The Prof G Pod with Scott Galloway - Office Hours: Volvo’s Subscription Model, The Debit Generation, Exploring Job Options, and Pre-Seed Investing

Episode Date: November 1, 2021

Scott answers a question about Volvo’s subscription service and offers a prediction for where the auto industry is headed. He then explains how ‘buy now, pay later' services deceive customers into debt, and gives advice for how to approach leaving your company. Scott also discusses the factors to consider when investing in pre-seed companies, and how to make smart money decisions with your partner. Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. Welcome to the Prop G Pod's Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please visit officehours.propgmedia.com. Again, that's officehours..profgmedia.com. Again, that's officehours.profgmedia.com. First question, and again, I do not see these questions before I hear them. Hey, Prof G. Richie here from Miami. Just wrapped up my second sprint with you in section four, this one on strategy. And on Tuesday, we were talking a little bit about Rundles and the car market. Why do you think Volvo is the only major car company to continue to offer a recurring bundle for their vehicles where you can turn in your Volvo SUV every year and get a new one. It looked like Lincoln was starting to get into this space during the beginning of the pandemic with their hands-free delivery of vehicles. But why do you think more companies haven't gotten on board with this? Interested in hearing your thoughts.

Thanks for the question, Richie. I love this stuff. So Volvo's subscription service is branded as Care by Volvo, starts at about $1,000 a month, and includes maintenance, protection for tires, wheels, excessive wear, and insurance coverage. The subscription offers a single vehicle model rather than a range of models, such as some failed attempts at other car subscriptions. BMW, Audi, Ford, Cadillac, and Mercedes-Benz all shuttered their subscription offerings, and they all had one thing in common, the ability to swap vehicles on a regular basis at a pricey rate. So, okay, your question, why hasn't, why is Volvo kind of the only one here or why aren't more doing this? I think it's the classic innovator's dilemma. And I haven't thought a lot about this, but usually my best thinking comes from when I

don't think a lot about stuff. So the thing here, the innovator's dilemma is that you start protecting your legacy assets. You start looking at your existing business and thinking, we've made this huge investment, and we need to monetize this investment. And you run all strategic decisions and tactics through your legacy assets. So for example, banks. Banks have something like 50,000 branches across the US, and about half of them have been closed. You need about $50 million in assets to support a bank branch, a real estate-based item, obviously.

And so they haven't gone after young people because they're not interested in a student with $2,000. And even though it would be a forward-leaning, probably good investment, they can't build or support a branch on 25,000 consumers with $2,000 in assets. And so what's resulted in is that they've become vulnerable or their soft tissue or their rear flank has been attacked by these digital banks who come in without the legacy liability of a branch network that perverts their thinking and creates costs where they don't need it. And these companies are eating traditional banks' lunch or a real existential threat. The same thing I think is true in this instance, and that is the automobile industry has this legacy liability called dealerships. You have these dealerships, auto dealerships

around the nation that are privately owned. They have very tight legal relationships. So, they dictate that Toyota cannot sell cars direct to consumer. They're contractually obligated the way they price and sell their cars through the dealer network. So as a result, it is very difficult. The dealer network doesn't want to put up with a subscription service. Dealer networks now make most of their money, and I didn't know this, but until the chip shortage where they got some pricing power with all the supply chain stoppage that's happened, they made the majority of their money on servicing the car as opposed to selling it. So does a subscription service work for a dealership company? It probably just increases their cost of goods sold.

There's a headache for them. Managing the inventory is incredibly difficult. But I would bet that the legacy liability of dealerships, which makes this not a profitable model, and the dealership doesn't want to put up with the headache of having me call and say, you know, I'd like a seven series this month. This is absolutely where the world is headed. And this is what Tesla should be doing, because they don't have those legacy liabilities. And they could come up with a more robust, flexible supply chain where they communicate directly with their consumers and say, okay, every six months you get a new Tesla. And if you want any Tesla, it costs X. If you want Teslas below this dollar amount, it costs 0.7X, whatever it might be. But I think that's

where we're headed, where a guy like me knows the brand he wants, knows the type of car he wants, but would like to swap in and out more seamlessly and occasionally go down to a sedan just for shits and giggles. That is absolutely where it's headed. Good for Volvo. If they can show any growth in that program or they can show it's growing in the faster core business, the public markets will recast their company as an innovator

and potentially moving to more predictable subscription revenue and will give their IPO or their multiple on EBITDA a couple extra turns, which more than pays for Peter and his efforts. Insom, this is the way to go. Thank you for the question, Richie from Miami. Next question. Hi, Prof G. This is Ryan from Brooklyn.

