Invest Like the Best with Patrick O'Shaughnessy - Zack Kanter – All Things Business - [Invest Like the Best, EP.142]

Episode Date: August 13, 2019

This week’s guest is, Zack Kanter, the founder and CEO of the Stedi.  Zack and I decided not to talk much about his business on this podcast and opted instead to explore more generally, so a bit of an introduction to what they do may be helpful here for some extra context. Stedi is a platform for exchanging and automating 300+ types of business-to-business transactions - transactions like purchase orders, invoices, etc. It’s a modern take on an archaic protocol called EDI - electronic data interchange, something I’d never even heard of until several months ago. Learning about EDI is a bit like finding out about the Matrix - every physical object you come across, from the food you ate for breakfast to the clothes you’re wearing and consumer electronics you use - anything with a barcode on it - was likely touched by EDI, often dozens of times before making it into your hands. Stedi is the first update to this messaging later in decades. Our conversation in this podcast is about business in general, starting with Zack’s fascination with Walmart and Amazon. I should also not that my family is a recent investor in Stedi, and I’m thankful to have learned a great deal from him over the past few months. Please enjoy our conversation.  For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Show Notes 1:52 - (First Question) – Interest in Walmart and Amazon             4:02 – Sam Walton: Made In America 4:49 – What from their success can be applied elsewhere 11:07– The idea of tempo with a business 17:17 – Ability for a business to expand laterally 24:33 - Magic of Amazon as a constitution 26:24 – The concept of the OODA loop             26:40 – Boyd: The Fighter Pilot Who Changed the Art of War 31:51 – Orientation within software businesses             32:24 – The Systems Bible: The Beginner's Guide to Systems Large and Small 38:03 – Lessons in building software             38:37– Certain to Win: The Strategy of John Boyd, Applied to Business 41:51 – Setting a common vision for a company 44:14 – Changing the dynamic of teams and how different size teams can accomplish different things 48:00 – How leaders should think about build vs buy 51:07 – The different types of value propositions 53:07 – Utility for companies 57:31 – Concept of network health and the best question from VCs 1:04:04 – Massive projects are less frequent in a world where we can do a lot quickly             1:04:08 – Wait but Why 1:09:37 – Just in time vs just in case learning framework 1:11:55 – His favorite question 1:13:39 – Why is most commonly heard advice wrong 1:18:06 – Kindest thing anyone has done for Zack   Learn More For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

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, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfield guide.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy 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'Shaunacy Asset Management may maintain positions and the securities discussed in this podcast. This week's guest is Zach Cantor, the founder and CEO of Steady. Zach and I decided not to talk much about his business on this podcast and opted instead to explore business more generally.

So a bit of an introduction to what they do may be helpful here for some extra context. Steady is a platform for exchanging and automating 300 types of business-to-business transactions, things like purchase orders and invoices. It's a modern take on an archaic protocol called EDI, electronic data interchange, something I'd never even heard of until a few months ago. Learning about EDI is a bit like finding out about the matrix. Every physical object you come across, from the food you ate for breakfast to the clothes you're wearing and the electronics you use, basically anything with a barcode on it was likely touched by EDI, often dozens of times before making it into your hands. Steady is the first update to this messaging layer in decades.

Our conversation in this podcast is about business in general, starting with Zach's fascination with Walmart and Amazon. I should also note that my family is a recent investor in study, and I'm thankful to have learned a great deal from Zach over the last few months. Please enjoy our conversation. So I want to dive into two businesses that you've already mentioned because of how extensively you've explored them and because there'll be great excuses to dive into like 10 or 15 sort of interesting bite-sized topics that some of which we've explored before together, some of which we have not. Those two businesses are Walmart and Amazon. So I'm curious why you wrote this, and I know it was even longer than what you published, you sent me some of the stuff that got clipped left on the cutting room floor, which was even deeper into this topic.

Why are those two businesses so fascinating to you and maybe draw a little picture of the differences and similarities between them? Walmart and Amazon, I think a lot of people appreciate Amazon on one or two dimensions. And that's usually maybe you do business with Amazon or you use something. like Amazon Web Services, or maybe you're just a consumer, and you think that the idea of Amazon Prime bringing a package to your house in one hour is the greatest thing in the world. What I've had the fortune to see being a vendor to Amazon, so I've sold with AutoPars business, I sold to Amazon both on the vendor platform, which is where they're the seller of record, and on the marketplace where Amazon is the

seller of record, obviously as a customer in many different ways, and then also as a business customer in the sense of using Amazon Web Services, which heavily relies on Amazon Web Services for our infrastructure. And so you just see that the surface area of this business is astonishing. And it's not only the surface area, it's the speed or what I would say, the tempo, which we can come back to some of the differences on that later. But the idea that Amazon seems to be picking up velocity over time is what makes it the most interesting business. It's the only business that I can think of that as it's gotten bigger, it's gotten faster. Faster not just in one dimension, but faster across a broad range of dimensions that are certainly astonishing to watch. But you can't appreciate Amazon without

appreciating Walmart because Amazon really took Walmart's playbook and then they brought it onto the internet. And I think a lot of the things that Amazon has done really well in the ways that Amazon has differentiated itself from Walmart and built what I believe is a really truly first in kind, first in class sort of business are things that were required to do business at internet scale. So I'm obsessed with the founding of Walmart, Sam Walton's book. Made in America is just, it's fantastic. Hidden beneath this veneer of folksiness is this unbelievable story where he just sort of makes it seem like, hey, you know, I woke up out of bed for 40 years and

accidentally Walmart is the biggest company on earth. So when you look at Walmart, what they did is a feat of such scale that I think in some ways it's more impressive than Amazon because they sort of reached the limits or got close to the limits of what's possible. with an intentional sort of coordination. Whereas Amazon, I look at it more as more of an organism, which is, I think, some of the things that got clipped to the cutting room floor in this piece. And I think the differences in sort of those models is just almost infinitely rich area

to explore. How much of what makes those two businesses and their history so interesting do you think can be borrowed or emulated versus is just singular and very specific to those two businesses? Ask differently, how much of what you're going to. to do with your business is directly inspired by what you've learned from those two businesses. Of course, what makes the two businesses similar, when you start to line these up side by side, you say, okay, what are the commonalities in the business? The thing that occurred to me when I was writing this piece called What is Amazon is realizing that they're both optimization problems.

So what Walmart basically figured out is that their sort of hypothesis in the beginning was rural areas of America can support much larger discount store formats than most people think. And so I think it's, is it Keith Rabeau who says, what secret do you believe about the world that everybody else thinks is false or maybe it was Peter Thiel, I forget. And that was sort of Walmart's core thesis. And at the time, people thought it was crazy, a 25, 50, 100,000 square foot store. They thought you put it in some town in the middle of America. They didn't think it would be able to support that. Well, what Walmart basically sat out to do is procure these stores. And what Sam Walton talks about in the book is he would pick an area

based on zip code and some demographics and he would fly around in his plane. And he'd look around, he'd say, you know, that looks like a pretty good spot for a Walmart. And so he would land the plane and then he'd get out and he'd negotiate the purchase of this place right on the spot. I had a whole store team. And this is actually, you could see the sort of mirrors of how Uber expanded in region by region. They'd bring in this crack store team and they'd build this place. And then they would order goods. So they'd order tractor trailer load full of welders or God knows what, and then they would have a grand opening and they'd start to sell this. So what you realize is that Walmart is this optimization problem. So you have this footprint,

and maybe it lives a footprint is 100,000 square foot store. And what you're optimizing for is within this, assuming that the footprint is fixed, because this has to be increased by step function sizes or large increments, is that you're basically optimizing for the selection of skews, the quantity of each skew that you have, and a skew is a product. So a selection of product. So a selection of products, the quantity of each product that you have, the price for each product, and then the placement for each product. So it's a pretty simple thing. As they say, it's as simple and as hard as that. So you've got this optimization problem, and Walmart executed on that for like 30 years. And they got to be the best in the world at that. And what you see with this sort of

optimization problem is an entire organization built around optimizing for this problem. And you could write this out as a formula practically. And there's massive trade-off. So if you have the correct price, but too few of a skew and in stock, you've robbed the customer of the chance to buy that. If you're selling for too low over price, you've robbed the company of a chance of profit. And therefore, you've robbed the customer of the chance of investments in R&D that that would bring about. If you have too many of things, or maybe you take up too much shelf space, now you've robbed the customer of the chance of being able to see that product. Or if you screw up placement, you've robbed them of that as well. So if you look around a store like Walmart, what you should see, the correct way to see it is this massively defective.

