The Tim Ferriss Show - #651: Legendary Investor Bill Gurley on Investing Rules, Finding Outliers, Insights from Jeff Bezos and Howard Marks, Must-Read Books, Creating True Competitive Advantages, Open-Source Strategies, Adapting Mental Models to New Realities, and More

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Starting point is 00:01:30 P-R-O-T-E-K-T.com slash Tim to claim this special offer today. One more time, protect.com slash Tim, P-R-O-T-E-K-T for 30% off. Use code Tim at checkout. And just to remind you protect.com that's protect with a K.com slash Tim and code Tim. This episode is brought to you by Shopify. Shopify is one of my favorite companies out there. One of my favorite platforms ever. And let's get into it. Shopify is a platform, as I mentioned, designed for anyone to sell anything anywhere, giving entrepreneurs the resources once reserved for big business. So what does that mean? That means in no time flat, you can have a great looking online store that brings your ideas, products, and so on to life.

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Starting point is 00:03:46 And let's face it, being an entrepreneur can be lonely, but you have support, you have resources, you don't need to feel alone in this case. More than a store, Shopify grows with you, and they never stop innovating, providing more and more tools to make your business better and your life easier. Go to shopify.com slash Tim to sign up for a $1 per month trial period. It is a great deal for a great service. So I encourage you to check it out. Take your business to the next level today and learn more by visiting shopify.com slash Tim. One more time, shopify.com slash Tim, all lowercase. Hello, boys and girls, ladies and germs. This is Tim Ferriss Show. Twitter at BGurley, that's G-U-R-L-E-Y. Bill has spent more than 20 years as a general partner at Benchmark. Before entering the venture capital business, Bill spent four years on Wall Street

Starting point is 00:05:10 as a top-ranked research analyst, including three years at Credit Suisse First Boston. Bill also maintains a blog on the evolution and economics of high-technology businesses called Above the Crowd, which you can find at abovethecrowd.com. Over his venture career, he has worked with such companies as Grubhub, Nextdoor, OpenTable, Stitch Fix, Uber, and Zillow, among many others. Bill has a BS in computer science from the University of Florida and an MBA from the University of Texas. He is also a chartered financial analyst. Bill is a board trustee at the Santa Fe Institute, a research and education center focused on the study and understanding of complex adaptive systems. Bill, nice to see you. Thanks for making the time. Thanks for having me.

Starting point is 00:05:51 All right. So I wanted to start with a number of things that I've seen pop up repeatedly in various forms in doing prep for this conversation. And the first I wanted to get your take on and expansion on is Michael Porter's book, Competitive Strategy, subtitled Techniques for Analyzing Industries and Competitors, which you have described, I believe,

Starting point is 00:06:15 as the most efficient short form MBA that one can find. Could you please explain what this book is? And if you still hold that opinion why you hold that opinion if you do go to get an mba like in the first semester or whatever they usually make you take a corporate strategy course and it's the first book assigned it's like extremely well-known business book there's a belief in silicon valley that an mba worthless and that people shit on it all the time. And yet, I would say 80 or 90 percent of the entrepreneurs I meet would benefit greatly by

Starting point is 00:06:55 reading the first three chapters of this book. And it's really just about trying to understand the dynamics of industry. One of the most common mistakes entrepreneurs make is they come up with some kind of technological breakthrough in their own mind, but they don't spend any time analyzing the industry structure or whether the go-to-market is going to be possible or not. And the book just has a wonderful framework for thinking about the competitive dynamics of an industry and whether or not you'd be able to break in or be successful or maintain success. This actually makes me think more broadly of frameworks and recipes, as it were, for making decisions. Back in the day, you were a sell-side analyst, and I would love for you to define what that is and also just define buy-side versus sell-side. And at that time, at one point

Starting point is 00:07:52 at least, the top three analysts covering the PC industry retired. And I'm reading from a transcript on Medium, Dan Benton, David Kouros, if I'm correctly pronouncing that, and Charlie Wolfe. And then Charlie became the advisor for Young Analysts, so you got to work with him. Here's the part that's of interest to me. So Dan and David became friends, so they both gave me all of their financial models. And I'm curious what they gave you. What were those models? And do you still use any of those models?

Starting point is 00:08:24 No, no, no. So they were company specific. But let me start with the sell versus buy. So, and the industry has changed over the years, but a sell side analyst is someone who does research on behalf of an investment bank that is presumably going to make money from trading on their trading desk that someone sends your way because they valued the research. So you're providing research to help sell stocks. That's how you're going to get paid. The buy side is anyone at a mutual fund who's trading for their own account. If you're a buy side analyst, you don't publish. It doesn't get public because you're using that as proprietary

Starting point is 00:09:01 information. The sell side stuff gets broadcast broadly. And usually when someone changes estimates or you hear about a ratings change, that's usually a sell-side analyst that has made a decision to change something. And that's what ends up on CNBC. And so a sell-side analyst, this is going to sound very naive, but a sell-side analyst could make a recommendation to buy, right? They could make a recommendation, like a strong buy recommendation or a strong sell or somewhere in between the two. That's, I think, where my Long Island brain was having trouble grasping. You had this controversy about that because the bank makes money in multiple ways and they

Starting point is 00:09:37 question whether people are biased or not. And then you had the whole Henry Blodgett thing from the 2000 period. So it's complicated. And could you describe, I know that you don't at this point use them any longer, but the company-specific models, what were the models? I was super fortunate my entire career by being in places where windows opened up that I was able to take advantage of. But the situation you described, I landed on Wall Street, very fortunately, started covering an industry. And there's a magazine called Institutional Investor that polls the buy side and ranks the analyst. And the top three analysts in the category I entered all

Starting point is 00:10:16 retired within one year. And they all became friends, partially from my own networking, like I was reaching out to them. But the models they shared were the models they had built on the companies we all covered. So their own particular version of Dell's financials or Compaq or Microsoft. And so it just helped me have a better understanding. I could see what they did, that kind of thing. Got it. What I'm trying to unpack also through the course of this conversation is just how you think about models and making decisions. I find that interesting. This is hopping around a little bit, but you did not pursue Google as an investment in 2002.

Starting point is 00:10:55 You had some investing rules of thumb in place. I suppose what I'm wondering is how you think about rules as an investor in the sense that it seems like perhaps to be consistently great you need rules but if you have rules you're inevitably going to miss some great opportunities but perhaps that's okay how do you think about rules like was missing google the result of a flaw in the set of rules that you had at the time or was it just a collateral miss? Let me work my way back to it because it's clearly the biggest mistake of my career. So it's something I've thought about a lot. So I think any investor starts with just building bedrock and that comes from reading. And there's a ton of books in history you can read. You can go through all the Buffett letters, as an example.

Starting point is 00:11:48 You can read Peter Lynch's One Up on Wall Street. My good friend Mike Mobison has put out some amazing books that are a lot more nuanced about stock prices, that kind of thing, A Random Walk Down Wall Street by Burton McHale. And then you build your bedrock, and then you're out there and you're looking for an opportunity. So I think public stocks are a little different than venture,

Starting point is 00:12:11 but there's some overlap. But you're looking for a reality that you think is going to emerge. It's not priced into the stock. So that requires you both to think you know where the world's going and also to know what the expectations are currently embedded in the stock. Because if you just have the same opinion that's already embedded, you're not going to make any money. There's a great piece by Howard Marks where he talks about you have to be right and contrarian. You can't just be right. You have to be right and contrarian. And that's more difficult. There's a famous saying that I'm sure has been uttered on your podcast before, but strong opinions loosely held. And I think all investors

Starting point is 00:12:51 have to work within that framework because things change. There's many, many variables. None of them are constant. They're all dynamic. And the minute you set a very hard rule, then you might be setting yourself up for a mistake. And venture, I have found, is a world where that happens frequently. And so the Google example, and it's really important to say that we didn't lay chase. Like they presented, there were 25 employees, Laird and Sergey presented. They presented to, I'm sure, a whole bunch of firms, and we didn't lay chase. We should have laid chase, but we didn't. At the time, Yahoo was at $10 down from like $80. Excite was going bankrupt. So search didn't look that exciting from an external

Starting point is 00:13:37 viewpoint. You had two PhD founders who had never been a CEO before and were insistent they were going to be good as a CEO. Normally, that's a red flag, you know, two PhD founders. had never been a CEO before and were insistent they were going to be good as a CEO. Normally, that's a red flag, you know, two PhD founders. There's just a number of things where you would make a list and say, oops, you know, this probably isn't what you want to do. Now, I'd like to highlight, and I always do, the two best venture capitalists in the world at the time, John Doerr and Mike Moritz kind of locked hands and said yes, right? And so it'd be erroneous for me to say like, oh, if you were a well-studied venture capitalist, you obviously get to know at that point in time because the two best didn't. And I think it's just the subtlety of the game. There's a great reality in venture that a lot of people talk

Starting point is 00:14:21 about now, but you can only lose one time your money. And in a case like Google, you make, what, 10,000 times your money? And that asymmetric result means you have to bias towards positive in a situation like that. The odds are just ridiculously different. And so what should have happened is I remember one of my partners looking at Larry and saying, what does it take to get this deal done right now? Because he was a closer type. And Larry said, 120 pre. And we should have said, how about 150? Like, if I could go back.

Starting point is 00:14:59 If I could go back. But you can't go back. Deal got done at like 80, so below what Larry had told us, but still, obviously, historic. So how did you then revise your rules of thumb or rules moving forward after that, if at all? Is a case like that, granted it turned into what Google is now, so it's easy to maybe punish yourself for not laying chase. But how did things change after that? You know, after that, the firm did Twitter, Snapchat, Uber, you know, we got some right. Yeah, you did. Yeah. And around that time, I remember we used to give a book out to our LPs, our limited partners, our investors at every annual meeting. And I think Bruce had just read The Rational Optimist, which is a Matt Ridley book.

Starting point is 00:15:53 And he started using a phrase at our partner meeting, what could go right? And because of this asymmetric outcome thing where you could make 10,000 times your money and only lose once on the downside, it was the right frame of mind. So it's very easy to get into a trap in venture where getting no right feels like a win. And it's just not that. I mean, obviously you can't do every deal. You can't do every investment. You'll go broke. But getting overly jazzed about correctly identifying a negative or a no, it's just not that big a deal. It's not the job. The job is to find the outliers. So my experience, granted, it's limited in some respects, but my experience and perception of benchmark is you guys are very, very selective. More selective than a lot of venture capital firms and a lot of angels who,

Starting point is 00:16:47 maybe like the poker player who doesn't mind his or her bankroll. Yes, you can only use one X your money, but if you do lose all of your money, the jig is up. Yeah. That's the problem with the complete opposite theory. You can't just do every investment you make. We have another challenge, Tim, which is we've, for a variety of reasons, have chosen a strategy where we don't let our money walk around without our work product and our involvement. And so we go on a board if we make an investment and we usually become the largest shareholder on the board. And as a result, our limitation is our board seats more than the capital, actually. You can't do 20 of them, not well. So you mentioned Howard Marks, Oak Tree Capital, who's been on the podcast twice.

Starting point is 00:17:34 Very, very impressive fellow. So I've seen you mention two investors, and I'm sure you've mentioned more, but two have come up repeatedly in various interviews and so on, Howard Marks and Stan Druckenmiller. Could you please speak to what makes them impressive or interesting to you? Sometime in the last four or five years when interest rates wouldn't get away from zero for so long, I told myself I have to learn more about macro because I just know nothing and it's causing all kinds of problems in my industry. I had been reading Howard's work for years. One of the things I just love about people like Howard and Buffett does it, but like people who archive their thought process just as part of their own process.

