Acquired - Episode 19: Jet

Episode Date: August 29, 2016

Ben & David break down Jet.com’s meteoric rise, culminating in Walmart’s blockbuster $3B+ acquisition of the company just two years after its founding. Will we look back on this deal as an ‘Instagram-like’ bargain or a ‘Pets.com'-sized blunder? And most importantly, can *anyone* compete with Amazon going forward? We speculate wildly. Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvanta  More Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Topics covered include: Community spotlight: Nowdue, a super fast invoicing platform for teams on Slack. Invoice like it’s the future! This looks very cool. Jet’s deep origins in Founder & CEO Marc Lore’s first two companies, The Pit and Quidsi (aka, diapers.com) Lore’s  chance run-in with Jeff Bezos at a school picnic in Seattle in the early 2000’sAmazon's dramatic acquisition of Quidsi in 2010, including Bezos’ admonition to Amazon corp dev to keep Quidsi from being bought by Walmart under any circumstances (covered well in  The Everything Store)Lore’s  less-than-favorable opinion of Amazon's culture Lore's vision of Jet as an ‘online Costco’ that can directly with Amazon on price by selling goods to a “huge middle-class of people" at effectively zero margin, and make profit on membership feesJet’s  huge,  pre-launch  fundraising rounds, and subsequent  massively promoted public launch in July 2015Jet’s pivot in October 2015 to  drop the membership model (their only profit engine), and subsequent massive growth (but also accompanying massive losses) 'Admitting defeat” to Amazon in July 2016? Immediately followed by the  blockbuster $3B+ Walmart acquisition announcementIs e-commerce really a winner-take-all business and will Amazon just take over the world? Featuring liberal citations (again) of Ben Thompson's Aggregation Theory and the importance of customer experience. Is there any path for Walmart & Jet to compete effectively with Amazon? Is Marc Lore Walmart’s only hope?Fantastic  interview with Tim Cook discussing (among other things) the massive amount of growth still left in the internet   Followups: Lucasfilm: Star Wars Rouge One trailer drops! Featuring a strong female protagonist!   New section: Hot Takes! (thank you @cteitzel on Slack for the idea)  Verizon/AOL acquires Yahoo!Lyft reportedly turns down acquisition offer from GM Microsoft acquires Beam Randstad acquires Monster.com   The Carve Out:Ben: Michael Mauboussin’s Talk at Google and Reflections on the Ten Attributes of Great Investors after thirty years of honing his craftDavid: Strava, the fantastic social fitness-tracking appNone this week… coverage of Instagram Stories to come next time!

90 plus percent. I don't think we rode together 90 plus percent of that ride. Welcome to episode 19 of Acquired, the podcast where we talk about technology acquisitions. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today's episode is the big news of the last few weeks, Walmart acquiring Jet.com. I think this set a new record in terms of episode requests that I got, Ben. Yeah, if you combine email, Slack, in-person, Twitter,

I think I personally saw north of 10. We got to give the people what they want. It's true. Before we dive into it, I want to do a community spotlight. We have a listener. His name is Chris Laurent, and he has an app called NowDo, invoicing like it's the future. So NowDo is to do super fast invoicing for teams. It's actually a Slack app powered by Stripe. And if you're interested

in doing some invoicing for your team, you should go check them out. They're at nowdo.ai, which I love those A-I-T-L-Ds. Absolutely. So listeners out there, let us know. Get at us at acquiredfm at gmail.com, on the website, on Twitter, if you would like to be on the next community showcase. And we'd love to tell everyone what you're up to. Yep. Or on Slack.

And if you're not in the Slack community, go to our website to join. Lots of good discussion from lots of people, not just Ben and me. Acquired.fm. A breath of fresh air from David and I. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation, and they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep. And as you know, from listening to us all year, ServiceNow is pretty remarkable about embracing the latest

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They boost productivity for employees, enrich customer experiences, and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com slash AI dash agents. So on to this week's topic. David, you want to do the acquisition history and facts? As always. So, Jet.com blockbuster acquisition this month by Walmart, over $3 billion for a company that was two years old, but it had only been public for a year. But the story actually starts... And not gone public, but... Or it had been launched publicly for a year, but the story actually starts... And not gone public, but... Or it had been launched publicly for a year. But the story starts way before then, actually, back in 2005,

when Mark Lorre, who is one of the co-founders and CEO of Jet, founded another company called Quidzy, which you may or may not have heard of, but you may know its main operating business, which was diapers.com. Killer domain. Killer domain name. And the Quidzy story actually starts even earlier than that when Mark started his first company, which got sold to Topps, the trading card company. And he moved out here to Seattle to run this new division of tops

and when he was here in seattle uh he was thinking about going into e-commerce and starting diapers.com and uh his daughter went to a private school here in seattle uh that jeff bezos's children just happened to go to as well hey and so they met at like a school picnic one day and chatted about e-commerce and little did they know the intersections that would be to come. Wow, so this is 2001 before he started Quidzy. Jeff was obviously, what, six, seven years

in full force with Amazon. Yep, sometime between 2001 and 2005, this happened. Wow, okay, okay. So e-commerce was a thing amazon was you know they were not a startup anymore this was a a very real company it's not like they were both ideating that maybe e-commerce will be a thing together no amazon was a thing yeah public company um and uh and laurie was thinking about uh thinking about jumping into the fray, which he did in 2005 when he started diapers.com. And there is a great history of diapers.com.

It would make a good episode for us someday, but it's already been covered very well in The Everything Store, which is the fantastic book about Amazon. And the punchline is that after a protracted negotiation during which Amazon tried to basically clone and then compete with an undercut on prices for everything, diapers.com and all of their other, soap.com and many other properties, Amazon ended up acquiring the company in 2010 for $545 million. Do you know why that didn't work? It seems like Amazon would have the resources to continue to deep discount, win on price, and then eventually put them out of business. They would, but there is an important other player in this story,

which we will see comes back again the second time, that Walmart was also interested in acquiring diapers.com oh wow so it had made a bid for the company i see i see so amazon strategy maybe was working very defensive prevent uh literally in in the everything store um uh the brad stone writes about um that that bezos gave direction to his corp dev team like do not under any circumstances allow walmart to buy this company wow yeah super interesting super interesting so um amazon buys diapers um laurie and uh the many employees of, of Quidzy go and work for Amazon. Uh, the Quidzy was established in, uh, in New Jersey, actually in Hoboken. Um, so, uh, Mark moved. And as was Jet, right? Jet's based out of New Jersey.