I've heard you speak favorably about some of the buy now, pay later options growing in popularity at both online and in-person retail stores. As a member of the demographic that is swamped with student debt and for some loads of other types of debt, I want to know what I'm missing with these types of products that at face value seem to be taking advantage of people who already struggle with personal finance. Ryan from Brooklyn, my brother. So you got where I got sooner. And that is, I was very taken with the CEO of Afterpay. He's this Aussie kid, super smart, billionaire now. They only did one round. I kind of want to be him. He's living in LA, had him on the pod. And this whole notion of the debit generation versus the credit generation,

I bought into it. I think it's bullshit. I'm with you. The more I've learned about it, it's just credit under a different name. Now, they do transfer the interest cost to the retailer because Urban Outfitters likes offering people credit at the moment on the spot because then they go back and they buy more. So they're willing to pay the fee to Afterpay or Klarna or for any buy now pay later. It's a good deal for the retailer because these young people immediately feel more confident and increase their spending. But brother, I am with you. This is just debt. There's just no, it's different lipstick, but it's the same pig. You got to pay this money back. And by the way, if you don't pay the money back, the late fees can be much more expensive than interest rate on credit cards. And it creates, I wonder if it creates, it's granting credit to a generation that otherwise didn't access,

didn't have credit at that moment, but there's no free lunch. And you're right, debt is debt. We can call it the debit generation, but it's still debt. Buy Now, Pay Later accounts for 3% of e-commerce transactions in the US, 7% in Europe and 10% in Australia.

One in five Americans have used a Buy Now, Pay Later service in the year, and global BNPL spend is projected to double to 680 billion in 2025. A 2017 survey of 18 to 34-year-olds found that one in every three millennials' biggest fear is credit card debt. Meanwhile, only one in five top fear is death and even fewer cited war. So it sucked to be killed on the battlefield, but as long as my credit cards are paid off, which makes no sense. I think to their credit, I think this is kind of genius marketing. And that is they've changed the nomenclature. They call it the debit generation, not the credit generation.

I mean, there's definitely some gymnastics here and some kind of genius jujitsu moves here. I do think this is – there's definitely a gymnastics here and some kind of genius jujitsu moves here. I do think there's definitely a genius here, but this whole notion that it's a new, more responsible means of spending money, come on, come on. Consumers using Afterpay are paying a 25% interest rate on a six-week loan by comparison. The average annual interest rate on a credit card today is roughly 16%. The debit generation, quite frankly, needs a class in math. A recent study found that a third of U.S. buy now, pay later users have fallen behind on one or more payments, and 72% of them said their credit score declined.

In sum, Ryan from Brooklyn, you're more thoughtful and you're more insightful than I am or was. I think I fell into the trap of thinking this was different. It's not. It's not. Different nomenclature, different marketing, different presentation of payment terms. But let's be clear. This is debt. This is debt. Thanks, Ryan. We have one quick break before our final two questions. Stay with us. 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

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Welcome back. Question number three. Hey, Prof G. This is Chuck from Rochester, New York. I've worked in Big Four Cyber Consulting since graduating undergrad four years ago. Consulting has always been known for having high turnover, but turnover is especially high right now across all knowledge workers in the midst of the great resignation. I'm relatively satisfied in my current position, but as the rest of my colleagues quit, it feels like I might be missing out on the opportunity to secure a bigger comp package just by switching companies. You've talked a lot recently about the benefits of low and middle class workers finally having some decent leverage over the shareholder class. However, with the rest of my colleagues quitting, I can't help but think that there might be value in continuing to climb the ladder in consulting. I'm curious to hear your thoughts

on if it's worth leaving consulting or any knowledge position for that matter to switch companies and take advantage of the increased salary employers are willing to pay workers just to get them in the door. Should knowledge workers take the bag and quit? Or is there any value to sticking it out

and being viewed as a loyalty player who stuck through this period of high attrition? Thanks for taking my question. I hope you continue your office hours even when you're palling around with Anderson Cooper on your new CNN show. Anyways, thanks a lot. I'm glad you brought up my friendship with Anderson Cooper. By the way, I just met Don Lemon for the first time. I went into this. I don't think I'm speaking out of school.

Am I speaking out of school? I'm famous for that. But anyways, I get the sense we're going to be friends. Not as close as Anderson and me. Not as close, but that's special. That's unique. Occasionally, like Anderson and I will say, should we bring in Don? Should we invite Don out?

