This Week in Startups - Rapid Fire News: OnlyFans reverses course, Circle to clean up USDC reserves, Warby Parker S-1 | E1271

Episode Date: August 25, 2021

In today's news show, Jason covers OnlyFans being back to business as usual (1:31), the stablecoin Circle cleaning up commercial paper from their USDC reserves (16:49), and does a break down of Warby Parker's S-1 as the company prepare to go public via direct listing (30:30).

Okay, we got a great all-new show for you today. I know you guys like when I do an all-new show. OnlyFans has flip-flop from their earlier position last week, and they're back in business as usual. There's a lot of interesting turns in there about banking. The stablecoin circle is cleaning up their reserves to move to a perfect dollar-for-dollar representation of their stable coin, unlike Tether. And this is a major move for Circle. And I think it's going to have a profound impact on cryptocurrency and Tether.

Finally, Warby Parker is going public via direct listing, so I'll break down the difference between DDC companies and software and direct listings and traditional IPOs. Plus, there's a little button at the end with a personal message for you. Stick with us. This week in Startups is brought to you by LinkedIn Jobs. A business is only as strong as its people, and every hire matters. Post your first job for free at LinkedIn.com slash twist. Drata. Don't let requests for SOC2 compliance reports slow down your business. Use Drata to stay ahead of the curve.

Go to drada.com slash twist for 15% off. And Masterworks, the first company allowing investors exposure into the blue chip artwork asset class. Twist listeners can skip the 30,000 person wait list by going to masterworks.io and using promo code, twist. Okay, in our first story, only fans has reversed their decision to not allow adult conduct on their membership service after getting commitments from their banking partners that they would not be shut down. We talked about this on the last two episodes, episode 1269 and episode 1270, back to back. Because it's kind of big news on the internet in many different ways. One, it kind of dovetails with Apple scanning people's phones for content that is of an adult nature.

Obviously, in that case, it's child porn. And in this case, it's, hey, there are some concerns that maybe the actors who are working on OnlyFans might not be of age. And obviously, that's dependent on what region you're in and it's a global service. So there were a lot of different theories of why OnlyFans decided to only allow adult content, i.e. pictures of yourself naked. versus adult conduct, i.e. two people or who knows what combination of people, you know, doing sexual behaviors just to keep it PG here. So this caused a lot of conspiracy theories when they made this announcement. And it actually inspired people to compete with the platform. One of the things that happens is these platforms exert pressure over their members, be it Facebook,

YouTube, or Apple's App Store. When they squeeze their partners and they get too heavy-handed in today's world because it's so easy to build software and there are so many developers and there are so many platforms, whether it's Amazon Web Services or Bubble for No Code or, you know, Survey Monkey Type Form. If this, then that, you have all of these amazing services that let you build a competitor quickly. So, of course, competitors started to emerge, Tyga being one of them, he decided he would start his own competitor, My Star, and we talked about that on a previous episode. So large investors, of course, were hesitant to invest in Onlyfans because of the nature of the business, even though Onlyfans is on pace

to do $1.2 billion in revenue in 2021, and had over $600 million of profits, according to Axios, which is a great newsletter company. So when you look at that, don't be so surprised. The fact is almost every venture capital firm has a no vice clause in it, including my own, which is LPs, limited partners who give venture capitalists and general partners, the people who make the investment decisions, they will say, hey, no vices, no gambling, no drugs, no alcohol, and no adult content. Why do they do that? Well, if you're running some giant endowment or family office, the people who are running those institutions might not want to be in those businesses. So all it takes is for one person, especially if you had money, let's say, from the Middle East,

or from a pension fund or from a university, they don't want some journalist to find out you invested in onlyfans, and now it's, you know, this very large institution is pro only fans, right? It's just that simple. And cannabis is another example. So you will have certain funds that pop up. And I've actually thought about this for a syndicate, like maybe starting a separate syndicate, just for gambling, because I like wagering, or just for cannabis, because I think that there's nothing wrong with cannabis for society. I think it's probably arguably a lot less destructive than alcohol or a number of the prescription drugs that people are addicted to. So putting that aside, that is the background of why people don't invest.

So Onlyfans, realizing their business was at risk, they went to work and they confirmed basically that the issue was, in fact, their business. banking partners. We are not yet in a world where banking can be just shifted over to crypto, nor will we in all likelihood, because regulations will emerge over time. There's just a short window right now to kind of innovate or break the rules or bend them with crypto. But the regulation's coming. We know that. And so that will mean people will probably try to use crypto for this. And I talked about that as a possibility. But it could also get banned by the government, forsaken great laws that don't allow you to use crypto to short circuit the monetary system. So here's the OnlyFans tweet.