Starting point is 00:18:19 But it's quite kind if you're a learner in the field that have someone of that capability that insists upon writing these letters and making them public, which they've done. I started reading Howard's work when I was on the sell side 25 years ago, and I've gotten to know him now. And he's, in addition to being very, very bright, he's also just a wonderful human and fun to interact with. There aren't many people, if you study financial history, most people, and Buffett included, will tell you macro is impossible. You shouldn't even try. And the two individuals you mentioned are two of the only ones that are known for being successful

Starting point is 00:18:59 in macro investing. Howard, mostly by being one of the most successful and longest tenured investor in the bond market and Stanford taking more kind of single individual bets that are macro in natures, going back to his success with Soros. He's become kind of re-famous in the past 12 months for predicting the inflation situation we're in and being very loud about it. Could you, if you don't mind, just give a definition, it could be simple, of macro investing for people who may not know that term? If you go to business school, there's two economic classes. You can take microeconomics and macroeconomics. Microeconomics is a lot about what's discussed in Competitive Strategy,

Starting point is 00:19:43 the Michael Porter book. So it's about the interaction between firms within an industry, pricing, that kind of thing, competitive dynamics. Macro is the study of economies, you know, writ large. And I'm fascinated with complex systems. Our economy is certainly one of those things, as is weather and whatnot, which is why I've gotten involved with the Santa Fe Institute. But they're nearly impossible to predict. And it's where you get into real, real trouble. There might be a variable you're not tracking that has never flipped from zero to one. And when it does flip from zero to one, all your models, all your planning are out the

Starting point is 00:20:25 window because this other thing's different this time. And you can, I mean, it's why no one can predict the weather more than five days in front of us, right? Because it's just too dynamic and too complex. And most people feel that way about macro. Let me go back in time a little bit, revisiting the sell side analyst side of things. So I believe at one point, and I could be getting the terminology wrong, but you were an institutional investor, which you already mentioned, institutional investor, all American or all America research team. Partly because those three people left the field, but yes. But what allows someone to land on that list? So it's a poll of your customers. It's a poll of the buy

Starting point is 00:21:07 side. So they literally pull the buy side in each industry and say who was most helpful. I will tell you that, and I don't know, this probably came from some book I read in business school, but when I showed up, and this is a framework someone could use, but when I showed up on Wall Street in one of the very first weekly meetings, they introduced us to the sales force. The sales force is the individual at your firm responsible for that account, for Fidelity, for Wellington, for teachers, you know, of Texas or whatever. And they own the relationship. And somewhere in my youthful wisdom, I decided to ask each salesperson, is there one client that will spend 30 to 45 minutes with me as a new analyst and just tell me what they want? Like, I'm just going to ask them questions. I'm not going to have anything

Starting point is 00:21:58 for them. I just want to know how I can serve them best. And I did like 20 of those interviews before I had started the job. That's a roundabout answer to how do you get on the list? Because I knew what they were looking for at that point in time. What made you a good analyst? And let me explain why I'm asking. I'm asking because one of the advantages that you bring to a board, which you've already discussed, to a board of a startup in the art of company building is your in-depth understanding of how the public markets work. And if a company is aiming for going public and so on, you have knowledge that scares a lot of other folks who might intimidate or befuddles a lot of folks who might otherwise want to be on the board. So I'm curious to know what made you a good analyst.

Starting point is 00:22:44 The thing I learned in those interviews, both in terms of the, because I would also ask them who does a really good job of this, and then if I could, I'd try and befriend that person. But what I heard frequently back was, and this is a little different from what the world perceives, you know, I don't really need you to make this buy or sell recommendation. Like What I would really get a huge benefit from is if you provide a point of view or a piece of analysis that causes us to think differently about a particular company or industry. Can you go off and do some work that other people haven't thought of that causes us to question, that makes us want to talk to you and hear what you're thinking. And so that became really the essence of what I was focused on. And partially from listening to them and partially from mimicking and copying David Kors, who you mentioned, I started doing a weekly facts at the time. And David was doing that before he quit. And so I started doing it too. And

Starting point is 00:23:46 interestingly, the Wall Street firm tries to keep your content closed within their customer set. And this is not very loyal to my firm, but it became very obvious to me that a sell-side analyst that was more well-known was more powerful, more impactful. And so I intentionally started expanding the distribution of this weekly pieces as far and wide as I could. How did you expand that distribution? I would leverage the sales force and get them to give me fax numbers. That's where I started. I then started developing industry relationships, which is important because you're covering these companies. You start going to investor days. The buy side is talking to these companies as well. And so I started getting some of

Starting point is 00:24:37 them on board. And then probably the most successful hack of my career happened when I was invited to attend Stuart Alsop's Agenda Conference, which I think was in Phoenix at the time. And used to be, it was the conference everyone went to. So Gates would be in the front row. Ellison would be there. They would stay for the whole thing. You could walk up and talk to him. Michael Dell was there. Everyone was there. How many analysts were invited to such an event? I don't know. Charlie had been invited and Charlie got me in. And I don't even remember. Rick Sherlin was probably there. He's a famous Microsoft analyst. And it's kind of what code is today. But the difference back then, way back then, was the most famous founders, CEOs,

Starting point is 00:25:26 sat through the whole thing and were available the whole time. Today, if one of them's speaking, they come in the back door, they go on stage, they leave. They're not around. So it was pretty cool. What was the hack at the conference? So this was around the time where the Palm Pilot launched. And so in the lobby of the conference, they were selling them. They weren't free. They were selling them, selling the Palm Pilot launched. And so in the lobby of the conference, they were selling them. They weren't free. They were selling a Palm Pilot. And I think it was like $200, $300. I can't remember. But they had put the contact information for every attendee at the conference in the Palm Pilot. And so I ran some quick math. People weren't really doing like cost of customer acquisition back then,

Starting point is 00:26:05 but I think it was like 70 cents a name or something like that of the most influential people in the entire tech industry. And so I bought the Palm Pilot, I took it home, and I spammed the four or 500 most important people in the tech industry with my weekly newsletter. Did you end up developing close or closer relationships with any of them because of that newsletter? I think so. And I think also just a reputation, right? It's actually not that surprising today, right? There's plenty of content influencers all over the place now with Substack and everything.

Starting point is 00:26:43 It was just a version of that when there weren't as many people doing it. And it started with fax and became email. And today I just mostly tweet it. I don't force the distribution out of these other things anymore. And I'm not as frequent, but yeah, I mean, it's a common way to build a reputation in a network. I mean, you do this with your own life. Yeah, I do. I do. So let's come back to the point you made of helping your clients think differently. Presenting that with something that helps them to think differently. And I'd like to connect that to a story I'd love you to tell, which is about what you learned from a food analyst. And the question that might come before that is, how did you meet the food analyst? Why were you even having a conversation?

Starting point is 00:27:34 Well, first of all, all the analysts share a floor. So we're all physically proximate. So the person that covers food or telcos or electric utilities, we're all in the same group. And the firm had efforts underway, which Charlie Wolf ended up running, to try and educate the analysts in a common framework or whatever so that we would all be better at what we do and that kind of thing. For reasons I don't remember, me and Michael Movison, the food analyst, started spending a lot of time together. And we're still close friends today. He's involved at Santa Fe, and I see him frequently. And he's done amazing things himself and released several books, and he's quite well-known. So we started hanging out together. He had just read a bunch of books on a framework called Return on Invested Capital, which Stern Stewart had published on. McKinsey had a book called Valuation, they still do, that uses this type of analysis.

Starting point is 00:28:32 And he was spreading it, what is the word, proselytizing through the analyst group. And I was a sponge at that point in time. So I said, sure. So I took the framework and ran it on all of my companies. It turned out just by happenstance that Dell stood out like a sore thumb with ridiculously high ROIC numbers versus the rest of the industry, like night and day, like 20 to one, wasn't even close. And in fact, it was so ridiculous. Like the first time I showed him, Michael didn't believe it was true. And so we got in the numbers and that kind of thing. And there's probably like 10 super lucky things that happened in my life, but him giving me that framework. And then at the exact same time, Dell as a company had made two stumbles. They had an options trade that went bad and their laptops had caught on fire.

Starting point is 00:29:25 And so the stock was in the ditch. It was trading at six times earnings. And we had discovered, if you will, through this framework that they had a massive competitive advantage because of this return on invested capital thing. And so we went to a strong buy on a broken stock and it went up 100X in the public markets from there. And I became close friends with Michael and Tom Meredith, who was CFO at the time. They did all the work. I was just along for the ride, but it was very fortunate. But that helped put Bill Gurley on the map in the same way that maybe eBay really thrust Benchmark into the limelight. Very much so, especially with the buy-side community. So Michael, I just wanted to double-check this.

Starting point is 00:30:15 There's a chance I've read a book of his. Did he write a book called Think Twice, Harnessing the Power of Counterintuition? Oh, yeah. He's written four or five books. And he's got great content he did a google talk that's on youtube that i'd highly recommend people watch it's just fascinating he's been on a shaughnessy a couple times so yeah he's he's worth checking out so in that particular case of proselytizing did michael do that was he proselytizing. Did Michael do that? Was he proselytizing and sharing this ROIC

Starting point is 00:30:46 idea because he had peers who were non-competitive and it was sort of a deposit in the karmic bank account to hopefully have some reciprocation? Or is he just a nice guy? It just seems like the environment, that would not be true in all environments, right? That someone would take this new insight and share it widely. I think he's a natural learner, and maybe that's what you would attribute Howard Marks writing to. You know, you ask people who do that, you know, you ask Buffett, why do you write your letters? Like, I think people believe that it helps their mental frameworks if they write stuff down and it challenges them. Even when I write a blog post, from the minute I have an idea or a compulsion to say, hey, I'm going to write about this topic, the process through which you actually put the words to paper and structure the paragraphs, structure the argument, you know, you get smarter. Sometimes you decide, oops, I was wrong. Like you learn by putting it all together. And Michael's always

Starting point is 00:31:51 been that way. He's pretty much built a career out of being someone who studies companies, valuation frameworks, how investors win. I mean, he's gone deep on things like Myers-Briggs on different investors and structural, how do you organize an investment team to be most, all kinds of stuff like that. It's what fascinates him and he's a synthesizer. So I think some of the best nonfiction writers are synthesizers. People say, oh, Michael Porter, Competitive Strategy, 14 other people had written that stuff before. Well, competitive strategy, 14 other people had written that stuff before. Well, he wrote it in a really compact way that's easy to read. That's super helpful. And Michael does that with, you know, he goes out and reads the stuff that's super hard to

Starting point is 00:32:37 read that's overly academic or whatnot and packages in a way that people can consume. I remember Kevin Kelly said to me once, and I'm paraphrasing, but I really enjoy Kevin Kelly. For people who don't know, look him up, kk.org. And he was saying, I don't write to express what I think.

Starting point is 00:32:57 I write in order to think or discover what I think or clarify what I think. So the taking of the ROIC from, in this case, let's just say food and applying it to Dell was this sort of translational move. So I want to read something from, I think this was a Vox interview, and I can't believe everything you read on the internet, but it would make sense. So this is related to OpenTable.

Starting point is 00:33:20 So having come out of OpenTable being successful, this is quoting you, I was trying to think of other industries where, if you put a network on top of it, it would absorb waste and make it more efficient and more usable. And this is within the context of looking for something that would basically appear like Uber, right? So not working within the taxi framework, but with black cars. And I'm just curious where else you've applied that type of translation, where you see a case study or a successful proof of a network being laid on top of something and then applying it to something else. Are there other examples of translating in that way? Absolutely. And by the way, OpenTable was, our impetus to do OpenTable was based upon something like that. So in 1996, Brian Arthur, who was at the Santa Fe Institute back then,

Starting point is 00:34:10 published an article in Harvard Business Review called Increasing Returns in the Two Worlds of Business. And it was really the first piece that talked about network effects. Of course, Microsoft was already starting to really take off. But this idea of network effects is that some industry is going to be structured where you get win or take most. And the more successful you are, you get locked in. And Brian talked about things just like the Microsoft UIs. You know how Word works. You get comfortable with how it works.

Starting point is 00:34:39 And then switching has cost and those kind of things. And sharing documents, collaboration, and Zoom obviously has massive network effects. So we started looking for those things because they tend to cause outlier outcomes. So I can remember, and this gets into back to your rule stuff, when I met with Chuck Timpston, the founder of OpenTable, and he had three restaurants, you had to believe a lot to get from that point to the global phenomenon that it became. And the bet that we talked about making when we said, okay, let's go do this thing is if we get enough restaurants on this thing, then the consumers

Starting point is 00:35:17 will come. And if the consumers come, then people will have to get on, you know, and that's what happened. But you had to believe it because otherwise at the time we were selling PCs to restaurant owners. And guess what? They didn't have connectivity at the time. So we had to partner with someone to get like broadband installed, which wasn't easy. I mean, it was all bad. So your normal rule set, we're putting a piece of hardware in a small to medium business that didn't have a lot of money. And we had to provision broadband. So you would normally go, don't do that. But I remember my favorite proof point of that network effect, and then I'll get to some of the other models.

