The Prof G Pod with Scott Galloway - Disruption is Due

Episode Date: July 9, 2020

Richard Florida joins Scott to discuss COVID-19’s impact on cities and suburbs. Richard explains why he thinks the idea that this is the end of cities is overblown and how the pandemic poses an opportunity to push for racial and economic equity. Richard is an American urban studies theorist and University Professor at University of Toronto’s School of Cities and Rotman School of Management.  Scott also breaks down Lemonade’s IPO, what the company’s challenges are now moving forward, and how you should think about investing. If there’s one thing he wants you to remember, it’s that market dynamics always trump personal performance.  This week’s Office Hours: Innovation Roadblocks, Equity Crowdfunding, and Omnichannel Strategy.  Scott discusses going back to campus during Algebra of Happiness.  Learn more about your ad choices. Visit podcastchoices.com/adchoices

Episode 17. 17, the atomic number of chlorine. Group 17 of the periodic table is called the halogens. It is the age at which you can join the armed services. It is also the age at which one can apply for a private pilot license. We're going to break the sound barrier with this podcast. Let's Chuck Yeager this bitch. Go, go, go. Welcome to the 17th episode of the Prop G Show. In today's episode, we speak with Richard Florida. Richard is an American urban studies theorist. That's a cool thing. Hi, I'm an American urban studies theorist. That is a good wrap in a bar, focusing on social and economic theory. We talk about the cities he believes will have the biggest impact because of COVID-19 or register the biggest impact from COVID-19, as well as how and why this is an incredible opportunity for social justice and racial and economic equity.

Oh my God, let's take it more serious here. Anyways, let's bust into today's episode. Okay, so I get asked a lot about stocks. Some I get right, some I get wrong. First off, this is the 13-month anniversary of the dog predicting in front of a cast of thousands in South by Southwest that Tesla, which was trading at $350, would go below $100. I don't understand the company. I think they've been steel. I think they're an auto company, but that's neither here nor there. The stock immediately dove to $230. Okay, the dog was walking. The dog was barking. I thought, wow, I'm good at this. And now the stock, I believe, closed at about $1,300. So let's be clear. The fine print, when I talk stocks, I get it wrong all the time. I've only really owned a handful of stocks. I've owned Apple and Amazon and Netflix since 2008. That's the good news. The bad news is I sold

Netflix in 2009, and it's gone up 40x since then. I want to find a time machine and a cloning machine so I can clone me, go back in time, find me, hunt my ass down, kill me, and then commit fucking suicide. Sold Netflix at 10 bucks a share. But anyways, I'm not angry. I'm not angry. I bought some Facebook in 2016 because I recognized they were a monopoly. I sold it about six months ago because I realized it was difficult for me to continue to be so sanctimonious about the company while owning it. So I've primarily just owned Apple and Amazon. I've purchased, I've sold one stock in the last 12 months and purchased two. I sold Facebook. I purchased Twitter. I believe that at about a $30 billion market cap relative to Facebook 700,700 billion. If Twitter can just

sort of command a fraction of the space it occupies, it should be a $100 stock. Specifically, they need to replace a part-time CEO, see above why part-time, that just makes no fucking sense, to increase the pace of innovation so they release products and services at double the velocity, which they'd be able to do if senior management wasn't a revolving door, because no senior manager or any talent wants to work for a guy who spends his afternoon at another company that has, whereas 90% of his economic wealth resides at IU Square. And then finally, they need to launch a series of subscription-based products. It can start as 1% of their revenue. A lot of people, including myself, would pay for Twitter

and get a lot of influence and a lot of reward or economic reward for being on the platform. And if that business is just the fastest growing part of their business, even if it's less than 1% of total revenue, that stock is a hundred bucks. So I like Twitter. The second stock I purchased was Lemonade. I was fortunate enough to get allocation in the IPO at 29. I think it went to about 60 or 70 on the first day and sits at about 80 now. So some people would argue that the underwriters did a terrible job of pricing this thing and that Lemonade left money on the table and endured more dilution than they should have. The counter to that argument with IPOs is they're no longer as much fundraising events. It's pretty easy to raise money in the private

markets and also in the secondary markets and primary, not only from institutions, but using Forge or MicroVentures or SharePost, you can buy shares in the private market. They're more or less branding events. And that is you get a tremendous amount of awareness that pop creates a ton of stories. If you type in lemonade IPO, there's probably more news stories on lemonade than there had been in the history of the company because of the pop. And that creates a lot of awareness among consumers, investors, partners. So it is more of a branding event. Is it worth the additional dilution to have that pop to get the additional press? Is it worth the 7% fee you have to pay to the underwriters such that you can have these ingredient brands of Goldman and JP Morgan taking you public? Maybe, maybe. But there are alternatives now. One, companies are registering bigger gains

in value. They're staying private longer. So a lot of the gains have been captured by a smaller and smaller group of people. Public market investors don't get now even access to the huge upsides represented by Google or Amazon or Facebook. The private market institutional investors are now capturing the majority of those gains because these companies are going public later. So let's talk specifically about Lemonade. And I try to apply these criteria I teach in the Prop G online strategy sprint to stocks to determine why I will invest or if I would invest in a stock or its prospects. And loosely speaking, they're first and foremost, a recurring revenue bundle. I think that is the future subscription. We're terrible at estimating time as a species. So if you can get into a monogamous relationship with your consumer set versus a recurring revenue bundle, all a prime, et cetera,

or syndicated research, or even a gym membership, right? Or SAS is the most obvious recurring revenue bundle, if you will, that you're going to be valued in multiple of revenues as opposed to multiple EBITDA takes into a different just weight class of companies. So Lemonade has recurring revenue. It's not a bundle yet, but insurance is one of those things who just keeps renewing. It's a bit of a racket. I love companies that are disrupting industries that have unearned margin. How do you determine unearned margin? So for example, in the insurance industry, 45% of all revenues go to administration and profits, meaning that you're getting $0.55 back in value. Whereas on a car, you're getting probably $0.80 back.