Thank you to everyone for making your voices heard. Standard PR speak. You know, thank you so much for criticizing us. We screwed up. Second paragraph here in the OnlyFans tweet. We had secured assurances. We have secured assurances necessary to support our diverse creator community and have suspended the planned October 1st policy change.

OnlyFan stands for. conclusion, and we will continue to provide a home for all creators. It's just a lot of PR nonsense speak to basically say, yeah, we were facing the risk of ruin. We were facing having all of our banking turned off. This is me reading into it. And now, because we are not having all of our banking turned off, we're going to reverse our decision. So if you would like to do adult content again, i.e. porn, feel free. And what probably happened was Taiga or other people had banked banking set up. And then OnlyFans probably went to their banking partner and said, hey, are you banking, Taiga or these other competitors? Why can't we get that deal? Or maybe OnlyFans

said, hey, we're thinking about taking legal action against you. Any of those are possibilities. Life's in negotiation. They obviously negotiate hard because they were going to lose all their users, obviously. The announcement came after OnlyFans blamed the banks for their decision to remove sexual conduct on Friday, August 21st. Dear sex workers from the OnlyFans' Twitter account, the OnlyFans community would not be what it is today without you. The policy change was necessary to secure banking and payment services to support you. We are working around the clock to come up with solutions. So there you go.

What everybody thought was true. In an interview with the Financial Times on Tuesday, August 24th, OnlyFense founder Tim Stokely addressed the theories around OnlyFans policy change. Here's the quote from Tim in the FT Financial Times. The change in policy, we had no choice. Short answer is banks. Tim called out B. N.Y. Mellon, J.P. Morgan and a UK-based Metro Bank by name as prior banking partners that made it hard for OnlyFense to operate. And here's another quote from Tim in the F.T. J.P. Morgan Chase is particularly aggressive in closing accounts of sex workers or any business that supports sex workers, i.e. Only Fence. Stokely made it clear the previous announced policy change was only about banks. The Financial Times also noted there was some speculation around only. fans making these changes because of MasterCard having some sort of new merchant rules. And Tim in the Financial Times was quoted as saying, we're already fully compliant with the new master card rules.

So that had no bearing on the decision. More speculation that come from the assumption that only fans couldn't find investors, but Stokely said that's not the case. We didn't make the policy change to make it easier to find investors. This decision was made to safeguard funds and subscriptions from increasingly unfair actions by banks and media companies. We obviously do not want to lose our most loyal creators. So, yeah, this makes sense when you see, you know, crazy action like this,

where it happens really quick, whether it's a crypto company or an adult company or any other company, they could have legal issues and journalists have maybe 10, 20, 30 percent of the information, their detectives, they're trying to figure out what the actual story is and give credit to the founder of this company for coming out and putting all of that to bed. You wish a company like Tether would do that, right? Would come out and just say, hey, in that Tether investigation, we still don't know what paper they own, the commercial papers. Before we get into the ad, let me just tell you straight up. LinkedIn.com slash Twist, your first job posting free.

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Some other key financial figures were reported in an Axios article, the total amount that's been paid to creators since inception on O. is $3.2 billion. Wow, that is a lot of money. The projected gross merchandise value, GMV for 2021 is $5.9 billion. That's the top line, how much money came in to pay for subscriptions. Obviously, things come out of that, like the 20% cut that OnlyFans takes, as well as credit card fees, et cetera. Their projected revenue at OnlyFans for 2021 is $1.2 billion, and their free cash flow in 2021 is $620 million. According to the fundraising deck,

which Axios seems to have gotten OnlyFans is projecting to double revenue from 2021 to 2022. I'm not sure who would invest in OnlyFans. This is one of the issues in the adult industry. Finding investors, very hard. You're not going to get a private equity firm in all likelihood. You're not going to obviously get venture capitalists. So who is going to invest in a company like this?

It would have to be a high net worth individuals. who are okay with being in this business and the potential ramifications if somebody underage were to leverage the only fans platform, which, let's be honest, law of numbers, this probably, possibly or probably has happened already and people don't know it. So that is one of the crazy things about this, and that's probably why some of the other adult sites removed user-generated content. User generated content plus of, you know, platform like OnlyFans is a really dicey issue. You want to empower people, obviously, but you also have to be very careful because abuse in the system can happen.

