Invest Like the Best with Patrick O'Shaughnessy - Josh Buckley - Identifying Legendary Start-ups - [Invest Like the Best, EP. 223]

Episode Date: April 27, 2021

My guest today is Josh Buckley. Josh is the new CEO of Product Hunt and an investor in many breakout companies like Rippling, Lattice, Boom Supersonic, and Relativity Space. In our conversation, we cover how video game companies are at the forefront of new business models, what current companies can learn from video game companies, Josh’s investing philosophy, and the three things he looks for when trying to identify the next legendary startup. Josh’s long experience operating his video game business, Mino Games, gives him such an interesting perspective as an investor, and I really enjoyed exploring that with him. Please enjoy my conversation with Josh Buckley.   For the full show notes, transcript, and links to mentioned content, check out the episode page here. ------ Invest Like the Best is a property of Colossus, Inc. For more episodes of Invest Like the Best, visit joincolossus.com/episodes.    Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here.   Follow us on Twitter: @patrick_oshag | @JoinColossus   Show Notes [00:03:56] - [First question] - His start as an entrepreneur in online game [00:05:09] - His parent's reaction to selling his first company at fifteen [00:05:57] - Starting a second video game company  [00:07:40] - The video game industry being ahead of the curve in performance marketing, distribution, and operations [00:08:49] - Notable two year lag between gaming innovation and other consumer sectors [00:10:50] - What is happening today in gaming that may be a glimpse into the future [00:12:41] - Key elements for creating a great gaming experience [00:15:29] - Building a meta game on top of the game itself to maximize engagement [00:17:23] - Monetizing free to play games through in-game purchases [00:20:25] - The most portable idea from fifteen years in gaming that can be applied to business [00:22:02] - A future shift towards usage-based pricing models [00:23:03] - His overall investment philosophy and strategy [00:26:45] - Example of small a market with a high growth rate [00:27:38] - Key elements of system elements and design when evaluating a business [00:31:07] - What a flywheel looks like and investing in one such as Next Health  [00:33:24] - Working core actions versus giving credit ones that aren’t yet working but may drive desirable outcomes [00:34:13] - Why don’t more investing firms have a flywheel? [00:39:04] - Product Hunt as a standalone business and part of a self-reinforcing ecosystem [00:40:17] - Emerging systems and ecosystem edges in the digital landscape [00:42:17] - Potential barriers for crypto becoming widely adopted in a variety of ways [00:44:29] - New frontiers and platform shifts like crypto that may unlock new doors for companies [00:45:13] - Which person has rewired his brain in his lifetime the most [00:47:13] - Weirdness around Stripe and Plaid when he first encountered them [00:48:37] - Meta games people in the industry are playing or should be playing [00:51:25] - Controversial ideas around the business world today writ large  [00:54:01] - Implications of shifting primarily towards a digital world [00:54:14] - The kindest thing anyone has ever done for him  

This episode of Invest Like the Best is sponsored by Canalyst. Canalyst is the leading destination for public company data and analysis. I'd heard of Canalyst over the past few years and became more interested after meeting the founder and CEO last year to pick his brain about SaaS businesses. Founded by a former byside analyst who encountered friction in sourcing, building, and updating models, Canalist is now used by over 300 institutions, including the largest money managers in North America and by a number of guests on the show. With detailed company-specific models on virtually every investable public equity, Canalist clients are able to react more quickly. If you've been scrambling to keep up with the deluge of IPOs and SPACs these days,

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This episode of Invest Like the Best is brought to you by Teegas. I started hearing about Teegas when several of my close professional investor friends sent me passages or ideas they'd found on the Teaguez platform. Conducting effective primary research shouldn't take weeks. It should take hours. Searching for answers shouldn't be lengthy, cumbersome process. It should be easy and nearly immediate. Expert calls should not cost $1,000. TIGIS solves these problems and makes primary research faster and better for professional investors. TIGAS has built the most extensive primary information platform available for all investors. With TIGAS, you can learn everything you'd want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 10,000 calls on Square, Snowflake,

or almost any company of interest. All you have to do is log in. Still want to do your own calls, Teegas has a solution. Experts that are just as good or better than what you'd find on other networks for just $300 per call, not the $1,000 or more that others charge. If you're curious about Teegis, call the top performing investment manager you can think of. They're probably already a Teegas customer and they'll point you in the right direction because customers, myself included, love Teegis. Visit teagis.com slash Patrick to learn more. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money.

Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaunacy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunsi asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions and the securities discussed in this podcast. My guest today is Josh Buckley. Josh is the founder of Buckley Ventures and the new CEO of Product Hunt.

He's invested in many breakout companies like Rippling, Lattice, Boom, Super, And Gersonic and Relativity Space. In our conversation, we cover how video game companies are at the forefront of new business models. What current companies can learn from video game companies, Josh's investment philosophy, and the three things he looks for when identifying the next category defining startup. Josh's long experience operating his video game business, Meno Games, gives him such an interesting perspective as an investor, and I enjoyed exploring that with him. Please enjoy my conversation with Josh Buckley.

Josh, been looking forward to doing this since we first met at a dinner two years ago. Crazy to believe how long it's been since then. We're going to have a sort of a three-part conversation here because I think you're building one of the more interesting, what I'll call modern investment platforms. It touches a lot of my favorite themes, including this first chapter of the story, which is your story is an entrepreneur. You started a business very, very young in life. I'd love you to tell us that story, what you were building, why you were building there.

Yeah, thanks, Patrick. Huge fan of the show. So I got my start as an entrepreneur. by programming. Got a computer at home when I was 11. I taught myself how to code because I wanted to make money on the internet. When I was about 15, I built my first company, which was an online gaming company. It was a virtual world. And we bought a community of a couple hundred thousand people playing this game. We made money selling virtual goods on this. I think this was around maybe 2005. I ran it from my bedroom for a year. My parents just thought I was playing video games up there,

but after a year, after a year, a company in Texas reached out and offered to buy it off me. And I was stressed out with running this thing in high school. So I sold it at the time, a lot of money. And I never even told my parents I started it. So when they had to surprise them with this contract and I kind of led into the rest of my career. What was their reaction to the contract? It was a lot of money at the time, especially for a 15 year old. And they were frankly shocked, quite proud as well, which thought amazing.

