to be a bad thing for entrepreneurs in the space. They can be the exceptions that prove the rule. There will be less competition for dollars and attention. But, on the other hand, there will be less dollars and attention to compete for. It sort of depends on whether you prefer to convince investors that they are wrong, which is hard, or you prefer to convince them not only that they are right, which is easy, but that your company is the best of all possible investment vehicles for them to express their position, which is easy when there isn't excellent competition, but hard when there is.
So at the end of the day, from the perspective of an entrepreneur who has a business idea that they passionately believe is going to be big, then maybe this is a moot point. Because, even if this argument is correct, and the social economy won't have many big opportunities for growth in the near future, and capital and capitalists will be leaving the space, it doesn't matter. Because you see something the others don't and you think you're going to be the exception. Some runners run uphill races and win. Others prefer their odds downhill or on the flats. Choose your race. Just be aware of the economic context in which your business will exist.
In conclusion…
We are going from the pyramid to the inverted pyramid, by way of the rectangle. This means that for capitalists, for investors and entrepreneurs seeking to build big businesses, there are opportunities at both the bottom, to disrupt, and at the top, to create, but the middle, the market for social needs, which exploded into existence recently and was so exciting only a few years ago, should be avoided for now, because it will basically remain flat.
I began my last post, “To think like Midas”, by saying that great entrepreneurs think like investors. I spent the rest of it explaining how a great investor might think. Using the past to see the future, we discussed trends and megatrends, and how the winners - the “Great Men” - see them coming, make them happen and shape them. Those are the people you want to bet on if you’re an investor, and if you’re an entrepreneur, those are the people you want to be.
By the way, this way of thinking shouldn't just apply to founders. Leadership should be fractal. If you work for a startup, this is how you want to think. Everyone is an investor. Everyone is an entrepreneur.
If great entrepreneurs think like investors, then what follows is the corollary: your business is your investment thesis.
A business is an argument, of sorts. It’s a statement about value: about what you find valuable, what other people will find valuable, and how best to create that value in the world while making a profit.
Every business asserts that it has found the best solution to a problem – and that the problem is not only worthy, but that it is the most worthy of all the problems it could possibly solve – given limited time and capital, risk, and the passions and talents of the team.
Framing the decision
Starting a business is an investment decision. Dating is an investment decision. Hiring someone is an investment decision. Paying for a service, using a product, working on a project – every application of time, money or energy – is an investment decision.
Here’s a framework for thinking about investment: cost plus opportunity cost must be less than expected value. Or, to put it the other way: expected value must be greater than cost plus opportunity cost.
Expressed in symbols: V > C + O.
Let’s run through one of those decisions…
Q: Should we hire someone?
A: Well, how much do they cost in dollars (salary + equity + incentives + overhead)? Okay, X dollars a year. How much do they cost in time (including recruiting, setup and ongoing communications)? Approximately how much does all of that time cost, if you put a dollar number, Y, to it? Okay, add X to Y get the cost, C.
Now comes the hard part: estimate the opportunity cost. Who else could we hire? What else could we buy? Or what else could we build? What else is competing for C dollars? Of those alternatives, estimate their expected values then subtract their costs to calculate their expected profits. Take the highest positive number and call that option B: the next best alternative. Opportunity cost is the profit forgone from the next best alternative, or O = V(next best) – C(next best).
Q: Should we continue to employ someone? Should I use your product? Should I pay for your service? Should I spend time with you? Should I invest in your startup? Should I start this company? Should I keep working on this?
A: Repeat the thought process above. The same framework applies to many different contexts.
Why decisions are complicated
If it’s such a simple formula, then why are some decisions so complicated?
There are at least three reasons.
1. Liquidity
Liquidity - the ability to trade something for cash - is an acute constraint on the cost variable in the formula.
Do you have capital?
Sometimes it takes years before the expected value pays off. Can you shoulder the costs long enough to receive the benefits? Can you afford to pay them right now and keep paying them as long as it will take for them to pay for themselves?
That’s what capital is for. To solve the company's liquidity problem, you have to sell debt or equity. The amount and terms you’re able to raise depend on how capital markets, specifically the investors which make the market, perceive the risks associated with your company and ‘the deal’.
Can you back out?
Many decisions can’t be reversed, or only with a penalty. That’s unfortunate, because when circumstances change, so do the variables. Costs, opportunity costs, and expected values go up or down. But you can’t always double down when times are good and pull out when times are bad, or when a more attractive opportunity shows up. Cash investors in a startup cannot generally back out early or easily. And sweat equity investors - the startup's team - can't either. The natural and inherent inability of all the investors to back out quickly and regain liquidity has critical consequences on the framework for decision making in startups.
Do you have time?
“The first rule in business is to never run out of money.”
“What’s the second rule?”, I asked.
“Never run out of money!”
Someone once told me that. I promptly forgot it, but it’s a lesson that life doesn’t let you forget for very long. For me, the day of reckoning has come and gone three times now, once per financing. When it’s over, and the money is in the bank, it’s such a relief. Running out of money is running out of time, which is a stressful experience. Ahead of you, there’s a looming ‘cliff’ - that date, that ‘dead’ line - after which you can’t make payroll.
This process is not fun, but it's inherent in the game. Until a startup has established its unit economics - its cost per user/customer acquisition and lifetime value per user/customer - and shown that it can continue to raise venture financing as a “scale-up”, it will always be racing towards a cliff.
So it’s not true that if things are going well, you can always raise more money. It is true that if things are going well and there’s plenty of money in the bank so that they will keep going well, that you can always raise more money. Liquidity is no joke. When you run out of money, you run out of moves. The runway ends before you can take off. Game over.
Another wise piece of advice I once heard: “Create options, then make decisions.” To that, I would like to add: “Improve your options, then improve your decisions.”
Taken together, this advice adds up. Let’s pull it together…
Liquidity is about scarcity and runway. The lack of liquidity for investments in a startup means cash from investors is justifiably scarce. And it can only provide liquidity for a limited time, giving you a certain amount of runway. Without that liquidity, you can’t make decisions, even good ones. Liquidity buys you time. Without options, you can’t make decisions. So spend the time creating options. Then, improve your options and your decisions.