Starting point is 00:35:58 At one point, we were reviewing the Salesforce productivity. And our model, when we scaled up the business, said each salesperson had to close four restaurants a month. And at the time, we were up to 7.7. So we were feeling pretty good. Things were starting to break our way. And in the board meeting, they laid out the list of all the salespeople. And one of them had done 35, 35 restaurants in a month.

Starting point is 00:36:24 And so I asked the question, who is that salesperson? And one of them had done 35, 35 restaurants in a month. And so I asked the question, who is that salesperson? And OpenTable started in San Francisco and we played local game. We didn't go everywhere at once. We built liquidity city by city. Anyway, that salesperson was the one salesperson left in San Francisco where we had 90% penetration. So the 35 were coming out of that last 10. And that individual was basically taking orders. And that, you know, to me was like,

Starting point is 00:36:59 oh yeah, the network effects really working here. And so anyway, we look for that. Some other frameworks, SAS. Could I actually pause for one second before you get to SAS? So you talked about, you have to believe, you mentioned you have to believe a lot of things can go right in order to invest in a business like OpenTable at the time. I would love to know what contributed to your ability to have conviction. I mean, how much of it was potential network effects versus total addressable market versus founder versus other stuff? I would say in some of these verticals, both OpenTable and Uber, there were years and years and years where everyone thought the TAM was too small. In fact, oh, here's a great story. This was in 99. So this is a 23-year-old story, but I had successfully recruited a CFO from a public company, which you could do back in those glory days, to come into OpenTable.

Starting point is 00:37:49 And one day I showed up early for a board meeting and the CFO comes to me and he says, Bill, I'm going to quit. And I said, OK. I go, why are you going to quit? And he goes, this business will never work. And I said, OK, why will it never work? And he says, well, my model says it'll never work. And I said, okay, why will it never work? And he says, well, my model says it'll never work. So I said, show me your model. So we look at the model and I dive in and he has frozen penetration in each city at 17%.

Starting point is 00:38:17 And he had come from a retail business. And I go, why did you freeze it at 17%? And he said, oh, no one gets more than 17% market share, all the businesses I've worked with. Because I believe in network effects. I was like, we're going to get 99. We're not stopping at 17. We're going to get 99%. You don't understand how this is going to work.

Starting point is 00:38:37 And that's because I believe in network effects, and he didn't. And when we filed the S-1, I really wanted to FedEx it to him. Did he stay or did he leave? No, he left. He quit. And I decided not to FedEx in the S1. I figured he had seen it. By then we were kicking off massive cash flow each quarter. So you were talking about models and I interrupted you. You were going to jump. Yeah, I was just going to mention a bunch of them. I mean, so yeah, please. So yeah, so I did my first SaaS deal in 99. And that category of companies is still bearing fruit. People have made tons of money, you know, and now it's common,

Starting point is 00:39:16 but at the time it wasn't. And you transform an entire industry, open source, you know, benchmarks probably had, I don't know, eight or nine successful open source companies where you've used that model to attack a industry that's pre-existing, but where someone has proprietary technology. Social networks. I mean, we were fortunate to be in Twitter, Snapchat, Instagram, and Matt Kohler, who is a partner at Benchmark, developed kind of a sixth sense on what a breakout social network looks like. And we've had a few that missed too. I mean, but the outsized nature of the wins are so high. So there's like four or five different ones, right, that we look for network effects. And you get good at, you start to understand what works, what doesn't, what leads to success, what doesn't. I mean, there's nuances, right?

Starting point is 00:40:11 In open source, with that business model, which is you're basically packaging support and reliability because someone could just download it for free. So how do you charge? And this goes back to Michael Porter. But if you have a very consolidated industry of big companies, they don't pay. They just hire the people that know how to use the product. So we were in MySQL as an example. Google and Yahoo are two of the biggest customers, never paid us a penny. You need that product to go into the corporate world where people want that kind of handholding, and that's where you get paid. So you can't just be, oh, I love open source, because then you get into something where it's serving a much more finite set of customers and then you can't make the model work. So you have to learn the esoteric

Starting point is 00:40:51 nuances. But anyway, yeah, there are many veins in venture that get mined over and over and over again if they're big enough. Just a quick thanks to one of our sponsors and we'll be right back to the show. This episode is brought to you by Athletic Greens. I get asked all the time what I would take if I could only take one supplement. The answer is invariably AG1 by Athletic Greens. If you're traveling, if you're just busy, if you're not sure if your meals are where they should be, it covers your bases. With approximately 75 vitamins, minerals, and whole food source ingredients, you'll be hard-pressed to find a more nutrient-dense formula on the market. It has a multivitamin, multimineral greens complex, probiotics and

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Starting point is 00:42:19 So if you've been thinking about giving AG1 a try, there is no time like today. You can try AG1 by Athletic Greens at athleticgreens.com slash Tim. One more time, that's athleticgreens.com slash Tim for a free one-year supply of vitamin D and 10 free travel packs. This may be a novice question, but I'm curious. What rules did you guys have around bet sizing, right? To use a poker analogy. How do you think about the parameters around the size of the check that you cut, just in terms of long-term strategy?

Starting point is 00:43:00 Benchmark's a very particular firm. We've wandered off course a couple of times, but we've always come back to our kind of home base and we've remained committed and focused to very early stage investing. And we're pretty much market takers on what that first check size is. What do you mean by that? There's a competitive dynamic in the industry that kind of defines what a Series A check looks like or, you know, sometimes Series B. And if we thought something was going to be an outsized winner, we wouldn't miss it because market was saying that had to be 15 or 5. It's more like a ticket.

Starting point is 00:43:36 15 or 5, you're talking about? A million dollars. 15 or 5 million? Yeah. Right. So would the guiding principle in a case like that be the percentage of ownership that you would end up with? Something we care way more about than the size of the channel. Yeah.

Starting point is 00:43:50 And we're not the only one. A lot of venture firms operate that way. So board seat is the constraint, and then ownership is the optimization variable. Whatever the math is that follows out of that is what you take. To be right and contrarian, I'm curious how you cultivate that in partner meetings. What is the format of a successful partner meeting when someone's getting up and saying? Well, one thing I would offer as a preamble to at least our process is the founding partners of Benchmark did something that hadn't been done before in venture, which is they created an equal partnership.

Starting point is 00:44:29 And most business partnerships, and this includes private equity and law firms and real estate firms, there's a hierarchy. And the people that have been there the longest sit at the very top, and they take an outsized amount. And some of our founding partners had worked at those firms and felt like the young people did more of the work. And therefore, you know, it wasn't conducive to the right type of internal behavior. And so they created this notion of equal partnership. And even today, when we go hire a new partner, they come in and they have an equal seat at the table. We just divide the pie, which is very different. The reason I think that's important to any discussion about our

Starting point is 00:45:09 own processes, I think that has a number of dynamics that kind of emerge from being equal. I think everyone's voice is heard. Whereas if you had a hierarchical firm and the big boss walked in and said, blah, blah, blah, like that would carry so much more weight, right? And so you feel like your voice is heard when you come in. I think we root for one another. If I'm at a hierarchical firm that's up or out, I'm kind of competing with my peers. Here, because we're going to divide it equally, I want our new partners to be as successful as I possibly can. And I felt that

Starting point is 00:45:45 on the way in, and I feel the desire to do it on the way out. Those are just natural emergent properties. So then to come around to your question, like, how do you be contrarian? How do you have, well, I mentioned, like, we have this phrase, what could go right? Like, you're just constantly thinking devil's advocate in your mind and devil's advocate on the positive side. Like, what would it take for this thing to break out? Like, are we making a mistake? Could this, could you imagine this being really, really big and what would have to happen for that to happen? When someone new comes along, you'd be surprised. I have specific memories of new partners coming in and we'll just tell them, bring all the companies you meet in,

Starting point is 00:46:26 like just bring them in and those companies will present. And then we talk about them afterwards. And that's where the learning process gets passed down. I'm sure just like storytelling in a tribe 300 years ago or 400 years ago, right? Like that, that is that dynamic. And a lot of people say venture is at the end of the day, a pattern recognition job. But we also talked about those rules can get you in trouble. So you're trying to create these kind of loose pattern recognition so that you can be helpful and identify things. And then you want to pass those along. And then you want to pass those along. And then you got to constantly check it, you know,

Starting point is 00:47:08 because of what we said about how you can miss something. But when that new partner comes in and those are happening, I can remember, and I'll leave the names out, but one of the new partners, like he brought in company one. No, company two, no. He was very frustrated. And then company 10, he brought in, we were like, try and close that immediately.

Starting point is 00:47:25 Like just the complete opposite. And he remembers that too. You're starting to learn. You're starting to pick up the collective wisdom of the group. It is a bit of an art form because in that window between when you meet a company and when you might try and close the investment, I bet you the average is under 60 days. It might even be closer to three weeks. And so it all happened super fast. Was there any feedback that you recall or could just hypothetically imagine you gave that new partner that helped him or her to hone in on the 10th that was then a yes

Starting point is 00:48:07 closes immediately? A lot of it goes back to what you might pick up in competitive strategy. The two books that I would put for the venture community, for the startup community that I'd put as next level right on top of competitive strategy are innovator's dilemma, which does an amazing job of describing why startups can compete with big companies. Amazing. And Crossing the Chasm, which does a really good job of explaining how a startup should kind of sequence their customer base as they grow. And they're both fundamental. And you just pick up a number of these different things. And I'll give you an example because you start to develop intuition. So a company where we had a quick yes on that I'm on the board of is called HackerOne. So

Starting point is 00:48:56 at the time of HackerOne's founding, there are four companies that used white hat hackers to make their sites more secure. Microsoft, Google, Facebook, and Mozilla. There were only four. No one else did it. And yet, people would say, I remember seeing an interview with Sheryl Sandberg where she said, someone asked her about privacy and security. And she says, well, the best thing we have is this bug bounty program. And she talks about it for a while in the crowd applauds one of the individuals that worked on the facebook program came up with a business idea of why don't

Starting point is 00:49:30 we build this for the other companies in the universe like every other company in the universe and when they presented we didn't even discuss the company the minute they left we were like okay how are we going to close this everyone Everyone had just jumped to yes, because it seemed so tautological that there's no way this thing's great for these four companies and no one else. And it turned out that those four companies had a group of like 20 or 30 people running the program, which other companies couldn't do. So it was just natural that if you ran that as a service, people would jump in. That's one that we got too fast.

Starting point is 00:50:11 So you've mentioned a number of your partners. Matt Kohler, who was also very helpful for Uber, seems to be very good at using himself as the guinea pig. Very smart guy. What are some of the lessons you've learned from your partners? And that could be anyone, but Fenton, Lasky, Kohler, don't even necessarily have to mention names. I'm just curious what their superpowers are or what you have adapted, learned from them. I'd probably go back to some of the founding partners because those were the ones that I learned from. One of them I'd say from Bruce Dunleavy is just have a really big tent.

Starting point is 00:50:47 We're in a networking business where you're trying to look under every rock for the next possible deal. And cutting off avenues of information or flow is just a really stupid idea. And so it ties in with what could go right, but just be super open-minded. And so Bruce had been involved with a company that I think was in a software tool space. The name escapes me, but we can look it up. And had developed a lot of friendships down the organizational chart at the company. And one day, one of the engineers from that company comes to him and says, I'm working on this marketplace thing called eBay. And he was from a different industry because he had developed that relationship that came in. Now, it turned out that Bob Cagle was much more excited about eBay than Bruce was. And so Bruce

Starting point is 00:51:39 made that intro because we're equal partnership. That's all cool. And Bob ends up doing the deal and, you know, becomes the number one ranked VC in the land. But it all came from that relationship. So the older I get, like, I just take the time, be kind, be available. It pays off, at least in our industry, it pays off big time. So that's one. Another one is just, and this is more specific to venture, but unless you're super lucky, there are two VCs I know that were very fortunate, Kohler and Roloff. It's Koi who, Roloff with YouTube and Matt with Instagram, where they had a hit two years in. But for the vast majority of venture capitalists, they don't have a liquidity event until year eight or nine. And so it's easy to doubt yourself. And three years in, people like to use the child age analogy. You've got

Starting point is 00:52:31 12-year-olds becoming 13-year-olds and your whole portfolio is like that with acne all over their face and you can really lose confidence. And so one thing that a lot of my partners did was just, it's going to be okay. Get back out there. You're doing fine. You know, that kind of thing, which was way more helpful than you could possibly imagine because the anxiety was like spiking. I want to come back to open source in a minute. But first, I'm wondering, you've mentioned a number of books that are sort of broadly applicable to entrepreneurship and I'm wondering, you've mentioned a number of books that are broadly applicable to entrepreneurship and I'm sure translate to, as you mentioned, investing in a number of capacities. If you were advising someone or just mentoring someone who wanted to learn how to be a good angel investor or venture capitalist in tech, what might you suggest to them in terms of approach or resources, books, anything? I'll give you a few more books. And then obviously the world's different today.