You see defects everywhere because, of course, like the only good news is bad news. If you don't get bad news, if you only get good news, you can't change anything. When you get bad news, you find out, oh, we've been robbing our customers by pricing this too high or we've been robbing them because we've put this welder at the wrong end cap. You have a list of things to remediate. The idea here is basically that you can never have the, you can never have. the perfect mix of everything, unless you had perfect access to information. So your job as the manager of a Walmart store is constantly to fix these defects. I don't know if this is how they think about it. This is now what I think when I walk into a Walmart or a Sam's Club. So everything else,

you hear these unbelievable things about, I've heard these unbelievable things about Walmart that I feel like kind of have gotten overshadowed by Amazon, but they built the first and largest private satellite network so that they could do store-to-store communication. They invented practically EDI, although I think IBM got most of the gains from it because Walmart didn't really do a whole lot with the standard. Innovations and inventory management. They have a logistics fleet of 7,000 tractor trailers and all these, all this whole apparatus that makes Walmart look like a very complicated business. And of course it is, but it's all in service of this, up until Walmart.com is all in service of this optimization of this footprint. And the whole organization got optimized around that. And then in 1994, I think when Amazon came about, Amazon had their own hypothesis. Amazon's hypothesis or Jeff Bezos's hypothesis was, okay, well, what if we did exactly that, but we took away the constraint of the floor space? And they said it's this idea of infinite shelf space where all of a sudden you start to see

this paradigm shift where consumers are shopping online. What are the things that are going to stay the same? And what are the things that are going to change? The things that are going to change is all of a sudden there's really no constraint in terms of shelf space. You don't have to figure out should I have 500 units out front or should I have 50 units? out front. So it's a different optimization problem. And you also have the ability for customers to look for the specific thing because your customer, maybe they would have been willing to

spend 45 minutes in a Walmart. Maybe they're also willing to spend 45 minutes on Amazon.com, but they can get a lot more browsing done in 45 minutes than they can in 45 minutes of walking around Walmart. Of course, this brings up questions of discovery where it's much easier to discover something in a Walmart than it is in Amazon. So we can talk about that. Fundamentally, Amazon came on in the scene and the distinction I draw is basically they came up with this unbound Walmart, which is basically they're taking the Walmart and they're dumping it online, not to downplay what Amazon did, but that's the basic idea. Amazon comes about and starts doing this, and all of a sudden what you find is that when you take a infinitely massive, incredibly large

market, which is consumer package goods, and then you collide that with the internet, and now all of a sudden you're not geographically restricted in terms of an average Walmart has 100,000 skews or something like that. Amazon is 488 million skews. And that was the last time I checks was probably another 500 million on top of that. All these weird things start to happen. And so the sort of point of this piece that I wrote is discussing what is the weirdness that starts to happen when you bring things into internet scale and how did Amazon solve those things? What a fascinating sprawl. I guess Amazon has become and will continue to become. I don't want to lose sight of the speed versus tempo idea. And this is going to be a good excuse to talk about things like

oot loops and other interesting military analogies. So what do you mean by tempo specifically of a business? When you think about any sort of business, if you could wipe your mind clear and you come into this in a very naive way, you would think, as a business gets bigger, it should get faster because it has more resources and all these things. And if you were this totally naive actor who walked in here, this is what you'd believe. Of course, any person who's worked in a small company versus a large company knows that this is not the case or even a large group. H.O.A. with three people or an H. HOA with 30 or 300 people, you start to see the point of diminishing returns pretty quickly. And I call this generally gridlock. Generally, big systems end up in gridlock. And whether that's a

feature or a bug of systems, you can argue. And some people say, hey, the U.S. government's a giant system and it's in gridlock. And that's maybe a good thing. But we'll try and stay away from that. When you think about Amazon, it defies these ideas of what should happen in terms of agility at large sizes. And I think the difference between speed and tempo is that speed implies some lack of maybe precision or insight. It's the Facebook idea of move fast and break things. And that's speed. And it's not necessarily efficient speed versus you look at a company like Amazon. It has an emphasis on frugality. It's like one of its main court. Leadership principles, yeah. Yep. 17 leadership principles, frugality is one of them. And I think like probably top of mind for a lot of people at

Amazon. And so Amazon makes bets for sure. Bezos always writes about this in his shareholder's letter in terms of if we want to make bigger bets and we want to lose more money and all this stuff. And it's like, yeah, that's kind of true, but you don't really want to waste a lot of money. Frugality is is sort of baked into the DNA of Amazon. And what you see is Amazon, I think, is the best in the world. They've institutionalized the evolutionary equation. And what evolution is, is, again, these all things are sort of all breakdown algorithms. Evolution is this idea of differentiate, select, and amplify. Process differentiation happens by mutation. The process of selection is by fitness for given functions, and then amplification happens through sexual

reproduction. So evolution is definitely not the most efficient system, but is definitely highly effective. And it evolves these really interesting, unique sort of designs that I think would be difficult for, understated, it would be quite difficult for a person to come up with on their own when you see, you know, the way fish swim and all these things. Amazon has taken this concept of differentiate, select, and amplify, and they've added, so if you think about this is the branch of science of evolution, if you go back to like these ideas of philosophy and, you know, sort of pseudoscience of this idea of creationism, again, I'm assuming we're just talking about straight science here, hope I'm not offending anybody. If you talk about creationism is basically

the idea of intelligent design. And everybody's probably heard the story of the blind watchmaker analogy and the idea that this was the standard philosophical argument, maybe up to the 1600s or something like that, where you are wandering in the woods and you come across a pocket watch and you pick up the pocket watch and you would not assume that it was grown in nature because it looks like it was designed with some intention versus you pick up a leaf. You know, a leaf is just sort of obviously natural. What Amazon has done is taking the best ideas from intelligent design to mix them with the best ideas from evolution. And what I mean by that is evolution is a very dumb process. It's very smart in the long term, but in the short term, it's very dumb,

sort of like the stock market. What happens is Amazon is famous for this memo culture. And so for those who aren't familiar, in advance of every major meeting with every major new idea, employees have to write a six-page memo. And the memo sort of goes through all the details of what they're proposing. And what you don't see is all the sort of selection process that's happening in advance of that. So let's say Amazon Prime, for example, started as a memo. and presumably there were many similar ideas that were discarded before they ever got turned into a memo because some employee has an idea and they start writing about it and they say, oh, you know what, this is dumb, this isn't going to work.

Or they talk to someone else in Amazon and they hone their ideas. And it's this idea of like steel sharpening steel. So you've got a group of very smart executives at Amazon all the way up and down the sort of management chain. And they're sharpening these ideas. And finally, the best memos make it to a meeting. And then these meeting, you know, in the meeting, people spend the first 20 minutes in the meeting reading it. and then they debate the memo and they talk about it and they're basically all working towards this fitness function of customer value. Anyone at Amazon will tell you frugality, customer value,

these are the things they're obsessed with. And the reason why all these things are so important and you can't, you had asked me, how do these things come back to what we're doing at steady? You can't just say like, oh, customer obsession. That's great. Let's do that. And then we'll have Amazon. Or let's just be frugal. Well, that doesn't quite work either. Like all the customer principles or all the Amazon principles are in this sort of elegant sort of tension. And what the executive's jobs are in these meetings is to be a proxy for customer value, whether this idea, Amazon Prime is an example, is going to deliver customer value while allowing Amazon to build a sustainable business over time. As you start to model this process out, now the ones that

succeed, of course, the ones that fail, the HEC memo goes into a little. Very quietly, yeah. Yeah, those those go away. And now the ones that go well, or the ones that are well received, are given the two pizza team, which is the other thing Amazon talks about, which is the idea that when we have a new initiative, we're not going to have a team larger than can be fed by two pizzas. And again, people are like, oh, two pizza team. Like, I'm going to bring that back to my business. But it's the whole set of ingredients that works in a very special way. So what Amazon is done at this point is they differentiated through the mutation of memos. They've selected the ones that seem most promising. And now they're selecting those for some mild amplification. And those are going to be brought to market in some way, which is why whenever you see

in Amazon, nine times out of ten, you see an Amazon release of a new thing and it's half-baked and it's embarrassing and all these things that you could just not believe that a company of Amazon's resources could possibly roll something this terrible out. But they do. and then they're the best in the world at allocating the capital to the ones that work. So I want to ask about the lateral movement in all of this. So Amazon started, if you think about unbundled or limitless Walmart as sort of an analogy for what its original vision was. I don't think you would have thought about Amazon Web Services, for example. So Amazon beyond its ability to

eat more and more traditional retail industries has also gone into completely almost orthogonal spaces. And so I'm curious as you think about your own business and maybe as advice to other people building ambitious people that want to build big businesses, how you think about that lateral ability that perhaps steady becomes something much different and maybe even more valuable. You could argue AWS is more valuable than the rest of Amazon given its cash flow profile. So how do you leave baked into like the DNA of a business enough flexibility combined with like enough focus, I guess is what I'm curious about. We sort of touched earlier on about this idea of Amazon as an organism.

Charlie Munger and Warren Buffett, they talk about this idea, if we want a business so great that a ham sandwich could run it. The problem with a lot of ham sandwich businesses is that these businesses that are run this way, they're generally rent-seeking. So in some way, people are locked in and all the sorts. There's a lot of negative things associated with a business that runs on autopilot. When you look at a business like Amazon, which is not rent-seeking, you could argue about whether it will be rent-seeking in the future.