That’s a recipe for success.
2. Asymmetry
Asymmetry is about expanding the opportunity cost variable in the formula.
In economic literature, information asymmetry refers to principals and agents, but its a subset of a larger class of problems caused by imperfect information. In this essay, I'd like to explore the asymmetry between a decision maker and reality, which is immense and complex, such that the cost of acquiring more information is very high, upward curving, and ultimately infinite.
There’s an infinite amount of information. You have access to a tiny fraction of it. When you make decisions, you’re dealing with imperfect knowledge. The decision you’re weighing is infinitely more complex than you will ever know, or need to know.
Say, for example, your startup has just received enough funding to make some additional hires, and you set out to hire your first marketing person. Suppose you reach out to ten marketing people, three become serious discussions, and you hire one. By pulling the trigger, though, you were also, by definition, ruling out every other eligible marketing candidate on the planet for that role. You were comfortable doing that, because, of course, you were not willing to interview them all, and you judged that your sample size of ten was sufficient. You knew that you might be missing out on some incredibly superior candidate who’s out there – somewhere - but your sense for how hard it would be to find that candidate and how very few exist is such that you’re comfortable pulling the trigger on the candidate in front of you. But what if you’re wrong? What if you didn’t look far enough, or in the right places? What if an incremental increase in time invested upfront in looking beyond your immediate network would have uncovered a trove of talent?
We acquire information in order to create and improve our options. Your sense for the opportunity cost of a decision is based on the very limited information you have about all the possible alternatives. Making decisions with limited information is an art. The mature response to “the information problem” is not to get squeamish when you don’t have enough information to make a perfectly informed decision. Rather, it’s probably to identify which data points, of those available, are most operative to making a decision, and then, if those are not sufficient, to identify which data points, of those necessary but not available, will be cheapest to acquire. Then, the game becomes getting the right information, and getting it rapidly and at lowest cost.
Which begs the question - how? I use three processes to support my overall strategy: networking, canvassing and landscaping.
Networking is an art. I don’t profess to be a master. However, I do dislike the stereotype of the charismatic-hustler-schmoozer-wheeler-dealer-connector-talker that some people associate with sales people. Many people who profess to be salespeople are decent at one or two aspects, but may not get the rest. They may be acting as pawns instead of queens. It’s not enough to make a move; one has to comprehend the entire board.
By meeting lots of new people, you are acquiring information. Every individual is a data point on the grid. The more data points, the more complete your understanding of reality and the fewer your blind spots. You are also creating an option, because friendly relationships don’t have an expiration date. Once you’ve established rapport, respect and trust with someone, and you become their friend, you can lean on them, at any point in the future, for information, advice, perspectives, ideas, introductions, help, opportunities and even capital - as long as the relationship is maintained. Not every relationship is lucrative, but every relationship has potential upside. It’s an option. Preserving and expanding your optionality is wise. And it’s a two way street…
Let’s suppose that you know 50 venture capitalists, but you don’t know any current high school students. Then, you happen to take a short plane flight with a venture capitalist and a high school student, but you can only sit with one. To maximize your benefit, which do you choose? Now, obviously, there are unknown variables here, so there’s no right answer, but I’d like to make a case for the high school student. There is marginal benefit in meeting an additional VC, but there’s a lot of valuable information built-in to the high school student that you don’t currently have access to. High school students are a blind spot for you. If, for whatever reason, you someday need to design a product for them, or recruit them as interns, or be aware of trends in popular culture or public education or any number of intersections that this individual represents, albeit, with a sample size of one, then you could get back in touch. Repeat this exercise with Norwegians, salsa dancers, gun control lobbyists, material scientists and Franciscan priests…
Canvassing is asking questions of others systematically to gain information, perspectives, advice and insights to achieve what I called “parallax” in a previous post. So while you network, you’re extracting information. Earlier this week I found myself standing next to a Franciscan priest from Italy while standing in line waiting for a bus at JFK. Through the conversation I learned a lot of interesting information about the Catholic Church. So, if networking is about going broad - knowing more people - canvassing is going deep - knowing people more. To be good at it, you have to be curious and fascinated.
Expand your network, ask them questions, gain more information - then what? Then, you put all of this information together into a coherent understanding of reality. I call that process Landscaping. It’s like an exercise in cartography: this is my map and here are the mountains, here are the rivers, the Black Forest and beyond here, there be dragons… Or, it can be likened to finding new puzzle pieces, then fitting them together. Landscaping lends itself to spending lots of time alone to think, read and write. New information and perspectives can be gained from conversations with others, but ultimately landscaping is about putting it all together into a story that makes sense about the world and the way it works.
Spending time on these three activities should expand your opportunity costs. You’ll increasingly realize that for every thing you do, you are choosing not to do many other worthy things. And the more options you create, the higher the likely value of the best option, and the greater the foregone profit of the next best option. An ironic take away might be: “At all costs, expand opportunity costs!” Even though deliberately increasing the “cost” side of the equation by increasing opportunity costs seems counter-intuitive, it’s what great business leaders do. It forces the bar ever higher for the value side of the equation, so that when they do decide to invest time and resources, it’s very high leverage.
3. Subjectivity
Subjectivity is inherent in calculating the expected value variable in the formula.
For the sake of argument, so far we’ve assumed that human beings are rational actors, which isn’t exactly right. Are they irrational, then? No, they’re not. When economists talk about “rational” actors, they are referencing the classic textbook definition: calculated profit-seeking. But money is a store of value, so profit-seeking is only a subset of value-seeking, and value is fundamentally subjective. Let’s think about that.
What is valuable to you?
I do not value what you value. If we did, we would be the same. But we are not the same, we are different. We want and care about different things because we see the world in different ways. We may have some things in common, but not everything. And that’s why we trade.