And I didn't know what to do with this money. It was life changing at the time. But that led me to do a number of things. I started flying around the world. But it also led me to study investing. One of the first investing books I read was actually the Snowball, Warren Buffett biography. And that led me to want to start flying to Omaha every year. It also introduced me to a community of people on the internet where I got my start as an angel investor when I was about 17 and had some lucky hits early on.

That brought me out Silicon Valley. Instead of going to college, White Combinator was my college. I went straight from high school to getting on a plane to San Francisco and starting a company right out of high school. So what was your second business? At the time, I just wanted to start a company. And all I knew was video games. I'd sold one. I played them.

I was a user. And I realized this was back in 2011 that Pokemon was this phenomenon because I was a big fan. But they had no presence online or mobile or anything. My best idea was Pokemon for the iPhone. and we launched it and kind of blew up. It won the top 50 grossing apps in the App Store, went through Wycombinator. Over time, raised about $40 million,

first round from Andrews and Horowitz, and I ran the company as CEO for about eight years. It was a wild ride, and I learned a lot from being in the gaming industry, developing and launching multiple games, I would say, to succeed in gaming, because it's such a competitive space, right?

In the mobile apps stores, there's kind of two shocks. There's the Apple App Store, and then there's the Google Play Store, yet there's millions of new apps launching every year, but with limited shelf space, which means it's brutally competitive and low barriers to entry. The only real way to win is operational excellence. And there's a number of disciplines you have to be better than the rest ads,

such as monetization, distribution, analytics. At the time, many investors rightfully and somewhat wrongfully just assumed it's a fully hit-striven business. I think one of the things that's been very clear in gaming over the last decade is just as much, if not more so, a service business where these games are full-on live services, where if you look at some of the biggest gaming companies around today, or at least the biggest hits of the last decade, like Roblox and Fortnite, these aren't just products, they are full-on services. Launching the game is only like 1% of the work. 99% of the team's effort happens post-launch, and the team grows massively over time.

Do you think it's safe to think of the best-run gaming companies as like an unfairly look into the future at what other companies will look like and how they will be run. Is that generally still true that video game companies are ahead of the curve on things like performance marketing and operations and distribution and all those sorts of things because of the competitive nature of them? Definitely. I mean, I think gaming in the West tends to follow gaming in the East with maybe a two-year lag, two to three-year lag.

And then consumer apps in the West follow gaming in the West. with maybe a two-year lag. And then you start to see some of these features trickle down into just even non-consumer social apps many years later. Some of this is cultural. I think games can just afford to experiment a lot more. Games also have to experiment a lot more.

The skill set that kind of a world-class gaming operational team has to develop all translate incredibly well to the key skill sets that many kind of consumer or some B2B apps have to build. There's a lot of cognitive psychology happening in there. Maybe we could talk through each of these kind of sub-disciplines because I think the lessons you learned from 15 years in the gaming industry is obviously a key thing that you're bringing to the table as an investor.

Maybe we'll begin with this concept of free to play and actually even backing up one step further. I wonder if there's an example in your mind of this two-year lag sequentially where you saw something in gaming, then you saw it in consumer social, then you saw it in non-consumer social, then you saw it in enterprise. Is there like a good example of that cadence actually playing out just to cement that idea in people's minds? Some of the most like fundamental concepts from behavioral psychology actually get their execution, probably starting it in gaming.

A lot of the ideas you might find from like a Daniel Kahneman, like loss a version, like the concept of variable awards. Everyone knows these concepts, but the execution actually kind of has followed through throughout gaming first. So we first saw the concept of loot boxes. probably throughout the 2000s in gaming in the East. Companies in the East, whether it's 10 Cent, et cetera, have now taken that idea to optimize to one full extreme

and created so much depth in the idea. Then you'll find mid-2010s gaming companies in the West, like Supercell or even like Niantic with Pokemon Go, we've gone on to implement these loopbockers or Fortnite as an amazing example with the variable reward mechanics throughout their products. It's one that maybe core ways that virtual goods are sold in these virtual worlds.

Now we're seeing both concepts of variable reward or loopboxes infiltrating a lot of consumer products. I mean, the news feed in Facebook is a variable reward mechanism. That's what makes it so addictive. That's what makes you pull back into it. It's the same with the Twitter feed. These are core concepts of behavioral psychology. Now I'm seeing startups all the way to enterprise SaaS

actually integrate the concept of variable reward because it ultimately adds so much to deliver. to a product. It's a key way for a product to both differentiate, but also delightous users. So this gaming frontier is the best place to apply our deepest understanding of human nature or behavioral psychology. And it sort of bleeds its way down through the stack of types of companies all the way to enterprise SaaS. What do you think those things are today? So what is happening today in gaming, maybe it's in the east or maybe it started to move its way west, that might be a glimpse into the future

if loot boxes and variable rewards were one thing 10, 15 years ago, what do you see in the gaming world today that you think is interesting and might bleed forward into the future? The most successful free-to-play gaming products are a mixture of maybe three different things. People just don't think it's a game. The game is maybe 30% of it. The second layer is the community.

It's both a chat room, it's a virtual world, is literally a social network or even a city within the internet. There's a group of people that are engaging together within the system of the game. There's a social network just in the same way that a Facebook or a Twitter is. And then the third element is a shop. These are huge businesses where a single player or customer will come and spend hundreds of thousands, if not million dollars on a single virtual item on their lifetime within this product.