It's constantly lowering prices with AWS and all these things. There's really only two ways of doing that in the short term, and there's, I believe, one way of doing that in the long term. The short term way of achieving this sort of like relentless tempo of customer value, customer value, lower prices, faster delivery, all the sort of. And whatever that means for whatever your business is, any sort of business, is through Herkulean efforts. And the canonical examples of this are Elon Musk or the Collison Brothers.

at Stripe or these name a famous founder and you've got this heroic effort that went into continues to go into building this business. And through their efforts of sheer will, they build this culture and they ship fast over and over again. But what you're relying on is this dynamic of successive heroes. And so other examples of this, Warren Buffett Charlie Munger, who are going to be the heroes to succeed them and have they created something, have they created a business that a ham sandwich could run? And for how long I'm not sure. What Amazon has built is like an autonomic nervous system. It has built into its DNA a self-reinforcing property. And this to me is the thing that in terms of you want to build a sort of business like this. One, of course,

like if you want to build a business that lasts a thousand years, you have to do it this way. What are the odds that you can get succession planning, which is like the hardest thing in the world? You can get succession planning right for so many generations, nothing. Almost impossible to do. So what you have to do is build a system that is not rent seeking, because if you build a rent-seeking system, the business is going to fall apart once you see some sort of skilled competitor come about. But it also can run on its own. And that's the problem. This is the million dollar problem. This is the multi-trillion dollar problem that I believe Amazon has solved. So how is it done? You talk about these lateral moves. Amazon, to go back to where we talked earlier, we talked about this

earlier, which is this idea that things get weird when you meet the internet scale. So Amazon had this started this unbound search, pretty quickly what they found was, okay, we can't stock all the products that we want to stock. Not only can we not stocked, we can't even identify the totality of vendors that are out there and communicate with them. And if we were able to communicate with them, we can't negotiate with them to set the best prices. Walmart's the best in the world at negotiating the best prices. Amazon is maybe average at it to start and are they can build this competency in house? Can they even hire enough people to do it? Maybe not. So what Amazon did is they opened up Amazon Marketplace. And for those who aren't familiar,

Amazon Marketplace is Amazon's third-party business where Amazon sells Tide on their website, but also you as a small business owner or even as an individual can sign up and start selling Tide. And so what Amazon gets with this is they've got hundreds of millions of skews is they outsource or eliminate the necessity of being the best in the world at something. So most businesses, you have to be the best in the world at everything that you do. Otherwise, you're going to get chipped away at piece by piece. Amazon, even if they had just the same number of skews as Walmart, they would have to be as good as Walmart, which is pretty hard to do. So they sort of brought in the wisdom of the markets. They open up Amazon marketplace, which allows anybody to sort of create an account, the idea,

the memo that was written for this. They said, what if anyone anywhere, anywhere in the world at any time could sign up to sell goods and ship them immediately? What would happen if that could be true? And so Amazon solved the problem this way with sort of third party what I'll call a platform model, which is we own the demand, to use a phrase by Florent Crivello, wrote this amazing piece about. We own the demand and we'll sort of outsource the supply. Similar thing happened with Amazon Web Services, where they say, look, we can foresee that we're going to outstrip the ability to sort of procure enough services and at a good enough service level and compounding speed and all the stuff. So we're going to do Amazon Web Services. The problem with something like Amazon Web Services and building what these vertical integrations,

these are the things that have plagued for generations. You've seen this in the world of automotive where General Motors buys a supplier and they gain 20% efficiency. And then three years later, they're a captive customer for their suppliers. So the efficiency plummets and all of a sudden they have this genius idea of they're going to spin it out. And they spin it out and it's a separate company and then they go back and buy it five years later. And it's just like, you know, never ending thing.

What Amazon or Credit Bezos with it, what Bezos's key insight was that our system will be self-reinforcing if not only are we selling services to other people, but we're selling the services to ourselves. There's two-sided benefit to that. One, if we start Amazon Web Services and we're our first and best customer, which is what Amazon is for Amazon Web Services, we will have the customer feedback because we know we're a customer, we can't say we're internally obsessed. We know we're customer obsessed. We'll be fanatical about collecting this information and feedback from customers delivering what they want. And we'll get the benefits of using the same service that our customers get. On the flip side, sure, you're a customer obsessed, but there's a

whole different level of customer obsession when you have to use the same interfaces and tools that customers are using. And so what Amazon did is they exposed themselves to their customers' pain, which is the fastest way we talk about Udle loops, the fastest way of getting into this feedback loop. And I think I'm going to try and ties back to something that's not Amazon and not Walmart, this is the key to building a lasting business. And Walmart did not have this. And that's why I say Walmart's one of the most impressive companies ever built. Because look at it. Still today, it's still cheaper to buy stuff at Walmart than it is to buy stuff on Amazon. The selection is still amazing. You walk into the service. Walmart is an absolute eighth wonder of the world. It's

incredible. What it's done for the world, and of course there's negative externalities as well, but what it's built is business is incredible. As a business, as a startup, as an established company, your reign is going to be zero months or it's going to be 12 months or five years. to what degree are you a flash in the pan? You zoom out far enough and you're a flash in the pan no matter, no matter what scale you look at, unless you can solve this problem of how do we force ourselves to continuously get better, faster, cheaper, faster tempo over time. It's an amazing idea that perhaps all Amazon is is the equivalent of a great constitution, that through Bezos's focus on words and communication and rules and,

and principles and all these things that they're famous for, that he's effectively externalized culture, put it into formulas, and that that is the magic. I've never really thought about it that way, but that seems to be kind of what you're saying. Is that fair? I've never thought of it as a constitution, and I love that.

He's built. People talk about simulations is a popular thing to talk about these days in terms of are we living in a simulation. Bezos has built a simulation or a game or he's built. Really what it is, is it's a microcosm of capitalism, except they own it. It's like, okay, you know, hey, a distributed ledger blockchain, hey, that's great. But what if we did that and we owned everything and owned all the benefits that accrue to it?

And so it's this beautiful mix of centralized, some centralized decision making and capital allocation and decentralized, you know, bringing in the wisdom of the markets by opening up all these things to external services. And yeah, he's, I think in some ways people say, oh, like you take away from Bezos's genius because I actually think that it's interesting to note, I don't know in your circle. but in my circles, the subject that never comes up, nobody ever says, who's going to replace Bezos? When I bring that up, people say, oh, it's because he's young. It's not because he's young. People talk about that when there's someone, people talk about what would happen to Tesla or SpaceX if Elon Musk weren't there. These are subjects of conversation. The reason is, is because Bezos is not, I don't believe is existential for the business anymore. And people say, oh my God, like, how could you say that is best see? Absolutely, he's best seeing the world.

But he wrote the program. And he wrote it in a way. similar does you bring up to the Constitution where hundreds of years later, it still's working pretty well. Absolutely incredible. You mentioned a term and it's a good excuse to talk about some of these interesting military analogies that we've discussed before. The first is the Udolup. So this is a, in certain circles, an incredibly popular phrase and idea from a guy named John Boyd, who if people have not read a book called Boyd about his life and kind of three-part career, I highly recommend it. It's an amazing book. But at the core of the book is this. philosophy, this Uda philosophy. And I'd love you to talk us through what that means and sort of

deconstructed a bit into its most essential, I think, first O is what you think is the critical, the orientation piece of this. So talk us through the Oudal Loop. Boyd is a fighter pilot. Call him that the Robert Cram biography is Boyd, the fighter pilot who changed the art of war. And Boyd is a fighter pilot. I believe in Korea. And he was an incredible pilot. And at the time, fighter pilot tactics, these air-to-air combat tactics was like more of an art than a science or maybe almost purely an art, not a science. And Boyd basically came back from Korea. I think it was Korea. Was it Korea or Vietnam? Yeah, I think it was Korea, but irrelevant. And so he comes back and he sets out to write a tactics manual. And he writes this tactics manual, and it turns out not a single

new move has been added to it. Substantial new move has been added to it since he wrote this tactics manual. So he's an incredibly thorough person. And eventually came up with this idea of the Uda and the OODA loop is observe, orient, decide, and act. And still throughout this book, I'm like, oh, like God, I really don't, you know, it doesn't land with me. And it wasn't until multiple Boyd books and papers and stuff that I finally came across what I think is what made the Oudal Loop click for me and maybe it will help some other folks. So if you think about a fighter pilot, you know, fighter pilot is flying in three dimensional

space. And maybe you're a fighter pilot's in an F4 phantom and the other person's in a mid-25. And you're coming at them at this air speed and you're the, the, position that you are angles, you know, relative to where they are flying in three-dimensional space also. And so a pilot is sitting there and they're observing, they're seeing what's going on. And one thing that Boyd came up with is the idea of energy maneuverability theory, where up till that point, there was no equations, no algorithms for figuring out what tactics and moves were available to a fighter pilot in any given situation. And what Boyd basically

figured out is if you say, okay, an aircraft weighs this much, has this much fuel and it has this certain characteristics of Lyft and whatever else goes into an airplane. And it's flying at this altitude, these are the... Your menu. Here's your menu. Here's your menu of options, exactly. And if you memorize these same things for mig 25, and you know you're flying at X, altitude, the other person's at Y altitude and the air speeds and stuff, you can sort of start to figure out, here are the things that I can do that make it impossible for the other person to respond. So you're observing, and the next step of this is orientation. And so, I don't know, I think you've read Ender's Game.