Figuring out what you truly value is a process of self-discovery. Why are you starting this business? If you succeed, what will it do for you? What do I want more of in my life? Given all that I could be doing, why is this the best use of my time? Given trade-offs between freedom and security, or work-life balance and financial success, what would I choose? Ask yourself enough questions like this and you’ll quickly uncover your own philosophy.
What is valuable to others?
No two people value things precisely the same way, but there is usually a fair amount of overlap. Even if there weren’t, there would still be gains from trade. You want this? I want your money. I give you this, you give me your money. Prices coordinate supply and demand. Demand is subjective, so prices coordinate subjective inputs and make them visible, coordinating action across time for vast numbers of people.
Figuring out what is valuable to large groups of other people is a lucrative skill.
Are there social, cultural and emotional complications?
Do you give the job to your friend, or the more qualified outsider? Do you invest in the startup you love, or the startup that’s going to make your limited partners more money? Do you do what your told, or stand up for what you believe? Are you passionate about what you do every day, or do you just show up for the check?
Subjectivity brings color to a colorless ledger of profit and loss.
Justifying your decision to yourself and others
Remember the formula? Expected value must be greater than cost plus opportunity cost: V > C + O. It is a framework as disarming in its simplicity as it is enchanting in its complexity. The nuances, caveats, subjective inputs and infinite information that form the context for every investment decision must ultimately be weighed in the balance by you - the decision maker.
As I wrote this, the image that kept coming to mind was that of a pole vaulter. Sprinting down the track, every muscle pumping, then planting the pole, leaping off the ground and catapulting into mid-air. In that moment, there’s one question: will you get high enough to clear the hurdle? Get ready - you are that pole vaulter. That hurdle is your opportunity cost.
That formula is the test. Your business (and your life, for that matter) has to pass the test. Again and again and again. If you’re an entrepreneur, you know what it’s like. You pitch. Not just once, or dozens, or hundreds - but thousands upon thousands of times. Yesterday I had seven meetings and three phone calls. In every single one of those, I had to help other people see that the expected value of what I wanted them to do (invest, partner, etc.) was greater than their cost and opportunity cost. They’re not me, so they don’t necessarily value what I value. Every person asks different questions and has different reservations. Patterns emerge in these conversations – which you revisit, prompting you to reconsider your logic again and again. You have to justify your investment decisions.
Your business is your thesis. It is your ultimate answer to how you will create value, both for yourself and for others, both now and in the future. It is your grand statement, your philosophy in motion, your logic incarnate. Given all the costs. Given all the opportunity costs. Given all the context and considerations. Given the world in which you find yourself. Given you.
According to Greek myth, the god Dionysus gave Midas, a king of ancient Phrygia in the 8th century, the power of turning everything he touched into gold.
Every year, Forbes publishes a list of top technology investors called the Midas list.
I also would like to borrow the metaphor by calling the superhuman we imagined in the last post, “Who, then, can see the future?”, Midas. If an investor had the ability to see the future, he would indeed be like Midas, every bet he would make would turn into gold. Within just the first year of business, he would have established a reputation so formidable that if he opened a fund, almost regardless of the terms, he would have a line of LPs wrapped around the building with checks in hand.
Where am I going with this? Why do I entertain these fantasies?
Fiction’s not for babies, y’all. There’s just something in a myth…
To return to the thread of my argument, I’m interested in learning how to think intelligently about the future. In other words, I would like to think like Midas. Great entrepreneurs think like investors, after all.
Who, then, can glimpse the future, if not Midas?
A mind trained to study the past. The past is full of clues.
For it was once the future.
Of Great Men & Marxists
The disciplines of philosophy and history have an intimate relationship. If, in the market to come, philosophers are to be kings, then historians are to be queens. When it comes to the philosophy of history, there are two schools of thought: the “marxist” school and the “Great Man” school.
“Marxist” historians, it’s worth noting, aren’t necessarily marxists, but they share with them a historical point of view: the vast majority of things that happen in society (and indeed, in the universe) are beyond the control of any one individual. Individuals are rounding errors in the grand scheme of things. What truly matters are large impersonal forces like capital structures, class movements, information flows, technological progress and the cultural evolution of ideas (Hegel’s zeitgeists). As a result, they tend to think of long-run outcomes as fairly determinist. There is a certain inevitability to the waves that crash with the tides of time.
In contrast, the “Great Man” school fills its pages with the stories of the likes of Julius Caesar, Napoleon Bonaparte, George Washington or Steve Jobs. Remarkable individuals do not resign to fate, they hammer their destiny into stone through brute force of will. Like Achilles, they seek immortality through their deeds, or like Martin Luther King, they rally their fellow men behind a beatific vision. To understand history, you must understand the characters in the story, and these are heroes and villains of ambition, cunning and genius. History does not happen to them, they happen to history.
Let’s imagine these two schools of thought expressed as investment strategies. The marxists, with a little irony, would invest in trends. The “great man” historians, would invest, (wait for it), in great men - in promising individuals. They would pride themselves as great judges of character and talent.
Which strategy would perform better against the Midas index?
Trends and Megatrends
There are trends, and then there are megatrends. At any given point in time, there are many, many trends in the world. Usually, though, there are just a few megatrends. The difference is temporal and structural. What I mean by that is: a trend may come and go, and if it has a lasting effect, it is residual or gradual or incremental to what was already there before, but a megatrend, on the other hand, comes and completely alters the landscape, things change and don’t go back to normal, and the new normal is structurally different. Think of them like waves and tsunamis. Waves can crash on a beach for millennia. While the coastline will change, it will change slowly. If a tsunami comes, it alters all in its path.
Right now, there are megatrends reshaping our world. The problem is we don’t have the historical perspective to see them. To use another metaphor: we can’t see the forest through the trees. Take, for example, the last ten years. There has been revolution after revolution in hardware and software, yet, “what’s next?” is the ever elusive question. That’s what Midas could see, but we can’t. Midas only bets on megatrends, while we run around chasing trends.