On grocery, you're getting 96% back because it's such a low-margin industry. In the case of Amazon, I would argue you're getting $0.103 back because they have predatory pricing and dumping. But insurance, what Bezos said is your margin is my opportunity. There is a ton of opportunity, i.e. margin in insurance. By the way, by the way, how do you spot an industry that's really ripe to be disrupted? Are you wealthy or are your wealthy friends being taken to dinner a lot by people in insurance or banking? If you're having dinner with strangers, it typically means the person on the other end of the table is selling you an undifferentiated product. So I think the insurance industry is incredibly ripe for disruption. Now,

we want to look to visionary storytelling. And that is someone who's able to outline a vision such that they get a larger multiple on revenues, cheaper access to cheaper capital, and they can pull the future forward. Bezos, Tim Cook, all these guys just do an amazing job. You just listen to them and you want to buy stock. And I believe the CEO of Lemonade has those attributes, tells a really good story. Benjamin Button effect, that is the company, does the product age in reverse? Most companies, most companies' products, when they roll off the driver's lot or the car lot, or you twist the cap off, they decline by anywhere between 30% and 98% of value. Whereas Netflix gets better every time you use it because it informs the value. Whereas Netflix gets better every time you use it

because it informs the algorithm. Waze gets better. Even Amazon gets better because of user reviews. Lemonade gets better because they're using AI, and I don't know how sophisticated the AI is, to basically assess the underwriting risk based on everything from the IP address you're coming into, the way you answer questions, the language you use. Some of it's kind of creepy, but you can see how it might be effective. And that way, every time somebody uses the product, they get better at assessing the underwriting risk, which lets them lower the price of the product, the access to cheap capital. When you buy $100 worth of insurance from Lemonade, you're probably right now getting $110 or $120 worth of insurance. And the traditional industry, the traditional players aren't going to

move fast enough, and they're not going to want to cut into their profits. They will not respond. This right now is an ankle biter of a company. Pretty soon though, the insurance industry is going to look up and they're going to see their torso halfway in a great white shark called lemonade. You have to have a reputation as an accelerant. And that is you have to give young, talented people who, in my opinion, are usually the coal, the infrastructure, the secret sauce of any super successful company. Unless you provide an environment that offers somebody a 24-year-old, a talented 24-year-old, the opportunity to live the life, i.e. compensation, role, responsibility of a 30 or 35-year-old, it's very difficult to compete with the tech guys. It sounds easy. It's not, because that means

clearing out people that aren't performing and clearing out senior people when they are no longer holding their weight or offering anything other than that they're senior. I would argue that's probably the most important thing for a company right now is to develop your reputation as an accelerant. Vertical. Most insurance companies are not vertical. They brand, then they get their product from a provider. Then they have a series of salespeople that they're not affiliated with other than they're

allowed to sell their products that they pay ridiculous commissions to. And then they sell off the insurance to an underwriter. Lemonade does their own sales. They've tried to digitize the entire experience to take humans out. And this is very inefficient in the insurance industry. Big margins, a lot of waste. They're trying to do the underwriting risk themselves. They do, I believe, underwrite or outsource or sell off some of the underwriting risks for capital risk. But this company, I would

argue, is more vertical than most. Anyways, this company sort of checks all the boxes. So I think their challenge now is to effectively start showing that progress against that vision, that a brand, if you will, or product is one part performance, one part promise. And I think they've outlined the promise very well. Now they're going to have to show obviously steps against that promise. What is happening in the broader market? Let's go meta. Let's go big picture. Let's take some edibles without taking edibles and let's riff about the big picture, the grande retrato. I think that means big picture. I don't know. Anyway, we have this weird dynamic in the market and market dynamics

will always trump individual performance. Let me repeat that again. Market dynamics will always trump individual performance. You'd rather own an average company in a great market than a great company in an awful market. And what are the market dynamics here? And why is the dog coming in big and buying stock in an IPO? Because, because the IPO markets right now reflect a disequilibrium right now. What do I mean by that? Probably two-thirds of the economy has been rendered obsolete for the time being. In other words, they don't have access to the IPO markets. It doesn't matter how good you are. If you're a media company, if you're a travel company, if you're in anything to do with restaurants, you're just shut out. You're shut out, right?

So that takes out somewhere between one third and two thirds of the consumer economy. And then you have the demand side, and that is institutional investors, and we don't like to say this out loud, who are living their best lives. Specifically, they have more money post-pandemic than pre-pandemic. So we have demand is higher and we have supply. The number of companies that can access the public markets right now is lower. So we have an imbalance. SoftBank did the last round. They were worried it was too high. SoftBank absolutely needed a pop, needed a win here. So they were willing to go in and price it below its natural level in

order to chalk a win for their largest investor, SoftBank, in order to get that branding effect. I just saw the mother of all crowds trying to get through a small door here and thought the thing was going to pop and got this one right. But in sum, when you're investing stocks, I don't believe in trading stocks. If this thing hits $100 a share, I think it's at $80. I'll probably take my basis off the table, but I like to be a long-term holder. It is very hard, I think, to trade in time markets. I don't have those skills. I like to hold stocks for at least five to 10 years and not think about them every day,

which is a lie. I check my stocks probably four times a day, and so does anyone else who owns stocks, as far as I can tell. But you want to have a set of criteria. You want a stock that you're going to own for at least five or 10 years. Make stocks investing, not trading. Also, I think a big trend is trying to figure out a way to get into the private markets to recognize some of those big upsides. You can do that with some of these secondary firms and have an investor mindset, not a trading mindset, but an investor mindset. Let's get on with the show.