Of course, abuse happened in the previous system. So you have to also be pragmatic about this. There will be bad things that happen on platforms at scale. OnlyFans, content creator, Bimbo Marxist on Twitter, shared their thoughts on the announcement, sex workers. If you decide to stay on OnlyFans, pull your money out as often as you can. Don't trust these melon farmers. I'm using a colloquialism for the curse word MF. Yeah, I mean, that's probably generally correct. Don't leave money in any of these platforms. Also, build your own mailing list. This is the other piece of advice I would have is, you know, tell

everybody, hey, if you want to get some extra free content, sign up over here. So in case this site got shut down, you wouldn't have to start from zero. You see people doing that all the time, creating a backup account on Instagram or TikTok in case their primary account gets canceled, or just having an email list is always the best thing to do. United Sex Workers is a UK-based organization advocating for better paying conditions for sex workers, and they commented about the announcement on Twitter, never underestimate the power of community. Together we demanded our voices be heard.

Suspended is not canceled, and Only Fans is not to be trusted. But now more than ever, it is time we come to. together and fight for our rights at work. So, uh, interesting comment there. Um, I do think that you're going to see a bunch of competitors emerge, even though creators are wary Sam lesson of the information, uh, who was recently on episode 10, 46, uh, he's a columnist and also married to, uh, the great editor of the information, which is a great news source.

I think it's like 25 bucks a month, well worth, uh, getting a subscription, uh, especially if you're pairing your only fan subscriptions down. Maybe you can get an information subscription as well. He thought this was a great, move by OnlyFans, hit the brakes, they will fly right by. Very well played, OnlyFans, Masswell Stroke to build, outrage for change, name banks, get them to cave and reverse. Interesting take.

You know, could they have handled this differently? Who knows? They probably were deep in negotiations with his banking partners. You try to solve things quietly. Then you have no choice if you're facing the risk of ruin, which is they turn off your bank accounts, which could be disastrous for OnlyFense. They had no choice but to comply. It doesn't, does seem similar.

In fact, to what happened to Robin Hood without having inside information, they've been pretty clear that they had too many customers at one point and they had partners they needed to negotiate with privately in order to resolve that issue. So this is one of the things that happens with big companies. You have non-disclosures with your partners. In other words, your banking partners,

you know, organizations you work with other business partners in the agreement says, hey, you can't talk about our deal. You can't talk about our negotiations. And that's a two-sided non-disclosure. Then something bad happens and you're trying to negotiate with it, but you have to tell your audience, your customers, hey, we have to change something, but you can't tell them what's going on with your partners because you've signed this legal agreement.

And that's just part of the chess board of being an entrepreneur. So we'll keep monitoring this situation. But I do think more competitors equals better and more sex workers owning their own platforms is better. So that's what I would like to see is somebody create a white label service. That would be the ultimate. Somebody literally create a white label service that allows you, like there's ghosts that let you make sort of a white labeled version of substack.

So you don't have to give substack your money 10%. You can just pay a nominal enterprise fee. That actually would be a great business. if somebody had a platform that worked just like OnlyFans for adult creators where you could set up shop and just pay them 50 bucks a month flat rate and then you don't have to give them a 20% commission, that would do really well. So that's a pretty good business idea. I wonder if somebody's already doing it.

I think somebody should look into that. All right, big news in the stable coin space. And I think we get a little bit of credit for this here at this weekend Startups Circle, which runs U.S. a stable coin that competes with USDT, Tether, which many people believe is a bit fugazi, a scam, or otherwise not honest, including the Attorney General of New York. Circle is moving their reserves to be 100% backed by cash and short duration U.S. Treasuries. Boom.

They want to become a federally chartered bank. On Sunday, Circle published a blog on their website stating that by September 100% of USDA reserves will be backed by cash and short duration U.S. Treasuries. Here's the quote, given our commitment to maintaining high standards, which in some cases go beyond those required by our regulators, we will, effective in September, hold all USDA reserves in cash and short duration U.S. government treasuries, which will be visible in our September attestation. Why are they doing this? Well, they're obviously going to face a lot of scrutiny, and they want to differentiate themselves from tether, which does not hold everything.

They only own 3% or so in cash. So this is a clear shot across the bow of tether. In fact, I would say it's about 10 shots that are landing right on the deck of the USS Tether, and I think Tether is going to obviously go down because of this. What you'll see over time is people are just going to move off Tether and go right into USDC or other stable coins that. give the initial promise of Tether. Tether was supposed to always be back one to one.