Resolving the Paradox
There’s truth in the paradox, as Kierkegaard might say, between the Marxists and the Great Men. The Marxists have a point. There are trends and megatrends shaping our world, and compared to them, individuals have very little agency. We are just a part of these broader movements, which loom powerful, impersonal, and beyond our control. Yet, despite that, time and again, it seems that certain individuals have a disproportionate impact on events. How do they do it? To resolve the paradox, let’s study the interplay between some great men and the trends of their day.
Would the Republic have fallen without Caesar? There’s reasons suggesting that it would. Through the class struggles between patricians and plebeians, so many checks and balances had emerged that the political system had become dysfunctional, and nobody could get anything done except in a crisis. Already the thread of culture had began, in the amphitheaters that were the precursors to the Colosseum, that taught Rome to celebrate the values of the victor in war. If might makes right, then the successful generals, who had in so short a time amassed an empire sprawling in every direction, had a sympathetic audience in the capitol - and none had been more successful than the champion of the Gallic campaigns, Julius Caesar. If to the victor go the spoils, then Caesar had spoils in plenty: autonomy and sovereignty as the governor of the newly conquered Gallic provinces, he was entitled to a large income. Finding himself with legions, wealth and popularity, he looked to Rome. Perhaps before he looked to Rome, Pompey and the Senate looked to him, and trembled. His power had made him a threat to their power, and they ordered him to lay down his military command. Which he disobeyed by crossing the Rubicon and taking control of the city and its politics, becoming de-facto dictator, and ending, except in name, the Republic. While his remaining days were short, they were long enough to sketch the blueprint for a new order, which would survive even his assassination.
In this story you have all the elements of a classic Marxist explanation: class struggles, cultural evolution, a structural imbalance of power. It’s not hard to weave a narrative that explains the fall of the Republic in such a way that Caesar is just an incidental detail, and that a similar figure would have emerged sooner or later, precipitating a similar chain of events. Perhaps that’s right. But, what was not inevitable, what was unexpected, if you will, is not that the Republic fell, but that the Empire emerged, and emerged the way it did, bearing Caesar’s image, with his idiosyncratic respect for the formalities of the Republic, with his populist flair. His way of doing business set broad parameters for the emperors to come. When they strayed too far from it, when they asserted their power too nakedly or circumvented process too blatantly, they upset a delicate precedent set by their namesake and found themselves tripping over the lingering remnants of old checks and balances. Here, the legacy of the Great Man.
The Republic was going to fall. That was the megatrend. But the way it fell, and the nature of what emerged - that was the great man.
This is how the paradox is resolved: there are megatrends and there are great men who see them coming, make them happen and shape them in the process.
The Stamp on Events
Let’s briefly run through a few more examples.
Would the 13 American colonies have split from Great Britain without one or more of the Founding Fathers? Perhaps - it was a megatrend. There were lots of deep structural reasons why that geopolitical relationship was strained, and so maybe it was inevitable that something would have happened, but what was not inevitable was the unique nature of the Revolution and the character and Constitution of the nation that it birthed. These the Great Men shaped.
Would we still have laptops and tablets and smartphones today without Steve Jobs? Almost certainly. But in the late 70s, when the megatrend was little more than the rickety Homebrew Computer Club, he saw that these devices called computers, which filled huge rooms and could barely do basic math operations, would soon become very powerful and very small and take on a variety of form factors and would gobble up a myriad of functions currently occupied by analog devices, from clocks to scales to calendars to notepads and more, and that this would change everything. In his mind, it was inevitable - far before most people, even most people in the technology industry, caught on. Three, nearly four, decades later he was still riding the megatrend. Would we have had these devices? Yes. But we wouldn’t have had Apple, with its humanist values and care for design and craft and user experience. Steve was one of the Great Men of his generation who made the megatrend happen, and the unique expressions Apple gave to it were, and are, beautiful - and clearly, they have put their stamp on the future of technology, and shown us what is possible.
How do we have agency in a world where the vast majority of things are beyond our control? It’s an art, and it’s a little bit like surfing. The wave comes, the surfer sees it coming, paddles in its direction, and catches it in time for the energy of the wave to carry him along with it.
What’s different about this, though, is that the great man can, at least to some extent, shape the megatrend, whereas the surfer cannot shape the wave. By making it happen, being its agent, if you will, he also gives it its unique expression - its name, it’s flavor, its voice. He fills in the details, and the details are important. They are the difference between the shape of a body and the statue of David.
The wave, like the megatrend, is just a form of energy. Energy can be redirected: targeted, channeled, focused. There’s a physics to it. A wave is not a very malleable form of energy, and if you try moving it, it will probably move you. But there are ways of capturing tidal energy to create electricity, and with electricity, you can do lots of interesting things. It’s like Tai Chi, a form of martial arts which doesn’t focus on strikes, but on redirecting the energy of your opponent. Don’t resist, give away - like water. Very taoist.
Events may come and go, but individuals put their stamp on them.
Touch to Gold
In the myth, to turn things into gold, Midas had to touch them; seeing them wasn’t enough. There’s a lesson there. Even an investor who can see the megatrend coming - who can, in a sense, glimpse the future - does not know exactly how it will manifest, and who will emerge to shape it, and what legacy it will leave in its wake. This is not the role of the investor, this is the role of the entrepreneur - the Great Man (or Woman) in the story - who not only sees the megatrend, but will actually touch it, every day, by building a company that will be its final expression. Yes, and thereafter, the company becomes the megatrend incarnate. It’s birth foretold, it’s destiny still unfolding
Predicting the future is as hard as it is valuable: extremely. In Greek mythology, even the Fates could only glimpse the future as through a fog. Sometimes, a few of the other gods, chiefly Apollo - or even, on rare occasion, a mortal - would receive a vision or a prophecy, which only the very gifted could interpret. Maybe even our imaginary “Midas” investor was a contradiction in terms - as the future cannot always be seen, even by the gods. And when it can, it is only the megatrends which rise above the fog. Only the outline and not the story. Only the block of stone and not the statue. Only the industry and not the company. The future cannot be seen, only glimpsed. Such that, even in the land of myth, if an investor could glimpse the future, he could not make money so easily, for glimpsing megatrends is not enough. You have to touch things to turn them into gold.