That is higher than the ACV of some enterprise SaaS contracts. Those three elements, I think, What gaming is doing is really exploring and optimizing those three idea spaces to an extreme. All of those disciplines and those three categories, the cycle time in which games are running optimizations on them and testing far-flung ideas is at an order of magnitude faster and more extreme because the costs and the risks are lower for messing up. But also they just have to because of how competitive that market is. games treat every user's visit like it's their last. They need to kind of bring them back. You're hitting on like my favorite topic.

So we're probably going to go deeper than we typically would on these subtopics. And it begs the question what the key elements are of game design. I've read a lot of books on this topic, but you're someone that's actually built it and lived it. Can you walk us through what you think those key elements are? And I may peel back the onion on a few of them as you describe it. The best games are creating spaces that bring you into flow. I think many people know flow is a concept from psychology where it creates a sense of immersion where time, ego, and the world fades away.

And the thing is, flow is almost synonymous with fun. Flow is like ecstasy. It's exhilarating. Athletes call it the zone. The best games are really creating these controlled spaces that bring you into that sense of flow. And then the biggest games today really take advantage of this, but you wouldn't actually think of them as a game. I look at Twitter, Facebook and Instagram as games and three billion.

billion people are playing them actively. They're essentially big layers on top of a slot machine. They are these flow machines. And I think in terms of what these spaces, games, etc., what elements actually make them tick, there's like three that I've really kind of drawn out. The first is frequency. There is some kind of frequent feedback within these products. And without frequency, you're going to get apathetic or bored and fall out of the sense of flow. The second is a sense of variable outcome. So there's a bunch of psychological studies that show people adapt very quickly to a predictable reward schedule. The term maybe is addictive like nothing else out there.

And then the third one is sense of control. So believe it or not, but people actually like to work, people like to work for a reward. To stay in flow, you need some sense of challenge. It's kind of like, I know, it's quite rewarding to build a piece of IKEA furniture. The best games and a few games as a very broad term as it applies to, many things that's really psychology are really good at getting people into that sense of flow. And that's like a core loop of a game that brings someone into flow and keeps them there. A bigger challenge is scaling that.

You'll see hit products or hit games bring people into flow, but they don't hold onto them, whether it's like angry birds or flappy bird, etc. And then that's where the concept of a meta game comes in, which is kind of like the abstraction layer above the game, is what provides meaning to the game. Like, why should you stay in that loop? Why do you stay in it over time? And it's a really hard problem to solve.

One of the hardest things, because as a player gets through a game, the context is going to change. You may complete the goals. Now, what's the next goal? And the meta game is about providing that abstraction above to provide a constant meaning as the context changes. That's one thing that you see all the biggest games get right, all the way to the ones I listed, like Facebook, Twitter, and Instagram. They have a metagame around identity, around social status. Maybe a couple questions on each of the elements. I love the idea of the bigger game going on.

And let's just use Twitter. Everyone's familiar with that. And maybe the measurement of that metagame is follow or count or perceived influence or something like this, engagement with the audience on average. That is like an obvious one. That game could go on forever. Like we could keep playing that game as long as Twitter's around. And so it doesn't sunset or end, which, as you point out, is the characteristic of a great game.

How does that literally work in an actual game? So if Twitter is sort of like a quasi game, a social application, in an actual game, give us an example of a good meta game that keeps players playing longer. Because I remember Angry Birds, like I remember playing it for a few months and then you move on. If there wasn't something bigger you were striving towards, give us just an example of something that sits on top of a core game mechanic that creates the flow, but then keeps people playing it. It's actually quite similar. That's where some people can get confused, where we really separate the,

core game loop that you may do day in, day out, which is the kind of flow. And then more often than not, the actual meta game on top of many of these games, whether it's Fortnite Game of War, more often than not is people getting a sense of meaning, often on a relative basis, via social status. So maybe they want to belong to a group. So they belong to a guild or a clan in that game, and they want to help their group progress and hit their goals. Maybe they want to receive a sense of status from their peers. They want to be a bit constantly at the top of the leaderboard, it's all about providing that meaning and making sure that there is true meaning to the player in that game. So you and in Fortnite, it may be constantly having the best

skin so that you are perceived by everyone around you as high status. That's fairly synonymous with being high status in Twitter, where it might be your tweets get a lot of likes on average or you have a very high follow account. And when you get to the metagame layer, it really comes down to like core human motivation. I think that's perfect, right? I remember talking to Jason Sitran about Discord that when they dug into like the underlying motivation, it was just belonging. That was actually the job to be done, provide belonging. Pretty deep and persistent human need. In the shop side, this is where it really gets interesting to me. Obviously, this is where the money gets made. What did you learn there? So loot boxes is one thing, providing variable rewards is another.

I think one of the things that's most interesting to me about free to play is that it allows you rather than charge a single price to calibrate the payment from the player to their level of intensity and I guess willingness and ability to pay. So you sort of get to earn, it's like a higher take rate or something. It's kind of how I think about it. What's interesting here, how do these games monetize? I think everyone knows like Fortnite you can buy like outfits and stuff like this, but give us sort of a general flavor with some examples of how games have chosen to monetize through these shops. All of these games are built on top of an economy. It's an incredibly hard problem to solve where only a small percentage of the players may spend anything. And then a subset,

people use the term whales, will spend a large amount. And that distribution, the power curve that makes the model work. The hard problem for these games to solve is that how do you make a product that is first compelling and second possible for someone to actually make that distribution work? Making a product that you're essentially selling something digitally, a single player may come in and spend hundreds of thousands or more dollars in this product and get real value from that. And that comes down to the game and the economy, everything around it, and the first two points. The part that I think you're seeing games explore more and more at the time as got more sophisticated over the last decade is the kind of shoppiece.

That is taking a lot of the lessons that's kind of integrating from e-commerce. You're seeing the basics, just like a basic storefront. However, increasingly more some of the best games really integrate the shop flow through. throughout the product, the game and the shop are one. I think one lesson that I think rings very true in startups that took me a long time to learning gaming is just raise your prices. Most games simply don't charge enough to make the entire model work. Like it is not possible for the model.