Starting point is 00:53:30 The content consumption is so different, but there's a book I love called Startup by Kaplan. Yeah. I bought that when I first moved to Silicon Valley in 99. That was one of the very first books. Yeah, it's just fantastic. And he was in the first portable computers. Every one of them failed. Every one of them. But they all raised massive amounts of money. He, on his ride home every day, had a cassette tape and left an archive or a diary, which makes the book so good because the details, fantastic. But they had the best venture capitalists. They had the best advisors. They had the best executives. And the executives that were in, this was GoCorp, I think, that were there, all went on to do amazing things. But this company failed hard and i i think it's nice to combine a book of failure with all the books of success just yeah i just think it's super educational

Starting point is 00:54:34 interestingly if you read that you should probably also simultaneously watch the general magic documentary it's so good because they were a competitor with Go, and the same story. And the people there all went on to wild success. Yeah. It's like the Jodorowsky's Dune, where Geiger, who went on to create the iconic design for Alien and Aliens. I mean, they're just these failures

Starting point is 00:55:02 that contain an all-star team and fail for any number of factors. But General Magic, I just want to second that recommendation. If people want an additional inside look, listen to my interview with Tony Fidel, which goes into great depth on that. On Tony, I'd read his new book, Build. It's solid. It's very strong. And it's got a lot of frameworks, you know? And you can agree with them or not agree with them, but I do think entrepreneurs benefit from frameworks because just running by the seat of your pants,

Starting point is 00:55:34 like you need a framework for having weekly meetings. You need a framework for executive recruiting. You need a framework for development of your team. And there are a lot of good ones. There's probably 20 good ones of each of those. But the worst thing you can possibly do is have no framework and just kind of see to your pants. And by the way, that's the most frequent solution. They absolutely have no framework. I would mention Shoe Dog. I don't know if the reality had as many near-death experiences as the book makes it sound like. But it's good to see the tenacity you need.

Starting point is 00:56:12 This is the Phil Nike book. But the tenacity you need to make it is high. And so if you're starting a company because you think it's going to be a good lifestyle oh holy shit you're in for a rude awakening yeah so the same writer who penned shoe dog in reality is the same person who did open the autobiography of agassi which is another spectacular and apparently the new harry book yeah oh no kidding yeah all right that's a selling point because i think it's morringer is spectacular okay so shoe dog so so far these are company building yeah books which is totally valid for kind of high-tech macro if there is such a thing

Starting point is 00:56:59 i think ridley's two books the rational optimational Optimist and How Innovation Works, are just fantastic and spectacular. They're much higher level, but they're really, really good. What makes them good? The first book, Ridley has this point of view that I think is very hard to dispute, that the vast majority of wealth creation and increase of standard of living for humans on the planet come from two things, commerce and what he calls ideas having sex. So if you think about, you know, if someone comes up with a new farming technique, the marginal cost of that is zero. And if you pass it along to someone, their productivity improves. And so, you know, it's super powerful in my mind, especially when I think about people, a lot of people on the planet want to improve standard of living of a lot of people.

Starting point is 00:57:48 And I look at what Ding Xiaoping did in China and say, I don't know that any other human in the history of the world has unlocked as much standard of living increase as this one human by bringing capitalism to China. And anyway, it's something that really speaks to me. Yeah, much smaller scale, but people should study Lee Kuan Yew. Okay. And this whole Singapore, well, just the whole Singapore story. I mean, basically taking it from a swamp to what it is today is just incredible. But I agree on the Deng Xiaoping piece. Yeah, yeah.

Starting point is 00:58:23 So then on other content, like the world's way different now, right? With podcasts and blogs and Twitter and all these kind of things. So no matter what you're doing, but especially if you want to do venture attack, like there's lots of people that talk their book, that talk their game, like follow, listen, read, consume, consume, read, read, read, read. I don't think you can get too much information. Let's segue to open source. What else do you think open source might be able to solve? And I've had some reasonably direct experience with watching, I suppose,

Starting point is 00:58:56 one example of what you described, which is Automatic. And very good friend, Matt Mullenweg, I'm an advisor to Automatic. And for those who don't know, Matt, who's been on the show multiple times, was a lead developer of WordPress, very familiar with open source, and then has built a sort of services and enterprise-grade, secure, stable solution for many different businesses and people

Starting point is 00:59:20 in the form of Automatic. So I'm deeply interested in this, and I know you are as well. You're a big fan of open source. What else do you think open source could be applied to or might be applied to? First of all, I think people are relatively familiar with the big individual software projects, Linux being the most well-known. It's over 20 years old now. It's clearly the most used operating system in the world. And what people might not know about it is a lot of scientists believe it's the most secure.

Starting point is 00:59:53 And that's kind of counterintuitive. Oh, all the code's public. How could it be the most secure? But it gets beat up the most because it's used the most. There's a great piece of writing, an incredible piece of writing called The Cathedral and the Bazaar that was the first kind of magnum opus on why this open source thing might work. And another thing people don't get is The Cathedral and the Bazaar compared, are you trying to build up like the Gaudi church or a bizarre, which is super flat and wide and obviously built by lots of people. And the thing is, open source is way better complex problems than simple problems. And it's the very complex problems that would be hard for a single company to do. And so if you're building an operating system, it might have all kind of edges

Starting point is 01:00:46 on how it integrates with other systems, different drivers you might need. And the world is able to build that, whereas an individual company would be very difficult. And so we started to see that in MySQL and there've been others like MongoDB and we're in one called Elastic. And there've been a like MongoDB and we're in one called Elastic. And like, there've been a lot of successful companies around single software frameworks. Something started happening about 10 to 15 years ago, which is people started using open source in more complex ways and then sometimes using it defensively rather than offensively. So the most well-known is probably Android. Apple had come out with

Starting point is 01:01:26 this smartphone. You could only get it on AT&T. It scared the shit out of everybody, not just Google, but it scared the shit out of all the other telcos. It scared the shit out of all the other handset manufacturers. And so Google did this clever thing. They said, oh, we're going to create a competitor, but it's going to be open source so you can trust us. Now, there's different versions of how open something is, and Android is not very open. But at the time, compared to the threat of Apple, it seemed like a much better trade. And so they got the world behind them on this thing, and it took off. Since then, that model's been repeated in

Starting point is 01:02:07 some esoteric ways. Facebook has something called the Open Compute Project. And if you want your hardware to go into the Facebook data server room, it has to be compatible with their open source framework. And what that means is no one can have an IP claim against Facebook because you've basically sworn off your IP. So they're commoditizing the stuff they're going to purchase. You know, since then, AT&T and China Mobile have worked with the Linux Foundation to do the same thing for the wireless and wireline equipment stack. So they're defining open standards for their next gen products. And if you're a supplier that wants to sell to them, you have to agree to those standards.

Starting point is 01:02:52 And once again, you're out of the IP game. So they don't get held up. It's very clever stuff. Would you mind just expanding on that a little bit? Well, let's go to the Facebook one because it's more understandable. It's called the Open Compute Foundation. It's managed by the Linux Foundation acts as a steward, much in the way that the crypto world thinks a DAO manages this loose federation. The Linux Foundation does that. Linux

Starting point is 01:03:18 has been a DAO for 25 years. It's super interesting. And so that group, they're like a nonprofit overseer of the project, Break Ties. They do patent defense, which I think is super interesting. So they pull patents in. No one sues within the open source project, but if someone were to come attack it, you'd go out after them. So anyway, Facebook has all these equipment in their data center, networking equipment, storage equipment, computer software. So they just created this thing called the Open Compute Foundation that defines open standards for how all these products work. And so if you want to be on their purchasing list, you say, yes, we are compatible with this open standard. And once again, it basically commoditizes that equipment.

Starting point is 01:04:09 So it just gives Facebook more leverage with a broader spectrum of suppliers. Every one of these things has a website and you can go see. And so now, you know, Amazon and Google, they're all part of open compute. I got it. So you can't get, if I'm understanding you correctly, tell me if I'm missing something. They're trying to create conditions such that they wouldn't end up... Back in the day when I moved to Silicon Valley, I worked in storage area networking. And EMC at the time was pretty famous for kind of being a black box. If anything broke, if anything went wrong, you needed EMC to fix it or upgrade it. And so to avoid being held hostage or losing leverage with suppliers, Facebook made this move.

Starting point is 01:04:46 Is that a fair description? Absolutely. And then another high profile one, Google was very worried about Amazon. That's genius. I mean, it's very smart. Oh, it's super clever. Google was very afraid of Amazon running away with the cloud services business in AWS. And so they had a piece of technology called Kubernetes. And this was

Starting point is 01:05:06 right around when Docker and containerization took off. And Kubernetes was an orchestration layer for containers. What a bizarre name. What was it? Kubernetes? Sounds like an Italian pasta. Well, here's the thing, though. They decided that it was in their best interest to take this technology and gift it to an open source consortium. They got the Linux Foundation to manage it, and they went out and recruited IBM and HP and all these other vendors to say, oh yeah, we'll support Kubernetes, because everyone wanted to make sure that people weren't locked into Amazon.. And eventually it got so successful that Amazon had to announce support for Kubernetes. And now if you need to move a workload from Google to

Starting point is 01:05:54 Amazon, there's a common framework for which to do that. And so you're less locked in. So this seems like it's become, at least based on the examples you gave, like a very refined, reliable counterpunch that Google uses. I call it defensive corporate strategy. Yeah, yeah. I'll give you two more very recently. Well, there's always been OpenStreetMaps, and that's kind of interesting because it's data rather than, you know, but the OpenStreetMaps team was very kind of non-commercial, so they didn't like when Apple and Google's obviously running away with the Maps business. So if you just look this up, like within the past four weeks, there's a new open source map group that's going to live on top of OpenStreetMaps that has Facebook and Microsoft and the other parties that don't want Google to run away with it. And quite frankly, I think that's pretty cool. If you talk to actually someone you should have on,

Starting point is 01:06:51 I think that would be really cool is Jim Zimlin, who's run the Linux Foundation for this whole time. Because he's a huge believer, and this kind of ties into Matt Ridley's ideas having sex, that not having IP is actually great for the world because it just creates constraints for people being able to take advantage of things. And so mapping is super interesting to me because it's data oriented. There's something called RISC-V, which is an open source processor, believe it or not, that has a lot of momentum now. You'll see people on the earnings calls for ARM, they'll start, is this a competitor? Is this going to be a problem? Because it's completely free license. And China is a big backer of open source, and you could understand why, because the West has accused them of IP theft. So this is a world where you can't be accused.

Starting point is 01:07:43 Safe space. Safe space. They're investing like crazy, but I wonder what's possible. I'll give you some kind of grander ideas. First of all, I think autonomous vehicles should definitely be open source. I think everyone benefits. Safety's higher. Communication layers are better. The idea that you would use artificial intelligence to figure out whether a light is red, yellow, or green is really fucking stupid because it's a state machine. It is in one of those three states, and that could be communicated into the software. You don't need to infer that. That's a known thing. But you need a common language.

Starting point is 01:08:18 And your test suites could all be used by everyone. Academia could be working on the same thing that the corporations are, safety's higher, easier for government to get involved if it's a single standard. And I wonder about other things, like the NIH gives out $40 billion a year, and many of these projects end up as research that leads to a drug that leads to having a 17-year patent life and get sold at 300 grand a year or whatever like if yeah why wouldn't we say if you take nih dollars your research is open source why do we use government dollars to fund stuff that becomes proprietary that doesn't make any sense to me yeah this is something that you and I can have a conversation about separately.