So Ender's Game, sci-fi book where all the battles take place in space where there's no down. And there's famous quotes, a sci-fi quotes from his book about picking the correct orientation, because if your enemy is disoriented in a space and the enemy thinks that they're upside down, and you have picked an orientation where you're walking on the ground, it's a very mental exercise, but all of a sudden, this person is disoriented and you're able to imagine. Similar with two fighter pilots, I imagine. And so it's sort of the analogy that I thought I'd like to read sci-fi. And you see that they're in these two different orientations. And now once you've decided on the correct orientation, I'm banked at this and this is up and this is down.

Now you can decide of what move you want to do and you can act, which is pulling a trigger and firing missiles. All sounds reasonable, but what it turns out is that Boyd meant for the Udoloup, and there's a more complicated drawing of the Udoloup. I think it's in Chet Richards' book, which is called Certain to Win, a fantastic book. And as it turns out, deciding and acting is implicit. So he says the observation and orientation is explicit. it. But then once that happens, you decide and act. If you're a fighter pilot and you've got all muscle memory going on, not saying like, oh, like, you know, eight seconds I should pull the trigger in front of these guns. Similar in business, you spend a lot of time thinking about a problem.

And then once it happens, you decide an actor, is why it never really resonated with me. And I can't remember if this was in Chet Richard's book too. But as I was thinking about it more, it's like, well, really the observing is pretty implicit also. If you think about the fighter pilot, back to this example, not sitting there. You know, I'm going to turn my head around and look, you're looking around like crazy, trying to find out where the other person is. You're looking at your radar and all this stuff. Similar in business, unless you're totally asleep at the wheel, you are observing all the time. So what is the Oudal Loop really about? I don't view it as a loop because observe, decide, and act are all happening automatically if you have good instincts. What you're doing is you're honing

your ability to orient. And that's when people talk about, Shane Parrish talks about mental models. You talk about mental models a lot on here. You talk about all these different things. It is pattern matching to give you the correct orientation for whatever problem you're coming about. And when we say tempo, tempo means, boy, we talked about it was tempo is going through the Oudal Loop as fast as possible. But if observe, decide and act are all implicit, what this tempo really is is orient, orient, orient, so you're orienting over and over and over again. In my business, in software, I believe orientation is more important than anything else. And it's actually orders of magnitude more complicated than orientation in other businesses. And I could talk about why.

might be some analogous things in investing. And so you have to maintain this mental agility, is mental flexibility, and then externalize that to the rest of your team, to the rest of your company, such that the whole team can operate at this tempo of orientation that is faster than anybody else thinks possible. So if you think about orientation as if you've got some sort of platform or collection of skills on a team, sort of where you're pointing the laser, so to speak, pointing at the problem to be solved and keeping the focus there is orientation. I guess One thing I would say about observation is it is implicit, but sometimes it's helpful to remind oneself to look around. And I always think about this little business parable called obvious Adams.

It kind of paints this guy that's obvious Adams is almost like a schmuck that is not especially smart, but he's just good at observing. Like he just happens to notice things. And thinking about the system's Bible again, like one of my favorite lines in there is people in the system slowly get sucked into that system so they can't see anything outside of it. It becomes their world. And maybe the observe for business people out there is really just making sure that you're not suckered into the realities of a system and don't realize that you can do something different. So that's like the only thing that I keep from the observed section of Boyd's work. I'm curious, you mentioned software as this special category maybe when it comes to orientation. Could you give us an example of specifically

what that means? Because this is something software specifically that I've personally gotten really interested more recently. Absolutely. And I think as you're talking about the systems Bible, talks about the system's delusion. Yes, that was the phrase. I couldn't think of it. And it's so great, which is you're stuck within the delusion. It's actually one of my favorite concepts in terms of relationship situations too. And I think business is really, everything's relationships. So you have business or relationships, personal relationship, family relationships, investor relationships. And you often find yourself in a shared delusion with another person. And so here we are, maybe we're out for dinner later and we get into an argument about something. And really,

when two people are getting into an argument, it's rarely about an argument versus a debate. An argument is rarely about the actual subject matter. It's more about I'm having a reaction to something and you're having a reaction to my reaction. And so now we have these reactions to reactions and pretty soon you're like way off the subject matter. My favorite metaphor for this is that when you find yourself in this space, they're usually characterized by stress, anger, frustration, any one of these negative emotions, which are fine to feel, but these negative emotions, that what you have to try and do is climb up to the next level. If you imagine, you could visualize a ladder. So I'm trying to get up the ladder to the next level so that I can look down on the delusion. And when you finally get to the place of looking down on the delusion, it's hilarious. And this is why you say, like, a year from now, we'll be laughing about this argument. And why is that? It's because it wasn't real.

We were in a shared delusion together. So, of course, this is helpful in relationships. But businesses, we're all in some sort of delusion. The pain of reconciling reality with the delusion can be substantial. But I very much agree that observation is important to sort of get you out of this delusion. Let me answer the actual question you asked. The actual question is, why is orientation so important in software? I think it was Mark Andreessen who coined the term product market fit. And Mark Andreessen is a famous venture capitalist and founder of Netscape and now Andrescent Horowitz.

And what product market fit is is basically what happens when whatever the startup has built has crossed this threshold into being the function of it is obvious. So the market is responding. The product has met the market and it is working. So people are starting to hand over. money or if not money handover data or whatever it is they're supposed to be doing. And of course, it brings into other interesting things. People have expanded on this of saying like founder market fit. And so like you could say steady is an example of founder market fit where I happen to be one of the only people on the planet earth who are interested in EDI and you know, have some experience in it. And so like this is like a good founder market fit. But I actually

love the image that comes up when you talk about product market fit, which is if you think about the market as this amorphous three dimensional thing, did you watch the Apollo 11 documentary. Not yet. I'll spoil it for you. They land on the moon. Or so they say. Yeah, allegedly. They have to perform this docking maneuver where the lunar, the limb, the lunar module blasts off from the moon and it docks with a command module where Michael Collins is waiting there as the loneliest guy on Earth or not on Earth for the lamb to come. And they have to perform this docking maneuver. Of course, like the docking maneuver, you start to wonder, you look at this and you're like, oh, wow, it's amazing. And then you start to think about this. You're like, oh, my God,

They had the entire computing power of NASA was like smaller than my iPhone. And they're looking at these like dials and switches and analog systems and trying to figure out what's going on. It's a miracle that they were able to do that. Sort of similar with startups. So you have this amorphous market blob. And then you have also a product that is occupying three dimensional space. And I don't know if these analogies are landing for you, but there's so many factors to a market. You know, what are the competitors that are out there?

All the market forces was a regulatory environment. And there's so many things to a product as well. And software is particularly complicated because you are building. You and I want to build a glass. We're going to create a mug. We're going to build a mug and it's going to hold 12 ounces of coffee. And we're going to work on this as a side project. So we're going to talk about this today. And then we're going to come back in a week. And you're responsible for everything but the handle. And I'm going to work on the handle. Well, chances are we're going to come back. And it's going to work pretty well. What are the odds that you're going to screw up the mug part? I'm going to screw up the handle part. And that's because what we're talking about is something that's observable. You know, mug is observable. It's quite simple. It occupies three-dimensional space. When you talk about software, let's pick a piece of software that most people have heard of. Slack maybe. So most people have Slack at their company. Like, how would you describe Slack? Or more importantly, if you were sent 10 years back and you just had to describe it in words, like, do you think you'd be capable of building exactly what they've built? It functions all the same way. Well, you might say yes, it might not sound that hard. But I've seen this. If you've seen the flow chart of what

goes into whether or not to alert the user about a Slack message. No. It's this, you know, infinitesically complex thing, just like down to the smallest detail. These infinitesimely small details are super complex. Anyways, the basic idea here is you're trying to build this multi-dimensional jigsaw puzzle. And so if you're off by one degree, it doesn't work at all. Colossal failure versus you have a mug and it's like the angles aren't quite right. You might be like, man, I really need to nail this in a V2, but it still performs its function.

And you see that, and it's just this certain narrow miss where software doesn't have it, and that's what makes building software so hard. What do you think are the prime lessons you've learned about effective software building? So you and I have talked about this. We're building some software. You kind of quickly diagnosed when looking at it. What the key areas to focus on are things I want to think about, like that sort of thing. What are the top couple things that come to mind that you would encourage anyone that's building software, let's say, for the first time to consider? Well, I have this three-step thing and it just leads to guaranteed amazing software items. No, it's complicated. I think we can sort of tie this back to some of the military strategy stuff. When you read Certain to Win, which is the Boyd book by Robert Cram, the biography is good for understanding why should I care about Boyd. Why was this an exceptional person? But then you need really a lot more application of the theory to understand why all this is important. And you hear people talk about Boyd and you're like, God, why are people talking about this? But it's sort of recognized, at least in some circles, is the

most substantial contribution to military strategy since the art of war by Sun Tzu, 2,500 years ago. And Boyd sort of talks about this idea of a patchwork of strategies, which we can come back to, which I love. And he weaves together strategies by pulling them from other places. And it reminds me of this quote, which is, when it comes to your product, innovate where you need to and then copy everything else. Because there's no sense, you don't want to reinvent your whole, unless you're doing a PhD paper or something, you know, reinvent everything from scratch. What he talks about is the four elements that made the German Blitzkrieg, the start of World War II, successful.