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We're at our place in Toronto, which has been actually a pretty good place to deal with this COVID-19 crisis. And when you say good, why has it been good? Well, you know, we were at our condo in Miami Beach. And when we were in Miami beach up to the middle of May, things were pretty fine in, in greater Miami. Um, we came back in the middle of May and you know, the crisis had hit Toronto. It didn't hit it as hard as New York, but it hit it pretty hard. And I think, you know, Canadians and Torontonians are pretty small C conservative and they just stayed pretty locked down and stayed with social distancing. So it seems like things are really on a pretty good track here right now. Well, I've always thought, you know, Canada, I often wonder if Canada thinks that they're

in an apartment living above a meth lab. I mean, they must just look down or hear the noise downstairs in America and go, what is going on down there? You know, stuff always looks better from afar. But whether it's, you know, Trudeau taking 20 seconds of silence such that he could actually answer something thoughtfully, whether it's this crisis bringing them together as opposed to tearing us apart. It just, I don't know, go Canada. Anyway, cities, Richard, I consider you my go-to, my Yoda, my sensei on urbanization and cities. Talk to us about what you see the major impacts and then second order effects of the novel coronavirus on this massive move towards

city over the last 30 years. What impact does it have on cities, second tier cities? What do you see happening? Well, it's a big question. And first of all, I think in the wake of these kinds of crises, and this is the latest, and it's a very serious one, but 9-11, and then certainly the financial and economic crisis of 2008, many people were quick to come out with dystopian takes, especially about New York City. I mean, New York City's obituary has been written three times over the past 20 years. And if you asked me what my single biggest error has been, it has been actually taking those takes too seriously. So I wrote my book, Rise of the Creative Class, in the early 2000s. And people said, cities won't come back. Back off your thesis. And I kind of said, well, okay. And

then after 2008, I wrote a book called The Great Reset. And they said, you know, New York is dead, London is dead, they won't come back. The financial markets will move to Charlotte or wherever. Both times, cities came back with a ferocity and a veracity I would have never expected and became hyper-gentrified, incredibly unaffordable. Now, I'm not saying that's going to happen this time again, but I have been able to go back and read a lot about the history of pandemics, infectious disease, pestilence, and plagues. They've never really dampened the trajectory of urbanization. They may have killed many more people, but the force of organization in making people more innovative and more productive has always been stronger. And the

thing that really struck me, I was born in the middle of the 1957 pandemic, which killed 100,000 Americans, far less than the current pandemic, but which also killed infants and children. My parents never told me about it, and I never knew it existed. And moreover, my parents were born in the 1920s, and they were the youngest both of families of seven, which means most of my aunts and uncles were kids during the Spanish flu. No one ever told me about the Spanish flu. So it seems to me that we have gotten overly vexed about this end of cities argument. And I think that cities will face challenges, but I don't think this will kill off cities. And I think at the end of the day, when we're through this in a year or two or three, New York will still be the greatest city in the world.

It will still have the leading concentration of the financial markets. San Francisco, Warts and all will still be the center of high technology. Toronto, Paris, London will all be great cities and there'll be change. Maybe we can talk about that a little, but I think that we're, we've gone far too overboard in predicting the end of cities. So let's, let's unpack that a bit. Let's talk about New York. I want to throw out a couple hypotheses and you tell me where I've got it wrong or where you disagree. I was thinking that New York is singular. You said it, it's the best city in the world. The density of grit, talent, creativity, nothing like it. You've had real estate actually

coming down the last two or three years, but people are always going to want to live in New York. The wealthiest people in the world have homes in London and oftentimes in New York. Store value real estate might get hit a little bit, but not a lot. But if you're living in Greenwich, Connecticut, Short Hills, or Montclair, New Jersey, and you're paying $1,000 a square foot for a home that would be $300 a square foot in any other suburb, which would look, smell, and feel the same, and the $700 per square foot premium is a function of its proximity, specifically it's an hour train ride to Midtown. And your employer tells you, you no longer need to live within an hour of Midtown.

Do those neighborhoods off the PATH train, off the Metro North or what have you, Long Island Radio, do they get crushed? Do suburbs near big cities get crushed? Yes and yes, I think. So first on New York City, if you look at the New York Times data, not on the people who left the 420,000, which included a lot of students, that's still only 5% of the city's population. If you look at the mail forwarding data, which is really interesting that the New York Times, it's about 1.6% of New York City's population had their mail forwarded. Most two areas surrounding New York, I think it's 0.02% to Miami, 0.02% to LA,