Like if you actually look at the model, it is not possible for someone to spend enough to justify the entire economic business of this game. And that's one thing that you see games like Fortnite and Roblox, et cetera. It is possible to spend. If you really love that product, and want to spend a lot of money in there. First, it's possible. And then there's a whole idea of space that you've seen in e-commerce,

that I think gaming is really exploring, which is optimizing that to its full extreme. So you can get very advanced on segmenting. There is many different profiles and player characteristics, whether it's creating a dozen different segments automatically of your players, and then offering different offers based on how they engage, how they're spending profiles, and players may change segment over time.

They may move into different buckets. So the product is really living and breathing based on what segment you live in. If you had to extract just a single lesson from your time in gaming and provide it to people that are building businesses as far from gaming as possible, what would that lesson be? What do you think is the most portable idea from the 15-year run you had there? It would be the full understanding of power laws. It would be understanding your base of users or customers in their segments and then understanding how much of your business is driven by your biggest segments and realizing you probably don't

understand them as well as you think. But if you're probably underpricing that segment because you don't value the product nearly like they do and you probably don't understand how to build effectively for them because either you don't love the product as much as they do or you don't drive as much value from it as they do. So you can't really build a one-size-fits-all product. There's so many different jobs to be done for a product. Your product may be a Swiss Army knife because you know, you have 10 different segments or five different segments.

And each of those segments may both have different things they want from the product and they may have different importance to your own business. In a world that I think is increasingly shifting to a very important. more variable monetization model, those latter segments who may drive more than half your revenue, but maybe a small base of your customers or users, are really important to understand. And I've seen more often than not, and I'm guilty than anyone of this, of not understanding that they are one of the biggest levers to inflecting many businesses. Let's go to the opposite end of the extreme.

We're going to start bleeding towards investing now. What jumps immediately to mind, obviously, is something like a Twilio, where the pricing is usage-based, sort of perfectly captures the power law. And famously, they had Uber as a whatever crazy revenue concentration they had with Uber before it was cut back. So there are models like that in non-gaming like Twilio that perfectly acknowledge and are structured to capture that variable dynamic you just walk through. How do you think that all plays out? And this is both a product and a pricing question. What do you think the future looks like here? Do you think we'll see less SaaS-type companies and more usage-based or Twilio-type companies?

I would imagine the best product should win in many categories. But if you have a product that just has an LTV that much higher than the rest of the market, you can out-distribute. You can eat the market. If you have a SaaS product that is five times greater LTV than the rest of the market, it gives you a lot of leeway to kind of eat the market. You can outspend the market on distribution. You can invest more in R&D.

you can kind of suck the oxygen out of the room, all else being equal. With everything, gaming is one lens through which to then view other things, whether that's products or companies. I can't remember who said it, but all models are wrong, but some are useful. This is not a complete model of the world, but certainly probably a useful one. How much does this map on to what I'll call your overall investment philosophy? So maybe you could begin by just describing what it is that you're looking for as you look through companies or your investment criteria or your investment philosophy. And once you've laid that out for us, it would be fun to return to this gaming lens to see what is portable and what is not. Not going to be

perfect. But start by describing your overall investment strategy. I invest in technology companies and what I'm looking for is the next legendary outcomes, the next 10 plus billion dollar outcomes. And this typically takes the form, hopefully, in the form of a compounding machine. When I found it, the compounding is starting and hopefully it continues on for, in the best case, decades. I also want to play this game for as long as possible. So it's really important for me to have incredible returns. I kind of view it like truffle hunting, right? You're searching for the gem out. So with investing, I'm technology start-ups at the early stage. There's really three key things I'm looking for. I would say the first is some kind of breakthrough idea that's going

to cut into a market. A breakthrough idea requires a radically open mind. By definition, you're believing that the future is going to be different to the past. That's a really hard thing to do psychologically, like a breakthrough, because they look so different to the past, they're going to look really weird. I've had to constantly train myself to have such an open mind of these things like Bitcoin, Airbnb, etc. They looked really weird early on before they suddenly became consensus. And people that caught them were open-minded enough to see a vision of the future where they would exist at scale. And then that's another lesson that I've had to throw out the window. When I got started, I was reading the book of value investing.

Value investing is kind of fundamentally opposed to breakthrough ideas, is betting that the world is going to stay the same versus the venture capital is betting that the world is going to be different. And then one of the point I would say that a lesson that I took from Pete Thiel and zero to one is more often than not, these companies have some kind of secret early on about their breakthrough ideas, a view of the world as to why this is going to break through. The second is the founders. A key question I will ask around founders.

is, is there someone I would work for? Because if I'm going to invest in them in a meaningful way, then I will be for a decade. There's a number of things that are important, in my view, and a founder, many of them kind of very trite, like they need to be highly intelligent. Other than that, I think they need to be fast moving and relentless and really tough. Starting a company is just frankly hard, and you're going to hear no so much that the person needs to be tough and kind of ready for all of that. And then finally, the rate of improvement.

When I meet someone and then I meet them a couple weeks later or a month later and I can just tell the rate of which they've been improving or exploring the idea space, that gets me excited because I view everything compounds, including a person. When I see a person compounding, that really gets me excited. And then the last one is the market. Again, this is an area I've spent a long time changing my views where first is I'm looking for markets that are rapidly growing. I would say that most investors I see are looking at the size of the market today, assuming the world won't change. I think one of the key things are being open-minded is that you're looking for the tectonic trends that are actually going to be true over the next decade that change the size of a market.

Give us an example of a market that you've seen. It doesn't have to be now. It could be any point in your career where it was small, but the growth rate was high. Just to put like a finer point on that idea because, of course, market matters. but I do think it's a much different thing to say it's growing fast than to say it's big now. And I certainly struggle with this too, because sometimes the fastest growing things are hard to imagine that maybe growing fast off a small base, but it's hard to imagine them being big in an end state. Give us an example of what you mean there.