So, um, Amazon, much like they did with Zappos left diapers alone. It's still an independently operating company, fully owned by Amazon. Um, Lori continues to run it, uh, for a couple of years. And two years later in 2013, he leaves and he starts thinking about, um, what he's going to do next. Was that on good terms? Do you know how he left? Yeah. Well, it's interesting. Um, especially now that the jet acquisition has happened um you know the as chronicled in the everything store and elsewhere you know the negotiations and the tactics that amazon used in acquiring diapers uh were aggressive um and laurie was not a fan of amazon and especially after having worked there.

And so when he leaves in 2013, which is pretty quickly, we don't know what the terms of his retention package were, but I got to imagine it was longer than sort of two-ish years that he stayed there. He's kind of got a chip on his shoulder, and he wants to gun for Amazon and Bezos kind of with a vengeance. Yeah. And I think he rips on when he was starting Jet or talking about the reasons behind starting Jet, he rips on Amazon's culture a little bit. And he's talking about among the many ways that he wants to compete with Amazon on Jet being, well, I'll leave you to tell

the business strategy, but he wants to create a place that's not such a cutthroat culture. Absolutely. I've got the quote right here. He gives a quote in the New York Times after he leaves Amazon and as he's starting Jet, he says, at Amazon, I saw that it didn't matter how you treated people. You just paid them enough so you didn't care if you burned them out and then you got new people and burned them out. It was an environment of very short-term thinking. Wow. We talk about Amazon all the time on the show and we praise them for their incredible long-term thinking. Yeah. I don't think of Amazon as an environment of short-term thinking, but we'll get to that. So he starts Jet in the summer of 2014. And the vision, the idea that he has is that Amazon obviously is very, very good at what it does. But Amazon's core customer is not your average American.

It's the upper class. It's wealthy individuals, upper middle class, people who actually care. They care about price, but they also care a lot about convenience and selection. Amazon's holy trinity, which we will come back to. And he thinks there's an opportunity to compete directly with Amazon and to compete on price to be the low price discount retailer on the internet. And the model that he has for that is Costco. Another great Seattle company. Another great Seattle company.

The intersections are just amazing here. And so another quote that he says as he's starting the company in this interview is he says, there's this huge middle class of people that are going to be spending more and more dollars online. And for them, it's going to be all about price and that they'll be willing to trade off convenience and selection versus price. So he has this big vision. He's going to win the core middle class of America away from Amazon. And he's not going about this small. He goes big. So he raises a seed round from NEA, Accel, Bain, and WTI as he's starting the company. So this is July 2014,

one year away from launch, just starting the company, raises $80 million right off the bat. Wow. Yeah. I mean, anybody who's going out and raising a seed now and knowing what valuation you're getting, there are a small handful of people in the world that could do a seed like that and instill enough trust to say, yeah, my seed venture, you can have, what, 20% to 25% of it or something

for $80 million. That's incredible. And he's not done. He doesn't stop there. February of 2015, we're still months away from launch. They haven't sold a single thing. The website isn't live anything. He raises another $140 million. So before they even launched the company, launched the product, he's raised $220 million. Wow. And I remember hearing about this when it was going on

and everyone that had been you know burned in the the late 90s talking about oh my god the bubble's back this company is it doesn't even have a great plan to make revenue they haven't launched a product yet pets.com all over again um well uh needless to say there was a lot of hype when they finally launched on july 21st 2015 so just over a year ago a year ago as we sit here today um and when they launched they spent a ton of that money on advertising customer acquisition i remember i was in um i was in new york city uh last fall uh shortly after they launched, and Jet had bought out, felt like half of the subways in New York City. And there were billboards all over the place, all over the country. They did not play small ball here.

Yeah. And they actually, I think they had a pretty successful organic invite campaign too, where they gave people like six months of free membership. I think it was called the Jet Insider Program. Yeah, I have it here. And refers were given up to, yeah, that's it. Six months of free site membership and they got almost 400,000 people, 350,000 people that signed up for the early membership program. So, I mean, that's pretty incredible to be able to build a base of 350,000 users pre-launch. Yeah, absolutely. And they did it by, as you mentioned, giving away free membership for six months. So we mentioned a minute ago that the model for how Lori and Jet were going to compete

with Amazon was they were going to use the Costco model. And so the idea was that Jet was a membership site and it cost $50 a year to be a member. Half of Prime. Half of Prime. Yep, half of Prime. And that the company, Lorry, was super explicit about this, that much like Costco, if you actually look at Costco's financial statements. Um, and you take, uh, the amount of the, the amount of money that they make from membership fees and you look at their net income, like it's basically the same thing. They make no money on everything they sell in the store. The only money they make is from the membership fees. And so that was what jet was going to do. So he, again, this is like, this isn't us talking. This is straight from Lori here. Quote, he says, the bottom line is we're basically not making a dime on any of the transactions.

We're passing it all back to the consumer. So they weren't going to charge membership fees for six months. If you were part of a jet insider, you didn't have to pay for six months. But then they were going to charge $50 a year. Which really is only a $25 value. I mean, we're actually, for those of us who are no longer price sensitive to a membership fee like that, because we're used to paying $100 of prime a year, giving me $25 toward that, sure, that's interesting. But it doesn't seem like a huge reward and it doesn't seem like a huge barrier to keep me away from signing up either.