0.01% to Washington, DC. What happened is it compressed moves that might've been made over one, two, three, four, five years. Family formation moves, expensive city, hard to raise kids, can't get a lot of space. Those folks left. I think the city gets way younger. Younger people are risk oblivious. You can meet great people there. You can forge a career there. With regard to the suburbs, I think your hypothesis is right. And I actually said this. I think cities that are suburbs that are linked by transit, that people paid a premium because they're lovely places and because they could take a train or a transit, they could get whacked. Whether it's true or not, and there's a whole bunch of

differences of opinions and differences of that trains and transit are vectors or super spreading risks. It doesn't matter. People are scared. So yeah. And there, I think, you know, you do get the possibility of people going further out. Um, you certainly seen this preference for places like the Hudson Valley. There are about a hundred places in the United States, these rural, and I I'll use my own term, create, I'm making air quotes, creative class centers, uh, some outside of New York, some outside of Boston, some outside of Denver, some outside of LA and San Francisco and other places that are kind of artsy and fartsy and have nice natural amenities and may have a local college. Those places get real attractive. There's so much there. So 100% agree that COVID-19 is more of an accelerant than a change agent. And the virus itself isn't

impacting cities. It's people, because of the virus, rethinking their life and accelerating forward 10 years. And the number of calls I have received over the last 60 days from people who would have never considered moving to Florida, calling and saying, what are the schools like? Do you know a real estate agent? I shouldn't say that. It's not that they would have never called me. They weren't going to call me for five or 10 years. And now they're like, how do I want to live my life? And they're not leaving. I think their general viewpoint is I will figure out a way to get through the pandemic. The question then is, but how do I want to live my life moving forward? This has given everyone pause to say, where do I want to be in five or 10 years? Life is short. This is a great stopping point or a

great opportunity to pivot to another city. It seems to me that Florida, if you can go long Florida real estate right now, if you can go long Texas, kind of low taxes, sunshine, that trend that's been in place for a while, doesn't that just accelerate? Isn't this just taking every trend in migration and just accelerating it? Yeah. And those trends are not all pointing in one direction. So I think there are many kinds of places. There are many, not many. There is a short list of kinds of places of every category, whether that's big mega city like New York or London, whether that's city of the sun in Florida or Texas, whether that's big mega city like New York or London, whether that's city of the sun in Florida or Texas, whether that's rural place or suburban place. And I think it means acting really

intentionally and strategically to get yourself on that list. And let me go back to your thing about the accelerant. When people become unmoored, like all of us have during this crisis, they begin to raise, just as you said, these questions about how do I want to live my life and where do I want to live? And this is a horribly tragic pandemic and it's terrifying and it's killed too many people already and made many, many, many others sick. But I tell my wife all the time I'm the happiest I've ever been. Why is that? Because I've always hated to go to the office. I've always kind of worked remotely. I never really liked to travel. I'm home with my girls and my wife, and we have a very small life. And I ride my road bike and I go for a walk. And it's like the best life I could live. Why would

I want to change it? And so I think many people are then saying, well, if I'm going to live that kind of life, where do I want to live it? And if you have kids, it seems to me things like backyard, play set, swimming pool, and nice weather matter marginally more. If you're young, big city, lots of excitement, lots of other girls and boys, ability to start a career matter marginally more, or maybe a lot more. So one of the things I, what I worry about with Florida and we spend the winter there. So I know it pretty darn well. I worry about two things. One, I worry about the condo market because what I see happening in people in Florida is saying, I'm scared to be in my condo. I want a single family house. And, and so I hear a lot of people from Miami beach going, okay,

do I move to Delray? Do I move to Palm Beach? Do I move to Boca? Where do I get a house that's more affordable than a house at more than $1,000 a square foot in Miami Beach? The second thing I worry about, Florida, and this is by no means alarmist, because I think South Florida will do great. There is no real economy there. So a lot of what South Florida is is a function of people getting on planes, maybe not every week, but certainly every other week, and going up to where the real economy is called

New York City. And the connection between South Florida and New York City in terms of the financial markets is humongous. If it's hard to get on a plane, then I think people might be forced. I'm not saying that some fraction of those people might be forced to live closer to New York City than the other miles wide. So that's what worries me. That said, I think you're right about betting long on big cities in the Sun Belt. So that would be Miami and South Florida metropolitan area, the Miami metropolitan area, Houston, at which I would bet long on Dallas for sure, Atlanta.

And then there are others, but Charlotte maybe, but the national for sure. But then it gets harder. And I think there are second and third tier cities in other parts of the country that have less rosy prospects. So let's go there. Give us a ranking here. What two or three cities are your most bullish on and why? And which two or three cities are you most bearish on and why?

It's funny that you and I had this conversation in another way a couple of years ago. And when anyone asked me this, I just say, look at Amazon. As much as I was a critic of the whole Amazon HQ2 rigged up process, extract incentives, look at that 20 cities on the list. That's a pretty good first estimate. So what is it? I think if you're smart and you wanted to buy real estate now, and I'm not a real estate investor because I'm too chicken, but New York City, if prices drop, New York City always bounces back. And San Francisco has plenty of problems. And it's filled with problems. And it's

super expensive. But maybe the silver lining in this is if there's a crisis of the commercial real estate market, and if co-working spaces crash, and if there's a retail apocalypse, maybe a lot of that stuff gets converted to residential. And that's what drives cities anyway, the ability to attract talent. And if you convert that stuff and you can drive housing prices lower, and cities actually are concerned about creating affordable housing for less advantaged people, then I think you've got to look at this next group of cities. So in my mind, that's a harder one to parse. What I would say is it's not going to be the rise of 100 of the rest. It's probably going to be the rise of a dozen of the rest. And therein, you know, I think places like we've talked about Houston and Dallas, uh, would certainly be