Here's an example. Early on the smartphone, the iPhone actually had relatively disappointing sales and building a business on top of the app store, it would have been quite radical to assume we would have had the outcomes of today. You had to kind of assume that the install base would have hit the business. millions of users we have today and these devices have become extensions of ourselves. Now there's countless of the most impactful companies in the world, but they're called business built on top of the app store. If you're trying to think of a business as a system, to maybe borrow like a network way of thinking, like there's nodes and there's edges, that's sort of the system.

What are the key elements of systems evaluation or systems design when it comes to businesses? So I find it really useful to think of a business as a set of systems. And it's both the set of systems that make the business work. There's also the set of systems that it sits in, such as the broader market, even the economy and as far as society, it can be really hard to do this as an entrepreneur because you have to focus on the day-to-day of your business, and you have to focus on one element of the system at any one time. It's almost like a vantage point problem. It's challenging to zoom out and take the 50,000-foot view and comprehend all these systems and how they work together. But probably the first thing I would

ask when I'm trying to understand a system is where is the leverage? And leverage is really trying to understand what element of your system is nonlinear, which can be quite counterintuitive. And nonlinear element of your system is where the outputs in any given area can vastly differ from the inputs where any of your efforts can be multiplied. Our brains aren't really wired to understand nonlinear systems. Many of our historical systems are brain linear like manufacturing or agriculture where the inputs can equally reflect the outputs. You plant more seeds and you get more grain. But technology businesses today are not linear. We have near infinite leverage and zero marginal costs where a tiny team of engineers can go on to impact a billion lives. And the history

of technology is all about finding leverage to multiply your affidavits. Technology is a new way of doing things. Or take a different example with customers. You may find looking at your customer base that your top five to 10% of customers may have a vastly different motivation for using your product and be willing to spend a lot more and just need it so much more. They may generate a disproportionate amount of your revenue. So it may be far higher leverage to focus on those core customers, and the customers are actually going to stick around and are willing to pay a lot more than, say, the other 90%

who are much more fickle. But if you were just to focus on the averages across your business, it may mask these non-linear relationships and you may draw false conclusions with a limited perspective of the system. Another thing I think to keep a mind is knowing where the boundaries in your system lie, people too often draw imaginary boundaries where there are none. And that can result in thinking in terms that are too broad or too narrow. Like when something is really working, you can often scale it far beyond where your imagination takes you.

For instance, like pricing. Many startups, I think, undervalue their software and can stand to charge a lot more for it. And then if you look at some of the breakout companies over the last decade, they've pushed the boundaries of what we assumed to be an existing market or system like Elon Musk with SpaceX. Nobody thought that a private company could go on to launch and orbit a rocket, let alone then go into a recovery and relaunch it. Or Uber. Uber started out as a black cap. service and turned out to be a complete car alternative. So I think both these things and like removing boundaries really requires questioning every assumption in your models and in your system and

really thinking from first principles. Say maybe an example of something that you've invested in and what a flywheel looks like. What does one of these core actions and feedback loops look like when you first approach the company told through a real example? This shows up in a lot of my investing. One example is a company that I have invested in called Next Health. So NextHealth has the epitome of this incredible flywheel. NextHealth starts off as a SaaS platform where they approach healthcare practices for the SaaS product. And this product instantly digitizes and monetizes their business overnight. You go from being an analog healthcare practice where you need a receptionist logging into your on-premise EHR system and they can only book nine to five whenever.

someone is in the office, putting Next Health in your practice instantly turns you into a one medical style practice where you get instant online booking, payments, marketing, everything. You're brought into the 21st century. That is going to be an amazing SaaS business on its own. But where this starts to get really interesting is that Next Health now has all of their health care practices. Today, it's thousands and thousands of healthcare practices using their platform. they are also integrated with the vast majority of EHR systems and continually building integrations day by day. What that gives them is this opportunity to launch an API for developers to build healthcare products. So now a developer can build a healthcare product that integrates with all the

EHR systems out there and has access to healthcare practices in six weeks instead of 18 months. So you can think of it like a plaid for healthcare. So now they have very large developers building healthcare products on top of Next Health CAPI. We're talking large public company about building healthcare products. And then finally, they have the third pillar of their ecosystem, which is the patients. They have tens of millions of patients going through this ecosystem over time. They can launch a number of things because they have the direct line to these patients and the information and they sit within the marketplace with three really strong pillars

that feed into each other. You have the healthcare practices, doctors, you have the developers, building products on top of it. And then you have the consumers who are actually engaging in the ecosystem. And each of them feed each other. How do you think about what to give a company credit for as you formulate an investment thesis? You talked there as a great example of something initial, something sort of secondary and maybe something tertiary. If you come at the company and let's say they've so far succeeded on the SaaS side, they want to start, but have yet to start the API side of the business. I'm always fascinated by this because it seems like a conundrum in software investing

that sometimes the best models may be products that grow out of each other. But a lot of the best companies, like take a Slack, for example, the core action you do in Slack today is basically the same thing you did when it first started. Obviously, there's like maybe a little bit of a network effect there, but they've just compounded that same core action over and over again. How do you think about that? One core action that's working versus giving credit to something that's not yet working, but maybe a key part of the driver of the outcome? That takes vision, right? It takes belief and some dose of potential optimism, right?

Ultimately, that is where you get paid for taking that risk and taking that belief in chance. But I would say that is one of the things that makes venture capital different, where you are betting on the future looking different from today. My job is both taking that leap and believing that this is creating real value in the world and this is creating something that the world wants and needs. that takes a healthy dose of belief. And that's where I draw back into the systems thinking, where ultimately the best flywheels make the next step of the flywheel almost inevitable.