So all USDA is doing here is taking Tether's original promise and fulfilling it. What a stupid move by the people at Tether to not see this coming. And you have to ask yourself at this point, if this is so easy to do, why isn't Tether doing it? Well, if Tether bought, let's just say, I don't know, some, you know, commercial paper, in other words, loans from, I don't know, real estate in China or something that is less regulated and they paid a small amount for it. Where do the other money go? And that's what people have been speculating. Again, here we're in that sentence is speculation. We will see what happens with Tether over time, but I do believe that Tethers' best days are far behind them, and I think that

they will face massive scrutiny, and I think they'll just be banned. I mean, if they got banned in New York, you'll have other jurisdictions follow suit, because who the heck wants to have this kind of a Black Swan possibility or people losing their money on something that's called the stable coin. So according to Circle's blog post, the rapid growth of the stable coin market has, quote, rightly brought significant federal regulatory attention as regulators consider the implications of digital currencies growing from $100 billion to potentially supporting trillions in economic activity in the coming years. In other words, Circle's getting ahead of this. Circle is the second largest stable coin with a market cap with almost $27 billion, while Tether is the

largest at $65 billion. But I do think Tether is kind of. kind of plateauing. That's something pretty clear to everybody. And I think Circle is surging. Tether is the fifth largest cryptocurrency by Market Cap while USDC is the eighth largest. I think you'll see those positions reverse pretty quickly, maybe within a year or so. Circle's most recent attestation and breakdown of its assets was published in July and it was dated on March 28th of 2021. On May 28th, 2021, here is a breakdown of their holdings for May. 61% cash and cash equivalence. 13% Yankee certificate of deposit, meaning CD is issued in the U.S.

by branches of foreign banks, 12% treasuries, 9% commercial paper, and 5% municipal and corporate bonds, which are something I've held for long periods of time. When you compare that to Tethers' most recent attestation, you know, they're like two-page PDF with the pie chart. that has been derided on Twitter for months now. They disclosed about 50% of their reserves were tied up in commercial paper.

In other words, over $30 billion in commercial paper. The recent Circle News is great for transparency. But Jeremy Aller, who has agreed to be on this podcast, but has not yet appeared. So Jeremy, clock is ticking. You got to get on the pod here because you told me you come on. And now I'm telling people you're going to come on. And you've got to come on.

Come on the pod. Let's go. September. Let's do it. In today's startup landscape, committing to security compliance is vital for growth. And proof of your company's security posture has never been more important. As you scale, you might start to receive more SOC2 requests from customers. And that's where DRADA comes in.

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And here's his quote. It became clear to me right away that Drata is an engineering powerhouse. The solution they've developed is well ahead of other market players. Their approach to deep native integrations provides users with the most advanced automation available. So check out Drata's five-star reviews on G2. see why companies like Clearco, smart recruiter, and the Good Face project work with Drada for their compliance needs. Twist listeners can get 15% off and waived implementation fees at drada.com slash twist. DRATA.com slash twist. In an August 9th blog, Circle CEO and co-founder

Jeremy Allaire, who I've known for 20 years, we're not besties or anything. We don't go to dinner, but I know him through three companies, Bright Cove, and then before that he did Colfusion. So I've been aware of him. We've met maybe five times over the years. Pretty smart cat, obviously. And I think super upstanding guy, I'll be totally honest. It feels like the opposite of the Tether team where Jeremy is like out and has been around for a long time. He's not like the CEO of Tether who nobody can seem to find and people speculate doesn't exist,

which I don't think that's true. But certainly it's very weird that the CFO and CEO of Tether are nowhere to be found. Here was the quote from Jeremy in that August 9th blog. he says Circle is setting out to become a U.S. federally chartered national commercial bank. That's kind of a big deal. And here's another quote. Circle intends to become a full reserve national commercial bank operating under the supervision and risk management requirements of the Federal Reserve, U.S. Treasury, OCC, and the FDIC.

We believe that full reserve banking built on digital currency technology can lead to not just a radically more efficient, but also a safer, more resilient financial system. Great. This means he is going above and beyond what Tether is doing. And let's face it, there's no way Tether would clear the ability to operate a bank with the Federal Reserve, U.S. Treasury, OCC, and FDIC after getting banned from working with customers in New York. That's just off the table. Circles focus on transparency comes as Tether is reportedly facing a criminal pro by U.S. prosecutors in the DOJ, which we covered in episode 1253. And I remember, that's in addition to what happened with the New York Attorney General.