Like the convenience afforded by fast shipping and I guess they weren't quite doing as fast shipping, but free shipping, it seems of course worth a prime membership or this case. Well, and so then it comes down to like, okay, so what was Jet actually doing? And the whole idea again was that price was most important. And so they had a goal that everything that you would buy on Jet would be 10 to 15% cheaper than you could get anywhere else online. And by that, they meant Amazon. So they actually built a lot of tech around this. And the whole idea was to incentivize customers to buy more than one thing at a time. So the default behavior that Lori saw with Amazon, and that I definitely fall into this

category, I don't know if you do, Ben, too, is that once you're a Prime member, you're like, oh, I need this. I'm going to order it right now, one-off. I'm not going to wait and order a bunch of stuff. Whenever I need something, I just order it and it and it comes right and they've slipped away from that a little bit with things like prime pantry or add-on items where i no longer subscribe and save which they got from diapers.com oh interesting yeah with with those um with those kind of mechanics i'm a little bit less confident in amazon actually than i i was um call it three years ago before those things when i would just be like, oh, I'll just prime it. I'm sure it will get here. And I'm sure I'll be able to get it free

and right now. And when that's the promise for so long, and then you have a couple of these things where it's like you need to buy something else to get the free shipping, it does actually sting you a little bit. It does. It does. And so what Jet did, a couple of things. You had to hit minimum order amounts to get free shipping. But also as you added more items to your cart, and in particular items, and they would incentivize, surface these items and incentivize you to do it, that were physically located in the same fulfillment center. So it costs less to assemble this package and you could send it all in one box. They would then drop the price on your items in your total order as you were basically doing

these behaviors that they were incentivizing. And the idea was, and another thing that they did and still do is, I believe is if you use a debit card instead of a credit card, you'll get a one and a half percent. They give you half a half percent. Oh, they give you half the interchange back? Yeah, they give you half the interchange back. This is super interesting. If you waive your right to return anything, then they'll give you an extra discount. If you waive your right to return certain items, they'll give you a discount on those items. That's so interesting.

I mean, all these things are wildly ambitious, very interesting. They're intuitive. And require a lot of technology, actually. Right, right. A lot of technology and a ton of financial modeling. I mean, you have to imagine that they're figuring out what return rates are, what it's worth to them, if they're going to make the trade-off between customer maybe getting dissatisfied with something they have and blaming the Jet brand versus how much it costs them to facilitate the return and actually accept the thing back. All this is very ambitious and interesting.

Maybe too short of a timeframe since it's only been a year, but did it work? Interesting. So let's remember all of this, the stated goal is all the savings that we're going to get operationally from this we're going to pass back to the consumer and we're gonna our starting prices are going to be so low anyway that we're basically not making any gross margin anyway and the whole idea was the membership fee would make up for that well a couple months go by we get to october 2015 and the other shoe drops and for whatever reason i got to imagine the internal data was showing that it was a flop and that's what like three months after they launched yeah three uh three months after they launch jet announces that they're dropping the membership fee so it's now completely free open to anyone to shop on Jet.

And the prices are still going to be really low. So they basically said, our only profit engine, we're killing. I'm reminded of the quote that people often, they don't really anymore, but they used to talk about Amazon, like the equity analysts would say that when they were down on Amazon, that it was a charity being run for the benefit of the American consumer. Jet literally became a charity being run for the benefit of the American consumer. Wow. And, you know, so Lori's, you know, statement on this was that they decided that on some items, the data showed them that they actually didn't need to discount 10 to 15 percent they would only discount four to five percent and that's how they would make money but remember again

they're discounting four to five percent relative to amazon which already has like incredibly low prices and drives massive and can get those prices through massive scale and negotiating power with suppliers and their incredible supply chain and everything. So with all those advantages, Amazon still maintains this razor thin profit margin. So the fact that the idea that you could take Amazon's profit gross margin on items, uh, knock it down by another four to 5%, do all the fulfillment yourself and still make money? Perhaps suspect here. Hmm. But nonetheless, the very next month in November of 2015, they managed to raise another $350 million round that Fidelity leads. This time it was publicized at a $1.4 billion

post-money valuation. Okay. So David, you are a venture capitalist. You get Mark Lurie approaching you for this round. Why would you do that? And I got to imagine, if not slide one, but somewhere in the pitch deck is the slide that says, oh yeah, our profit model, we just killed that. Right, right. So what could possibly be the thing where you're like, we painted it as a pretty negative story so far. Why would you do it? Here's why you do it. So they announced the round in November 2015, another $350 million. In December 2015, in Q4 holidays, you know, the big moment for retail. At the end of December, they announced that they now have 2 million active customers and that they did 33 million in revenue in December alone. This is for a company that

only launched six months ago. So this is incredible, incredible growth. So it's growth, even though, you know, even at this point in history, you would have been still suspect on the unit economics of the business. It still seems like a good investment opportunity. Go, go, go, Ben. I'm sure this was the story, was and is still the story that to compete with somebody like Amazon in e-commerce and in retail, you need to acquire customers and you need to make a huge splash and you need to just make this massive investment in that customer acquisition plus the infrastructure. And to do that, you're going to have to lose money for a long time. And Amazon itself lost

money for a long time, as we all know. Yeah. And I wonder too, is Mark Lurie going into making that pitch without any hedges and saying, this is a hundred year company, we're going to be enduring, we're going to serve the middle class, or is there something in there where you're like, ooh, this could be a quick turnaround, like something like this Walmart thing could happen? Well, that's what I was going to say. Whether this was a slide in the pitch deck, literally or metaphorically, we'll never know. But I got to imagine going through all of these investors' minds are, hey, this is a get-to-scale play. And if Jet can get to scale, maybe there's some chance that they can build a sustainable standalone business here, but there are a lot of people in this world who are very threatened by Amazon and who would love to have an opportunity to bring into their fold an at-scale e-commerce business, of which there are basically one in the world in the U S right now, which is Amazon. Right. Right. Right. So, um, we'll get to that in a second. So that was December, 2015, May, 2016. So a couple months ago,

um, jet announces again that now they did 90 million in revenue in May of 2016. So they've tripled revenue, monthly revenue, uh, from December holidays. And December, of course, is the biggest revenue month for any retailer. So their year over year would have been way up. Way, way, way. Well, it was infinite because they weren't even launched in May of 2015. Right. But presuming that they could compare it to a quarter. Right. The growth is incredible. No doubt about that. Uh, but what was interesting is, uh, shortly after that announcement, um, last month, uh, so July, 2016, uh, Lori does another interview with fortune. I think it's clearly, uh, PR was one of their customer acquisition strategies. Uh, and Lori