If Amazon increases the buyers coming to the platform, they can lower prices. That makes it almost inevitable that more buyers are going to come to Amazon because they're known for having the lower prices. What I like about the systems is that lowers the amount of belief I almost need. If we apply the same way of thinking to investment businesses, why do you think we don't see more investing firms that have a flywheel? And I realize that some are, you're trying to do this, I'm trying to do this. There are firms trying to do it, but it doesn't seem to be the norm.

How do you think about that? Is that seem strange to you? So I do think there are firms in venture with strong flywheels. It tends to be centered around having a strong brand that then goes on to compound on itself. Having a strong reputation for partnering with the best companies tends to attract the next generation of top founders and partners. And that makes the brand grow even stronger. So it creates this nice flywheel effect. We've seen this at the top firms that have built brands over decades with this flywheel. Like some of today's top firms were formed in the 60s, like Greylock and Southey Hill or Sequoia and Kleiner were stuck in the 70s. Another example of a strong flywheel is Y Combinator.

They've probably built one of the best flywheels our industry has seen where this become like a shelling point for early stage founders. At this point, the program basically pays for itself because a founder going through YC's demo day may get a 50 or 100% premium on their valuation. And over time, YC builds this amazing alumni base of founders that act as a great channel to help each other and a great channel to sell products to each other. And what's great about this flywheel is it's highly scalable. Like they could fund a thousand or more companies per year by doing this.

I think we're seeing a lot of change in the industry right now, more than I've ever seen. It's clear that software is just taking over our entire economy and we have many decades of runway to go. We're saying as a result, thousands of new investors come in at the early stages. And even at the top, we're seeing like large crossover funds. come down into the private markets. With all these new investors, the markets getting more competitive than ever. And we're seeing brands being formed fast than ever, too.

Andres and Horowitz has become a tier one brand in a decade. And we're also seeing individuals who have built just as strong a brand as institutions in the market in this time. There's a lot of new, young and hungry investors out there who are willing to work really hard to win and establish their brands. I think this is driven by the fact. that startups are growing fast than ever. You can tap into global markets instantly. And fast-growing company today could hit a billion revenue in seven or eight years versus it took

HP 25 years to get there. The real flywheels in the industry are beyond brand. This is a service business at its core and it's a relationship business. The job really comes down to how do you attract the next generation of world-class founders and how do you be the most desirable partner to them. So a founder is really making a relationship decision. Is this someone I want to spend the next 10 years working with? I think the strongest partners have some kind of operational background rather than just having a reputation for being a great investor. So they may have ran a P&L in the past or founded a company. That's what we saw with the last generation of great firms like Don Valentine, the founder of Sequoia, was an executive at National

semiconductor or Tom Perkins was an executive at HP. I think it's really hard to both build and scale a flywheel in the space, in large part because it's such a people-driven business. You're really limited by the quality of partners you can attract. But I think with all the change in the space, with all the competition, we're going to see a lot of innovation and new models and brands being built in this decade. There's no rules for how this has to work. Let's talk through how you approach this strategically and then maybe even the specifics of how you think about doing this. Maybe begin with Product Hunt. What did you see in that business as a standalone business, but also as a part of this

ecosystem that can be self-reinforcing? Product Hunt is essentially a city on the internet that celebrates new emerging products. It has been around since about 2014. And over that time, so many of the most exciting venture businesses we see today launched on product time, whether it's Notion, Airt, Zoom, Robin Hood, Coinbase. All of them got their start very early on launching on product time. Even today, we see Stripe and Zoom, et cetera, come back to do launches to our community. So it's this incredible community that has millions of people coming every month to see what

is the latest happening and launching within tech and startups. It was acquired by Angel list many years ago, and I approached the company last year because I just saw all this untapped potential there, both investors. and developing new tools for that community and expanding the city. It's clear that there is this incredible energy there and so much magic has come out of there, but there is so many different directions that can go. What beyond what we've talked about so far are the most interesting emerging ecosystems or systems that you're seeing in the digital world? The obvious one is some of the crypto stuff maybe that has emerged or reemerged as super

interesting and high velocity, but what are the edges of this evolving landscape that you're paying closest attention to? The one I'm paying a lot of attention to is crypto, and maybe for a slightly different reason, some others where I think we're seeing it potentially flip a lot of the business models we've seen historically on the internet on its head, both through crypto and NFTs, I think we'll see many business models potentially get disrupted that have historically been staples as traditional startups. First, I think it will change a typical model from software as a service, where software is something you come and pay for, to potentially software as something that makes you money by using it. You get paid to use it. If that dynamic works, it can completely change the

model for many different markets and industries. Imagine if your users are making a lot of money by using your product, creates an incentive structure for them to make sure you succeed. Imagine if the next Google launch that you actually made money because you owned a certain keyword. By using that product, you are heavily incentivized to actually make this succeed over Google. That idea can apply to every field. And I think we're starting to see very, very early innings of that play out. I also think it completely changes incentive structure for talent. The amount of developers that have made fortunes working on a crypto protocol in comparison to stock options, I think is going to

skew towards the protocols. And we're seeing early on, it's liquid quickly. The dynamics in general are just almost better in every single way for a developer working on a protocol where the question for me over the next decade is what startup spaces are not going to be disrupted by some of these protocols. What are the barriers to that happening? With crypto, I'm always cautiously excited or something like that, where it seems theoretically like that's all true. And it's hard to argue with the evidence that some of the wealth creation and time to liquidity and talent have all clustered in that space. But we've still seen such a relatively small amount of actual consumer applications that don't effectively boil down to speculating on assets trading. How do you think about

what might stop the potential revolution in business models that crypto could usher in from happening? So if you and me are having the same conversation in 10 years and none of that's come to pass, why do you think that might be? I think for anything to work in a big way, it needs to be substantially better than what exists out there. Do I believe that our existing payments, rails, and infrastructure will be replaced by crypto? Probably not. I don't find that crypto is better by such an order of magnitude that we need to rip out our entire payments infrastructure. I think it's kind of like seeing mobile wallets take off in emerging markets. Because a lot of these emerging markets never necessarily had credit cards, etc. They will make the leap far ahead of