high as well. You know, no place I think would probably do better than LA. I think LA LA was the metro that grew the most during the Spanish flu of any in the, in the country. It just looks like a place that has sun, it has weather, it has a real economy, it has single family homes. And then probably, you know, the smaller places are places that have already been on an upward trajectory. The places on that HQ2 list, Columbus, Ohio, Indianapolis, Indiana, Pittsburgh, Pennsylvania, Nashville, Tennessee, and then the smaller places, you know, I think smaller places that really get their act together. You know, I've been doing work both in Bentonville and in Tulsa, two very different kinds of places. But both of them have put attracting talented people at the top of their list and gone after

that like gangbusters and have had some success in it, especially in attracting young families who are getting priced out of pricey markets. I still think we're going to have a geographically unequal economy. It's just that certain places can improve their position because people are really questioning where they're going to live and work. There's sort of these golden ages where a city is expensive but doable and a wonderful place of growth. It feels like New York could have that again, that instead of paying $1,500 a square foot

in Brooklyn, it goes to, I don't know, 900 or a thousand and a 30 year old making a decent, you know, a good living slash great living can leave a reasonable life there. Whereas now it feels like San Francisco and New York, if you're not making a million dollars plus, you just feel, you feel lower middle class and which is fine when you're, when you're younger, but the moment you start collecting dogs and kids, it gets kind of tough. It might, it might of tough. It might be just an incredible place. And the other thing that intersects this, I just want, is the Black Lives Matter protest and the incredible multi-class, cross-class, professional worker, service worker, disadvantaged, multi-racial movement for social justice and

racial and economic equity. That puts a lot of political pressure on cities to finally address issues of affordability and gentrification and inclusion. Now, this sounds so ridiculous, because everybody's going, oh, my god, COVID and unrest, people are going to abandon cities. You could almost have a perfect storm, and I don't mean to sound like Pollyanna over here, where those two things coming together, falling real estate prices and the fact that people are saying enough's enough. You can have a perfect storm where for the first time in my life, you would have an urban policy agenda that would make our cities more inclusive, more equitable, more resilient, more sustainable. And the other thing, and one other thing that I think is really

interesting, if that perfect storm came together and you began to convert commercial and real estate to residential why do we have people commuting an hour and 90 minutes into cities it's almost like the central business district is the is the last relic of the old industrial economy it's like these giant towers that said we're a great company, where all the rank and file employees were. What if we began to think about our cities reconfigured around 15 or 20 minute neighborhoods? And in the suburbs, you rebuild some reasonably decent office parks to fix the suburbs that were declining as their housing park. So people don't have to commute an hour or an hour and a half. They can kind of live and work and do their lives in almost the same place. There is a moment

here, and it's a fleeting moment, so we have to take advantage of it, where we can rethink how our cities move forward and how not only our cities, but how we can finally make our bland, generic suburbs reasonably better places to live and work. I wonder if that happens or if what happens is we actually end up commuting, our commutes become longer, just more infrequent. And this is pulse marketing, but I commute from Palm Beach to New York or used to for the last nine years every week. Sunday night, put my kids down, bomb to the airport, the 9 p.m. JetBlue, PBI to LaGuardia, Thursday 2.30 p.m., same flight back. I commute, the easiest, I believe,

the most fluid thousand mile commute in the world is Southern Florida to New York. I think it was something like 1,100 flights a day. If you missed a flight, it wasn't a big deal. There was something 30, 60, 90 minutes later. I have now decided I'm only going to do that twice a month. Instead of four times a month, I'm going to do it twice a month. And I wonder if the same thing's going to happen where people move further away from their offices, not as much to move to little hamlets where they support a small micro city, but they

move further away and just commute, longer commutes, just less, less often. They're a lawyer for Skadden Arps. And they say, you need to be in the office two days a month for our big meeting and for, you know, rub elbows with clients, but you can live in Wisconsin. Anyway, I want to talk a little bit about, you picked this class of cities that you thought were going to do really well. And another thesis I've had is that the key to urban development, and you're going to forget more about this than I'm ever going to know, is a world-class university. And you mentioned Pittsburgh, you mentioned Houston, Dallas, I think of Nashville, I think of Atlanta. What do you think about COVID-19's

impact on universities and what it means for urban university environments, or these towns that are supported, the Ann Arbor's, the Raleigh-Durham's of the world, the Gainesville's of the world. What does it mean for those cities? And what do you think happens to our universities, our university towns? So, you know, actually the comment you made in the question are related, so I'll tackle them together. Two big drivers, aside from the cluster of talent and the cluster of great tech companies you have that drive urban growth are whether you have a great university or great universities and whether you have a great airport. And it seems to me that one of the big things that might limit super commuting is if air travel becomes very restricted,

not even very expensive, if it just becomes hard to get flights and people are scared to get on them. And if that happens, it actually makes location in and around a global club airport much more valuable. So it makes Miami or Houston or Dallas or New York, whatever, a couple of dozen places like that, because you can't get anywhere from anywhere else. With regard to universities, we know that they are powerful, powerful drivers of urban economic development. And that flow of talent into, you know, that's probably a big thing in the rebuilding of New York. In fact, New York, we know this, retains a lot of the young talent that goes to New York, stays in New York, where a lot of the young talent that goes elsewhere doesn't. So I think if universities really can't open or have

to open in some hybrid way, that's a big deal, a bigger deal than a lot of the other stuff people are talking about. And then secondly, no one talks about this, but I worry about places like Ann Arbor or Boulder or Madison, these wonderful techie college towns that have become really interesting micro-clustered economies. But the whole town economy is dependent on the college. I mean, New York is dependent on NYU and Columbia. Boston and Cambridge are dependent on Harvard and MIT, but not like Ann Arbor is dependent on the University of Michigan or Madison's dependent on the University of Wisconsin. And so what happens if these places really take a hit? That I worry about.