is very good at that and has always been. Um, but it's interesting, this quote that he says in this interview last month, he says, well, uh, this being American, you know, retail e-commerce has never been a winner take all market. Uh, which, you know, he, he wasn't exactly saying it was before, but he was kind of like, Hey, Amazon, I'm coming for you. I'm going to beat you before that. He says, this has never been a winner-take-all market. There will be a really large number two, three, and four, and we can be one of those. So he's basically said, I give up. I can't be number one. So this is a good time. I mean, a lot of times we pause and wait for tech trends to later. For new listeners, we've got our sections coming up,

our acquisition category, what would have happened otherwise, what tech theme does this illustrate for you, then we grade the acquisition. And rather than saving this for what tech themes, you know, David, is he wrong about the future that the economics that the internet creates can turn retail into a winner take all market? Well, I think, you know, if you go back to our, our favorite analysts on this show, Ben Thompson, and, you know, the idea of aggregation theory, this kind of is the underpinning, you know, sort of ideology of the internet and internet business models is that you can take all of these industries that before the internet, um, were by necessity fragmented and could have multiple winners because you needed

physical store space in, you know, every market in town. And that led to, you know, some companies would do better in some locations and others and others. All of a sudden, there's only one storefront and it's a website. And that can lead to just this huge ability to aggregate. If you can create the best customer experience, and we'll get back to this a lot, I want to talk about the idea of the customer experience of Amazon versus the customer experience of Jet, that the best customer experience is going to win and be a winner take all. Yeah. And I'm trying to look up a stat here. E-commerce has a percentage of US retail revenue. In 2012, I'm sure it's only a few percentage points more now but in 2012 it was like five percent like there is so much of retail that is transacted physically that has yet to move to online and you and i are talking about

this the other day about i'm doing the dumb thing where i try and time the market and wait for a little dip in amazon so i can buy it and then realize that short-term little gain and then hold on to it for the long while. And you're making the obvious point that, Ben, there's so much retail that still has to move to online. There's 10x or 100x more growth left in this company if they continue to conquer the way that they are. And I do wonder as all this, the 90% of retail that's left physically as it moves to online, is that Mark Lurie comment, is history going to disprove that, right? Maybe it will be a winner-take-all market because if you vertically integrate and have all of the

distribution centers- and the best customer experience and the best customer experience yeah and you have all that under one roof like amazon or maybe what jet could be maybe retail is a winner take all in the future well um i think we should talk a lot more about that uh we'll just wrap up real quick acquisition history and facts because we're at the end here. So August 8th, last week, as we're recording this, bombshell announcement, Walmart acquires Jet for $3.3 billion, $3 billion in cash, and $300 million in stock retention incentives for employees. So a couple of quick things on this. Um, one,

Mark Laurie is going to continue to run jet. It'll be a standalone property taking the Amazon model here, like Zappos and like diapers. Uh, but he's also going to run walmart.com. Um, and, uh,

they have a pretty significant, um, lockup on him. So a huge portion, it's been reported that a undisclosed but huge portion of his financial outcome from this deal, both in the stock incentives that were the $300 million and I think also a big part of what he would earn from the cash up front is going to be subject to him staying at Walmart for five years. Wow. Which is quite long compared to traditional lockups in tech acquisitions. Right, right.

And he owned a tremendous amount of this company still, something like a quarter or a third, even after all this money. Even after all that money raised, yeah. Don't know exactly because we don't know the valuations on the early rounds, but he definitely owned a lot. And super interesting. And so much of the press, uh, both the press, uh, and, um, the actual statements from Walmart about this deal are, you know, clearly a lot is about, yeah, the fact that they're putting in the acquisition announcement that he's going to run walmart.com. It's like, obviously you don't pay 3.3 billion for a person, but they really wanted Mark Lorre. Well, we'll get into that next in acquisition category.

But to come back to this idea of, you know, is there going to be a really large number two, three, four in U.S. retail e-commerce? Man, it is really hard for me to imagine that. Yeah, I think right now, I was trying to do some research the other day into who is the number two to Amazon right now. Is there a meaningful second large e-commerce site? And what it comes down to is that there are category by category. I was talking to a friend

who used to work at Amazon and he was saying that in electronics, there's obviously your best buys of the world that dominate online in that category, still generally way behind Amazon. But, um, there is no, you know, massive horizontal platform like, like Amazon is that, that gives you a strong number two. Yeah. And I think, um, well, let's, let's, uh, let's continue this discussion in tech themes, but, um, let's do category first. So this is a tough one. Where are you going to put it, Ben? Yeah. So I sort of have like a little flow chart here. I don't believe that Microsoft... That's a good Freudian slip. I don't believe that Walmart will independently operate Jet.com forever. I think that they take the learnings

from that and roll it into their business. They could do something really insane and bet the farm on Jet that they actually keep Jet alive and pour all the Walmart.com resources into that. But I don't think they'll do it. I think what ends up happening is they run Jet as a standalone thing for a few more years. They take the learnings from it. Maybe even they take the entire model and rebrand Jet.com as Walmart.com and keep that entire model as the way to do Walmart e-commerce. But if they had permanently kept it alive, I would have said business line. But since I have low confidence in that, it's a people and a technology acquisition. I think it's actually

more the people that know how to build the technology. I think they've probably built a tremendous amount of interesting technology now, but it's really the fact that Walmart, other than Walmart Labs who built the mobile app, but that's much less sophisticated, doesn't have in their DNA a strong technology background. And I think with buying such a large group of people who are running such a fast growing business, it's like, can we overcome this tipping point of making this actually a place for technologists to go like Amazon is, rather than what you usually see in these scenarios of buying a smaller company and those people are just a at some point. It's like, is,

is jet a big enough buy that we actually can tip the scales and say, you know what? You are a sophisticated developer and architect that or product person or whatever. Yeah. That, that is interested in building the future of this stuff. This is the most interesting place to be.