To be continued…
P.s. Apologies in advance to women. You can be Great too.
Let’s put a twist on a favorite childhood question.
If you were an investor (so financial profit was your primary motive), and you could choose a superpower, which would you take? Would you scale walls, or fly, or see faraway objects?
Given the choice, I think you would be wise to answer: D) None of the above.
In my last post, “The Philosopher Kings”, I argued that the single skill that would come to differentiate successful captains of industry - the superheroes, if you will - from their otherwise talented and competent peers - us mere mortals - would be their ability to think intelligently about the future.
If D) None of the above then E) Other. Fill in the _____.
Let’s fill in the blank with the ability to see the future and imagine, for a moment, what we could do. Even if you could only gaze ten seconds ahead, or, for that matter, even one second ahead, you could make an endless amount of money. That is, of course, until the SEC finds out and bans you from trading with such an unfair advantage.
My friends who work at banks on Wall Street tell me that the most expensive real estate in the world is the server room next to the New York Stock Exchange’s routing system, because if you can transact orders even a fraction of a second faster than the rest of the market, you can provide liquidity with high frequency trading and make a spread by buying from the sellers and selling to the buyers. Even if the spread is tiny, if you can do it enough times and with enough volume, over time you can make a fortune.
If you could gaze even farther ahead, say a week, or a month, you would have an even larger and more unfair advantage. You would choose the security - a stock, for example - which you knew was going to make the most dramatic move, and invest in it heavily, and with as much leverage the market would lend you, and then you’d make a fortune.
If the days tell you their secrets, you become a trader on Wall Street. If the years tell you their secrets, you become a venture capitalist on Sand Hill Road. You provide every round of financing to the next Google.
It’s an interesting thought experiment, because the more you think about it, the more you realize how little hard information about the future you need to possess to become rich, and that the more information you have, the fewer and more targeted and more leveraged your investments would become. You wouldn’t need to have a portfolio. Portfolios are for investment managers who know they’ll have some winners and some losers, so they spread the risk around. Instead, as a rational profit-seeking actor, you would put everything you’ve got (or as much as they’ll let you) into the biggest winners in a descending order until you have no capital left to invest.
I wonder how long it would take someone with this superpower to amass the first trillion dollar fortune. Less than ten years, certainly. Perhaps less than five. Or maybe, even then, I underestimate.
Why entertain this fiction? Because it is a practical fiction.
It makes my point for me. Information about the future is valuable. Infinitely more so than gold. The prophet is the goose that lays the golden eggs. Only a fool would butcher that goose for dinner. Only a fool would trade that information for bullion. Yet it’s so easy to be a fool, and fools there are in legion.
What if there were a way for us, mere mortals, to drink a drop of some magical elixir that gave us that superpower for just a moment? What if it were possible for you and I to glimpse the future, if only through the fog?
There is a way. It’s there for the taking. And are we fools not to seize at the opportunity?
That is, by proxy: the ability to think intelligently about the future is as close as we can come to actually seeing the future, and that is certainly close enough to reap the benefits, although not close enough to be error-proof.
I would like to build upon my previous post, “The smallest market is about to become the largest market”, in which I argued that Maslow's pyramid of needs is about to be turned upside-down, such that the largest market today - providing for our basic needs - will be the smallest market in the future, and the smallest market today - helping people self-actualize - will be the largest market in the future. As I concluded, I think that this structural shift has implications for investors and entrepreneurs. In this post, (and the next and the next), I would like to begin to unpack them.
Where to begin?
Let's shift our gaze to talent. It's not an obvious place to start, but I'd like to suggest which skill set will become the most scarce and sought after as the market undergoes this shift. The world is changing. Who will rise, who will fall?
Plato's Republic describes a utopian society in which philosopher's rule. They preside over the workers and the warriors, ensuring that every newborn child discovers his or her calling and talent (as a worker, warrior, or philosopher), and is groomed and educated for it. That, in short, was Socrates plan for ensuring justice and happiness in a benevolent kingdom.
That is also what is about to happen to Silicon Valley.
Despite the 10,000,000 views that this code.org video received in the last week or so, in which Bill Gates, Mark Zuckerberg, and Jack Dorsey take to the microphone to encourage the 'newborn children' of our society to code, they are no longer coding every day. Engineering may be, along with design, one of the primary skill-sets of the future - for the workers - but not for the warriors (Peter's 'jocks': salesmen, deal-makers, marketers, operators), and not for the philosophers. Those roles have very different skills.
They are right, of course. Engineering talent and skill is scarce. That's why engineers are paid such high salaries. To increase supply in the market, coding should be taught in schools. That will bring costs down, and create more high-paying jobs, which is something our economy needs.
But, as I am sure they would readily admit, they have not risen to their level of success by their mere ability to code. It certainly gave them an advantage. Perhaps it helped open some doors, especially in the beginning. Hire more easily? Oversee product development efforts with an appreciation for process, technical challenges and architectural issues…
My point is, that there are lots of engineers in the world, but only a handful have accomplished what those three have in their careers. Nor are they the most deeply technical people in their organizations. That's not what differentiated them. Their true genius lies in their ability to think about the future.
As a counter-point, think about Mike Moritz, Peter Thiel, or Steve Jobs. Moritz studied history at Oxford and was a journalist at Time before joining Sequoia. Peter studied philosophy and law at Stanford. Steve didn't even go to school, but he did read a lot, and cultivated an amateur appreciation for the making of consumer products, until he had, through working closely with hundreds of product people throughout the course of his career, an extremely refined taste for what people want and sense for how to go about building it.
Ironically, what Moritz, Thiel and Jobs have in common with Gates, Zuckerberg, and Dorsey is that they wished they had each other's skill sets.