Starting point is 01:09:05 I look at the state of nuclear energy where the costs are high because of regulation, not because of the actual product. And I wonder, what if the globe had a standard for fission-based nuclear reactor? Wouldn't we get to lower price points? Wouldn't we get to safer products? Wouldn't they get more evolved? It seems possible to me. Are there any companies that are on a short list of companies you would love to see exist or types of companies? Like anything that's just kind of a bee in your bonnet or has been for any period of time? Yeah, I can give you a few. So one, and this one's kind of well known in the venture industry, but everybody

Starting point is 01:09:45 talks about something called the interest graph. And they wonder why there isn't a internet website that kind of links everyone that is tied to a specific interest. And there are companies that people talk about as being close, like Pinterest or Quora or or twitter but i don't think any of them have really pulled it off would reddit fall anywhere i think especially with some of the subreddits they're getting close yeah you know yeah and people talk about kind of like a holy grail but like there's not anyone that's i think just really nailed it really really, really nailed it. And if you did, you would have this combination of really cool unlock for people because if you were into quilting,

Starting point is 01:10:31 you'd be immediately connected with everyone else that's on your level and you can imagine that kind of thing. But then the advertising performance would just be off the charts because you've kind of bucketed everyone into these places. I actually think Twitter still has a huge opportunity on this front, but it'd have to build a top-down version

Starting point is 01:10:50 of Twitter rather than this feed thing, which is super hard for a lot of people. What do you mean by top-down? I think you could take all of the information that's flowing in Twitter and all of the influencers that are in there and build an algorithm that would score who's smart about certain things. Let's make it super simple to convey the point. If you look at stocks, so they already have a UIDA unique individual identifier for each stock with the dollar symbol thing. But right now, the only way you can kind of, you could do a search, but there's a ton of noise. What if you had a page where for each stock, you had a list of the top stories of the day, and that could be pulled out of the Twitter feed by knowing which people are the axes

Starting point is 01:11:38 on that individual stock, which you could infer simply with the data that's already in there. You can imagine that for sports teams. So I could have Twitter sports that is a top-down version that's using the information in the feed, but then presents it more like a standard newspaper would, if you understand what I'm getting at. That one's one. I'm highly interested in people feel free to reach out in any variation or new take on linkedin i just think it kind of stopped you know and it stopped 10 years ago one idea that um aren't you semi-retired bill

Starting point is 01:12:15 aren't you kind of semi-retired people will probably steal your version of retirement is super intense yeah people may steal this and that okay, but I hope they reach out to me. It feels to me like you could have page rank for people. Okay. And so I don't think the skill thing on LinkedIn works because it's public, so you get all this performance art where people are just being nice. But what if you had people maybe privately opining on who they think is smartest on particular topics? You could develop a really cool product that would be unique to each individual because what you see, Tim, would be different than what I see because it starts by who you trust. And then what you see is there. Anyway, I think that's a really interesting concept. Yeah. I wonder if Twitter could actually use the literal page rank by correlating verified

Starting point is 01:13:13 accounts, although that's become kind of unusable for me because it was kind of pay for play for a while. So it's difficult to filter now. But if people have websites that are their personal websites, just looking at the page rank, it seems like from a computing side, pretty easy to do. One thing Twitter could do that would just be super industry is create a leaderboard for every topic under the sun. And then the things you could build once you had that would be super compelling. Yeah. Let's talk about Twitter, specifically a tweet thread, and feel free to amend this, but I'd love to have you walk me through this particular thread. This

Starting point is 01:13:54 is from spring of 2022. It's not that long ago. And here it goes. So there are four points under an intro, and I'll just read it if you don't mind. So an entire generation of entrepreneurs and tech investors built their entire perspectives on valuation during the second half of a 13 year amazing bull market run. The quote unquote unlearning process could be painful, surprising and unsettling to many. I anticipate denial. Number one, and maybe we could just do these point by point. Well, we don't have to, I'll do two at a time. Number one, and maybe we could just do these point by point. Well, we don't have to. I'll do two at a time. Number one, previous all-time highs are completely irrelevant. It's not quote unquote cheap because it is down 70%. Forget those prices happened. Yeah, I screwed myself on that first one. Second one, and valuation multiples are always a hack proxy. Dangerous

Starting point is 01:14:40 to use. If you insist, 10X should be considered amazing and an upper limit over that silly. So let's sit on those two for a second. Would you mind just expanding on either or both of those? There's an unfortunate reality in the venture world that really became very crystal clear to me through a conversation with Howard Marks, actually, but it's structurally set up. You know, people talk about boom, bust, and cycles, but this is set up more like a sawtooth. So, risk on happens very slowly, almost like the roller coaster, nink, nink, nink, nink, nink, nink, going up. But when it crashes, if it's interesting to you, I explain or do my best job of explaining why it's structured this way. When it crashes, it happens all at once. So it's more like a sawtooth than a sine wave. And it just crashes and it's painful.

Starting point is 01:15:35 And that just happened. And it happens. It looks like it happens every seven to 15 years, you know. And I thought this was going to happen six years ago. I even wrote some things. I was way early. It took six more years and it got ridiculously crazy, but it took so long from 09, which was the last kind of, and 09 wasn't as hard to reset as 01, but from 09 to 2013, because so many entrepreneurs are young, you had people grow up that had never seen a reset. And risk on is a lot like the boiled frog.

Starting point is 01:16:13 You don't know what's happening. Would you mind just quickly defining risk on for people listening? What do you mean by that? So the community as a whole takes on more risk gradually without realizing they're doing it. And their mental models and their frameworks adjust daily to what's happening. And so their thought about how the world works is really a window of five years or maybe three years, not 30 years. For many of them, they don't have the 30-year perspective. And when the going gets good, greed takes over and you weigh the data points that feel good to you and are going to make you the most- A lot of confirmation bias.

Starting point is 01:16:55 Oh, like crazy. And so then you've shortened your window to the last 12 months. This is how the world works. And because things got so sloppy with interest rates being near zero, speculation so high, money everywhere, we taught a lot of people not only valuation things that will never be true again, but like growth at all costs, like spend as much money as you can. You can raise money every nine months if you want to, because you could. You know, the failure nine months if you want to because you could. You know, the failure rate of companies in the five years prior to this reset is probably like super low. Probably the lowest it's ever been, failure rate of startups, just because it was so easy to raise money. And so you develop mental models and then the world shifts dramatically, 180 degrees, whatever you want to say.

Starting point is 01:17:45 Like, it couldn't be more dramatic how fast it shifted. And, you know, even today, entrepreneurs will say, well, I just need to hold on until things get back to normal. And I'm not the only one. There's other VCs going, this is normal, dude. Like, that was a fantasy you were in. And you need to forget it fast. But you can't and there's another painful thing that i i don't even jest about because it's a real it creates real problems

Starting point is 01:18:11 and it's actually quite unfortunate but founders whatever that peak valuation is they ran the math where they took their ownership they multiplied it by that number and they thought about they're not worth that way and that can just be super destructive once it's no longer true. You mean psychologically destructive? Psychologically, yeah. I think it's super difficult to come to terms with once you've been through that. What do you mean by valuation multiples are always a hack proxy? So this gets into some of the earlier stuff we talked about, just about how deep you go on investing history and understanding investors. But if there is a scale of financial sophistication between one and ten, and you would say a really smart person in New York is an eight and a half, the average Silicon Valley person on financial literacy is a two.

Starting point is 01:19:03 And it's funny because they make fun of Wall Street, but it's just out of ignorance. They don't know anything. And so most of them think about valuation by a price to revenue multiple, which couldn't be a cruder tool. And at one point I wrote a blog post called the Keys to the 10X Revenue Club. And I took all the public tech stocks and laid them end to end based on price to revenue. And one of them was at 20 and one of them was at 0.1. And it was just a big curve. So there's no line there. There's no reason to believe that price to revenue is how you should value anything.

Starting point is 01:19:41 But it's how just because it's easy and these companies are young and immature, it's hard to do a DCF. It's hard to do something more sophisticated. It's the common language of the group. But things changed overnight. And so someone was pointing out, I think, on Twitter that and they use price to gross margin instead of price to revenue. Still, Twilio went from 70 times gross margin to three in a very short window. I mean, talk about valuation reset. That is just radical.

Starting point is 01:20:14 And so it shakes the industry. And no one's going to feel sorry for Silicon Valley. I'm not trying to elicit empathy. But just in terms of understanding what happens it is so foundational the change is so radical that the best thing you can possibly happen is if you can adjust your mental models fast and get on with the new world but it's very hard for people to do and that's and by the way what i write that this kind of stuff in part to help the industry. And I'm super grateful Sequoia in 09 put out, there's a famous deck they put out,

Starting point is 01:20:49 So Long Good Times or something like that. And these things help people adjust faster. Having structure, having smart people tell them it's okay, it gets them there faster. That I think relates to number three. And you mentioned DCF just for people who don't have that reference discounted cashflow. So number three is you may be shocked to learn that people want to value your company on FCF. That's free cashflow. Am I getting that right?

Starting point is 01:21:15 Yeah. Yep. And earnings, Facebook trades at 14 times gap EPS. Am I pronouncing that correctly? Yeah. Yes. And is growing 23%. What earnings multiple are you assuming? So could you just walk us through that bullet? I'm going to use a little bit of detail so that you can understand. I am that best of two on the financial literacy. If you think all companies should trade at 10 times revenue, here's one of the most successful companies of all time that is producing massive amounts of positive cash flow and gap audited earnings that's trading at a very low multiple of those gap earnings. And earnings are a small percentage of your revenue, right? So if you're

Starting point is 01:21:58 trading at 10 times revenue, you're probably trading at 50 times earnings, right? And here they're trading at 14. Or you may not even have earnings because there's a great graph. We should try and find one so someone can see a link of the percentage of companies at IPO that are profitable. And it's this nice cyclical wave that goes with these boom-bust cycles. We'll find it and put it in the show. So Wall Street does risk on also, right? And so in really dark times, the percentage of companies IPOing that are profitable is like 90. But by 2020, 2021, that number is 5%. Like the vast majority of companies are losing money as they go public.

Starting point is 01:22:40 And Wall Street's encouraging that behavior. And so I've often said Wall Street is the buyer of what venture capital produces. And if Wall Street wants high growth money losing businesses, we will create as many as they can possibly consume. Those are a lot easier to build than the profitable ones. Way easier, which is part of the cycle. That's part of why you end up in this cycle thing. So anyway, the point of highlighting that is just to try and get entrepreneurs and founders reset on where the world is today. Why did you, and I'm sure a lot of people listening will think this is a stupid question because they already know the answer, but why did you highlight Facebook in the way that you highlighted Facebook? I think on a historical basis, Facebook is trading at a very low multiple. It looks like a very cheap stock. I mean, Coca-Cola, you know, for years traded at 30, 35 times earnings. Facebook's at 14 or meta, whatever they like to be called.

Starting point is 01:23:41 And 23% is a pretty impressive growth rate for a company of this size. Yeah, for sure. Like Coke is less than 10% growth, like five or three. Since you mentioned meta, what do you think of, I mean, on one level, I really have to admire the just doubling down on the metaverse. What is your take on this sort of direction? So years ago, you know, I read Snow Crash when it came out. Oh, so good. Thought it was the best thing that I'd ever consumed. And I was in Hook, Line, and Sinker.