Yep. No question. There's that part of it. You know, as I was thinking about this, I was going through the, you know, our standard rubric of categories and I kind of part of it. As I was thinking about this, I was going through our standard rubric of categories and I kind of went down the list. I'm like, okay, well, people, there's definitely a big aspect of that in Lori and the other people

at Jet. Technology also, exactly as you were saying, a big aspect of that to this deal. Product, I don't think there's really a lot of product here because Jet was a retail platform, not a product itself. So maybe not that one as much. Business line, yep, they're adding the Jet.com business line. And then asset too, the category we added last time with Waze. Very much. So in the press release that Walmart puts out here, they note that they make sure to like, I think the second bullet that they call out about the rationale is that Jet has a growing customer base of urban and millennial customers. Boy, that doesn't sound like Walmart's base. Who does not shop at Walmart? Urban and millennial customers. So there's definitely

an asset buy here in the customer base. I think you're right, though. At the core, the two biggest reasons are the people and the technology. But it kind of could fit into multiple buckets here. Yeah. Yeah, I agree. It's funny, as you say, that the millennial generation and the urban dwellers are more of the jet base and that's so obviously not walmart i saw a couple comparisons um on a couple other podcasts i listened to and then um in stratechery to uh walmart being this generation's sears and yeah kind of fading into irrelevancy because the factors that made them big are not aligned with the current generation. And you see this incredible trend toward urbanization and in a very meta way,

Amazon setting the trend for what is a modern urban campus look like rather than being out in the suburbs and industrial parks. And Jet just caters to that demographic and and plays on that trend so much better than walmart's existing business so do we think that um this means that we're going to see biodomes in hoboken nailed it that's exactly what i mean for for those of you not in seattle amazon is building these like super crazy um is it biospheres? Biospheres. Yeah. Yeah. Obviously biodome is the, is the, yeah. But the yeah, it's like an indoor or like an indoor central park type thing for Amazon employees and, and people. I think it's going to be open to the public. Oh really? In right in downtown Seattle. Yeah. That's awesome. Yeah., right in the middle of Amazon's campus.

Yeah. I'm trying to take off my... Obviously, we're huge fans of Amazon here. So I'm really trying to take off my Amazon's going to take over the world hat when looking at this thing. Because I think more and more, even over the past year with Amazon's tremendous growth

and just having a lot more faith in their long-term plan, I just start evaluating things as, are they really going to compete with Amazon? And I think that's a pretty fair assessment. But in looking at that, I can make sure that- They're like this generation's Microsoft. In the 90s, any company that was trying to raise venture capital, the first question would be like, well, what are you going to do when Microsoft starts competing with you? And then Google. And that was like the question for a while. And then Google and then Facebook.

So here's, this is like a great allegory. So mobile undid Microsoft, or at least the old Microsoft way. Like what will be the thing that pushes Amazon into irrelevancy? Yeah, Great question. I mean, and I think this is like, uh, obviously, you know, self admittedly, we're both huge Amazon fanboys here, but like, I don't think it's jet, you know, I think it's something, and I think there's also a good chance that it wasn't the Mac. Yeah. Yeah. Um, I think there's a good chance that whatever that is comes from Amazon itself. You know, they're making big investments into drones with Prime Air.

Like that could be hugely disruptive because that changes the economics of delivery and fulfillment. You know, it could be voice that they're doing with Alexa because that changes the customer experience of how you order. It could be 3D printing with products that you're buying don't get made at a factory anymore. Maybe they get made at your house, but maybe they get made locally and then just last mile delivered to you. Amazon's investing in that too. It's hard to see you know what the blind maybe virtual reality like i don't know yeah it's interesting the other lens to look at that through is maybe um we're just mixing tech three themes all through here this episode but it's one of the things that that is talked about with why apple nailed mobile is because Apple like skipped a generation and lost the previous war. So it's, it's like, who's sitting out this one and will be like way behind and gasping their

last breath to come up with something truly innovative that unseats Amazon. I've been thinking about this too. Um, there's a great's a great article that we'll link to in the show notes, a series of articles that have come out this week on Apple, interviews with the senior team. Yeah, they're doing a ton of PR right now. They must be trying to hide something. Getting ready for the September 9th thing. Yep. But there's a really good one with Tim Cook, and he kind of talks about this a little bit. And I love this because in tech, it's so easy for us to always be thinking, what's the next thing? And he talks about this.

The interviewer asked him, iPhone growth is slowing. It actually was down last quarter. What's next after mobile? Is it a car? Is it AR? And Tim makes this great point. He's like, mobile is the greatest market that technology has ever seen. And we are still so early in it.

Like, every person on the planet is going to have a smartphone and half of them do already. And so many people that never had computers have smartphones. Exactly. Like, you can't even compare like yeah okay let's look at the auto industry like it's way smaller than the phone industry um and

his point is that like you know he says mobile still has so many amazing years of growth ahead of it like it's you know to use an amazon phrase it's day one you know still 10 years in to the smartphone um and i think amazon is kind of the same thing like that's their phrase it's day one, you know, still 10 years into the smartphone. Um, and I think Amazon is kind of the same thing. Like that's their phrase. It's day one. Like, you know, e-commerce, uh, is day one, you know, there's still so much ahead of it. Yeah. It's 5% of us retail. Like there's so much ahead of it. Yeah. I was going to refute the Tim Cook thing. Cause like two and a half billion people or three billion people or something have smartphones so there's like two to three x more growth left in it well his point was that um his point wasn't so much that it was like

think about all of the the corners of your life that your smartphone is going to be a critical part of in the future that it isn't today like uber great. Like who would have thought the smartphone would have like been your taxi a couple of years ago and now it is. But like, is the smartphone your doctor today? No. Will it be in five or 10 years? Maybe. You know, is, uh, is the smartphone, you know, whatever it was, the smartphone, how you bought

stuff on Amazon five years ago? No. Is it how you buy stuff on Amazon now yes yeah interesting yeah and and you make a great point on the the retail thing like it really it's cheesy but like it really is day one like people overwhelmingly still don't buy their stuff online so yeah i mean i think of course there are things that uh waves that will come along that could disrupt Amazon. But it's one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to mid-sized businesses and provides enterprise grade security with the technology, services, and expertise needed to protect you. They offer a revolutionary approach to managed cybersecurity that isn't only about