Here's Dorsey going on and on about one of the master skills of the liberal arts: storytelling. He's obsessed with it, and that passion drove him to teach himself. Look at how he's applied the art of crafting narratives at Square. Two years ago I remember reading a brilliant article on TechCrunch, which I can't find right now, about how Dorsey turned product development into a story-telling exercise. He's certainly applied it to forming a culture and marketing. Here's Moritz, a trained story-teller, telling Charlie Rose how much he wishes he had spent more time studying math and the hard sciences. Maybe Jack and Mike should trade.
I think that's instructive. The lesson: have a skill set, and cultivate an appreciation and respect for others' disciplines. Thiel, for example, has researched a number of fields of deep technology at great length. I read an article last night by Ross Anderson about Oxford's Future of Humanity Institute, which is basically an interview with philosopher Nick Bostrom, who has become an expert on artificial intelligence and it's implications. Clearly, thinking thematically and broadly about the world is not hurting these people's abilities to understand technical issues in-depth.
We do that at Everest. I am involved in design and engineering discussions, but they are also kept abreast of business decisions and strategy. I think a narrow person wouldn't fit in our culture.
There is one skill set those six individuals have, and they didn't learn it in school. They learned it by being curious and thinking. They think about people, products, history, trends, and the world we live in. I'll say it again: their true genius lies in their ability to think intelligently about the future.
These are our philosopher kings. They rose through the ranks of the workers and warriors, but their true calling was to think about society's problems, imagine solutions, and organize talented teams around solving them.
Let's return to the original thesis: the smallest market is about to become the largest market. So, if that's the case, why would this skill set - the ability to think intelligently about the future - be the most valuable?
Food, water, and shelter. Without them, you’re dead. If you don’t have them, you’ll spend all your time, energy, and resources trying to get them. Because you need them to survive.
If you’re in survival mode, and your friend calls, wondering if you can hang out, you’ll probably ask for help, and barring that, say “no, thank you”. Perhaps you’ll explain that you’ve got more urgent things to take care of before getting together to watch the Oscars.
Some needs trump others, as even this simple example shows.
In 1943, a psychologist named Abraham Maslow published a model of human needs that established a three-part hierarchy, which he represented with a pyramid: a set of “basic needs” at the bottom, “social needs” in the middle, and “self actualization” needs at the top.
It pays to understand what people need, as any good entrepreneur or investor will tell you. If you have an insight into a need that hasn’t been met, and you can think of a scalable way to meet that need with a product or service that costs less than what you can charge for it, you’re in business.
So let’s take a moment to review his model - and look for hidden insight.
The pyramid begins with “basic needs”. Taken literally, that means things like food, water, shelter and other immediate survival needs. A broader but more useful interpretation might be expanded to include things like access to education, transportation, communication and information, given how important these things are to making a living in the modern economy.
Basic needs come first, so they are at the base of the pyramid. The implication being, of course, that until these needs are met, people will be preoccupied with them, and won’t move on to address their other needs. Also, the base of the pyramid is the widest portion by area, which signifies that it occupies more, time, energy and resources than the rest.
In other words, it’s the biggest market. The vast majority of the economy exists to cater to our basic human needs. Historically, this has always been the case.
Over the last ten years, however, a new market has emerged. A host of companies have exploded onto the scene that address our “social needs”, and the clear winner, the creative monopoly, if you will, is Facebook, but there are many others, both building on top of that platform, like Zynga, or creating communities of their own, like Path.
Maslow placed social needs at the middle of the pyramid. They include things like connectedness, love, respect, intimacy, attention, and ego. This is the second biggest market. It used to be smaller, but it has gotten a lot bigger very quickly. It’s a sign.
At the top of the pyramid, Maslow placed a set of needs he classified as “self-actualization”. These include our drive to make an impact, experience new things, live up to our full potential as human beings, find meaning, be happy and fulfilled, etc. Like basic and social needs, self-actualization needs are universal - everyone has them - but they come “last”, in that you don’t worry about them until your other needs are met. It’s not that they aren’t important to you, quite the opposite, but they are less urgent, or you can’t afford them, or you don’t have time - yet. Someday, maybe when you retire, you’ll get to them, at last.
It’s at the top of the pyramid because it’s the smallest market. Or, used to be.
That’s about to change.
It began a long time ago.
Since the industrial revolution began, roughly 150 years ago, technological progress has brought about huge gains in the standard of living in the developed world, and despite our present economic headwinds, the pace of that progress is accelerating.
Peter Diamandis makes the case for informed optimism in Abundance, which describes a bright future where basic human needs are met because exponential technologies drive down the cost of things like food, cell phones, health care, education, water purification, and energy.
Here’s the point. There’s a well-informed case to be made that in the near future, “nearer than we think”, we’ll live in a global economy that is conquering poverty, providing access and opportunity to billions of people who’ve never had it, and rapidly addressing the “basic needs” of humanity.
Imagine a world where the basic needs of all people are met. Woah.
Which begs a question. What will they do with their time?
Well, no doubt, they’ll still have to work. But now, an ever smaller share of their time will provide not just the same, but better, quality of life.
(In theory, if this trend continues, they’ll barely have to work at all. Machines will do all the work. Robots will build houses for us. Harvest food for us. Do our laundry for us. We’ll all be unemployed. And rich. But that’s so far into the future that it’s not relevant to this essay.)
Once they’re done with work for the day, they’ll have some free time left before bed time. What will they do with that?
To oversimplify, they’ll go on Facebook. They’ll say hello to their friends. Spend time catching up. Share what’s going on. Score a date. Etc. Or do the real-world offline versions of these activities. They’ll busily go about fulfilling their social needs.
That gets old after a while, as you probably know. Getting and giving likes and comments is great, but it’s no way to spend a sunny afternoon. What happens when they get bored? What will they want to do?
According to Maslow, when you have lots of well-fed, well-slept, well-sexed, hydrated people with secure jobs providing sufficient income and lots of love and attention in their lives from a steady support network, what do you get?