what we've seen in the West because the kind of delta is that much greater. I think the fields in which crypto will win in first is where they just offer so much greater value than what exists out there today. And I think where that will take place first is in the spaces where crypto actually flips the economic model of a industry or market, where now you have a base of a million people that feel like owners of your business and are heavily incentivized to make this work. I think you see this with Bitcoin where the more people that own Bitcoin, they are heavily incentivized to spread the gospel of the good story of Bitcoin, right, and to get that next person to buy in, which is potentially the kind of story that never ends. I think you may see that play out in many other industries,

and I think the question is, where does that most apply? So for me, it's really about what fields does it change both the system in and does it meaningfully improve that industry enough to actually get that industry to flip in a meaningful way? Are there any other platform shifts or new frontiers that are even in the same ballpark, in your opinion, as crypto in terms of the new types of companies or opportunities that they will unlock? Is there anything else even close to that? Another one that I think is becoming more trite is artificial intelligence. I think we're seeing it play out in a number of industries where applied AI to certain industries

is going to make a product that product without just cannot compete with. When you have the right elements of the data set and incredible models, you can frankly build a product that just out-competeens anything in the market. I think the question is, does that apply to everything or where is that best applied? What person across your life has most rewired your brain? The first is Gabriel Leiden. He was a competitor of mine. We were both running free-to-play gaming companies

and throughout the 2010s. And he ran the number one and number two grossing apps in the app store under Machine Zone, built a multi-billion dollar business doing so. He wired my brain in a big way, understanding, thinking in terms of systems. He is by far one of the best systems thinkers I have ever come across. He was entered an industry that was,

he entered the free-to-play gaming industry, and brought complete first principles thinking to the space and built products that just ran circles around everything else out there through the systems he built and optimized. Someone I talk to every day to just rewire my brain in the same way. Another person is Richard Burton. Richard is a close friend of mine where I met him in London when I was a teenager. And when I first came to San Francisco when I was 17,

he drove me up here from Los Angeles. And what is incredible at him is that consistently over the last decade, he has pointed out things to me, such as Stripe, Plaid, Ethereum, all these things that at the time looked really weird. This was Stripe in 2011. This was Ethereum, maybe 2013, et cetera. It looked really weird at the time. And then maybe three to five years later became incredibly consensus. What that taught me was, like, one, I said, gosh, I need to spend more time paying attention

to the things he points me to, but second was just a huge amount of respect for things that look weird at the time, potentially contrarian, because those things, ultimately the biggest outcomes in technology and venture, all of them looked really weird early on. They were non-obvious ideas, whether it's Bitcoin, SpaceX, Uber, Ebbing, they were in that intersection of non-obvious, slightly contrarian ideas that ultimately did well. What was weird about Plaid and Strzheimer? Ethereum seems kind of obvious. That's definitely, it qualifies as weird, maybe still. When you first saw Stripe and Plaid, since you gave those examples, it's so obvious now in hindsight, they're great businesses and the models are fascinating. What was it weird about them when you first encountered

them? In hindsight, I mean, take strike as an example. FinTech in 2010, 2011 was not a clear thing. I remember going on a walk with Paul Graham back in 2011 when I was going through Wicombinator and I was starting a gaming company, and he paused me in like mid-sentence and was like, Josh, you should go start a payments company. I was very certain being in gaming. I did not have any interest. But at the time, FinTech was kind of this, as I'd say, like a cottage industry where there had been no precedent set for this to happen.

Like the idea that you can go compete with PayPal or any of the existing incumbents as a small startup was just beyond reason is one of the first things. Second, I think there was a kind of receipts. wisdom that it's just a very unattractive space to be in. The margins are tiny. How are you going to kind of build a big business out of these razor-thin margins? There was just no precedent for doing it at the time. There were these large incumbents, whether it was PayPal at the time, brain tree, etc. But the pitch, at least publicly, if you weren't looking under the hood, it did not have the cachet externally that it does today. If we zoom all the way out here and talk about two things.

again, I'm going to stick with this game and meta game concept. What do you see in your peers, both entrepreneurs and investors these days, in terms of the medigame that they're playing? So it feels like we're all kind of doing the same thing in the day-to-day, right? Building or investing or whatever, it's sort of a case-by-case basis. But I think we're all doing that for some larger reason. Do you think that people are playing the right metagame might tendency is to think that probably too many people are playing the money game? Money happens to be a nice, clean measure. which maybe why so many people play it. What do you think about this?

What have you observed in players in the ecosystem and the metagames they're playing or maybe should be playing? So I think there's nothing wrong with wanting to make a lot of money. It can motivate people to go do and build amazing things. And for most people in business, the motivation is some combination of money, power, social status, or say, impact. And I think people tend to oscillate or switch through.

these motivations as they progress in their careers. And we also imitate and mimic the desires of the set of people around us. I think it's important to realize that money doesn't make you happy. Money just solves your money problems. I think it was Paul Graham who said that. As you climb Maslow's hierarchy of needs, you start to find out how few of your problems are just money related. You can only sleep in one bed at a time. You can only drive one car. I think maybe a more interesting question is what motivates people to do truly legendary work? And I think people who do truly great work are much more intrinsically motivated. The act of doing the work itself is the reward, rather than doing an activity in order to attain some separate outcome. When you're intrinsically motivated,

you don't necessarily care what other people think. You're just done a state of play and you love the game. It's kind of like playing the piano because you love it rather than, because of some external pressure, like maybe your parents telling you to play. And I think we're all born this way as kids. We're born to learn to explore, to be creative, until the pressures of society start to kick it. I think it's important because doing great things is really hard.