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Yeah. Well, I can tell you one thing that would not have happened jet would not have sold a amazon under any circumstances i mean i can't uh i can't imagine laurie you know working for jeff again yeah and okay so that's not a possibility uh so the walmart thing falls through let's say walmart's just not willing to pay the price tag is it like to target or one of the other sort of bigger retailers? Yeah, or Google. Why a technology company? Like why a Google? Well, Google's been experimenting in many ways

over the last couple of years with trying to compete with Amazon in different ways. You know, there was Google Shopping Express. Which has never really been serious. Never taken off, but they sunk a ton of money into that. And a whole bunch of initiatives, I don't think any of which have really worked, but that they're working on. Yeah. And so you can imagine that, I mean, because I don't know if they still are, but for a long time, Amazon was the number one advertiser on Google. They spent more money on AdWords than

anyone else in the world. Oh man, I totally believe that because it's amazing when you search for a product now, how your organic search result and your paid search result are both for that product on Amazon. And neither Google nor Amazon are happy about that. You know, Amazon is aggressively trying to move, do everything they can to reduce that dependency. Right. It's like Amazon's paying the Google tax. Yeah, exactly. And Google is like, oh man, that's a huge opportunity. And like, that's the biggest part of our business. Like, how can we just do that directly? Yeah. And oh man, this is really interesting fact. So I've been using smile.amazon.com for a long time. They basically take the affiliate fee that you would be giving to, you know, whoever referred to you, like clicking through from the wire cutter or something and donate that

to the charity of your choice. And I was like, that's so interesting. I always wondered, like, what's the motive for Amazon to do that? And they basically are trying to give you a strong enough incentive to bookmark it so that you hit Amazon as direct traffic instead of going through Google and paying that customer acquisition tax. Because even though they'll then pay that affiliate fee on everything you buy, they won't be paying the AdWord tax to Google. Yeah. It's like, we'd rather donate this money than give it to Google. Yeah, seriously. i mean i think somebody else buys this company like yeah like they were not

going to be able to continue to raise the amount of money that they would need no which is is so interesting that i mean amazon did and Amazon did it in the public markets. And Amazon did it when there was no Amazon to compete with. Yeah, right. They built that business over a very long period of time. Right. And they did it financed by the public markets. Yep.

Neither of which Jet had the luxury of doing. They had to do it super fast, and they had to do it from private market investors. Yeah. And they definitely get picked up because investors have put a ton of money into this thing. It's not going to zero. This company is going to get picked up at some point for some kind of favorable outcome.

Yeah. I mean, you got to imagine that that was a huge part of the investment thesis for all the VCs and the mutual funds that invested in Jet. Yeah. And you start to wonder too, like a few months ago, do you start getting, if you're Mark Lurie, do you start getting investor pressure to be looking around? Yeah. Like it's clear you're burning tons of capital. Like growth is there. You're building a customer base, but like you've explicitly told the market you have no profit engine right and

then you've explicitly told the market that you no longer think you can beat amazon right um something's gotta happen yeah yeah um another thing that's going through my head is okay so like why is this we had um had Taylor Barrett on last week, and he was talking about the acquisitions that he thinks go the best are the ones where the founder of that company, the company to be acquired, is excited to get their hands on the assets and resources of the larger company to make their original vision

fulfilled and more successful. And what are Walmart's assets that Mark Lurie would be happy to get his hands on to make that dream come to fruition? Why is that a good place to land for Jet? Well, I think it's a couple of things. One, a lot of money. Yeah. Like Walmart has way more money than Jet would ever be able to raise. So yeah, that's an interesting thing that like if it really is true that they're going to let Jet continue to be its own thing and they, I mean, it's a tall order to hold Walmart to their word of continuing to pour money into this thing. Like we don't know what promises were made, but like this thing needs a ton of capital to pour money into this thing. We don't know what promises were made, but this thing needs a ton of capital to grow. Walmart's effectively the best private

investor or maybe the best since they didn't have access to the public markets and definitely couldn't have IPO'd. It's like, hey, this is actually a great place to, if they're committed to it, fulfill our mission and just pour a ton of money into growing. And I think that's number two, which was Doug McMillan, the CEO of Walmart. You know, well, at least if you listen to the interviews after the acquisition and the press release, you know, clearly has a man crush on Mark Lorre. So, you know, and, you know, Doug has said, you know, Mark's basically going to have carte blanche to do what he needs to do to make this a successful business and all the resources he needs. And then I think three, the other, the third asset that if I'm Mark, I'm excited about is the customer base of Walmart. Like the vision of Jet originally was like serve, you know the middle class americans that are price conscious

and that's walmart's customer base yeah that's true and then before we move on there was one other thing i was thinking is it's really difficult to compete with amazon now merely because of how razor thin their margins are and amazon you know famously your margin is my opportunity um it was a it's a jeff bezos quote from a long time ago when they were starting amazon and he was saying that about walmart um you know that they were making a few what three four five percent um of profit margin sale and amazon makes in the neighborhood of one or less and they um amazon was growing up in this world where there was opportunity to compete on price there and jet had a really hard time obviously competing with amazon price since there just wasn't much margin left do you know of any historical precedent where there was already a race to the bottom? One company became dominant

because they were incredibly cheap on razor thin margins. Like how were they upended? How did they, because presumably you have to compete with them on some other access or some new technology comes around and upend them. I don't know. It's hard to imagine like i think about like microsoft's you know or um traditionally you know the whole your margin is margin is my opportunity quote applies to high margin businesses right like microsoft's problem was they made so much money on windows that they couldn't transition to a world or transition fast enough in the last generation to a world where the operating system is commoditized by the browser. But if you already are operating in a world where you know you're a commodity,

it's super hard to get disrupted. Yeah, and that goes right into my tech theme. This is such a classic innovators dilemma yep i mean for 20 years now walmart has watched and their their biggest fear materialize where amazon just grows and becomes this mega behemoth and starts stealing their business but they can't seem to compete because what that would involve is is cannibalizing their incredible business and building a super low margin business. And that might be a long-term strategy. It might be the necessary long-term strategy to stay alive, but they're a publicly traded company. How do you tell your shareholders,

the next 10 years are going to be pretty rough going because we're undercutting ourselves and building this thing that makes way less money for a long time. Yeah, super hard. And again, in a minute, we're going to grade this, but man, it's hard for Walmart out there right now. On the one hand, they spent a lot of money for something that I think at least Ben and I feel like is still going to lose to Amazon. Like Walmart's still going to lose and Jet's still going to lose. But they spent $3 billion, 3.3. Like that's not a lot of money to Walmart.