And there's some German words, I'll probably butcher, but I'll try. And they talk about it is this idea of mutual trust. And I think, now I'm going to probably mix these words up, but I think Einheit is mutual trust. Trust is the most important thing on the team. And so you say, okay, like, I get to go back and I really have to like work on trust on my team. Well, how do you work on trust? You know, there's like trust exercises. and we communicate more and all this.

Well, it turns out that people sort of have generally gotten the arrow of causality with trust wrong. And what the Germans figured out is that trust comes from bottom up. And what I mean by that is they had this thing called there's no exact American word for it, but it's our English word for it, called finger spitz and gefuel. What finger spitz and gefuel is is the literal translation is something like the feeling that you feel at the tips of your fingers. And what they mean by that is somebody's intuitive ability to do their own job. And what they found was that this mutual trust, which I believe in Einheit, comes as a sort of an emergent

property of having a team of people with finger spitz and refuel. So you might be a gunner and I might be a tank driver and we don't really need to trust each other a lot in terms of having done X, Y, and D together. If you believe that I'm great at my job and I believe that you're great at your job, we're going to probably work pretty well together. This is particularly important when you're dealing with anything that falls out of this easy realm of tangible objects. Think about a map. We're thinking, okay, like, we're going to go in. We're planning a military operation. We're going to look at this map. And a map is a very rough approximation of reality. If a map were a perfect reflection of reality, it would be reality. Yeah. And so what you need

to do is sort of paint a general picture of a map. We think they're going to be over here and they're going to have a force about this size. But when we get there, we need to make a whole bunch of decisions. And in order to make a whole bunch of decisions, we have to have a shared consciousness. And a shared consciousness, I believe, is the most important thing in software development is because we're talking about things that happen below the line of perceptibility, meaning I can't even write code. But if I could write code and you could write code, we still can't write the code in our heads and run it in our heads and get guaranteed outcomes. So I need to trust that when we break up into separate places to do our separate work, that the decisions that you're making are at least

directionally similar to the decisions that I would make if I were making the same decisions with the same set of information. Do you think that comes back just again to shared consciousness specifically to this constitution idea that we talked about with Amazon, that it's really just about setting and communicating a common vision at the company level? Is that the best, most effective way to create this? I think a lot of people talk about vision. And so I think vision can't possibly be the answer.

Because when you think about these, if it were that simple, every company. company that was great at Vision would have taken over their market by now, and we would be talking about them instead of someone else. So I think it has to be more than that. Vision is what I would call a North Star. And when you think about this, people generally need to know what I would call vision is if I went away for a month, would people on the team be able to make directionally correct things? Well, by definition, if they're going to be directionally correct, they have to understand what direction it is. And so the wonderful thing about the business that we're working on is that it's a vision that we can execute on for so long. And what we want to do with vision is sort of give people

a North Star they can go towards. And our ultimate purpose is to facilitate the exchange of all global trade. So we believe that we can sit like a clearinghouse in the middle of every single transaction that happens back and forth. Now, that's a nice vision to talk about, but that's not actually actionable. And so we have a lot more, that's a very low fidelity definition. We have a higher fidelity definition that talks about what our platform is and the different ways that we expect people to use it over time. Bezos is famous we're talking about, look, it's much less interesting to talk about what's going to change over the next 10 years. It's much less interesting to talk about that than it is to talk about what's not going to change. And he says,

what's not going to change? People want low prices. People want fast shipping speed. People want vast selection. The selection one maybe is questionable. I think there's some value to curation, but it's a basic idea of what can I bet on over the next 10 years. And that sort of thing is the North Star. For us, it's things like, okay, we know that there's this set of 300 different transaction types. We know, like, there probably isn't going to be a new replacement for a purchase order over the next 10 years or an invoice. Somebody's been around for a very long time. When you sort of think about these things, that's sort of the vision part, which a lot of people have. So now what you need to work on is what's the other part of it. And that's where I think

the principles and the values start to come in. And the principles and values in terms of, like, what are the ways that we think things should be done? So we have this idea of what needs to to be done. It's the sort of the how and the why, I think, and what's the general toolkit that we're bringing to it. So just to close out our military analogy section of the conversation, one of the points you made when we were talking at Capitol Camp was this notion of potentially Google being like an army, Stripe being like the Marines, and the desire to, hopefully it's steady, or the ability to build a business that's more like the Navy SEAL. So what I take this to mean is fewer and fewer, or a smaller and smaller team that are more and more precise, perhaps.

I love you to flesh out this idea and maybe use it as an opportunity to create sort of a commentary on the changing dynamics of teams and the size of teams and what they're able to accomplish. I love this topic. The thing that drives the trajectory of humanity is this basic idea, which is very simple, that we use the best tools of today to invent the tools of tomorrow. And that's what turns the whole thing. If we had to go back and build every new thing with the original tools, we'd never get anywhere.

When you think about the military analogy, you can't say like, you know what, the Navy SEALs is the best fighting force on Earth. I'm starting a new country. I'm going to build the Navy SEALs. Well, it doesn't quite work that way because, and again, I'm going to probably show some of my military ignorance here for people who have served. But my basic guess is that, like, they have to be delivered somehow to the places that they're going. And so maybe that's being delivered on a plane, which is run by the Air Force, or maybe it's on an aircraft carrier or a submarine. And, you know, aircraft carriers don't travel alone. They travel with a whole group of things.

And a plane requires mechanics and all these things. So what you need in order to build the more precise tools, the surgical instruments, or what I'll call the high leverage instruments, is you could have a lone assassin. If you could give them a machine where they can teleport anywhere in the world would be pretty high leverage. Army, maybe less high leverage because it's a whole lot of resource going to it. The way this ties back is idea we stand on the shoulders of giants. Well, more than that, we use those giant's tools for all sorts of things.

And Google built a whole bunch of infrastructure, Amazon, AWS built all this infrastructure. And of course, then Stripe comes and says, you know, we're going to build on top of all the things that they've been, literally. Not just the code libraries and stuff that are available because of those, but also the physical infrastructure that delivers these things. Well, Steady is starting. I don't know when Stripe has been quite a while. Steady has this tremendous advantage of starting in the next generation. And so not only are we able to build with AWS and Google, but with all the SaaS tools that have come out since then. So we can use these best in breed products. We can use Stripe, for example, for payments.

Stripe couldn't use Stripe for payments in the early days because Stripe didn't exist. AWS couldn't use AWS because you can't build AWS on AWS. So what we end up with, which I believe is the first time this has been possible, is having an effective, like a shadow force that works on your behalf. on a transaction fee basis. And what I mean by that is we use tools like, we use something called AWS Cognito. And this is like a boring little corner of AWS's vast swath of services that gives users the ability to choose a username and password and log in to our application. And so we don't build that.

We just use AWS's off-the-shelf tools for that. And AWS, I don't know if it's dozens or hundreds or thousands of people, but they have lots and lots of people working on that. And we pay some fraction of a cent for every user that we can figure and every time they log in. And so probably 24 hours a day, seven days a week, someone is working on that section of our codebase. We don't pay any debt associated with that. We have no liability associated with that. We don't have the code on our balance sheet.

We don't need to improve it over time. We don't need to focus on security. We don't need to worry when they roll out the latest version of some JavaScript framework, whether it's going to work with that. All this stuff happens automatically. and we just pay this tiny, tiny fraction of assent. It's a fascinating leverage story and reminds me of two other things I wanted to ask you about. They're somewhat related. The first of which is this notion of a too-hire list.

And the second of which is a simple heuristic for build versus buy. So you kind of lay the groundwork for that second answer. So maybe start there. For business people out there, how should they think about whether or not to build or buy some portion of their business? This is something we've talked about a bunch, something we talk about a lot in terms. I think 100 years ago or 50 years ago or 30 years ago, you could get away with having

portions of your business that were not something that you were particularly proud of. Certainly ethical and above the line and all this, but it's not the most impressive part of your business. I think that times have changed, things are hyper competitive. You look at the turnover on companies and the S&P and all these sort of things as indicators of the fact that a company's reign is much more tenuous than it used to be. And you have to divide everything your company does. You think about your company as a surface area.

