Sharp Tech with Ben Thompson - A Closer Look at Opendoor and Cloudflare and Responses to Your FTX Emails

Episode Date: November 17, 2022

A closer look at Opendoor in the midst of its biggest challenge yet, the state of Twilio and Cloudflare, excellent pushback on claims that crypto doesn’t have a product, and reactions to SBF’s DMs and Max Verstappen’s antics.

Hello and welcome to Sharp Tech. I'm Andrew Sharp, and this is a free preview of today's episode. It's not necessarily a reflection on like the declining value of property in America if suddenly there's a market correction where things return to a saner place. And it seems like that's sort of what's happening across tech right now. Yeah, well, I mean, the big issue with tech, and this applies to all these SaaS companies, applies to Cloudflare, is in a world of like infinite money, like everyone's looking for a return, right? So I was like, yeah, I'll take seriously your 10-year projection and that you're losing all this money now.

You're making money in the long run. I don't think that's actually necessarily flawed. Like the whole point with a SaaS business in particular is because it used to be when you sold enterprise software, you would sell it that you'd like, you sell a bunch of seats. Or originally you would actually sell the package software or you'd sell like a big installation. And so you would invest all this money in the sales process and then you'd get a big payment. And then you had to implement it, there'd be service content. to X, XYZ, Microsoft really shifted the world to this paying on a license basis. So even though you were using Windows or you're using Office and it would come on a disc,

like you would pay on a per employee basis and you'd pay a subscription fee. You pay sort of every month. And so on one hand, the problem with this from a startup perspective, this is a whole it's all sold now, is you're investing tons and tons of money on the front end in your Salesforce to get that initial sale. But you're not going to make that money up. It's going to take a long time. you're just getting small monthly payments, right?

You're paying $8 a month for Slack or $12 a month for Zoom or whatever it is. It takes a long time for that $12 to add up for that salesman's commission and salary and all that sort of thing or the advertising that you do. But the idea is you're going to get that money for like forever, right? Like as long as this company runs, it's going to be using XYZ. And so you're like there's this way to like market a SaaS company in an IPO going by cohorts. And you show, look, this cohort from five years ago, we lost money on them on year one, You're two, you're three. Oh, now we're making money on them.

And oh, by the way, because we have a relationship, we can create new services and we can add on and increase them out their paying. And so we actually have what's called a negative churn where, of course, the churn is losing customers that's outweighed by the increased revenue we're getting from our existing customers. And that's sort of what you want in a SaaS business. And it's, it makes, it makes sense. The problem is that it's a lot easier to look at a 10-year printout when your money is collecting 0% because there's like, right? They're not getting crushed on every other front. Yeah, when interest rates are super high, it's like, well, I have money in hand if I buy U.S. Treasuries, right?

Or if I buy, you know, Apple corporate debt, which is, you know, I know, they're not going to go bankrupt. And so the hurdle rate is much higher for this stuff, even if it makes sense. The other thing I, so that's number one. Like just overall the change in available money has made investors much less willing to look in the long term. I think number two is the reality is a lot of these SaaS companies, he's ended up hitting walls. That wall was, again, off on a Microsoft wall, where Microsoft would build the same product and it wasn't as good,

but you already got it. And so these 10-year projections suddenly looked a little iffyre. Like, well, your growth, what happens for growth tops out after five years, right? Like, yes, your existing cohorts, you'll make more money, but they're going to have this huge sales and marketing cost that's going to start, you know, not returning good stuff. And so there's more justifiable skepticism, I think, about actually how reliable, are these long-term projections.

Because SaaS really only became a thing in the last, you know, seven, seven, eight years or so. And so only now are we getting to the point where we can look back and say, where those 10-year projections actually valid? And so you have a double whammy of reevaluating what's actually the long-term growth potential with a tremendous decrease in willingness to invest on a 10-year horizon. And so all these companies have just gotten completely crushed, you know, over the last year. Is Cloudflare making money now? No, no, they're not.

The, well, so. No, they're not to be clear. So, so this is all tricky with this sort of stuff. So number one, on like a gap basis, which incorporates things like stock base compensation that, you know, measures your equipment costs on depreciation. Like, no, they're not. And on an operating margin, they are. They're making, you know, they're making great money.

But, or sorry, a gross margin, I should say. So gross margin is just how much they're making. minus how much it costs provide that service. It doesn't include R&D, sales and marketing, all that sort of stuff. Okay. I think from a Cloudflare perspective, I'm still fine with that because they do have this really unique advantage in infrastructure. And I want them still investing in growth, even in this difficult market.

I think the question that's being asked of a SaaS company, which is, yeah, they're like, yeah, our gross margins are positive too. It's like, well, yeah, but you're spending as much money as you make on sales and marketing. Like, is that actually going to pay off? And so that's what needs to be sort of pulled back. But everyone bought into the narrative of investing in growth is sort of worth it in the long run. Today, there's a lot of companies that need to pull back. Like, oh, wait, you claim your unit margins are positive.