So, you know, it's a shot. It's a better shot than they'd have on their own. Right, right. I was thinking about that in the lens of like, how do I want to evaluate this? It definitely puts them in a more favorable position than they were. But unfortunately, I think we have to evaluate on the lens of, is this actually worth that much money? Where that falls flat, and I think what my real position is, is you kind of have to do an expected value calculation and figure out like, what do you think the chances that this thing actually succeeds are? That Jet will return in profit dollars more than 3.3 billion. Yeah. And like taking a 20 year time horizon, I mean, this is like a potentially trillion dollar

category. Yeah. So. So, I mean, there is a non-zero chance that Jet can either beat Amazon or become a meaningful number two. Like we could be wrong. Right. Right. Let's say this becomes a trillion dollar business. I mean, if there's a 1% chance that it succeeds, the expected value is still 10 billion, right? Like that it actually kind of it great 3x yeah exactly exactly you know um this is the art uh of being an investor versus the science like right what are these probabilities yeah and uh you know assigning one percent and assigning a trillion are super arbitrary right the the magical nature of the whole thing is it's binary

like either it's really going to work and it's going to be company saving which we're both saying is the very unlikely or it could happen yeah or it's definitely not going to work and we know for a fact or let's like say that it was the far more likely outcome if they didn't acquire jet is that walmart just was going to totally lose. They could not have competed with Amazon. Well, and back to the people thing, right? Man, $3.3 billion is an expensive acqui-hire, but who would Walmart be able to recruit to go be a senior leader at Walmart who would guide them through, you know, guide them through this like, you know, last stand that actually really knew how to do e-commerce and knew it from the best and knew it from the inside of

Amazon like nobody. Yeah. And if you're recruited to be that exec, you have this uphill battle of recruiting all the people that you know are talented to come work at Walmart with you. This way you get to bring like a world-class team yep yep even even if you're rearranging the deck chairs on the titanic we're we're i feel like we're bleeding into conclusion which we'll get to real quick but um two tech themes i wanted to mention quickly one we've touched on a bunch but i just think this is such a like in terms of handicapping jets chances for success like i so totally believe in aggregation theory and Ben Thompson's aggregation theory

and the idea that on the internet, the best customer experience wins. And this is where I think the logic of Jet was flawed, which is that, oh, there's a segment of customers that care about price more than anything else and they don't care about the other two parts of the holy trinity of you know the amazon holy trinity of retail which is price convenience selection on the internet i think that's wrong i think everybody cares about all those and amazon can offer all three to to everybody to lower class people to middle class

people to upper class people um and like who wants to think that they don't deserve great convenience and great selection like nobody you know um so i think again i could be wrong you know but but i think the logic behind jet was flawed in that um all three are important to everybody um so that's one two i also think like this also, we've been really hard on jet on this episode, but it also is a little bit of the faster horse thing to me too. Like we were talking about like, what's gonna actually disrupt Amazon. I don't think it's jet, you know, like it's jet is a faster horse. Like what's, what'll disrupt Amazon is drones or 3D printing or virtual reality. Right. And it's so interesting to look at Walmart acquiring Jet. It's like,

okay, cool. Jet can be competitive on price, much like Walmart was always competitive on price and their business model was to make a little margin. Amazon has this different business model where they've created this incredible flywheel where they make a small margin on third-party sellers for using the platform. Oh, yeah. And then they also charge those third-party sellers that use Fulfillment by Amazon for leasing space in their warehouses. They've created this totally different- And running their websites on AWS. Right, right.

They've created this totally different business model that's not making a couple pennies on every transaction. It's like having a percentage of every piece of the back end and the logistics leading up to that transaction. And I think they're playing a different game. Yep. Whereas JEP fundamentally was playing the retail business model. Yeah. Okay, conclusion. D, like it's not an F because Walmart had to do something. Yeah. I'm gonna go C for the reason that I was saying a minute ago, which is like they had to do something

and this I think was the best that they could do. Like, again, they weren't gonna to hire like what search firm in the world is going to take on that job of like, you know, hey, the JD says build Amazon within Walmart. You know, like nobody who's actually capable of that is going to take that job. Yeah. Yeah. So you think this is just as good as youtube okay okay c-minus we're all over the place yeah um okay that's what we got for jet uh hopefully you enjoyed it uh this was a lot of fun doing i've got a couple sections couple sections to wrap up quickly here. Follow-ups. Ben, did you watch, did you see the new Star Wars trailer during the Olympics? Lucasfilm follow-up alert. Oh my god.

So, my spoiler alert, and let's give about five seconds of me talking to other people. Spoiler for the trailer, not for any movies. It's still, there are dedicated people who don't want to watch the trailers. My favorite tweet of the whole thing, so obviously there's this incredible moment at the end where you get about a half second where you see darth vader and it's like

it's amazing right and i don't i don't know how much we want to get into this on the show but you know twitter's become this place that is not necessarily the greatest place to hang out all the time for for all people and i'm gonna look up the actual tweet here it is it's from craig hockenberry the developer of twitterific everyone's worked up about seeing darth vader for half a second seeing a strong female protagonist for the other 215 is more important yeah love that it was awesome it was like mic drop i know i found myself like i saw that right after i saw the trailer and i'm thinking oh like i and the rest of america and the world are all worked up about darth and there's this incredible shift going on in like the world where the most anticipated movie

of this year has a amazing strong female lead yeah as did the previous star wars movie yeah um yeah what uh disney just continues to be a stellar steward of lucasfilm and Star Wars and like, man, two Star Wars films in two years. And I, and then we're going to get three in three years. Awesome. And we're like so amped up about this trailer.