Should we invite Don out for Mexican? Like Anderson and I do every Tuesday night. None of that is true. None of that is true. But if we did, we'd say, let's bring Don out. Let's bring DL. We'd have a funny name for him. Let's bring in DeLemon. A little DeLemon with our Mexican, right? Anyways, it could happen. It could happen. Anyways, 4.3 million people quit their jobs in the US in August,

their great resignation, according to the labor department. That's nearly 3% of the workforce and the greatest number on record dating back to 2000. More people resigned in the last month than in the last 20 years. At the same time, businesses had 10.4 million job openings in the country in August, down from a record high of more than 11 million in the previous month. Okay, so back to your question, should you jump ship or switch ships

in the world of consulting? First off, it's good to be you. You're an information age worker. How are you doing at your current job? Do you have senior level sponsorship? Do you like what you you doing at your current job? Do you have senior level sponsorship? Do you like what you're doing? Are you learning? Do you feel appreciated?

Do you have people actively championing your career progression? And usually that means you have a relationship that's not just professional, but someone generally feels emotionally invested in your progress. Do you like the people you work with? Is it a good platform? Are you growing your salary fast? Kind of add up all those things. Now, having said that, I don't think it's a bad idea to kind of every two or three years, maybe every three to five years, if you just love what you're

doing, to test the waters. And that is, if you get a call or you know someone who's at a company, they're trenched it in. Most people think they're so awesome that the phone's just going to ring off the hook. And if someone does say, hey, I'm working over here, would you like to come interview? Do it every once in a while and just see what's out there. Priced yourself at Stern, at NYU Stern. And this is not a perfect analogy. When I started teaching there, I had sort of a revelation or midlife crisis or early midlife crisis around 2000 and decided I wanted to change my life dramatically and left all my boards in San Francisco, got divorced, moved to New York, had nothing to do

and decided I wanted to teach. My first year at NYU Stern, I made $12,000 as an adjunct professor. And slowly but surely over the course of the next, I don't know, six or eight years, I got up to about 200K plus, plus good benefits and all kinds of goodies. And the reason I got there was one, I'm a fairly competent teacher and I could put a lot of butts in seats. School is a business. They got to pay their bills. And if you draw a lot of demand and create a lot of gross margin dollars for them, you have leverage. And two, what I did on sort of, I call it every five to seven years, not every two to three years, I would get an offer from a competing university. And this is what you do if in fact you get an offer or you're talking to other people. Be transparent and don't be a jerk. Go in and say, I have an offer from X. I wanted you to know,

or I'm interviewing at Y. I'm just checking it out. And I wanted you to know. And that can backfire. That can say, well, that's great. We've been meaning to speak to you. We think it's time for you to move on. That can happen. But oftentimes what they do is they say, well, why are you going there? And you say, well, I'm going to make $150,000 instead of $130,000. And they'd be like, well, boss, we would have no problem paying you $150,000. Companies, this is true of relationships too, people don't tend to see your value until there's a credible threat or reality. I don't want to call it a threat. I'm not suggesting you threaten them that you might leave. So if you're seriously considering leaving and you have someone there you trust, I would go to that person, if it's your boss, and say, look, everyone's leaving for greener pastures and I'm

contemplating interviewing elsewhere because I'd like more money or whatever it is. But oftentimes, what I've always said to the people I work with is, I never want to be surprised. If you're thinking about leaving, I get it. But tell me why. Because it might be things we can fix. Sometimes people come in and say, well, I wanted to manage people. I'm like, boss, I'm happy. Here's eight people, young people who are a fucking chocolate mess. Go manage them. Or I'm interested in working in Europe. And I'm like, well, we have a London office. Why didn't you raise your hand? I would have sent you on the next plane tomorrow night. So it's okay to leave. What you don't want to do is leave for the wrong reasons and leave for somewhere that's kind of the same dog, different fleas. Sometimes the best company to go to is the company you're at. Anyways, Chuck from Rochester. Thanks for the question. Next question. Hey, Prof G. What's up, dog? Well, obviously, I listen to you a lot and end up somewhat talking like you. Less swearing, though.