And everything your company does is either getting better or it's getting worse. Things don't really linger in the middle because you're working against other people who are potentially getting better. So on a relative basis, it's either getting better or getting worse. Every piece of your business then needs to be getting better because presumably I don't think there's anybody who's listening to his podcast who's saying like, yeah, I'm just willing to have my business fall behind. So the idea with build versus buy, you look at every piece of surface area. that your business has, and you decide, is there someone out there who can compound this at an effective enough rate? Or maybe you could say, who could do it better than I can with the resources that I have, limited set of resources. So I'm quite confident that Stripe can compound

the payments platform that they've built at a faster rate than steady could if we built it. It's, you know, a statement, one about the product and two about the founders and all the sort of velocity that they had behind them. AWS is another great example, where the rate at which their services improve, they launch a service, then they launch it in multiple regions, then they roll out server-side encryption, then they roll out price decreases and speed increases. You could just watch these things get better and better over time. Those are actually two interesting examples because I can't go through a list of a dozen examples. There's very few companies that I believe are compounding faster or even at an acceptable rate. And that's basically the list of public companies

that I own. And past that, we have to make the decision of either build it ourselves or don't do it at all. And most often we don't do it at all. We just say, we're going to leave this. We're going to leave this till a day. Either that somebody else has done it and we could buy this primitive unit that's going to be compounding in a fast rate or we have the resources to do ourselves. When we've talked about this, it's that last piece that has stuck most in my mind, which is very often the result is just leave it alone, don't do it. It's a great way of preventing systems bloat in the John Gall framework again. and makes you realize very quickly I've kind of adopted this way of thinking that if there's not someone doing it really well that you can hire or buy, so to speak, you don't think you can do it really well. It probably isn't something that's actually critical to the business and it's a great way of reducing waste across the ecosystem, which is fascinating and keeps you very focused. You've laid out a couple of interesting, let's call them grids or two-dimensional ways of thinking about different companies. And I'm kind of rounding now back to this. You mentioned earlier, you've been in this kind of software VC way of thinking about things. So I'm going to ask about categories or

frameworks for placing companies. One that we were talking about just before we hit record was this notion that Sarah Tavill from Benzmark shared with me about the power, the magic of companies, which are delivering a better product, but also for cheaper. That when they see that, that has led to some fantastic outcomes. But you had an interesting retort to that idea. So I'd love you to lay out that simple framework. So what we're talking about is this basic idea of value propositions. And so you've got the idea of more for more, which is a standard luxury product, something like a Porsche or a Lamborghini maybe. You've got the idea of more for the same, which is something like Costco. You walk into a Costco, you're going to spend the same amount of money that you would have

at Walmart, but you're going to get a 50% larger size. You can do less for less. And less for less is really popular with any sort of budget airline, Spirit Southwest, JetBlue. And of course, you could try less for more, but that's not going to go over very well, which leaves this last one of more for less. And historically it's been very challenging. More for less is challenging because customers often don't believe it. Almost sounds like an infomercial when you try and pitch the more for less idea. I believe that that's starting to change a bit because this is like Benchmark's favorite sort of business is the more for less and benchmark seems to know what they're doing. So you just see from the magnitude of successes that have happened that it's working. And I think that

it has something to do with the leverage of technology. So it's a more believable value proposition, particularly when you're competing up against some sort of legacy incumbent, which is we're going to deliver more value, but we're also going to do it for a lower cost. And it'll be interesting if consumers and businesses start to get trained to say, this is the only one that I'll accept. And you might look at a Tesla might be an example of that, where it outperform similar cars in its thing and its sort of class and it's less money. There was another interesting grid that you drew for us, which was around this idea of utility. So maybe you could describe that kind of four-part framework and the types of companies that fit into that slot as well. Yeah, absolutely.

We're talking about how to start a startup, I think. And you do hear some sort of success stories of people who are just like, I wanted to start a business and so I started a business. But that typically doesn't work out that well. What you look at in terms of if you want to build a business that you're going to be good at and you're going to enjoy doing over time, I think it has to fall into this in a certain spot in this two by two matrix. And what I called it is the first axis. Is it a positive? Does it materially improve? Does it materially improve? the life of the user yes or no. And the other one is, would you yourself be a user for the product? And you sort of sum this up in a much nicer fashion, which you said global utility and personal

utility, low to high on both. And so if you look at something that does not materially improve the life of the user and you yourself would not use the product, this would be something like Angry Birds, something that just kills a lot of time. The problem with that is two things. One is it's really hard to build something great if you, you wouldn't use it yourself. Also, So if it doesn't materially improve the life of the user, the chances are that you're in the business of hits. So you're in a fad business and you have to sort of continue producing hits. Otherwise, you're out of favor.

If it materially improves the life of the user, but you yourself would not be a user for the product, that would be something like, I think the one I used last time was help. I fall in it and I can't get up. So I don't have elderly grandparents and I myself don't need that product. So I wouldn't be very good at building or scaling that company because I'm not going to to be able to see around the corners. You might have something that you yourself would use. but does not materially improve the life of the user.

And an example of that might be, these are always the hard ones to come about because you like to think that the things that you're using are materially improving your lives. I think the example we used last time was McDonald's. McDonald's. Perfect. Yeah. Are you saying McDonald's is not healthy?

And lastly, is the magic category, which is materially improves the life of the user and you yourself would be the user for the product. You do see counter examples to this. You see things primarily in the category of people, just very smart people who go out and say, I'm going to build something that I wouldn't use myself or I don't really have a personal experience in, but it does materially improve the life of the user. And these are these mega successful consumer companies typically.

But I very much view, and this is controversial, but I very much view these consumer tech startups as lottery tickets. And probably to many people on the show, they're listening and saying aren't all startups lottery tickets. And I think that that's not necessarily true. And it brings us into this interesting sort of subject where you look at the consumer business, the problem with a consumer business is that anybody can start one. Not anybody can be successful at them, but if you are, I'll use this Ben Graham quote where he says, anyone can achieve, I'm going to butcher the quote, but he says anyone can achieve market returns. But if you want to exceed market returns, you have to have something like a considerable amount of application, this is typical understatement

by Ben Graham, along with a certain trace of wisdom. And it's that trace of wisdom part that I feel like gets overlooked, where you're telling people like, you just need to go out and you need to work hard and you need to do all these things. When you're talking about docking this three-dimensional product into or infinite dimensional product into a infinite dimensional market, it takes more than a certain trace of wisdom. You need to be pretty good at what you do. Now, there's counter examples to this, which is the consumer market, where you can just sort of go out and build something and see massive adoption and sell it or not sell it. Something's like an enduring company like Facebook. But I believe that there's a sort of more probabilistically reasonable way of building a startup by using some of these sort of techniques from value investing in the B2B space.

But the caveat being you have to be willing to be a user of the product yourself and sort of have this deep sort of business expertise, domain expertise in order to do it. It would be fun if some crazy enterprising student out there or someone wants to do this to go through, let's say the top 50 or 100 stocks in the S&P 500 and try to categorize them in these four buckets. Because another question, a natural question is, I think that upper right quadrant will call it would be the thing that everyone wants to work on. Another interesting question is that where is most of the value? Because I'm sure Facebook, McDonald's, some of these companies may not be in the right quadrants in terms of what we'd want to build, but are nonetheless incredibly valuable because

of just like base protocol in humanity. One of the things you always read about is the strength of social connections being a clean proxy for sort of quality of life. And it reminds me of maybe the topic I was most excited to talk to you about, which is this notion of network health. So I think I asked you the question, something like, what were the best questions that you've been asked from VCs in the fundraising process? So maybe you could start the story there and describe why this question of network health was such a good question. So the network health question, I talked to Alfred at Sequoia, Alfred Lynn at Sequoia, a super smart guy. One of the reasons for this is he had a cheat code.

in our conversation, which was Alfred, I think was the COO of Zappos. And so I sit down and like, I'm used to, you know, you just pull the wind up string on my back and I'll talk about my backstory and what EDI is and how it fits in the world. And we get on the call and he sits down. He's like, okay, great. So you've come up with the new version of EDI, what happens next? And I'm like, oh, all right. Well, you know, I guess you're going to cut out the first whole bit of the preamble. So we really were able to really get into it. So at one point in the meeting, he leans back and he says, okay, so steady is a network. And what he meant by that is we have suppliers or vendors and we have retailers. We might have third-party logistics, trucking companies and all the sort of stuff. And of course,

everybody can play multiple roles too. So you might be a buyer and a seller. You might be a warehouse and a purchaser and all this stuff. He said, so if you have this network, how would you measure the health of the network? And I start answering. I said, well, and I like, I stopped and started a few times until I realize that I didn't have an answer to the question at all because I started answering with top level metrics in my head. And then it's short-circuited gross merchandise value. What's going to the platform? Oh, wait, that's not health. Maybe the performance of the business. It's, you know, you talk about take rate. You can all this sort of your stuff. But like, that's not the health of the network. And so I said, I understand what you mean. But can you give me more?