Let's see it. You know, you can maybe invest in growth in the long run. I do think Cloudflare is an exception. I think it's good. They continue to invest because I think they do have a very large opportunity and they have a very large structural advantage in the markets that they're going in. And I would not want them to pull back on R&D. But that doesn't necessarily apply to your Fogg standard SaaS company or even to a company like Twilio. Okay. Well, that's a comprehensive answer for the 10 or 15 people who have emailed us

looking for cloud flare takes over the last one. Well, they're probably going to be annoyed. They want analysis of the last quarter. I don't have that in front of me. But now we have a foundation so we can we can come back to it. There you go. But, but, Speaking of market corrections, Ben, FtX, let's revisit the crypto space with several good emails. I'll start with Brandon. He says, I think you guys are fundamentally misunderstanding crypto when Ben talks about wanting to see, quote, more products from crypto. I've been around the crypto world since 2012 and worked full time in crypto the last two years. The best way to think about crypto now and for the foreseeable future is as an internet casino that takes advantage of regulatory arbitrage. The mistake people make is grossly underestimating demand for that product.

Back in 2013, I would have told you that a quote-unquote internet casino would be maybe a $30 billion industry. But no, even removing ETH and Bitcoin and other stable coins, Right now, today, coin gecko shows there's about $300 billion of what I would consider speculative nonsense. And that's just tokens, not NFTs, et cetera. I think there's just a massive underestimation of the demand for get rich quick schemes. To lots and lots of people, that all sounds incredibly silly and unproductive. And I probably agree, he says in parentheses, but it can't be denied that it's a massive industry with it. very clear product market fit.

Maybe that's an industry that is not interesting to Ben or Andrew, which is definitely fair, but it's not lacking products, in my opinion. So this feels like the crypto version of Tom Seismore and Heat telling Robert De Niro the action is the juice. What Brandon is saying is that in crypto, the scam is the product. What do you think of that? I think it's a great email. I think it's very well put.

Like there is product market fit. And I'm probably being idealist and naive to care about blockchain in any sort of like non-crytal related utility. But, you know, I think Farkas is interesting. Everyone else is like, look, how can I make a quick buck off this? It's a good point. I have this great email. I have really nothing to add. Okay.

Well, one other question about potential blockchain applications. this note from Michael, what do you think about blockchain for electronic health records? Sounds like a terrible idea. That was my reaction. I was like, I don't know. I'm a little uncomfortable with that idea, but, you know, maybe 20 or 30 years down the line. I mean, the thing about the blockchain is it's permanent and visible to everyone. And so what are the applications where that makes sense?

And I think those applications will mostly be applications that people didn't think about that are not analogies to applications that currently exists, right? And, you know, I've made this analogy on the podcast a million times, but it's very useful where the first version of ads on the internet were ads next to text. Because that's what newspapers did, right? Doing a feed where you could dynamically insert stuff was great for content and it was great for ads. That made much more sense. if there are real products, not casino products, you know, for crypto, it's going to be something new that was only possible with crypto. And it's possible that will never exist. It's possible that the entire crypto or casino aspect gets completely regulated out of existence or people go out.

And someone will actually build something useful here. But you need to think about those qualities, right? It's permanent and everyone can see it. That does not sound a good angle for health records. What are things that would be interesting if they were permanent and everyone could see it? Right. Like the, you know, I think where the NFT bit, what's interesting is this idea of if you have an NFT, that's like a ticket, right?

You have access to things that you want to have access to otherwise. And why is that useful? Because it's visible to everyone and it's permanent. So people know that you have that sort of access, right? But this goes back to my other criticism, you that's about the last podcast, this conflation of ownership and utility. I think this NFT angle only makes sense if the utility is the actual stuff you get access to,

now that the NFT is going to increase in value. Once you're conflating those two, the product value falls apart. So sort of tied in there. Well, all I can say is I am not entrusting my health records or I'm going to be wary of signing up for any idea where there's even a possibility that my family's health records are being managed by like a 26-year-old kid in a Bahamas pet house.

I'm just out on all things blockchain until further notice. Totally reasonable. Ivan says, hey, guys, I've been really enjoying the podcast so far. I did want to push back a bit on your discussion around media bias with FTX and SBF. All right, and that's the end of the free preview. If you'd like to subscribe and receive every episode of this show, you can do so by subscribing to Stratecary Plus. That'll give you access to every Sharp Tech episode, all of our Sharp China episodes, the Dithering Podcast with Ben and John Gruber, daily analysis of the tech business from Ben, and more shows that we'll be adding in the months to come. If you'd like to become a subscriber, click the link in your show notes to get access to the entire Straterey universe.