And those economies, if universities can't open, may be more vulnerable to this than bigger economies. I think I agree with you. I think that kind of the untold story here that's going to have the biggest impact is what's going to happen to our universities come September and the impact it's going to have on everything from the cities to the way we approach learning to whether or not we decide our society needs that certification of a college degree. Last thing, Richard, you are, I mean, you're fantastic at this.

Toronto and Miami, you've kind of got this wired. If you were a 25-year-old male, college degree, off to a decent start, what city would you want to live in? And let's just talk about someone who's decided not to go to college and wants to go to just a great place to try and forge a different path. What cities would you tell your 25-year-old self to move to? Well, if I was 25, I would be worried about my career and whatever career that was. I'd be worried about developing the personal context to move forward in that career. But I'd be even more worried about finding a mate.

I think, I think it's New York. I mean, I think it's New York, um, because it has the most possible economic opportunity and it has a fantastic selection of, of people to meet and to date. Um, even Toronto, I mean, our move to Toronto has been the best thing we've ever done. And I mean, the reason I say that's not because Toronto is a great city, which it is, because it makes you understand America. You know, Seymour Martin Lipset, the great, the late great American political sociologist who wrote his thesis on the rise of socialism in the Canadian Plain provinces, said the greatest thing about studying Canada was everything he

learned about the United States. Like living outside the United States helps you understand the United States so much better. So I'd also say to a young person, you know, maybe go elsewhere, maybe go to a nice, great city outside the United States. Yeah, we're contemplating, and these are good problems, but we've always thought about moving to London. And we've always just said, you know, when we're near the end and hopefully have grandkids, it's just unlikely we're going to look back and think, wow, we really screwed up moving to London for two or three years. Richard Florida is a writer and a journalist having written several global bestsellers, including the award-winning Rise of the Creative Class and his most recent book,

The New Urban Crisis. He is co-founder of CityLab, the leading publication devoted to cities and urbanism. He's also an entrepreneur and founder of the Creative Class Group, which works closely with companies and governments worldwide. He joins us from Toronto. Richard, stay safe. Thanks, Scott. Hopefully, I'll see you in person soon. We'll be right back. Hey, it's Scott Galloway.

And on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life. So tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts. Welcome back. It's time for Office Hours, the part of the show where we answer your questions about the business world, trends, career advice, and anything else. I will answer questions about things I have absolutely no domain expertise in. Why? Because I have that. I'm infected with that

unique breed of narcissism meeting arrogance to believe I can talk about things I have no domain expertise in. Anyways, if you'd like to submit a question, please email a voice recording to officehours at section4.com. Question number one. Hey, Scott. This is Jay from Connecticut. First, I really love your podcast. It's so thoughtful and addresses issues that are really important. So thank you for that.

I have a question for you on impediments to innovation. So startups have been enjoying all sorts of attention in the popular press, almost to the point of really being fetishized. But in reality, new business formation is at historic lows. And I have a theory that because healthcare is shackled to employment, many people, particularly parents with families, are reluctant to go out and take risks. And because of that, innovation is suffering. So first, do you think there's anything to that theory? And if so, what do you think are some viable ways to address that issue in the near term? Thanks, Scott. Jay, thanks for the

thoughtful question and also the kind words. I think you're right. What I think you're talking about is, okay, so there is a destruction in innovation. If you think about it, we like to think we live in an era of innovation, according to CNBC. We don't. We live in an era of a non-innovation, and that is the number of startups being formed or business formation has been cut in half since the Carter administration. 15% of companies used to be less than a year old. Now it's 7%.

And the question is why, given that we turn entrepreneurs into idols, what is going on? Why are young people not starting companies? And I think you touched on one of the problems, if not the biggest problem, is until healthcare is portable, and as long as healthcare becomes the largest single source of bankruptcy, your ability to go naked without insurance is just, it's a huge impediment to going out on your own. And then the cost of insurance to go through an independent provider, I have a small company, 12 people, and based on how young they are and how many kids they have, the insurance cost is 20 to $40,000 a year per employee. So small business of 12 people, and we're paying a quarter of a

million dollars a year, maybe $350,000 a year to ensure our staff. I mean, I have access to cheap capital. I have a decent track record. I can raise a lot of money, but the majority of companies just can't do that. They can't afford healthcare. And then, so you have companies, small businesses can't get out of the gates. You have people not wanting to leave their jobs. You also have, you know, I'm part of the problem, specifically the amount of student debt that young people take on. It's also a bit of a generational issue. Young people are supposedly more risk averse, and there's fewer of them.

When there's fewer people and you have a grang of a country, you're just going to have fewer innovators because part of your ability to start up a company is not having dogs and spouses that you need to support in a big mortgage. We also have a monopoly problem, and that is the fastest growing parts of our economy, whether it's hardware, social networking, devices, search, e-commerce. The fastest growing parts of our economy, the cloud, are dominated by monopoly or duopoly. So it's just not easy. The places we should have the most startups are the places where you can't get funding for a startup. And let's talk about funding. While on a gross level, there's more funding than ever, it's kind of a winner-take-all.