I also attended a strategy sprint, which I definitely enjoyed and learned a lot from. So keep up the great work. My question is the following. I'm invested in a company at pre-seed stage. The company is growing and now seeking seed funding for its go-to market. I'm keen to add

more money, but my wife, who happens to be very smart in the financial brain, is mostly against it. Well, her

rationale is that this next investment would be too diluted and much less interesting than the initial one. So, we'd be

better investing in another early stage company. Well, I guess there could be mathematical analysis to it, but I'm keen to get your opinion and see how you'd approach things. About the company, that's relevant, operating at the intersection of health and tech. It's the first connected at-home dispenser, providing an on-demand personalized blend of supplements in 100% liquid form.

So it's pretty much your, you know, supplement Nespresso machine. Anyway, anyway, thanks in advance. And by the way, I reckon you should be able

to guess where I'm from, despite your aging brain and declining accent recognition capabilities. Cheers and thanks a lot. Okay, Francois, I'm going to guess you're from the French-Albanian border, which does not exist. It sounds to, Francois, I'm going to guess you're from the French-Albanian border, which does not exist. It sounds to me like you, I'm going to guess you were

raised in a different place than you were born. I think there's a little bit of soup, a little bit of sauce, a little bit of salsa and chip, and we've mixed, we've double dipped here. What I mean by that is I get the sense you have lived in a few different places and have an accent that is pan-euro-amia, so to speak. That's the best I can do. But Francois, I don't know. I'm going households or households where people have partners is that there's a wisdom in crowds. And that is groupthink works. If you have 100 people and ask them a series of questions and 80% of them guess one way, usually they're right. And I like that you two are talking about these things. The number one source or cause for divorce is not infidelity. It's not a lack of shared values.

It's money. And that is you need to be in sync with each other and openly communicate about money. You don't want to take risks that she doesn't know about that she'll blame you for and vice versa. You need to both be on sort of a level playing field or transparent with each other about your approach to money and your approach to spending and your approach to investing. My partner would every day sell everything we have and stick it in Krugerrands

and Deutsche Bonds and then stick them under fire retardant mattresses. This person is so conservative. I am not. I am very risk aggressive. And I think that the combination between the two

is a nice blend. Now, your decision around whether to do the next follow on round, there's a lot of questions here. One, how much money do you have? If it's 10% of your liquid net worth to go into the seed round and it's at a good valuation, then I would say yes. And you have insight into the company. Is the company killing it? Then I would say yes. If you have 30, 40, 50% of your liquid net worth in this company, and this is another 10% of your liquid net worth or 20%, I would say no, because one of the keys to building long-term wealth accumulation is diversification. And while there's a lot of well-publicized stories about Mark Zuckerberg and Steve Ballmer having 100%

of their wealth in one company, assume you are not those people. And if the company does really well, you're going to do well, even if you don't participate in this round. Also, there's probably a happy medium where you might invest a little bit more. So it comes down to this. I'd say at your age, I'm going to guess you're around 30. You sound young, but you're married. So I'm going to say 30. You don't want to have more than kind of 20, 30% of your liquid net worth in any one thing if you can help it. Sometimes you can help it. When I started my own businesses, I just had no choice, but I ended up with a disproportionate amount of my assets in one company because I was the only person willing to fund it in the beginning. And then it typically shows some

signs of success and you need to or have the opportunity to put more money in. And before you know it, the majority of your eggs are all in one basket. And then you get divorced and the dot-com or dot-bomb explosion happens and you lose 98% of your net worth. Just saying for a friend. Anyways, red envelope, 2008. That's what happened to the dog. That's what happened to the dog. Fucking scary moment for me. And then my first kid shows up. Oh, that's nice. I'm failing not only as an entrepreneur, but I'm failing as a father. Good times. Good times. Anyways, the good news is I know how to get you rich. The bad news is slowly. Investments like this, investments in your career,

investments in publicly traded stocks, but don't go all in on anything. Don't go all in on any one thing. The failure rate or the infant mortality on businesses is still like six out of seven businesses. You never know what's gonna happen. And if you're wrong, then call me and kick yourself, but that'll be a good thing. It'll mean you made a lot of money instead of a lot, a lot of money. That's fine. So

kind of my gut is I'm kind of with your wife on this. I wouldn't go too, it's easy to fall in love with these things and go a little too deep. Don't go too deep. Don't go too deep into the paint. Thanks for the question, Francois. That's all for this episode. Again, if you'd like to submit a question, please visit officehours.propgmedia.com. Our producers are Caroline Chagrin and Drew Burrows. Claire Miller is our assistant producer. If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Prop G pod from the Vox Media Podcast Network. We will catch you on Thursday. Support for the show comes from Alex Partners.

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