A lot of people who are in the market for self-actualization, whether they know it or not.
That’s a huge opportunity that’s about to get huger.
“The future is already here, it’s just not evenly distributed yet.” There is already a much larger percentage of the population in the market for self actualization than there ever was in all of history, and that percentage has steadily grown, with the economy, in the rising technological tide that has lifted most boats post-1850.
Maslow’s pyramid is about to be turned upside down. Time, energy, and resources are about to make a migration from the bottom to the top. As people’s basic and social needs are met, they are going to self-actualizing full-time.
The smallest market is about to become the largest market.
As an investor or entrepreneur, the implications of this are massive, and I’ll discuss them in my next post.
At nearly midnight on Wednesday, I figured out Mark Cuban’s email address. Now, the hard part: how do you stand out amidst the fray of companies clamoring for his attention and investment dollars?
My read on him, which you might find reasonable after watching a couple episodes of Shark Tank, is that he’s an aggressive, “show-me-the-money”, “get-to-the-point” kind of businessman. Given that people tend to like other people who remind them of themselves, I wagered he’d respect an entrepreneur taking a similar approach to get to him.
So I took my standard sales template, variations of which I’ve used to get meetings with all sorts of high profile people, but then I modified the subject line and the first line.
Normally, my emails read something like this:
Subject: Everest
Name,
I respect you for X.
I’d be honored if you'd consider an investment in my company.
Everest helps people achieve personal goals and live their dreams…
…
…
Regards,
Francis
I knew that wouldn't work with Cuban, so I decided to take a risk and switch up my approach:
Subject: Peter Thiel invested so you’re lucky I’m emailing you
Mark,
You want to invest in my company.
…
It was so ridiculous, that I assumed he’d understand the humor and get that I was baiting him to vie for his attention.
It worked. I got his attention. He responded in the morning with a curt email, declining to invest, suggesting that if my idea is so great, “money should be pouring in” and wishing me “all the best”. Which he clearly did not, given his angry tweets.
Even though he did not mention me by name, somehow the press got a hold of it (did he send it to them? I don’t know) and here I am on the NY Post and SF Gate. Yay! More downloads.
These are the confessions of an arrogant startup CEO:
- I have a job to do: raise money for our startup.
- I am responsible for the salaries of 10 extremely dedicated engineers, designers, product and business people, who are working night and day because they believe in a vision for using technology to unlock human potential. If I don’t raise money, they don’t get paid.
- The product which they’ve worked for a year to build gives people the tools and community they need to achieve personal goals and live their dreams. Please check it out here: http://everest.com. If I don’t raise money, a beautiful idea will fail.
I was taught that in sales, there is an imperative: always be closing. Which is another way of saying, do whatever it takes to convince people that it is in their best interests to invest. I believe that is truly the case with Everest, and my job is to communicate that, however I deem will be most effective given the listener. When the listener is Mark Cuban, I adapt my style.
Taking the gracious and polite approach will not always get you a meeting. After being introduced to one particular VC by a close friend of his, I began scheduling with his assistant, who scheduled, cancelled, and rescheduled the meeting for six months straight. Finally, when I showed up, he wasn’t there. That’s the harsh reality of getting an idea off the ground in Silicon Valley. Building something significant requires significant capital, and everybody is vying for very scarce attention and resources.
My approach with Cuban is not at all indicative of my normal modus operandi and it back-fired. After I saw the tweet, I responded immediately, apologizing to him for the approach:
Mark, I saw your tweet. I apologize for the email. I mis-judged. I meant the flair to come across as humor, not arrogance. I truly do believe this is an opportunity for investors, but I over-reached.
I sincerely hope that my actions, especially taken out of context, don't reflect negatively on my team, our product, our partners, investors, or vision. My greatest fear has always been that some failing of my own prevents the success of something that is so much bigger than me, which I believe in so much, and work for every day.
Sometimes you blow it. But you have to keep going.
Power is perceived influence. Influence creates the illusion of power.
Cause and effect are easily confused.
When we see a leader who wields great influence over people and events, we perceive power, and we look for its source. When we look, we see that they hold titles and positions, that they oversee large budgets and teams, so we conclude that this is the cause of their power.
But it is only the effect of their ability to influence. First, they used their ability in small matters, until successful results attracted larger matters, and the larger means that accompany them.
Because of this mistake, we assume that if only we, too, had the prerogatives of ‘power’ - the budgets, the teams, the titles - then we, too, would be the puppet-master and command the outcome.
It doesn’t work that way.
I found out, because I tried. I tried and I tried. It back-fired enough times that I have finally begun to understand that despite my best efforts I never achieved power, not because it was hard to acquire, but because it does not exist.
Instead, I have begun to study and seek influence, and found it to be good soil that bears much fruit.
To grow in influence, realize that attempting to command other people is a waste of time. Because it is such a futile pursuit, it limits the scope of your influence to fewer people, and your control over them will require more energy to maintain than it is worth.
Think of it like a mugging. If you point a gun at someone, you can command them. But as soon as you move on, they will run. You may have temporary control, but from unwilling subjects that resent and resist your will.
Instead, embrace the way of the salesman. The salesman understands that there is a destination that both parties would benefit from reaching and that they need each other to get there. Because the customer is unaware of this opportunity, it is the salesman’s duty to make him aware, explain its merits and persuade the purchase.
Long after the salesman leaves, his influence remains. It remains as long as the customer is considering whether or not the proposed transaction is truly in her best interests. Once she convinces herself of it, then she will, of her own free will, perform many of the actions that the salesman would wish her to, had the salesman attempted to impose his will through the threat of force.
Sales requires influence. Influence requires trust, alignment of interests, and a plan. That’s why the most effective salesmen are also leaders. Because leaders do not command; they bring one or more people together around a plan to reach a destination shared in common.
Influence requires sales. The two are symbiotic, like Yin and Yang. To influence someone, you must sell, you must persuade them of three things: that you are trustworthy, that your interests are aligned with theirs, and that your plan is the best possible workable option.