This new DOJ investigation seems to be around committing bank for it, essentially, using a bank account that is not prescribed for one use for another use. And we saw this in poker, I believe, where people were unable to deposit money to play online poker back in the day. and then they would create banks that did this in some sort of sly way. I think the theory here is that the DOJ is probing whether Tether did this to move money. And they basically admitted it in a YouTube clip that I believe BitFinext has shared multiple times on their Twitter handle. I'm really interested to see where that goes. And this is an example of once you start committing any kind of fraud or fuguesizing, the activity and you get on the regulators or Justice Department's radar, it never ends.

They watch everything you do like a hawk. Because think about it, if they got you once, the New York Attorney General, and then you commit more fraud, that would be like, you know, you caught Madoff and then you let them off the hook again. You caught Elizabeth Holmes at Theranos and you'll let her off the hook again. You do not want to have that look where you caught the criminal and then you let them go. That would be like you brought in, you know, some serial killer for questioning. You kept them overnight and then you let them go the next day and then they kill five more people.

That is the big fear of any, you know, detective or, you know, the DOJ or the FBI or anybody. You don't want to let people run amok after you know or suspect that they're doing bad things, which my guess, key word in the sentence here is guess is that Tether has many skeletons in their closet. know of one or two. I'm guessing. There's 20. It's just a guess. So remember what I told you in a previous episode, Circle and Jeremy O'Leare are using transparency and safety as a selling point, not just for customers, because a lot of these customers don't seem to care that Tether has problems, right? And I think the customers who don't care, those customers are probably involved in money laundering, money that was gotten through activities that maybe are not above board. I think

what Circle is doing here is they are really going to regulators and saying, we know you're going to have strong regulation in the space. We would like to regulate ourselves. We would like to go beyond what you're doing and then put that directly as a counter-example to Tether. And imagine if Tether gets banned. Imagine if Tether faces a DOJ investigation and it actually all comes public and they're guilty of three or four more things, which I think is possible, if not probable. If that happens,

man, people will just flow over to this other more trusted stable coin and as they should. So how did Tether respond to Circle's announcement? Well, Debo, my friend over at CNBC, summed it up. As Circle says, it will change the makeup of USDC reserves to all cash in U.S. Treasury bonds. Tether applauds transparency, but says their, quote, comfortable with assurance opinions that we have provided. You may be comfortable, Tether. Nobody else is. So we couldn't find the statement online.

It seems they sent it to CNBC directly. And in this ridiculous statement from Tether, I mean, this is the height of insanity, but I have to read it anyway because it's so stupid. Tether says, we applaud our friends for embracing the transparency, that Tether has pioneered in the marketplace. I made that point at the beginning of this news story.

That Circle is doing what Tether promised they would do and didn't do. Now, Tether's saying they actually applaud it and that they're friends with Circle. You are not friends with Circle. Circle is going to sink your battleship. They're going to drink your milkshake, Tether. It's over. You're done. You cannot recover from this.

I am predicting Tether done for anything other than gray market transactions. and offshore marketplaces, you know, and I think this is game over. I think it's game over, checkmate. Congratulations to USC. And it gives a clear path to other people. And you know what? I think it's good for the crypto space. All of this regulation, which I know people are complaining about, we talked about us on

previous episode, you know what? Stop crying about it. It's going to make the industry much, much, much bigger. And it's going to be more trusted. And that's a good thing. Yes, it's short-term pain. Yes, less intimate. I get it. But you can't run amok with people's money. Period. End of story. Sorry. You have to

play by the rules. Everybody else in finance is playing by the rules. You can do innovative stuff. Do it in a sandbox. Under 10 million in tokens, you know, you have like, we have some sort of safe harbor. That's the way we should do it in America. Once you get past 10 million bucks, there's too much of a crater created from shenanigans. This tethered thing is just too high risk for society. We do not want to deal with a black swan. We want to keep the market. it going. We don't want individuals to lose their money. So just, you know, create a little sandbox here and let's make everything above board and let's get rid of players who are untrustworthy like Tether. Tether is untrustworthy. Anybody who gets banned from doing banking in New York

is not somebody who's trust. Any CEO and CFO who are in hiding and will not go on CNBC and will not, you know, face the music and be transparent, you shouldn't trust them. We shouldn't have them in the industry. Let them work offshore. Okay, let's go to our next story. Okay, Warby Parker, which makes glasses filed their S-1 yesterday and they're planning on going public by direct listing. Somewhere Bill Gurley is having a nice ice cold beer kicking his feet up and feeling great. So before we get into this Warby Parker, let's do just a quick primer on direct listings. There have been five notable companies that recently went public via a direct listing. Spotify, Slack, Palantir, Roblox, and Coinbase.