With strong female protagonists. Right. And we've never met any of these characters. Like these are entire, except for that little quick clip of Darth Vader. Like this is, these are people that exist in a universe that we're invested in but we aren't invested in a single one of these these uh these characters so yep um tremendous

job to to disney as usual okay uh new section that we're adding uh this will be very quick um but we we got several requests for this is hot takes. Yeah. Thanks. Thanks for throwing this out in the Slack as an idea. Yeah. There have been a ton of M&A transactions happening recently. It's like they're coming hot and heavy. We should do an episode just based on like what is going on in the market. Yeah. We could, we could do some fun stuff. So four that we have today for the idea here is we're going to do 30 seconds or less quick takes on these deals. Number one, uh, Verizon acquiring Yahoo. Yeah. Like I feel like we just did that episode, so we don't have to do that. I saw these great, uh, more great tweets about like that, that Verizon, that Yahoo is going to be like the fabric that holds all of verizon's aol assets

together or something it's like i have no idea what that means i like that's like uh that's like random startup generator right that you have a history in ben oh god oh yeah we won't get into that here yeah okay uh number two uh Lyft turns down acquisition offer from GM. Reportedly. It better have been really low. To me, I don't know if there's a strong place for a second player here. I think that ride sharing lends itself

to a winner-take-all dynamic because density is so important. Customer experience. Yeah. If I wait two minutes for an Uber versus 10 minutes for a Lyft, I'm opening up Uber every time. Yeah. Yeah.

I remain bullish. I tried to start a company a few years ago called RedRide that was a ride sharing aggregator. And I remain bullish on aggregating all the other options but um i don't think there is a way that you can be almost exactly like uber but slightly worse without like a different value that's never been a winning value prop i'm gonna be exactly like x but i'm gonna be slightly worse yeah. Okay. Close to home, Microsoft acquired local Seattle startup Beam. Yeah. I'm super curious to see what they're going to do with it. I mean, we don't know how big the deal was.

Beam was an incredibly fast-growing Twitch-like service that enabled interactivity and a lot of features that weren't available on Twitch. So that you could actually play games or you could influence things that were happening in the game while somebody else was playing. Yeah. Great job to that company for building something that caught on so fast. Techstars and all their other folks up here. Super young, incredibly talented founders.

Big congrats to everybody there. Yeah. To me, I think they're it's they're gonna meld into whatever um is part of the the broader gaming strategy right now yep but i don't think that they're gonna like bet on beam being this distribution vehicle to compete with twitch twitch i mean twitch is a twitch is a juggernaut so, but we'll be great as part of Microsoft. Okay. Final one, monster.com getting acquired by Ronstadt. Oh,

how the mighty have fallen. Yeah. It's so funny thinking about like early days of LinkedIn when that was getting started. Um, that, that monster was the thing with the Superbowl commercials, right? Monster was the place that,

uh, before I was thinking about, I think the deal size was a little over 400 million dollars something like that yeah yeah so it's what at uh 50th less than a 50th the size of the linkedin deal yeah and uh you know the trend there like let's call it what it is network effects are so powerful a flat site like monster is just never going to compete with a site that has all the right network effects and incentives that LinkedIn does. Network effects, they are a thing. We should just rename the podcast Network Effects.

Yeah. Aggregation Theory, Network Effects, Flywheel. Perfect. Boom. We don't have to do any more episodes. Okay. Car route. What you got, Ben? All right. So another podcast for me. It is another, a previous car route that I had was a talk at Google by Michael Mauboussin. Oh, so good. Yeah.

Incredible. And he has this great book, Untangling Skill and Luck, The Success Equation. He has a podcast episode where he is on the Masters in Business podcast. It is a Bloomberg News publication and really, really good. He talks about a lot of the same things, but applies it get caught up in the um the glitz and glamour of what company is hyper growth right now and he kind of like brings it home and makes you realize investing is more about identifying mispriced assets and places where you have an information mismatch and then using that information to your advantage and everyone everyone is very, very focused on, will Amazon go up? So I'm going to put money in Amazon, but how there's all these other strategies around using information to your advantage to identify and bet on mispriced

assets. Oh man, you set my heart aflutter. I thought you were going to say that Michael was starting a podcast of his own, and that would have been the most amazing thing I've heard all month. Sadly, no. But Michael, if you're listening, you got to get on here. But just to add on to that really quickly, he also did release a about 20, 30-page piece this month or last, too, with sort of 10 top eternal truths of investing. And it's so good. He is just a treasure. Are we both following Bill Gurley on Twitter?

I think we are. I think that's both of our source. Yeah, I think that's both of our source. I have a non-Bill Gurley Gurley carve out though. All right. Mine is actually Strava, which is an app for iPhone and Android designed for working out, for bicycling, for running, for swimming. Uh, and it is so fun. I bet, I bet a lot of our listeners are already on it, but Ben and I went for a long, uh, at times ill fated, but really fun bike ride this weekend. And we both use Strava to track our ride. And it's just like, the app is so well done back to customer experience. Like it's the little things like we didn't have to tell Strava that we were

biking together, but at the end of it, because it knew that we were, it was tracking us, our rides and that it was, you know, 90% plus together. It joined our rides together.

And then to all of our friends who are following us on the app, like it was Ben and David rode together and, um, and your friends give you kudos and just like the, um, all of the little, the, the segments,

there are the leaderboards, the leaderboards. It's so well done. And it makes, um, working out and, and exercising in outdoors, which I love to do anyway,

just that much more fun. And it makes you feel like you're part of a community, which is super cool too. And their, um, their marketing and brand is just so on point. If you like to bike or run, just go watch all their videos that they've produced. It'll make you literally go out the door, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts.

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