Starting point is 01:24:14 And so when Philip Rosedale started Second Life, I was knocking on his door. I served on that board for 12 years. I have immense knowledge on this kind of immersive stuff and philip and i actually did a post-mortem podcast recently which is i would point people to cool but what we found is i think there's a difference between the kind of gaming stuff and this idea that people want to live experiences like they do in the real world in this virtual world and what we learned in that second category you know i see this in the facebook demos and stuff like oh we're going to do a board meeting in world or whatever is yeah that that doesn't make a lot of sense like the the number of people that love escapism first of all young people do yeah you don't want to wait in line at the postal office in your second life right right well but but young people do it

Starting point is 01:25:20 they role play a lot yeah and so yeah that sense. And then a handful of adults do it. They have wooden swords in the park. Burning Man is that experience. But it's not a high percentage of humans. And one thing we found quite interestingly is a lot of the people that love it are looking for an escape. So they may actually have mental health problems or they're in a tough spot in their life. And it reminds you that both Snow Crash and Ready Player One were dystopian novels, right? People were escaping a world that sucked. And so we did

Starting point is 01:26:00 a bunch of in-world board meetings. And this is pre-Zoom. Like Zoom is an amazing substitute, which is one of the frameworks from competitive strategy to the notion of being in-world. And so it got even harder, right? Because Zoom, I think Zoom's way better for a board meeting than making everyone get an avatar and sitting around. And I just don't think that's going to happen. It's a long answer, but I think the premise they have is wrong. I don't think this becomes the next platform, the next smartphone. I don't see that. So how do you reconcile that with the position that they're trading cheaply? I guess if that's just based on the math. Oh, I think Wall Street's on my side on this one. I think if they shut down the VR effort, not only will the profitability would soar because they're

Starting point is 01:26:52 spending real money, like $5 to $10 billion a year, but I think the stock doubles. Doubles. Yeah. Where would you suggest they redirect their resources? I won't even take credit for this because people are saying it all over twitter there's really good buzz on some of their ai tools and the world's super excited about that yes they are my god look at uh open ai and the microsoft investment and so on i mean it's incredible longer conversation but i think whatsapp has some interesting things going on you know whatsapp in india could you give a teaser if you read about whatsapp in india it has a similar place in the world that we chat does in china like they've

Starting point is 01:27:37 accomplished more so those things are more interesting to me. Yeah. So I'm curious, you know, I've had Mark Zuckerberg on the podcast and he's a man of strong conviction. I'm curious from your perspective, like zero to a hundred percent, where would you put the likelihood that he would ever can the VR efforts and redirect? A lot of people love to discuss this. And you know, what's that other,

Starting point is 01:28:04 there's a bias. Like when you get pot pot committed maybe that's confirmation bias too but like you like if you've already bought something you like it way more than oh yeah sunk caught yeah it's super hard and he's had people telling him what i just said for two years now so it's interesting because if you look at other big bets like that, I think the two most amazing are AWS and Android. They were both kind of out of left field, not part of their core business, but super successful. And I just, I think you've already run the clock. You've already spent way more than either of those did in the development of those

Starting point is 01:28:45 things. And you just don't have the numbers. There was a thing going around Twitter that the year-over-year sales of headsets is down globally for the industry. It's not happening. All right, let's hop to number four. So revenue and earnings quality matter. Could you please explain the word quality? That's like a nuanced thing. Like if you talk to someone who'd been investing on Wall Street for 15 years, you could talk about revenue or earnings quality and they would know exactly what you're talking about. But it's not something the average person would know. And that blog post, again, that I wrote called The Keys to the 10X Revenue Club, I go through like 12 different things that signify quality.

Starting point is 01:29:33 Okay. And we'll link to that in the show notes. Yeah. So, I mean, a simple one is margins. used cars and your revenue is the price of the cars you're selling, but you're only making 10% on a car, that's really low revenue quality compared to a SaaS vendor with 90% gross margins. Their incremental dollar of revenue creates 90 cents of gross margin. Yours creates 7 cents of gross margin. You can't value those companies both on price to revenue. They're very different. So that would be revenue quality. Earnings qualities typically relates to cash flow.

Starting point is 01:30:13 So you might have really good gap earnings, but because of different factors in your business, your cash flows may not be nearly as good. It could be timing differences, those kinds of things. And so anyway, you go through the posts that I wrote, but they're just elements of whether or not you have a competitive advantage, whether or not you have churn in your business. Is this customer going to stay around forever or they might leave tomorrow? One of the reasons Coca-Cola trades at a high multiple is everyone imagines Coke will still be here 50 years from now. They have no reason not to believe that. Whereas some of these tech companies, you know, why is Facebook at 14?

Starting point is 01:30:51 They don't know. Could TikTok, you know, take away their business and then they're done overnight? Those become bigger risks for tech companies sometimes because they look like they might be disruptible. You mentioned, and you also write about and speak about competitive advantage a lot. What are some lesser known or undervalued competitive advantages? I mean, we already talked about network effect. Like that's one that just comes to mind right away. Lock-in, we had hinted at,

Starting point is 01:31:18 like, is there reasons why switching costs, which is also, you know, back in, it's in the Porter book, like, are there switching costs that make it hard to leave for a customer to leave? You know, how many substitutes are there for your product? How unique is it? Right. That's a competitive advantage. Like, are you an N of one? And some of the network effect companies become that way. Like I could create an Instagram competitor, but I don't have everyone on it. So the user experience is a function of everyone being on it. So it's hard to compete with that thing. So you have a strong competitive advantage. It could be performance, like in an enterprise product, you look at

Starting point is 01:31:54 something like Snowflake, people just say this, this database does things no other database will do. And so then that becomes a competitive advantage but it's how hard is it for someone to find an alternative to you and trade you out is the easy way of saying it this is not directly related to competitive advantage but i wanted to just revisit the total addressable market and your open table story with the spreadsheet or the model that had been capped at 17% and you're like, we're going to 99%. It's not 70%. Just to reflect back also on Uber, since you and I were both along for that, right? Pun intended. And in the early days, there were three black cars, two or three black cars in the very, very early days, sort of prototyping. And I remember sitting with Garrett and looking at some of the potential market sizes,

Starting point is 01:32:54 but the assumption always was that the pie could grow and should grow if Uber's functioning effectively. And that's what ended up happening. So can't say you know there are 700 black cars in san francisco what percentage of those will use uber and the upper limit is 700 because then in the matter of a handful of years you have a thousand plus yeah black cars because of the rider demand so i just wanted to mention that since you also mentioned it earlier yeah i wrote a very long piece on this because there's a famous, I think NYU professor, Aswath, his last name's not coming to me right now, but he's famous for valuation work. He's always on CNBC. And he wrote a piece that said Uber wouldn't be worth more than,

Starting point is 01:33:38 I don't know if it was two or $3 billion. And I wrote a reply called how to miss by a mile. Oswath Damodaran, I believe. Yeah, he's wonderful. I called him before I published it just to tell him it was coming, but it was a classic mistake. He basically took the taxi market and said, that's the upper limit. And that's just the wrong math. Like we made, or Travis and the team made this thing so convenient and so available that it was a product that's 10x better than the taxi market. By the time I wrote that, I already knew that Uber in San Francisco was 20x bigger than the taxi market in San Francisco. So I already knew he was wrong with that analysis.

Starting point is 01:34:21 We'd already blown through it. But he didn't know that. And I mentioned in that article, there's a couple of classic examples of this. There was one where McKinsey was hired to calculate the global market for mobile phones and came back with $900,000 as the upper limit. And I have found you get into more trouble with this kind of tam conservatism if you feel like something's super disruptive and it's unlocking things your optionality to build on top of that's going to be pretty spectacular it makes me think of esports versus any comparable you might use with i don't know live viewership of sports or whatever it's just not it's just not the same thing. So that was the one through four points.

Starting point is 01:35:06 Jeff Bezos, I think, retweeted or replied to that tweet thread. It was very complimentary. You have spent time with Jeff. What do you think are some of the most underappreciated aspects related to Jeff in any capacity? Well, he's probably the best entrepreneur that I've ever been around or got to know. It's remarkable and it's multifaceted. Here's one that I think is not well discussed. So he has a bunch of traits that make him a great entrepreneur. The company today is at such a radical scale that there's no way, and he's in the chairman role, like he's not touching all the decisions. He's not touching all the product decisions. He has built a organizational framework to take what Jeff Bezos believes

Starting point is 01:36:00 and run the whole company that way. And that's not well dissected, not well understood. But here's a great story. I'm riding in an Uber. This is about eight years ago, maybe seven. And I always talk to him. I always talk to the drivers because I'm a shareholder and I always talk to the drivers. And I'm asking him, you know, something about whether we can stop. He goes, well, I got to get back down to San Jose by two 30. And I'm like, what happens at two 30? He goes, I have to meet at the Amazon warehouse at two 30. I go, what's going on? He goes, oh, they got this new program they're running where you show up at two 30 and they have all these burner phones and they load your car with packages and give you a manifest.

Starting point is 01:36:49 And then they book the ride over Uber. And so this was the early days of same-day delivery. And this is a company that's worth tens, hundred billions of dollars that is running an experiment on top of Uber. And I know for a fact that most of the companies I've worked with that have gotten over 20 or 30 million in revenue would not run that experiment because someone would say, oh, we won't know how to do the accounting. We can't like, that's too much of a hack, like whatever. But this large company was super comfortable running this kind of hack experiment on this other company. And he showed me the manifest.

Starting point is 01:37:35 I looked at all this stuff. Of course, I called Uber immediately thereafter and briefed them that we were being used in this way. But unbelievable, right? I mean, just unbelievable. No other large company would do that project. None. Zero.

Starting point is 01:37:50 And so somehow he's institutionalized this kind of experimentation and risk-seeking. And he's talked about it. There's a great interview with him from Code that you should try and find for the show notes from four or five years ago. And, you know, I could watch it over and over and over. It's like the Eagles documentary. I could just watch it again. That would be okay. But it's fascinating.

Starting point is 01:38:15 They ask him, when does the internal experiment get killed? And he said, when the last person with good judgment gives up. And that's not how other big companies work. They don't run experiments that way. In fact, one of the reasons startups can compete with big companies is because most big company experiments, they run one test. And if it fails, they quit. And a startup can't quit because they have to shut down if they quit. So they run experiment one and

Starting point is 01:38:46 two and three and four and five, and then they pivot and do six and seven and eight and they stay up all night because it has to work. And so they just get way more shots on goal than the big companies do. Bezos is also someone who's chronicled a lot of his thinking and decision-making frameworks in letters to shareholders. And there are some compilations of his letters, much like Warren Buffett. Yeah, they're very good. Very good. To give one example, I mean, it can be highly tactical. So, I mean, the reason that people who would call internal meetings would be required to put together, I think it was a six-page document.

Starting point is 01:39:23 Yeah, yeah, yeah. meetings would be required to put together. I think it was a six-page document. And the first 30 minutes of the meeting would be spent reading this meticulous document and all of the reasons for why that was instituted. I mean, it's very concrete. It's not sort of ambiguous, hand-wavy stuff. So I definitely recommend people check that out. By the way, and that mirrors back what we talked about earlier about writing and thought process. Like if you're forced to write a six page paper, it's much harder to put that together than it is a five page PowerPoint. It's easier to leave stuff out. You really have to think through everything. He's also, I mean, he's super curious beyond belief. He's willing to change his priors super fast if he got something wrong. Yeah, it's something else. I mean, I think AWS is maybe top five business move in the history of the world.

Starting point is 01:40:16 I don't even know what just the notion that they launched that out of a consumer internet company and became one of the most important enterprise companies. It's fairly unprecedented. It's just amazing. Yeah, it is jaw-dropping. And for people who want an Easter egg, if you have not learned of this before, go to relentless.com and see what happens. It will forward directly to amazon.com. That is not accidental. So is there anything else that you'd like to say about the recent events and sort of correction slash implosion? Or do you feel like you've said what you would like to say on that? There's one last comment I would make. It was interesting. I was listening the other day to a podcast with Shane Battier, who I've been fortunate enough to meet. He's the, I don't know who that is. He was famously outlined by Michael Lewis as the no stat all-star in the New York times magazine. He's an NBA player, really successful that kind of rode

Starting point is 01:41:18 the analytics craze and did things that most people don't do. But when you ran all the numbers, like he's always winning and that kind of thing he played at duke and and has a ring you know from from the nba and anyway he's now starting to dip his toe into the corporate world and so he did this podcast kind of a crossover but he's he was talking about sheshefsky and how shesski, you know, he spent four years there. And so he had a lot of stories, but I was listening and nodding because you've had great coaches on, right? You've had great players on that have played for great coaches and these learnings can be translated, right? And so he's saying, you know, Coach K told us that he expected the very most

Starting point is 01:42:03 out of us. Each individual had to perform at their highest level. He said, it's always team first. If you need to be an individual, you don't need to be here. And Shane was talking about how people remember the winners more than they remember whether you were the third or fourth scorer on a team. Like they remember the winners. And I think that's true in startup world as well. And then, you know, he said there's a singular goal for this organization and it's to win the national

Starting point is 01:42:29 championship. And like those three tenants, you know, he's talking about relative to Coach K. And I'm like in the middle of nodding and I was writing stuff down. I'm like, oh, I'll go talk to people. I'll go forward this podcast. And then I stopped cold and I realized in 2020, 2021, if an internet entrepreneur stood up and said those things out loud about what he wanted from his company, he might get canceled. Company first. You have to perform at your absolute best. And the only goal here is the one goal, you know, the corporation. We're all on a team together. We wandered to a place that's very different than that. And on your recent podcast with Jonathan Haidt, he started to talk about the, I think you were using the word anti-fragility,

Starting point is 01:43:17 but like how this had crossed over from the campus world and these people were now, these younger genes. Right. I was asking him how to develop intellectual anti-fragility, and he was giving the counterexample of what we've observed. Right. It's happened in the university, and this did get out into the companies. And so these companies were being basically held accountable for delivering an experience for the individual. It's like your goal as a company is to help the individual have a great life. And I think it's very hard to be high-performing. Imagine if Coach K had that problem. Like he had to make sure everyone on the team felt happy and safe and included.