Spotify back in 2018, a true pioneer. Slack in 2019, Palantir in 2020, and then Roblox and Coinbase in 2021. So we're averaging about 1.5 of these a year, but it seems to be ramping up. Obviously, if Warby Parker goes out this year, there would be three major direct listings. Let's break down the differences between a direct listing and a traditional IPO initial public offering. When you go public via a direct listing, you don't have intermediaries, i.e. banks underwriting your shares.

So this is a little bit risky because without the intermediary, there is no safety net guaranteeing the shares will sell. You don't go on the same, where they call the tour, you don't go on the same roadshow. You don't have the blessing of the big Goldman Sachs, et cetera. For this reason, companies that add direct lists have to have strong brands and some level of notoriety. Obviously, with Spotify and Coinbase and Slack and Roblox, you have very high profile companies.

They don't need to be sold because they have a massive, You know, anybody who's in the stock market knows those companies well. Now, with direct listings, you also have no lockup periods. That is great for early employees and investors like myself. In traditional IPOs, there's a lockup period, and that's between 90 and 100 days. Basically six months is what you can expect. That means when Robin Hood goes public or Uber went public, I can't sell my shares. Neither can the folks who worked for a decade or like me, Angel invested in hell my shares

for a decade. We can't sell. You know who can sell? The banks. The banks are took in public and their customers and clients who they let have friends and family shares and they can flip them. How is that fair? That makes no sense. It's complete hypocrisy. It's complete inner kind of inside baseball dealing. It just screams of unfairness. Now, direct listings also have no further dilution for shareholders. In an IPO, you're giving new shares of the company that are created and that dilutes existing shareholders. Of course, you get money for those. And direct listing, you're basically saying, here are all the shares that are available. We got 100 million shares or a billion shares of Spotify, have at it.

Start trading them. Now, direct listings are also much less expensive. They take less time and money than a traditional IPO. And in an IPO, these investment banks charge an underwriting fee to do this whole process, you know, for finding all these investors for you. And the underwriting fees are charged on a percentage basis based on how large the IPO is. The more money the company raises, the lower percentage of the fees. PWC Price, WarehouseCCupers recently published an IPO,

price calculator on their website based on the average of 829 IPOs, and in deals greater than a billion dollars, the average underwriter fee was 3.5%. And the average investment banks on a deal were 16. So based on this, you know, you're spending $35 million making your shares available. According to Andreessen Horowitz's breakdown, apparently that's some venture firm in Silicon Valley, I haven't heard of them yet. Their direct listings charge a flat advisory fee, which is typically

half of what the smallest underwriting fee for an IPO would be. Are you concerned about your portfolio's performance in the near future? Well, J.P. Morgan, BlackRock, and others are projecting public equity returns of just three to five percent over the next five years. Analysts that Bank of America urged investors to consider real assets as part of an inflation strategy. So where are the major players putting their money? endowments for Yale, Harvard, and other top asset managers are looking into alternative assets. According to Masterworks research, endowments over $1 billion are investing 55% more in alternatives on average. If you're looking for a very interesting asset class that's uncorrelated with the stock market, it's blue chip art.

Masterworks.io sells shares in multi-million dollar paintings by artists like Banksy, Picasso, and Warhol. according to Masterworks, contemporary art has appreciated 14% annually from 1995 to 2020, outperforming other real assets like real estate and gold. I just had the founder, Scott Lynn, on the program again, episode 1232, for an alternative assets roundtable, and he shared some great insights around inflation, appreciation more. Go listen to episode 1232. Masterworks.I.O. is a fantastic idea, and they're executing at a super high level.