And that is one company emerges in the private markets as the disruptor in that category, and maybe there's one other, and they get 95% of the funding. So it's just not a very robust startup environment where more funding going to fewer players, monopolies, suppress innovation and competition, a risk-averse generation because of crushing student debt and fear around how they're going to survive and pay further. Healthcare costs of their employees all adds up to a great era of non-innovation. And it's one of those emergencies we'd be focused on if we didn't have these constant dumpster fires of one of the most incompetent, bigoted, and morally corrupt

administrations in history. This is another one of those national emergencies we need to focus on, how to create a more robust, inviting world for wannabe entrepreneurs such as myself. I lead a exceptional life, largely because this country was able to provide me with almost debt-free education. They gave me the skills, the contacts, and the confidence to start a business. I've paid a lot in taxes. So I think that this engine of good in America, two-thirds of job creation comes from small businesses. There's sand in the gears through poor leadership, terrible fiscal policy, out-of-control healthcare costs, and generally has resulted in a less friendly environment and a more risk-averse

generation. That was a mouthful, but I think it's an important topic. Thanks for the question. Next question. Hi, Prof G. My name is Omar. I'm a professional living in Thailand. My question is around the evolution of rewards-based crowdfunding platforms. Since the coming of Kickstarter, the platform has served as a launchpad for many brands, including Brooklinen and Allbirds. The next step is an equity-based crowdfunding platform where everyday people have the ability to invest in startup companies.

There are a couple of companies doing this, but none have emerged as clear winners in this space. I'm wondering if you have any thoughts on if this will change the traditional venture landscape and also the company-customer relationship. I would think that if you own a piece of a company, there is a completely different set of incentives in place that can drive purchase behavior.

Thank you for all that you do. Cheers. Thanks for the question, Omar. So equity crowdfunding is something I don't know a lot about, but let's look at the venture market. Typically, venture capitalists raise money from institutional investors. And a lot of those institutional investors, especially allocators and funds of funds, are getting paid by their limited partners.

And then they invest in a VC company or a VC firm that takes two and 20. And that is they take 2% fees each year and then 20% of the upside. That is expensive. So there's a lot of margin in that supply chain, which logically means that disruption is kind of due, if you will, in terms of venture investing. And why is that? It's just that non-accredited investors didn't have access to private investments. And that changed a bit in 2016 when Title III of the Jobs Act went into effect and allowed startups to raise money from non-accredited investors. So you've had the emergence of these crowdfunders, right? And you've also had a decrease in funding from VCs in Q1. I don't know if that's a bit of a trope. I think that'll probably pick up again. But when you think

about 2% of VC investments goes to women-led startups, despite the fact foreign 10 startups are women-led and 3% of VC funding goes to black or Latino-led startups. Three quarters of VC funds have zero female investors and most investment lies in California. So you have sort of this geographic and racial and gender, I don't know what's the right term, bigotry, or systemic bias slash racism built into the funding model, which needs to, the wheel there needs to be broken. Non-accredited investors want more access to the private markets where the majority of gains are being registered. I think crowdfunding, there's going to be more of these platforms. I'm bullish on it. I think it's going to continue to be big. The two leading guys, StartEngine and WeFunder, reported record Q1 investment volumes and record diversity

in founding teams and industry focus. So I think the best VC firms are going to continue to get their deal flow. They'll consolidate the market, the tier two and tier three. The people that I think are probably going to go away, I think angel investing is going to go away. I find most angel investors are either gridiron great old economy guys that want to help out entrepreneurs, but the majority of full-time angels I find are just failed venture capitalists. Their track record is really spotty. I think angel investing is consumption. It's not really an asset class. Okay. So thank you for the question. I think we're going to see a lot more of this, but we're going to see, just as we're seeing disruption in other high margin inefficient industries, it would make sense. We're going to see a disruption in

the funding of startups. Next question. Hey, Scott. My name is Max. This question comes to you from COVID Ground Zero, Kirkland, Washington. I have two short questions as follow-ups to what you previously said. The first is, you mentioned before in your Winners and Losers series that brick and mortar stores are an important ingredient to a strong omni-channel strategy and that it serves as connective tissue to other platforms. Do you still see them as this way or more now as a liability for COVID? Reason I ask is because of the announcement to close down Microsoft stores. My second question is in regards to the economy. You mentioned all

of your best businesses have been started in a recession, and I think that rings true with many entrepreneurs. Is there any businesses you think that could benefit from a recession? More importantly, businesses you would advise not to be started. Thanks again for all your wisdom and insight. Thanks, Max. A lot in there. So brick and mortar, the retail landscape is being decimated right now, specifically the retailers that are more dependent upon their brick and mortar footprint. And there's nothing unusual here. It's just, again, this notion of COVID-19 being an accelerant. We have three to five X amount of square feet of retail per capita as many other Western nations, Japan, UK, Europe. We're just overstored. And it's finally, we've been predicting a regression to the mean for a decade and it's finally here. And we're going to see just a ton of brick and mortar stores close. Does that mean the store goes away?

Absolutely not. Multi-channel strategy is something, is a key learning that you need to apply to all components of your life. If you're selling something, if you can sell it to a consumer or you can get the consumer to interface with your product or service via multiple channels, they become much more loyal and spend more. So the moment Williams-Sonoma, and I remember doing this analysis in the 90s,

can get someone to buy from their website, their catalog, and in-store, they've got you hooked, and that consumer, the multi-channel consumer, is more loyal and more valuable. So if you're producing content, if you're a professor, you absolutely want to be doing online and offline courses and writing case studies and writing books. If you can get somebody to consume your IP or use your service across multiple platforms, the barriers of exit become much greater. They don't want to learn how to absorb that information via these different channels from another company. So it's a tremendous multi-channel is the future, including retail. Now, that also means that likely in this era, we're going to see a reduction in the ratio or a switching in the ratio of the proportion of