There are many lessons in the art of sales, but one, by far, is the most important. It is a pre-condition. Without it, all the skills and techniques will feel manipulative. With it, all the skills and techniques will have their desired effect.
The lesson is that people are incredibly sensitive to how you feel towards them, so they are very hard to fool. If you do not respect them, or if you do not have their best interests at heart, or if you perceive them as an object to be won, rather than a person like yourself, with legitimate desires and needs and concerns, then they will feel it. If they feel that from you, your logic will not be trusted.
That is why great salespeople listen. Listening shows that you care about what motivates the other person and that you want to know what they think.
To sell with integrity, one must truly believe that the agreement being proposed is the right thing to do, not just for yourself, but for other person, such that, if you were them, you would agree to it too.
Once you master this lesson, then you will likely have also gained influence with the other person; for, to feel such a strong sense of conviction in the deal and empathy for the counter-party, you have probably had to convince yourself that this is indeed a workable plan that aligns interests on both sides.
Imagine, for example, the chief executive of a company. Like so many bosses, he may entertain the delusion that he has power, and may attempt to tell people what to do. When they don’t want to do what he wants them to do, he will boil with frustration. They will argue or reason with him. Instead of persuading them that a strategy is sound, he will want to say, “Don’t ask questions! I’m the boss, do as I say! I pay you to work for me!” As a management tactic, this is like pointing a gun at someone. If they don’t do what you want, you are threatening to fire (at) them. For the most talented people working at the company, this is an empty threat, because there are always other opportunities for them elsewhere, at other companies, and most of them probably pay better. So if the CEO insists on wielding his ‘power’ in this way, his best people will leave.
Conversely, if the CEO wants to get his way, he can also threaten his employees with promotions and bonuses and titles. This is an expensive and unsustainable tactic as well, and will not motivate people on a day-by-day basis.
A more effective approach begins with realizing that the people working at the company each have their private interests, and they work there, despite all the opportunity costs, because they see it as the best of all possible options currently available to them for achieving the things that they want to achieve in life, whatever they may be.
You, the leader, on the other hand, have a strategy and plan that you believe the company should follow in order to succeed, and you need them, the people on the team, to go where you want them to go, and do what you want them to do.
The best way to achieve results together is to influence each other. Encourage them to gain influence over you. Seek permission to gain influence over them. It is a profitable trade that begins with trust, then lets the best ideas win. If you truly believe that your plan is the right one for the team, then your arguments should be persuasive to them. They will feel your integrity and they will hear your logic. Similarly, if they truly believe their plan is the right one for the team, then their arguments may also sway you.
How much smarter will smart people become, how much harder working will hard working people become, if they are aligned with a common purpose?
In this way, a leader gathers the interests of many behind a journey to a shared destination. So that victory, when it comes, will be as much theirs as yours.
Waking up at 6.30am to exercise is hard.
Waking up at 8am seems easy, by comparison.
Resisting the temptation to eat sweets is hard.
Indulging in a cookie at lunch seems easy, by comparison.
Staying up late to get every last detail right is hard.
Heading home when it’s “good enough” seems easy, by comparison.
Saving money is hard.
Swiping the card seems easy, by comparison.
Telling truth by admitting wrong is hard.
Letting it go unaddressed seems easy, by comparison.
It’s hard to do the right thing.
But it’s even harder to do the wrong thing.
It’s even harder to realize you’re out of shape, when you could be feeling energized, fit and strong. It’s even harder to feel unhealthy and overweight, when you could feel trim and healthy. It’s even harder to be good, when you know you could be great. It’s even harder to get by month-to-month, when you could be secure. It’s even harder to come to terms with your own guilt, than to own up and regain your honor.
It turns out that every choice has two consequences: pain and pleasure.
Beware the pleasure before pain.
Choose your hard.
Credit goes to my sister, Leila Pari, for sharing this insight during a late night drive in Hollywood. Thanks for the inspiration, sis!
They laud simplicity because they do not understand it.
If you show it to them, they will recognize it.
Let them ask for it, let them pay for it.
Just don't ask them to do it, because they do not know how.
That's where you come in.
What is simplicity?
Simplicity is not about less.
To simplify, do not eliminate for elimination's sake. Do not take away features, remove buttons from the screen, go to less meetings, seek fewer friendships, give away possessions, let go of employees, and shut down programs. Less, for the sake of less, is not more.
Simplicity lies on the other side of complexity.
Simplicity is arriving at a conclusion that in retrospect, appears inevitable.
Simplicity is not minimalism. Simplicity is perfection.
And what is that?
Perfection is attaining the sort of completeness that would not benefit from either subtraction or addition.
“Perfection is refinement applied to a standard”, my father recites. He learned it studying architecture - received wisdom from Le Corbusier or some such Great.
Refinement applied to a standard:
“This manufacturing precision extends to how these many pieces seamlessly come together. The inlay of the product is matched to the housing through a highly sophisticated process. With the part on a conveyor, two high-powered cameras take pictures of the housing. An instantaneous analysis is done, and then the best match, out of a possible seven-hundred and twenty-five cuts is determined. The variances from product to product we now measure in microns. We believe that going to such extreme lengths is the only way that we can deliver this level of quality.”
Measured in microns. The printing of millions upon millions of flawless, identical copies of such an advanced product is a feat that is truly one of our civilization's greatest accomplishments. Yet hold it in your hand, put it in your pocket, FaceTime with your grandmother - it is simple.
Problems are not simple. Problems are complex. Problems are big. Problems are vast. Problems are daunting. The harder the problem is, the more worthy of a solution it will be, and yet, the more frightening.
Simplicity should not serve as an excuse for hiding from the problems that need our best work.
Albert Einstein achieved simplicity. He dared to unravel the mysteries of the universe. He arrived at E=mc².
If you wish to pursue this version of simplicity, there are no shortcuts.
If the problem is worthy, and you believe in your ability to solve it…
Do the work.
Don't be afraid to expand - expand the budget, expand the timeline, expand the problem set.