I think it's really genius. So sign up today at masterworks.io. And if you use the code twist, you'll skip their 30,000 person wait list. See important information at masterworks. com. So let's dive into Warby Parker's S1. The LTM revenue,

in other words, the trailing last 12 months of revenue, that's typically how we would say it in the business, trailing 12 month revenue. They're saying LTM and their S1, S1 is a document you file when you're going public. Their LTM or trailing 12 month revenue

is 487 million, which is 33% year-over-year revenue. Companies that grow over 20% are considered high growth in the public markets. In the private markets, maybe not so much. And in this case, this means Warby Parker's revenue from June 2020 to June 2021 was, you know, basically half a billion dollars. So in our industry, you'll hear the term annual reoccurring revenue, ARR. That's typically for SaaS businesses. That means the revenue is guaranteed to keep going.

that doesn't apply when you're selling, you know, glasses. It's not like people are having a subscription to glasses. I mean, maybe they do have a subscription process, in which case they could say annual reoccurring revenue. LTM is the last 12 months, and people who could say trailing 12 months. So that just gives you an idea of what, you know, is actually going on with the business,

a little more, I would say honest, intellectually honest. So when I meet with founders, I just always ask them the same thing. What are the last three months revenue? And then I'll put in parentheses, three numbers. Just so we're clear. I'm not looking for one number. I'm not looking for three paragraphs.

I'm not looking for disclaimers. And man, my job is maddening sometimes. I will ask a founder for the last three months revenue, and they will start talking for 10 minutes. And I still don't have the numbers. It is bonkers. If you are working with investors or potential investors, and they ask you a really simple question,

give them the answer because they probably have a follow-up question. And the follow-up question might be really good for you to give. So the first half of 2021 puts them out of five, $140 million runway. They did $270 million. That's pretty great. They claim to have a 60% gross margin. That's nice.

They operate 145 stores and claim to have over 2 million active customers. Not sure how they define active customers. We talked about that on previous episodes. What's an active customer? For me, an active customer would be somebody who made a purchase in the last 12 months. That would seem like a fair one to me because they might come back. We talked about next door saying people who open an email were active users. this is one of those things.

If you're going to be a public market investor, you're going to want to really drill into. Oh, actually, my research has just told me. Active customers, I guessed it, are unique customers that have made at least one purchase of any product or service in the preceding 12 months. I had literally guessed it. That's good.

In 2019, Warby Parker essentially broke even. In 2020, they lost about $56 million, which is nothing, you know, losing a little bit of money while you're growing a business. It's called investing in the business. In 2021, they're on pace to lose. It's about $14.5 million. So they're decreasing the loss or they're investing less, I guess would be two different ways to look at it,

depending on if you're a growth investor or you want to see profits. One of the most money losing slash break-even businesses of all time was Amazon. And now they've turned on the profitability just by turning a dial, right? They can just decide how much money they want to make by increasing the cost of Amazon Prime. I don't know if Warby Parker has that ability. I don't know what percentage of market share they have. If they made every pair of glasses $25 more and increased their profitability, would they lose customers where people push out buying new glasses?

You know, the e-commerce is hard. All right. So just taking a pause here, I have invested in DTC companies before. Most of the time, we say no to these companies 99 times out of 100. And a lot of investors hate this specific sector. Why do they hate it? Well, it's because, you know, if you're Warby Parker and you're one of the great, greatest D to C companies of all time, along with Dollar Shave Club and many others,

direct-to-consumer is low margin and hard to scale. And if they're only making 30% year-over-year growth, right, at Warby Parker, and they're making nine figures, let's compare that to, you know, a software business like Twilio. What, Twilio has a $2.4 billion dollar, 2021 run rate. That's up 65% year-over-year. And they're at a $63 billion market cap. and Twilio has two times Warby Parker's growth rate with four times the revenue.

Why is this? One of them selling software. One of them is consumption-based, right? And the other one is selling physical product. Selling physical product, hard to scale. Warby Parker is also not a marketplace. If it was a marketplace and you had a bunch of sellers on one side and you had a bunch of buyers and Warby Parker was managing that and taking a rate, a percentage of the sales,

like eBay does or Uber does or any number, Airbnb of marketplaces. That might be higher scale. That might be more interesting. So investors love software and marketplaces. They love consumer subscriptions. They love FinTech. They hate direct to consumer. It's a really, really hard business.

You need to have a very new product like, say, AitSlee, which is a direct-to-consumer business we've invested in, or Terra Cafe, which is a very unique direct-to-consumer business in my mind. And I don't mind investing in them, but I do, when I look at those businesses, look at them differently than consumer subscription SaaS and marketplaces. I mean, let's take an incredible example. YouTube, $28 billion run rate for 2021, 83% euro for your growth. YouTube is not a spring chicken. I mean, they have three times Warby Parker's growth rate with 50 times their revenue. So take a pause and ask yourself, if you're placing a bet, are you going to place a bet on

Warby Parker? Yeah, I wouldn't. It doesn't seem like a high growth business to me. And finally, Amazon Web Services have $56 billion run rate for 2021. What's their growth rate? 30%. In other words, Amazon Web Services with $56 billion in revenue, that is not a small company. That is a huge company. They've got the same growth rate as Warby Parker. Is this the fault of management at Warby Parker?