Starting point is 01:44:00 And that was true north. It would be very hard for him to be performing. I don't think he'd want to coach the team. And we've lived through a little bit of a reaction to this. So Brian Armstrong at Coinbase has very publicly spoken. I think Toby at Shopify took a little more nuanced stance, but the same stance that we have one objective here, which is this company. And if you're hyper passionate about something else, that you got to talk about it all the time at this company, maybe you should go do that full time.

Starting point is 01:44:33 But this performance awareness had kind of gone away because of everything I talked about. It was so easy to survive as a company. And now we're in a world where I think, you know, you got to make hard choices. You got to do what hard choices. You got to do what's right. You got to perform. And so it'll be interesting to see whether someone can act in this way without getting, you know, negative. And Brian took a lot of heat, you know, for what he did. Yeah. It seems to have passed pretty quickly. I mean, he was able to weather the storm and take the heat, but it was pretty short-lived.

Starting point is 01:45:07 When I talk to executives at the bigger companies, the ones we all know, they're dealing with this stuff on a daily basis. Non-stop. Non-stop. And it's very similar to what's happening at the university level. And so it's just super curious to me. I've always been one of these. I played sports in high school and college, and I'm always, when there's a winning team and the coach writes a book, I've always ran out and read it and made it part of my mental

Starting point is 01:45:31 model. So it is kind of interesting to see where we are. What do you think the future of, and this may not be, you tell me if this is a question with some there, there or not, but what do you think the future of e-commerce looks like? And since you mentioned Toby, I'm a huge fan of Toby. I mean, I was an advisor to Shopify super early when they had about 10 employees. And I just think he's one of the most incredible humans out there. But where do you think Shopify fits in or doesn't fit into that?

Starting point is 01:45:59 It seems like with some of the Apple privacy changes and all these various things, the landscape has changed super dramatically. If you try to look into your experience slash crystal ball to look forward at what e-commerce looks like. At the end of this, I'll tell a quick Toby story that I think is a wonderful tool that people can use. And he gave me permission to share. So I thought what they did

Starting point is 01:46:26 with the shop app was super cool. So the previous Christmas, I started noticing websites I'd never been to before, knew who I was and allowed one click checkout. And very few companies can make their business as a B2B company and then have this crossover product, which has a consumer network effect. And they did that with that app. And I thought it was just super cool that they pulled that off. And so, look, he is one of the truly greats. And you've interviewed enough of these people, like when you're with a Bezos or a Toby, you kind of know it, right? Yeah, it's different. And Toby's been on the podcast. I recommend people check it out. Yeah, it's just a different feeling. Yeah, yeah. And they're hyper curious. They have their own

Starting point is 01:47:15 mental models. They're willing to learn new ones. They're constantly thinking and they've built some type of organizational fabric that's scaling, which is another element. Here's the one he shared, which is one of my favorite ever. So he said, whenever we're dealing with a problem and we call a meeting to talk about the problem, I always start with this structure. We are here to solve a problem. So the one option that we know we're not going to leave the room doing is the status quo. That is off the table. So whenever we finish this meeting, I want to talk about what option we're taking, but it's not going to be what we're currently doing. And I think that is brilliant because most of the companies that I've ever worked with, their default is, well, let's not change it.

Starting point is 01:48:07 If we can't get the gumption to change something, don't mess with it. And I thought it was genius. I just thought it was genius. He's also been not only an incredibly smart, effective human and leader, but very humble. And I really, I just admire him so deeply, not just for the performance of the company, but for how he carries himself in the world. I think it's just as impressive to me that he carries that much horsepower, but doesn't wield it in a overbearing way, which would be very easy to do. A lot of people do it. So thanks. Thank you, Toby. So just a few more questions, Bill. And if this goes nowhere, I'll take the blame for it. So aside from the books that you have mentioned, are there any books that you have gifted frequently to other people?

Starting point is 01:49:07 Yeah, there's three books I would mention. So the first one that I've gifted the most is called Complexity by Mitchell Waldrop, which is about the rise of the Santa Fe Institute. And even when you were talking with Haidt, I think he mentioned certain things are complex adaptive systems. They're very hard to predict. They're very hard to analyze. They're very hard to analyze. They're very hard to understand. And that's what Santa Fe is all about.

Starting point is 01:49:29 And that book introduced me to network effects. When I get to go there, I usually go a couple of times a year. Mike Mohsen's there and Josh Wolf's there from Lockston. I just love the learning of things I don't know and just like pushing my brain to go farther than I would with the normal stuff I consume. And it's beautifully written. Great writer, Mitchell Waldrop. There's a book that I happen to have right here. This book, Mr. China, is fantastic.

Starting point is 01:50:00 He went to China in the mid-90s and started a fund to privatize a bunch of industries he's from london and got his head handed to him and survived enough to write a humorous story about it but holy shit you know so it's kind of it sounds kind of like the red notice by bill browder equivalent but but in China. His life didn't end up getting threatened. He did go to jail, but I read Red Notice also. Red Notice, yeah. There was no death involved.

Starting point is 01:50:33 This is more of a business book and a know what you don't know and what can happen to you when you go into foreign lands. And then the book that I've been fascinated with the past five years, four or five years, is Epstein's Range. David Epstein wrote a book called Range, which was kind of a counterpunch to the 10,000-hour thing by Malcolm Gladwell, and it started by talking about Federer. But at the end of it, he got into a couple of notions that I find super interesting. So a lot of the big breakthroughs in science have come from people that have changed disciplines or changed genres, which he talks about a lot, which I just find

Starting point is 01:51:19 super fascinating. Like if you go on Twitter, which obviously there's a lot of people shouting, but your constant refrain is like, shut up. you don't know anything about this field, leave it to the people in the field. But if you study science and history, that's not actually, the biggest breakthroughs come from people that had a different middle framework and move over and then see things differently. And so I think it's super interesting. There's a professor at UCLA named Hollybrook who did a piece on something he calls far analogies, where he views it as an intellectual skill, but who can borrow ideas from farther away than where they are? Like, listen to some podcast of this person in this field and have it impact what they do. And I just, I'm fascinated by everything in that world.

Starting point is 01:52:13 So range for people who want a little bit more of the subtitle is why generalists triumph in a specialized world. And I did recognize the name because of another book, which is The Sports Gene. Yes, he wrote The Sports Gene. Inside the Science of Extraordinary Athletic Performance, which is a great book. The Santa Fe Institute, let's talk about this for a second or maybe a minute or maybe more than a few minutes. Why is that important? You've, I suppose, explained it in part. And what have you gleaned from your involvement?

Starting point is 01:52:43 Because it seems like such a prominent commitment on your part. Yeah, another individual that's been involved there for a long time and has been the biggest benefactor is a guy named Bill Miller, who was a very famous Wall Street investor. He was at Legg Mason and had a 15-year run where he beat the S&P. And I think for Michael and Bill and myself and Joshua, we, by listening and learning about analysis of these types of systems and seeing another big thing about Santa Fe is that it's multidisciplinary. So they have biologists hanging around with epidemiologists, hanging around with physicists, you know, and they all interact together. And Cormac McCarthy hangs out there, too, which is kind of cool. Yeah, that is cool. And just hearing and learning, you pick up things.

Starting point is 01:53:33 Like, it's hard for me. The network effect thing I picked up the first time I went there with Brian Arthur, and I applied that quite directly. There was a speech that was given three or four years ago about the electric grid problems that were happening in North America. And the professor that presented it at the end said the best solution is smaller communities that are loosely coupled. And I walked up to her afterwards and I said, you just explain why the euro is a bad idea because you tightly coupled this thing too much. And you can just imagine even like a computer system that's distributed, that learning could have other application. And if it's too distributed, there's no scale.

Starting point is 01:54:18 But if it's hyper integrated, then you have this failure problem, this global failure. Right. So anyway, it's kind of an example. Do they have talks and so on online, or is it more of a closed room type of experience? They do. They do. They publish books. There's lots of stuff online.

Starting point is 01:54:35 It's cool. Okay. So last one or two questions. This one can go any number of directions, but if you could put anything on a billboard, this is metaphorically speaking, just to get a message, a question, a prompt, suggestion, image, anything out to billions of people, let's just assume they would all understand it. What might you put on that billboard? I think circa 2023 and everything that's happened over the past five or six years, I would put be less tribal, be less tribal. And I have friends on both sides of the political spectrum,

Starting point is 01:55:11 and I can't imagine an activity that turns off more brain cells than tribal affiliation. All the books that have been written on bias and all the Kahneman and Takeshi and like thinking fast and slow and all the Nobel Prizes for that stuff. I think political bias is stronger than confirmation bias, sunk costs, all those things. And people are just turning off their brains. And it's both directions. And it's not just the fringe. It's not just the populace like it's people that just affiliate and then they don't think they don't listen and it's both sides i'll give you an

Starting point is 01:55:52 example gerrymandering horrible they both do it it's horrible just say it's horrible but they don't they say oh look those guys are horrible when they do it. Capture is horrible. And on the Republican side, that's banks and big pharma. On the other side, it's unions, the teachers union and the police union. George Floyd probably doesn't happen if the police union doesn't have the power they did because Derek Chauvin would have been off the force. But the police union protected him. And if you're on the left, you can't say that. You can't make that statement. You can't be anti-union. And it's just stupid for people to turn their

Starting point is 01:56:29 brains off this much. Anyway, I'm passionate about this. So how would you suggest, let's just say you were teaching, you're a good teacher, you've spoken to students. If you were to give a presentation on cultivating anti-tribalism, probably have a sexier headline to it, but what might that lecture or class contain or blog post? I think the first thing I would try and do is just highlight the fact that people are turning off their brain. So the way that people have shown, like proven how confirmation bias works, how loss aversion works, how like there's 20 different cognitive biases that we're all aware of. So the first thing I would do is just run some stuff. There's been stuff done.

Starting point is 01:57:17 And then why does anyone want to be intellectually inconsistent? If you think it's an ends to a means, then you're just in a fight. You're just in a fight. You're just in a fight. I don't even want to have a discussion with someone if cheating on your spouse and philandering is okay when your side does it, but it's so horrible when the other side does it. What's your principle? I don't understand. Anyway, I would try and get people in touch with the fact that they're doing it. And then I would just highlight that our government's far from perfect. And so most tribal people view their side as near perfect. And there's no sign of that anywhere.

Starting point is 01:57:55 By the way, there are a few orgs that I'm starting to learn about, nonprofits that give money to centrist candidates or things like that. And I think the world, if you could go back 30 years it was just more collegial like across the aisle i mean you mentioned twitter a number of times i feel like twitter incentivizes for polarization just with the mechanisms at work. And you're a good writer. I wonder why you post so much on Twitter, which seems so impermanent compared to a blog post. Just the durability of the signal seems to wane so quickly. Why do you now post more of your thoughts to Twitter, say, than in longer form? Probably because I'm old and I don't have the concentration that I used to have to get to work.

Starting point is 01:58:52 So you brought up two subjects. I'll answer the second part first, and then we can talk about the tribal stuff. So I find Twitter just to be super fascinating as your ability to get close to experts, leaders in your field. 100% agree. It's unbelievable. More so than LinkedIn. And there's a chance that some reply you give to them, they might like, or they might follow you. And now you've developed a mentor or a peer partner. It's really just shocking, amazing the amount of information you can take out of this thing. I'd say a third of my podcast guests come from Twitter interactions and then DM.