And there's going to be many times when doing anything great that the external world is telling you it's not worth it. So you really need a sustainable source of motivation. Extrinsic motivations are always going to be important. to you in your life. Everybody is extrinsically motivated to a degree, unless you want to go leave society and go live in a cave or go live in a monastery. I think you just go so much further when you actually love the game you're playing. Maybe if we zoom even one level higher out and we talk about the overall system, just the whole landscape of business that we're all playing in,

what is the most controversial or weirdest idea that you have about the state of the world today? One idea I'm currently wrestling with is that, and maybe I'm overfitting my video gaming lens here, but basically that today's reality is akin to a giant MMO video game, that we are living in a massively multiplayer online game. We have the two parallel worlds today. We have the physical world and the digital world. And I believe we're already in the matrix. We're already in this massively multiplayer online game. The boundaries have really blurred. Our lives have shifted rapidly into the digital world. More than half of our waking hours are on our screen on our smartphones, our laptops.

Our smartphones are a physical extension of ourselves. They're part of our brain. Over half a billion people are actually living in these virtual worlds like Roblox, Fortnite and Minecraft. They're actively in there. And I think there are actual forces sucking us into this digital world. The physical world just isn't growing fast enough for the financial system. to keep up. Something you might hear from Pete Teal is if you sat in a room today and took away

all the screens, it would look like a room from the 1970s. The only difference is the screen. But imagine if we were to invent, say, a teleport machine. We would spend so much less time online. We'd spend all our time teleporting around the world. Planes aren't as fast as we thought that'd be. There just hasn't been the growth that we anticipated or expected in the physical world. So all the talent and money and time is shifting into the digital world because the economy is rewarding knowledge work is where all the productivity is happening. My worry is that the digital world and the virtual world is a bit of an illusion. It's like a hallucination. It's very convincing, but it's not real at all.

And I think we're going to start to see things break over time. As artificial intelligence becomes super intelligent, we're going to start to see things like trillions of deepfakes where 19, 5% of the images on the internet are fake. I think the digital world is much more suited to machine to machine communication than humans in a loop really just start to slow that down. So I think we may start to see people want to take a step back over time from the digital world. And I think there'll be some form of physical renaissance over time. What are the implications of this for you as an investor? I mean, it's definitely a interesting way of thinking about things. Does this change

what you're looking for or what you care about, again, back to what you're trying to accomplish and make a dent. Does it make you want to make a different sort of dent, given the pluses and minuses to this migration to digital? I think it's inevitable that the forces are just too strong. I mean, if I were capable enough, I would really try to push for more growth in the physical world. And I'm so grateful we live in a time where we have Elon Musk who's trying to get us into space and kick off real growth and real innovation out there because right now it's all happening in the world of bits. I think until we have that, and I would love to invest in more things actually provide real growth in the real world, until we have that, I think the tectonic

forces are just going to suck us deeper and deeper into the digital world, which I live in here, and I think it's fun and exciting, but I think it really is some form of illusion. And I think people mistake it for being real. I think that leads to some pretty big structural risks. It's inevitable, but I would love to be part of more things that create impact and growth in the actual real world. This has been so much fun talking about all aspects of your experience and what you're building now. I asked the same closing question of everybody, which is, what is the kindest thing that anyone's ever done for you? It may sound trite, but it's my parents. I grew up in a family that loved me and gave me freedom to pursue whatever life I wanted.

They did not stop me doing things that ultimately at the time looked weird. Like it was a much more fringe thing back in 2010 to not go to college and to Silicon Valley than it is today. Probably made no sense to them is what I wanted to do. And I think consistently throughout my life, they have just given me the freedom to both fail and to do what I wanted. I've always known that I've had that base and foundation. And I think that's one of the luckiest things I could ever have, having such a solid basic foundation.

I can take risks like that. And I always have that unconditional support. Josh, I always love talking to you. I feel like your story is going to be one that repeats often. Your story is uniquely enabled by technology and that's only accelerating. And so we're going to see more thoughtful, humble, but ambitious people like you attacking the world of business and tech and investing. And it's such a pleasure to finally connect in this format. Thanks so much for your time.

Thanks so much. It's been a pleasure. This episode was brought to you by Canalyst. In this four-part mini-series, I sit down with Canales, co-founder, and CEO Demir Hot to learn about the origins of Canales, the problems it solves for professional investors, and what the future of Canales looks like. In this week's episode, Demer and I discuss the Canales roadmap over the next 12 to 18 months and beyond.

What do you think the near-term and longer-term future looks like from a product roadmap standpoint? So, you know, what are you most excited about? let's say in the next 12 to 18 months. And then what's the dream big, 18 months and longer vision for where this might go? From the first day, what we set out to be was the fundamental data set of record for all capital markets participant. That was true day one where it was me and James and a couple of folks. And it's true today. And we believe we still have a lot of work to do in executing that goal. And so that's the grand vision. We feel we feel very, very ambitious. about it and very happy about it and very confident about it.

And so what that means near and midterm, there are three things that we're focused on that our clients are already seeing and are going to see. Those three things are increasing automation, global coverage, and what we call freeing the data. We're basically enabling our clients to consume the content that we've created, however they need to consume it, whether it's on the web in Excel,

in a custom view of their own or even systematically by API. And so those are really really, really our focus areas. We're going to be launching global in the next little while. We have a true north to cover somewhere around 10,000 companies up from the 4,000 or 5,000 we have today. And then on the automation bit, one of the key things that we've launched in the last couple of years has been automating the quarterly earnings workflow for our clients. There's still a lot of investment there for us and a lot of value to provide saving our clients that most valuable, most precious time, which is right in the middle of our earnings season, markets are open,

and things you care about, have updated data. So that's the near-term focus. At the end of the day, the most precious resource our clients have is time. And everything that we build a catalyst that we have built, that we are building that we're going to continue to build, is about helping them reclaim some of that time. Ideally, to pick better stocks, make their own clients happier, ultimately have happier, more successful careers.

And really, that's what catalyst is all about. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.