No. It's just the nature of different businesses, have different margins and different growth rates. It's very hard for a company that makes a physical price. product to scale. SaaS software? Yeah, that scales. So one final thought here about Warby Parker, CNN business reporter. Nathaniel Meyerson dug up a pretty interesting insight from the S-1, where they talked about

the positive trend and signals for their business. Staring at your computer all day is good for Warby Parker. The rising usage of smartphones, tablets, computers, and other devices has contributed significantly to increase vision correction needs and consistent new customer growth within the eyewear market. In other words, we're all going blind from staring. out our smartphones. Don't I know it? I mean, I started wearing this past year, like readers. If anybody has suggestions for me about how to get my eyesight back, do we have to stop looking at screens? Should I get LASIC? I don't know. I've never had eye problems. I got to figure this

out. So you're all going blind and Warby Parker's going to win. Maybe I should invest. All right, at the end of the program here, I like to do a little button, just a personal observation. And this one comes from just a simple tweet that somebody tweeted at me. A gentleman name Jose Posuelo on Twitter mentioned something. I had said once about running a bed and breakfast being just as much work as running a hotel chain. I don't remember saying this, but I have told this to many founders. I must have said it here on the podcast. And here's what he says. Our restaurant journey has been so complete. It's incredible the breadth and depth of problems to tackle. Jason said somewhere that running a bed and breakfast is as much work as a hotel chain might be slaughtering

the quote. Seems it's true. Next stop scaling. Let's pause here. And I'll tell you what I've been talking about. And I mentioned this in my first book, Angel, and many of you know I just got back from Italy where I took a week off, was alone, basically, not with my family, and just went to the beach every day and wrote. And I kid you not, I went to this beach club. And when I was at the beach, the cabana had a desk and a chair.

And I just, I didn't ask for a desk in a chair. And I looked in Italy, they put a desk in a chair at every beach club, at every cabana. And I sat there like a crazy American, popped over my laptop every day. and wrote. And it was the greatest feeling in the world to sit there by the ocean and write. It was wonderful. And I got a lot done.

And one of the things that I did say in the previous book, Angel, and that I still subscribe to, is when you're thinking about your time, and this will be relevant for the next book, which I won't talk about what it's about yet because I'm in the process of talking to my previous publisher and my agent,

I haven't even picked a publisher yet. So I'm going to have an auction or something for the book, and I'll probably go with my existing publisher because they were pretty great, Harper business. As long as I pay a decent price for it. Not that I'm doing it for the money. I'll be totally honest. I'm writing the books now because I love the act of writing.

And I love when you read a book that I've written when you say it had an impact on me. And so this tweet is what I live for because he obviously read this in the book. He might have heard it on the podcast as well. But the point is pick a business that scales. Warby Parker is a business that scales, but there are businesses that scale more. If you're an entrepreneur, whatever business you pick, if you're running a hot dog stand, a bed and breakfast, a hotel chain or Airbnb or AWS,

whatever it is you're running. If you're a great entrepreneur, you're going to spend 80 hours a week running it and you're going to spend every other waking hour thinking about it. It's just the nature of entrepreneurship is that it is all encompassing. If you're not all in, if you're not thinking about your business constantly, you probably pick the wrong business.

But you want to pick a business that scale. and that's high margin. And many of the founders I meet, especially young ones who are starting their journey or older ones who are scared or don't have the ability to think big because they're just conservative. This conservative nature

leads you to pick a business that doesn't scale, such as a service business or making a physical product. And those businesses, you're going to work just as hard, but you're not going to get the reward. So always level yourself up. If you were thinking about starting a bed and breakfast, think about starting a marketplace of bed and breakfasts, right?

If you were thinking about serving, if you were thinking about creating a web hosting company, think about making a platform like AWS. Always try to think one level higher. If you were thinking about creating a delivery food service, think about creating cloud kitchens like Diego and Travis did, right? they just thought one level of more abstraction up and then you could have more profit and build a bigger business. And so, Jose, thank you for writing the note.

It really, you filled my bucket, as the kids say in preschool. You want to fill the other person's bucket and not drain it. And so you made me feel great. Thanks, Jose. I appreciate it. All right, we'll see you all next time. Bye-bye.