Ask me another question. It was, is this nice sort of meeting where it was not, it was not ever serial, so he was not asking this question to stump me. I gathered that he didn't have the answer to it either. And so he, and maybe I'm wrong. Maybe he's sitting over there with my perfect answer for network health. He's holding out of me. But he said, okay, Airbnb probably looks at things like the percentage of listings that have never been booked. And I started thinking about that. I said, okay, it's, you know, you think about that. It's an unhealthy node. So each one of these things are nodes. An unhealthy node. Why? Well, well, one, the seller's having, the renters have a negative experience. But the more important thing is that they've got finite shelf space, finite browsing space. It's not, well, it's theoretically infinite, but you're limited by the number of minutes that someone's going to spend looking at this. And that's actually not my insight. There was David Maugh from composite capital, who we started talking about this. And he reads my Amazon piece. And there's not many people who read that and come instantly with more information. He goes, yeah, well, it's not infinite shelf space like you're talking

about you're limited by the amount of time the number of minutes that people are willing to to spend browsing which is this and I'm just like I mean you know quick parenthetical he was with us as well in Columbia and I think I asked him just to pick a random business and like talk to me about it and like an hour later I mean I couldn't believe that he could possibly do this about other businesses so what a fascinating guy I'll get him at some point as well. Unbelievable smart we had just fascinating conversations about he filled in the whole missing piece for me which is how the Chinese ecosystem were so yeah of course the the person who's looking for places is doesn't want to see all these useless places that nobody's ever

going to book because they're overpriced or because they don't have photos or the photos are bad or whatever. And so I said, I'll think about that. I hypothesized a few metrics on the call. I think two that I came up with. I came up with two and I'm not sure I can share them. And I went and I started, I talked to someone I know at Uber and I said, what does Uber look like in terms of network health? And he had an instant answer for it. He said they look at the number of zeros. And what a zero is is the number of people who or percentage of people who open

in the app and have no Ubers in your area. Columbia, Missouri. When we were there, you try and leave for the airport at 4 in the morning, there are no Ubers in your area. That's an unhealthy node. The second one, and that can be solved with network density, the second one is this idea of the amount of time that drivers spend around driving without rides, which is the other side of the unhealthy node. The really interesting thing about network health, and you and I rift for 15 minutes or five

minutes at Capitol Camp, you just start to mind explodes when you think about this concept. is that you could start to model, because everything is networks. Most things fall into some sort of a network paradigm. You and I right now are a network of two. We're somehow communicating with a network of people on the podcast. So if you could theoretically measure this, the amount of time that people are spending zoning out on this podcast is a network health metric, if you could measure it.

You start to realize that all the things that you care about in terms of a network are actually incidental. So the things like take rate, things like gross merchandise value, all these things are sort of preceded by these leading indicators of network health. And so you may have very impressive top level network metrics, company metrics, but network health, I would sort of suppose is the canary in the coal mine. I think it's an incredibly portable and useful tool for talking to almost anybody, whether it's investors, business with a product, whatever, to ask them to define that idea. because very quickly, it's like one of those questions that lets you get five levels down,

like very fast, because on the one hand, it's very simple. There's nodes and there's links between the nodes. You can define those things typically pretty easily. But then thinking about, like, well, what would mean a high quality link? Is it frequency? Is it by direction? Is it intensity? Is it clustering?

All of these things become fascinating exercises. And of course, you could then apply the kind of Peter Drucker idea of what you're then start thinking about it, measures what you can manage towards. So by identifying, it's almost a self-fulfilling prophecy, by correctly identifying measures of network health, you're going to make a healthier network, because that's the thing you'll tend to manage. So just a fascinating idea for people out there. Certainly exercise used with caution, because you see the perfect examples of these gone wrong is engagement metrics. And so if you've logged out of Facebook, Facebook sends you these increasingly desperate emails. And they say, you have a notification because someone you

once knew thought about liking something that was on your feed and you get an email notification with that. That's someone trying to improve the health of you as a node in probably not the most helpful way. You mentioned something earlier. I love this idea. Tim Urban, the way but why writer, calls it the human colossus, this compounding set of technologies and know-how on top of which we can build further technologies. So you've got this lever that's getting bigger and bigger and bigger. And yet there's this sort of counter problem of our inability to do some big coordinated things quickly. So the Empire State Building was an interesting analogy that you had brought up in our correspondence. So I'm curious your take there.

Those seem to be sort of opposed that on the one hand, we've got more ability and technology than ever. On the other hand, something like building the Empire State Building quickly or the interstate system or big infrastructure plays or massive physical accomplishments seem to be, if anything, less frequent. What do you think about that idea? This is something I've thought about a lot, something that had really interesting conversations. This is where David Ma and I instantly, where we talk about being able to go five levels deep, you mentioned this, like this is the thing that we went an hour deep on. The basic problem, if you think it's a problem, and possibly it's just some sort of behavior of a system that's expected, is that what I frame maybe unfairly as is we can't do hard things anymore.

And people say, well, what do you mean by that? Well, we built the Empire State Building from start to finish in 18 months, and we invented, they invented, all of the techniques for building skyscrapers while doing it. Today, it takes five years to build an interchange and a major highway. I think the example that is sort of nearest and dearest to my heart is if you came to me, said, look, I've got this growing software business and I need a financial package. I need an ERP system and accounting system. I would say, no question best in breed. You've got to use NetSuite. NetSuite founded in 1998.

This is a business that raised $100 million from Larry Ellison from Oracle. It was a couple ex-Oracle execs or current Oracle execs at the time, I'm not sure, who went out and built this accounting an ERP system. And today, 20 years later, it's the best ERP system on the planet. And I want to put this in a delicate way. It's not because they've compounded faster than anybody else. It's not, this is the AWS of accounting systems. It's clunky.

It has an outdated API. They're running in their own data centers, all this stuff. Of course, it got bought by Oracle, I think, for $11.5 billion, so maybe four years ago. So the question is, you see these unbelievable suite of tools that are coming out. You see all the things that AWS has. You got new languages. You have new monitoring tools and all these things in software. Why has nobody built a better net suite?

That sort of frames the problem. And I reject the idea that we don't do great things anymore because we certainly do. Stripe's an example. So I'll just try and keep using these same examples over and over. It's a phenomenal payment system. You look at Stripe compared to cybersource or authorized.net or whatever these legacy tools were. And you can't even put them in the same solar system. Stripe has a suite of tools, but fundamentally they do one thing.

They do payments. And not to say that's easy. They have 1,800 engineers and they're run by by all consensus. Yeah, by all consensus, two of the smartest people in Silicon Valley who have an army of people and read about management, read about the Apollo space program. How do you coordinate people to do hard things and all this stuff? But the defining feature of the company is this payment system. Slack. Similar thing. It's a messaging platform that they send and receive messages. Google, Google, now they've got a suite of tools, but Google's got a really hard time rolling out new

products. Most of these have been done by acquisition. And so what it seems that is we've traded off the ability, because I don't think it's a choice, to do, broad things for doing deep things. So we go very deep in one area. We get the world's best team. You have all these best in breed tools. But the reason why things like, and I assume the cinder blocks we make today,

I mean, it's got to be amazing. I don't know anything about cinder blocks, but I have to imagine these, you probably got factories that make the unbelievable cinder blocks and like we're probably more efficient at making steel than ever before and all this stuff.

Yet it takes us 10 years to build a building. What I call these, you know, these are called primitive units, these things that are sort of discrete, well-defined, clean interface, interface, meaning the way they interact with other things. So Strives a clean interface for payments. We've gotten very good at these.

We've sort of moved away from this, what I'll call them, monolithic application. I've long said, I think it would cost $100 million to build a modern net suite, $100 million in the initial round. And I think it would take, and you'd have maybe a one in 50 chance of success. I mean, there's terrible odds. Versus, you know, you want to build one specific piece of CRM or something like that,

even much better odds. So I'm fascinated about this question just why. I have some potential thoughts, but there's probably people who are listening to this who have more well-formed thoughts. And I hypothesized that it's a problem of complexity in that we have when you're building the empire state building and you have zero ways of doing it. You invent one way of doing it and then you do it. And you've got this paradox of choice problem where now we have all the best in breed project management softwares and this cinderblock manufacturers and all the stuff and architectural design firms and all these things, and everything gets slowed down, even with best intentions. And I think this is the problem to solve. And there are counter examples. So there's SpaceX,

Tesla, which are doing enormously hard things that require enormous complex coordination. One could argue, though, that these both maybe fall into the category of inventing the techniques while you're doing it. Automotive, maybe not so much, but maybe in terms of their distribution network and whatnot. Do you think that this could all be summed up with this kind of just in time versus just in case mindset for learning and doing, maybe you could describe that framework. Going back on this thread of reasons why school was so frustrating, school is an exercise in just in case learning. What I mean by that, you sit there and you learn about clouds and rocks and God knows what in case someday I have to look outside and I say, hey, Patrick, here's

our wonderful coworking space with the cumulonimbus cloud sitting out front. Versus you get into business where you talk about this idea of feedback loops, you start to learn things just in time. And so people joke around the most important skills knowing how to Google because that's what you do. If you can go out and Google and you can teach the thing yourself, you can get good at it. I'm not sure that it fits exactly in this paradigm of we can't do hard things anymore. I think it's more of a paradox of choice than a just in time versus just case, although I see where you're going with it because you've got this idea of we're going to invent the things we need just in time. And what the whole Toyota production system is about, which is what just in time came from,

is this idea of eliminating waste. And that's the thing. I've heard that the Toyota production system is a commercialized application of the John Boyd theory, except they emerged in parallel. So it's not Leon Toyota didn't borrow from Boyd and vice versa. But I think that's what Boyd missed. And Boyd, if you read the biography, a lot of what he did is fought waste at the Pentagon. But he never explicitly said, our goal is eliminating waste.