Starting point is 01:59:33 Oh, yeah. And that's something you and I may feel that most people don't know. But if you develop a massive following, DM becomes this magical place where about half the time someone asks me if I can help them recruit someone, that person follows me. So now I can just start talking to them right out of the gate. There's a protection too for high profile people in DM because there's no personal information that is exchanged, right? And they can always block you if they get sick of you. And therein lies the safety. So you can also, if you're trying to interact, and I don't do that that much, but interact with, say, A-list celebrities. Well, it's like, okay, you can try to wade through this phalanx of agents and managers and publicists and just take two years

Starting point is 02:00:20 to try to get a message to someone, or you can just DM them if that gate is open. There's a book idea that I'm working on. And one of my core beliefs is that in this day and age, circa 2023, your ability to rise up in any industry or any particular endeavor is so much easier than it ever was before because your ability to get close to the mentors, leaders, best practitioners, and learn from them is unlike it's ever, ever been before. And add in hybrid work, maybe you can work for a company that's not even near you. It's really awesome for people that want to pull themselves up on the tribal thing yeah you and hate went deep on this and he's way smarter on it to me but it does reinforce performance

Starting point is 02:01:12 it's uh it's too bad let's double click on performance so recent conversation with james clear and i'm going to paraphrase him but he said you know who you are and the decisions you make are downstream of the information you consume in in a sense. So you should choose your sources of information very carefully. And I would tend to agree with that. I'm pretty selective. Are there any newsletters you subscribe to or read regularly or writers you follow regularly? Not in book form, but in a more regular form, frequent form. Yeah. Eric Newcomer does a venture capital sub stack. And so just being in the industry, that's something to follow. There's a website called Tech Meme where Gabe has this curated news rank, including Twitter comments people

Starting point is 02:02:02 have made about that article. It's just, it's a daily. Oh, that's cool. I haven't seen that integrated. That's very cool. Gabe's a machine. Yeah, it's really well done. So in the industry, like I go there and between tech meme and Twitter, I end up on a lot of sub stacks and whatnot, but I don't,

Starting point is 02:02:22 I don't have one where I read every single thing they post. Everything's been inverted into this consumption world where the aggregator of Twitter or tech meme is kind of funneling what I find. And then I go do those things. One of the things I think Twitter should do is define a long form bucket container, a podcast container, and a video container, and then have pocket-like features where if you see something like that, you store it, and then it queues. I mean, that's one of the benefits of Spotify as a podcast listener is I think it queues and organizes easier than some of the others. If there's anything more you want to say about the book, or do you want to keep that

Starting point is 02:03:08 under wraps largely for now? Is there anything else you'd like to say about the work in progress? There's a speech I gave at the University of Texas that you could put in the show notes because it's out there. And it's talking about chasing your dream job and how to succeed and thrive at your dream job. And I've done some research since I gave the speech because people have encouraged me to turn it into a book. And some of the polling we've done shows 70% of people have career regret. 70%, which is a huge number. And so we're doing some more work to better understand that and how people end up in that place. But the punchline, which I hinted at earlier, is I just don't think there's ever been a better time

Starting point is 02:03:49 to have a self-determined job process if you want. And the tools are better than they've ever been. And there's way more detail in this thing. But it was built off of studying the biography of a very unusual set of people, Bobby Knight, Bob Dylan, and Danny Meyer, the restaurateur, and seeing similar patterns in how they attacked what they did. Just out of curiosity, if you had to give, or had to, if you were invited to give and agreed to give a TED Talk, but you couldn't give it on venture capital, couldn't do investing, couldn't do career advice. What might you give your TED Talk on? Probably regulatory capture. Okay. I have this core belief that capitalism and democracy will eventually destroy one another.

Starting point is 02:04:38 Could you also just define regulatory capture at some point? You don't have to do it right now, but yeah. Yeah, I do. I mean, there's a Wikipedia entry for it. Just the basics for folks. There's a famous professor from Chicago, and I forget his name, like 1958, that wrote this seminal report. But basically, in a heavily regulated industry, the incumbents typically end up being the ones that write the legislation and typically lock themselves in, build competitive advantage, build a moat, back to Michael Porter, through the use of legislation and make it harder for startups to break in.

Starting point is 02:05:11 One of my favorite examples, the Obama administration came up with this program where they spent $44 billion paying doctors to implement EHR systems. And the idea that you would pay someone to implement software when you need to do it on your own for your own competitive survival. But there was a healthcare advisory board. The CEO of Epic sat on that board, and they came up with this program. What is Epic? It's the leading provider of healthcare software. Yeah, exactly. It's not, but like, and then once they came up with this program, the thing that you would obviously think is, well, what's wrong with paying someone to use software? Well, they probably won't use it.

Starting point is 02:05:57 So then they put up like another 20 billion for the second phase called meaningful use, where if you proved you were using the software you got paid to implement, you get another check. And it's mind numbing. And this stuff is everywhere in our government. Like I said, both sides of the aisle, everywhere. And, you know, Citizens United did not help. It made it way worse. And our government would be way better if you could somehow extract these powers from the government. So if you could wave a magic wand and get some things moving to act as some countervailing force to reduce regulatory capture, what would you do?

Starting point is 02:06:39 And by the way, we have really broken industries with the most regulated pharma, banks, telcos. These are the ones. Look at the banks. Five other industrialized nations have moved to insta-transfer run by the government between banks. In the UK, it's called UK Faster Payments. It happened 17 years ago. You can read the Wikipedia page on it. ACH in America still takes three days to clear.

Starting point is 02:07:05 It's fucking ridiculous. But it's because the banks and Visa have too much power with the Financial Services Committee, and they've prevented. Powell wants to do it. It's called FedNow. It's been on the books for 10 years. But they block it because of how we operate. The first thing you would do, and no one will agree to it, is you reverse Citizens United. There's too much money

Starting point is 02:07:29 in the system. You can go to Open Secrets, I think it is, on almost any one of these decisions, and you'll see, you can just watch the Financial Service Committee. Someone argues against FedNow, and then you look them up, and there's a big bank in their region and that big bank's the donor. It's not rocket science, but that's where I'd start with some kind of reform. One of my first experiences, this would definitely be in my TED Talk, when one of my first companies I worked on that had a potential regulatory hurdle, a lawyer told me, oh, well, you should talk to these congressmen or whatever. And so, do you want me to introduce you? Sure. And so, oh, he's going to get a phone call.

Starting point is 02:08:08 He's going to be in your neighborhood. Can you get a bunch of people in a conference room? I'm like, what do you mean a bunch of people? I just wanted to say hello. No, I need you to get 15 people in the conference room. I go, why? And they all need to bring the minimum check that they, or the maximum check, I'm sorry, that they can donate. And I'm like,

Starting point is 02:08:26 really? So, so I call a few people. I felt horrible. Like, Oh yeah, you got to give 10 grand. I just want to talk to this guy. And then,

Starting point is 02:08:34 and then a week before they show up, they go, you know, your spouse can give to tell everyone their spouse can give. And so this happened to me three times, three times to meet someone in Washington. So dirty. You need to get a hundred grand together, like just to have the first meeting.

Starting point is 02:08:51 And that's real. That's a great speaking fee. Yeah. Yeah. No, that's how it works. And so, I don't know. You look at things like the healthcare system, they're just so messed up. It's not a free market,

Starting point is 02:09:10 and it's not single payer. It's the worst of both, and it's the best of neither. So if democracy and capitalism are on this annihilation crash course, I mean, what do you think? I know this is, look, we're talking about very complex systems and all sorts of tertiary effects to who the hell knows. But what do you think the U.S. looks like in 10 or 20 years? And conversely, are there any countries that you would be really long on? I mean, despite their current situation that some people hold them against, I think the U.K., which is much older than us, has done a better job than we have. With what? Just for clarity, what have they done a better job with?

Starting point is 02:09:50 I think less regulatory capture. And one particular thing they have that is super clever and will cause every lawyer in the world to hate me, they have something called losing party pays. Oh, yes, absolutely. I'm astonished that the US.S. functions the way it does. But yeah, please continue. And so we live in the United States of litigation, and a lot of the friction that exists that slows down the gears and messes things up is because of the vigilante nature of our legal system. And losing party pays just makes the number of

Starting point is 02:10:28 initial litigations filed drop by 10x. Losing party pays. Yeah. And I mean, does the UK allow its barristers to have contingency fees or they must have some type of upper limit on that that is much lower than the US. Before I give my TED Talk, I'll go a little deeper. All right, regulatory capture. Bill, is there anything else you'd like to say? Any closing comments, recommendations, anything you'd like to point my audience to or ask them to do? Anything that comes to mind at all that you'd like to mention before we close? I think I'm good, man.

Starting point is 02:11:03 I think we hit on a lot of different things. Yeah, we covered a lot and thank you for the time bill i really appreciate it this was great and for everybody listening we will put together extensive show notes linking to everything we talked about and you can find that as usual at team.blog slash podcast and until next time be just a bit kinder than is necessary and experiment, experiment, experiment. Thanks for tuning in. Hey guys, this is Tim again. Just one more thing before you take off and that is five bullet Friday. Would you enjoy getting a short email from me every Friday that provides a little fun before the weekend between one and a half and two million people subscribe to my free newsletter,

Starting point is 02:11:46 my super short newsletter called Five Bullet Friday. Easy to sign up, easy to cancel. It is basically a half page that I send out every Friday to share the coolest things I've found or discovered or have started exploring over that week. It's kind of like my diary of cool things. It often includes articles I'm reading, books I'm reading, albums perhaps, gadgets, gizmos, all sorts of tech tricks and so on that

Starting point is 02:12:10 get sent to me by my friends, including a lot of podcast guests. And these strange esoteric things end up in my field, and then I test them, and then I share them with you. So if that sounds fun, again, it's very short, a little tiny bite of goodness before you head off for the weekend, something to think about. If you'd like to try it out, just go to Tim.blog slash Friday, type that into your browser, Tim.blog slash Friday, drop in your email and you'll get the very next one. Thanks for listening. This episode is brought to you by Shopify. Shopify is one of my favorite companies out there, one of my favorite platforms ever. And let's get into it. Shopify is a platform, as I mentioned,

Starting point is 02:12:50 designed for anyone to sell anything anywhere, giving entrepreneurs the resources once reserved for big business. So what does that mean? That means in no time flat, you can have a great looking online store that brings your ideas, products, and so on to life. And you can have the tools to manage your day-to-day business and drive sales. This is all possible without any coding or design experience whatsoever. Shopify instantly lets you accept all major payment methods. Shopify has thousands of integrations and third-party apps, from on-demand printing to accounting to advanced chatbots, anything you can imagine.

Starting point is 02:13:25 They probably have a way to plug and play and make it happen. Shopify is what I wish I had had when I was venturing into e-commerce way back in the early 2000s. What they've done is pretty remarkable. I first met the founder, Toby, in 2008 when I became an advisor, and it's been spectacular. I've loved watching Shopify go from roughly 10 to 15 employees at the time to 7,000 plus today, serving customers in 175 countries with total sales on the platform exceeding $400 billion. They power millions of entrepreneurs from their first sale all the way to full scale. You would recognize a lot of large companies that also use them who started small. Get started by building and customizing your online store, again, with no coding or

Starting point is 02:14:08 design experience required. Access powerful tools to help you find customers, drive sales, and manage your day-to-day. Gain knowledge and confidence with extensive resources to help you succeed. And I've actually been involved with some of that way back in the day, which was awesome. The Build a Business competition and other things. Plus, the 24-7 support. You're never alone. And let's face it, being an entrepreneur can be lonely, but you have support.

Starting point is 02:14:34 You have resources. You don't need to feel alone in this case. More than a store, Shopify grows with you, and they never stop innovating, providing more and more tools to make your business better and your life easier. Go to shopify.com slash Tim to sign up for a $1 per month trial period. It is a great deal for a great service. So I encourage you to check it out. Take your business to the next level today and learn more by visiting shopify.com slash Tim. One more time, shopify.com slash Tim, all lowercase. This episode is brought

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The Tim Ferriss Show - #651: Legendary Investor Bill Gurley on Investing Rules, Finding Outliers, Insights from Jeff Bezos and Howard Marks, Must-Read Books, Creating True Competitive Advantages, Open-Source Strategies, Adapting Mental Models to New Realities, and More

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The Tim Ferriss Show - #651: Legendary Investor Bill Gurley on Investing Rules, Finding Outliers, Insights from Jeff Bezos and Howard Marks, Must-Read Books, Creating True Competitive Advantages, Open-Source Strategies, Adapting Mental Models to New Realities, and More

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