online to offline,, it's flipping. We've had a decade in eight weeks. What do I mean by that? E-commerce was going up one percentage point a year as a ratio of total retail. It started at 1% in 2000 and was 18% as of two, three months ago. It's jumped to 28%. So we've had basically 10 years of e-commerce progress in eight weeks, which also means we're going to have 10 years of deceleration in bricks and mortar. So where brick and mortar was supposed to be in 10 years, well, we're there. So we're going to see probably 25, maybe 35,000 stores close of the 600,000 stores out there. But the rumors of a store's death are greatly exaggerated. The store

is not going away. There's just going to be much fewer of them. Multi-channel is the way to go. Is this a good time to start a business? Yeah. Typically, I find recessions are a great time to start business because the inputs, people, real estate are a lot less expensive. So yes, I think it's a great time to start a business. What areas would I avoid? There's always opportunity, but I would say stay away from what I would call specialty retail right now. Anything involving apparel, anything that's connected to how much we need to go into the office is probably going to switch.

Anything around the consumption of a product shoulder to shoulder, although that's distressed investing. Let me flip it. The places I would focus the two areas I'm most excited about if I was a young person looking to pick a career to allocate my most finite resource, my human capital, I'd look specifically at two industries. The first is education and the second is healthcare. Thanks for the question, Max. Thanks for your questions. Keep sending them in. Again, if you'd like to submit one,

please email a voice recording to officehours at section4.com. Okay, so for algebra of happiness, I'm going to try to answer a question that I have received more via email than any other question I've received in a long time. And that is specifically, should my son or daughter go back to school? And I think we're now fully in the switch part of the bait and switch being executed by my industry education, where a bunch of strident, delusional and disingenuous statements from university leadership saying, we're looking forward to getting back in the fall. We have a national obligation to welcome our students back, which was Latin for sending your deposits. So should your son or daughter go back to school? A lot of it's situational.

And that is, if you're in a position to take a gap year, I would probably do that, especially if it's the freshman year. But the question then becomes, well, where do you gap? When Europe has decided they're no longer going to let in the nation of typhoid mares known as the United States, what exactly do you do? You have to sit down with your son or daughter and say, let's be honest about the experience. Realistically, the university is not going to allow in-person classes. That was a lie. Now they're continuing to say, well, we're going to have studio and labs. No, they're not. We're not going to have on-campus learning. Let me just come out and say that. The super spreaders in our society seem to be Republican governors, and at least for the time being, university presidents who, in order to save their financial asses, are trying

to say that we have an obligation to bring kids back to campus and put them in rooms where the windows don't open such that we can become, you know, infect 11 million asymptomatic carriers and then distribute them to the four corners of the earth. It's like the opening scene of Contagion 2. So that's just not going to happen. So the question becomes, do you want an online learning model? And you have to decide, is it worth it? Look at the amount of money you're paying for Zoom classes, and you have to make a decision. I would argue if you're in your sophomore or junior year, and you're going to be at home with your parents anyways, you might as well keep that momentum towards the accreditation and just figure out a way to kind of grin and bear it. Hopefully

we're back by the spring. There's also sort of a hybrid model and that is sending your kids back to Chapel Hill, back to Charlottesville, back to Berkeley, and they take their classes online. Maybe they're in the dorms, maybe they're not. I think that's a decent model. The lawn will be open at UVA. It'll be taped off for distancing. They'll just close the buildings. And that gets the kid out of the house because, let's be honest, parents, most of you are dying with your 19-year-old brooding in the basement, and he or she wants back to campus. I think there's a non-zero probability that when that happens across these small towns, they may end up sending the kids back when there

is a massive outbreak of infections in these small towns. Healthcare system is overrun. I realize that sounds troubling and cynical, but that doesn't mean I'm wrong. Also, I would call the university back and ask what they can do in terms of financial aid or financial relief. I think schools are in a difficult position, as they should be. We've had it coming for a long time. And just as when there's too much inventory in the gap, and just as there's probably too many seats at these universities, as international students are no longer allowed in our cash cows, the administration has used online learning as a criteria to extend their bigotry and decide

we're not going to, that international students have to go home or we're suspending or rejecting their visas if the university where they're getting a student visa is going all online, which makes absolutely no fucking sense other than a cloud cover to continue our racist culture wars from the far right that has decided the only way they continue to hold the power of the white male patriarch is to be overtly racist. So that has now infected the university system where we basically said no more foreign students, which will create a financial crisis. But anyways, that's not your problem. The bottom line is these universities, especially kind of the tier one and tier twos, need your son or daughter back. So I would call them and ask them for financial aid, assess your opportunities for a gap year. If you're a freshman, I would probably think about putting it off a year because I think that freshman experience is important and wonderful. And I wouldn't pay $58,000 to do my freshman year in my parents' basement, most likely. But more than anything, an open, honest conversation with

your son or daughter right now that A, there's going to be no in-class learning. The off-campus experience will be severely impaired. If it's not severely impaired, you're probably going to create a health crisis. And to remind him or her that a 19-year-old that can't return to Chapel Hill or Austin or Ann Arbor or Madison, Wisconsin, There are a lot of 19-year-olds in history that have been asked to do much worse. And so buck up. It's only going to be another semester at most, and hopefully we're back to normal. But be clear, but be clear, the university experience will not exist as we know it in the fall. Our producers are Caroline Shagrin and Drew Burrows.

If you like what you heard, please follow, download and subscribe. Thanks for listening. We'll catch you next week with another episode of the Prop G Show from Section 4 and the Westwood One Podcast Network.