And that's what Toyota has done or Toyota did. And Toyota did that by it with this inversion mechanism of, you know, a lot of monger's the famous inversion thinker who says, I'm going to take a problem and put it on its head. And what Toyota basically said was, okay, instead of taking things and pushing them through the production line, we're going to instead start with basically what the customer orders. And then every time they remove a wheel from the cart, the cart is going to go back to the wheel manufacturing center and they're going to produce another wheel to put on this cart. So this idea of just in time exactly when you need it, the whole thing gets done just in time.

And the whole idea behind this is eliminating waste. So I could see how building something, they say a startup is jumping off the cliff with the parts of an airplane and trying to build on the way down. That's part of the reason why startup works is also part of the reason why a lot of them fall at 100 miles an hour directly into the ground. But it's this idea of doing things just in time. And when the just in time things work, they work like magic. We're going to close to a couple fun questions.

The first is to ask you what your favorite question is and why. So my favorite question is this question of what, not being said. And I think that this is the question that kills companies, kills relationships, kills products, kills investment strategies. Often what you find is that everybody thinks that they're holding secrets. And the secrets that they're holding are not actually secrets. Example, you're standing in a group of people and you're thinking somebody's like, man, this guy really hates me. Like this guy just can't stand me. You don't want to call attention to it. Well, the chance are that that guy is probably thinking, wow, this guy talks too much or this guy reminds me to

hate or something like that. And so we're often holding counterweights or counterpoints in the same sort of secret. Or we're holding the same one, which is you say like, I'm worried such and such person's not working out. I'm worried that they're not in the right role. They're probably thinking I'm worried I'm not in the right role and I'm not performing as well as I should be also. So I look at my job as a founder is basically harvesting our collective unconscious as a group for these things that are not being said and saying them. It's actually pretty simple. And it works really, really well. And I tried to use that as much possible in relationships and friendships and friendships and business and everything. And you could find that like when we're talking about go back to the systems delusion problem, you can almost always discover the systems delusion by talking, by talking about these things that are not being said by naming them.

And then they basically go away. I love that idea. You have a physical ladder climbing up to get the perspective. Another question that works here is what is the hardest conversation I could have right now that I haven't had? I think that that always yields. One, it's interesting how easy it is often for people to answer that question and how hard it is to then go and do it, simple but not easy. So the second to last before my traditional closing question is you mentioned this a little

bit before when at least you hinted at it when you responded to my question about focus and how, if everyone believes that, it can't be the right advice about why most commonly heard advice is often wrong. I think about Google AdWords comes to mind. And I know a dozen people who got rich off of Google AdWords in the early 2000s. If you heard about Google AdWords and you had anything to do with anything selling products, anything, you can get rich on Google AdWords at that time. And of course, since then there's been Facebook advertising, Instagram, influencer advertising and advertising all this stuff. The unifying feature of all these things is that by the time you've heard of him, it's all priced out.

This is why Eric from Benchmark said an innovation product tied with the innovation distribution strategy because otherwise you're just giving away most of your gross margin to a platform. Unless you are the platform, then you're doomed to give it away. Most advice that you hear about is all backward looking. Blitzscaling. If you heard the term blitzscaling is the popular thing in Silicon Valley now. Blitzscaling is so obviously the right way to build a business. It can't be questioned.

I mean, look at the companies who've done it. Uber, Slack, Airbnb. newcomers, relative newcomers, someone like a flex port. But it can't be that simple because you can't just go out and buy the latest book and implement the advice and get rich. It doesn't work that way. And generally, we'll go back to the systems Bible book, the army is fully prepared to fight the last war. That is basically sums up all advice. This is backward looking. Blitzscaling was the absolute correct answer over the last 10 years. It's a back testing thing. And so that doesn't mean that the opposite of all current advice is correct. I remember the Ed Thorpe book. My big takeaway from that book,

probably something you knew already. But for me, it was the one thing of that book is never invest in anything in which you don't have an edge. So if you don't have an edge in it, don't invest in it. And that changed everything for me in terms of like, why would I do anything other than start an EDI company? It's the thing that have the biggest edge in. When you start to think about advice, unless you need to have some sort of insight, some sort of edge that gives the ability to do things in a different sort of way. People say, you have to be contrarian and right. Yeah, but you have to do that many, many times in a startup in order to have outsized results. Go back to the military stuff, which I know we closed out, but I'm going to open it up

just a little bit at the end. In the art of war, Sun Su says, if you prepare for battle and you build a big army and you go up against another army and you win, you have not won. You've done, in modern terms, it called attrition warfare, which is, you know, the dominant strategy for a long time. You think about attrition warfare, the trench warfare in World War long or something. Or yeah, or Civil War, you line up in lines and you shoot at each other and whoever's left standing is the winner. Sun Tzu said 2,500 years before that is not really a good way to win. When you want to win, what he said is you want to bring a boulder up to a high hill and roll it down the hill is what the war should be like onto the troops below. And to me, you hear blitzscaling, which sounds a lot like Blitzkrieg is not the same as Blitzkrieg.

Blitzscaling is attrition warfare for startups. Was the correct answer before, but now that it's commonplace, not the right way to do things, you just as a startup you can't hire a thousand great engineers. Maybe you can. It's so probabilistically difficult that it's not a good strategy to do. So when I think about these things, I'll steal the title of that Chet Richards book again, which is you want to do things in a way that makes you certain to win. And that's what value investing talks about is like, hey, screw being right,

let's just figure out ways that we can't possibly be wrong and we'll get rich. And I think there's ways to do that for a startup. For sure, there's ways to do that for a startup to maybe not get 100%, but to approach 99%. Limiting burn, overpaying people in order to get the best possible people. Extreme focus. There's a whole menu of things that you can do, but you have to have taste. That's the hardest part is this idea of what Ben Graham talks about, that certain trace of wisdom and it has to be more than a trace of wisdom. You have to have the taste to look at a whole menu of strategies and say, this one is right and this one doesn't work for me. You can't just go out and read seven powers and say, I'm going to do this one, and this is going to be in my business,

and Blitzkrieg is good. And so, such and such is it's about weaving the correct Patrick of strategies to find the perfect orientation, and then you take off. It's a fascinating place to close in what highlights the nuance and difficulty of building a successful business. You know my closing question for everybody, which is to ask what the kindest thing that anyone's ever done for you is. So I have one that's top of mind based on the conversations that we've had tonight, which is when I was starting steady, I didn't know anything. about startups. I had an auto parts business before.

I was a business. It wasn't a startup. It was different in my mind. Didn't know anyone in the world of venture capital practically. And I said, you know what? There's this one guy on Twitter

who likes my tweets a lot, and I'm pretty sure he's a VC. And so I look him up. His name's Zach Ware. At the time, he did a fund called VTF Capital. So I sent him like a two-page DM, which is like something we didn't get to talk about is this idea of all the common advice

in terms of they say, don't write long emails. Well, it depends how good of a writer you are. Sometimes if you feel like writing is an edge you have. Maybe you should write long emails. So I wrote this long thing. I'm not even sure at this point how coherent it was. And he said, let's talk. And his background is at Zappos. So he sort of knew the instant EDI terminology and everything and totally got it. And I didn't have a deck. I didn't have a name. I didn't have a website. And he said, I'll commit for 100K. First call. That opened up unbelievable doors.

They eventually went on to invest more than that. Unbelievable doors. And if I could cheat by offering a second one, which is the second thing that's sort of, I forget who is telling me about this. It might have been Brett from first round was this idea of kindling. The beginning of a relationship, the beginning of a business is very delicate. And it's like you ever see a castaway, you know, he's just, you know, trying to blow on that fire and get it to work. I think people don't realize how fragile these things are because most of the time they fall apart before they even happen. It's like the Fermi paradox. And so I got this first commitment from Zach who believed in is believed in me more than anybody, more than anybody had in my entire life. He just, the

conviction, boom, I believe in you. And then the second one was Ryan Peterson from Flexport, by a happenstance of too long of a story to tell here. I ended up with some early advisor shares in Flexport. I was an early Flexport customer. And Flexport's gone on to just raise a billion dollar round from SoftBank. And Ryan, and I told Ryan, I'm doing this EDI thing. Just figured I'd sort of tell you about it. And he said, I'm pretty broke right now, but I could, he's like I do 10K. And this was not that it was three years ago or something like that. And I said, okay, it was amazing. He texts me and he says, here's a link to my crunch base page.

Just tell me anyone else you wanted an intro to. And that was, I mean, just like what an unbelievable thing of saying like here, I'm going to open up my whole cap table to anyone you want an intro to. In response to that kindness, I said, here's a list of all of them. Please send me an intro. So those are two things. I just look at, you look at these things, the trajectories of life. And steady has been the most meaningful thing I've ever done.

And it's only, I'm only two and a half years in because it's changed my whole network health in terms of the people I've met, quality of thoughts that I'm having because I'm being pushed to such a limit of what I'm able to do. I can all trace back to those two people who said, I believe in you. Let's do this and open up their networks to me. Taking a chance, a common answer for kindness. Well, this has been awesome. Thanks for all the time, a variety of crazy, interesting topics.

I hope to do it again. Yeah. Thanks so much for having. Hey everyone, Patrick here again. To find more episodes of Invest like the Best, go to investorfieldguide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com forward slash book club.

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