A list of some opinions I changed my view on this year and links to sources of influence (which weren’t necessarily written in 2021):Continue reading “2021: some things which changed my mind”
There is a lot of <$1b company M&A coming…
Recently I had coffee with David Newns and we were discussing the opportunities around M&A for small-cap companies. Historically the VC world has not been acquisition-driven so it’s reasonably rare for someone to tolerate my perspective on this. It seems clear that over the next few years (probably measured as remainder of average current VC fund term), we’re going to see a vast amount of acquisition strategies being deployed by <$1b valued VC-backed companies. There are a few reasons, all fairly obvious:
1. A vast amount of venture capital has been deployed into technology companies over the last three years. This includes not just new VC funds but many family offices who are now allocating directly.
2. Company valuations have inflated based on that capital availability. Remember that valuations are an expression of belief in future performance.
3. VCs are now warming up to the fact that sensible M&A can drive value.
There are lots of interesting consequences to this (cap tables, founder positions, investor pref ranking, anti-trust, investment bank configurations etc).
Sleep lessons for founders and CEOs (also investors and boards)
In the current capital-rich environment where anything seems possible, I’ve been slipping into a habit of wondering how previous companies would have worked out had we started them today. After much rumination I think my biggest missed opportunity was not a constraint of capital, but rather an undervaluation, and misunderstanding, of sleep.
Like many, I was given a rude awakening by Matt Walker’s (excellent) book a couple of years back. But it’s still pretty alarming the number of people I meet who give me blank looks when I enquire about their sleep habits. Listing my biggest sleep mistakes to help other founders and leaders:
1. I’ll sleep when I’m
My single biggest error was having a completely incorrect mental model for sleep, treating it as a requirement, not an enabler. First I thought of it as dead time that needed to be minimised. Then I began to think of it as a fixed cost for being awake. Both of these are wrong (scientifically). I still occasionally meet people who are trying polyphasic schedules to minimise sleep-time, there is now sufficient peer-reviewed data showing this is a very dumb idea. The best (both scientifically accurate and which clicked for me) mental model is to think of sleep (not food) as your brain fuel.
2. Red-eye flights and misplaced financial prudence
Pre-Covid, I flew a lot (~250k miles/year) which inevitably meant frequent red-eyes. In my first couple of companies, I used to fly economy for literally everything. Gradually I realised the false economy of that principle: if I’m flying into a day of meetings, my level of sleep is going to determine the quality of discussion and decision-making. I started thinking of myself as a vessel for sleep and (selectively) began flying business.
3. Not taking sleep as a fiduciary responsibility
Only in the last 2-3 years did I truly grok that sleeping properly was part of my responsibility as CEO (also true for any member of a leadership team). An investor backs a founder/management team for their competence in strategy and decision-making. That categorically requires good sleep habits: REM is really important for cognitive functionality and mental resilience. I’m still amazed that many investors suggest executive coaches but not sleep reviews.
4. Misunderstanding THE EFFECTS OF COFFEE
I am unquestionably a coffee snob. For years I lauded my own ability to ‘not be affected by caffeine’, which meant that every dinner ended with an espresso (permanently jetlagged road-warriors will empathise). It turns out this was also pretty dumb. Caffeine has a half-life of about eight hours, so although I never had an issue getting to sleep it was actually reducing my deep sleep cycles by ~30%. Do this for long enough and it will shorten your lifespan by 8-10yrs.
Like any convert, I’ve become pretty zealous about the importance of sleep for decision-makers. It’s a question I now ask of all CEOs and investors. If you want to dive in a bit more, I recommend Andrew Huberman’s podcast which has several episodes on the topic. Also, it was very cool to see the recent launch of Supermoon Capital, a fund focusing on sleep-related opportunities.
Digital currencies, DeFi and the impact of the next Carrington event
‘But have you hedged yourself in crypto?’ is the kind of question I am being asked a lot lately. Ignoring the technical and economic miracles/mirages of DeFi, I started to scratch an itch about non-obvious vulnerabilities. Like everything I write, this remains work in progress.
If you read a sufficient amount of human history it’s inevitable that you start thinking about progress in terms of disasters. I’m particularly interested by non-extinction disasters, the kind which are globally damaging but not fatal to humanity. I’d categorise Covid as a relatively mild entry in this category (by historical measures).
The impact of non-extinction disasters on humanity is in part a function of how the impact area is configured. For example, had the Tunguska event (most likely a meteor which exploded mid-air) happened over New York or London in 1908, it would have set much of the western economy back several decades. Instead it exploded in Siberia so the impact was materially zero (unless you were one of 80 million trees). Side-note: I often wonder how much more seriously we’d be taking asteroid/comet impact risk today if Tunguska had been imprinted upon a city. Anyway.
Whatever your views on DeFi and digital currency, it’s clear that the world’s economic ecosystem is becoming more, not less, digital. This brings me to my current non-extinction disaster obsession: the next Carrington event.
A quick primer: the sun is still quite poorly understood as a physical entity. However we have enough data to know that it operates on ~11yr cycles where it periodically vomits out solar flares (coronal mass ejections). Mostly they’re pretty small (and relatively harmless to us). Sometimes they’re quite huge and potentially devastating if they hit our planet. In 1863 one of the latter (the Carrington event) resulted in the largest geomagnetic storm we have on record and badly damaged much of the planet’s telegraph network.
If a Carrington-level event struck today however, the impact area is configured very differently. With a planet run on electricity and digital communications, damage estimates (calculated by insurance companies) run into trillions of dollars with a recovery time of several years. Although many western electrical grids are shielded for solar events, those near coastlines (where most of our population centres are) will likely take significant transformer damage. Satellite infrastructure will be heavily impacted. The UK government’s assessment is that “services from a significant proportion (of satellites) are expected to be lost either temporarily or permanently” and even transmissions from hardened military satellites will be “degraded, or totally lost, due to ionospheric impacts”.
Bear in mind also this is a when, not if, statement. We had a near miss in 2012 where a Carrington-scale solar flare missed the planet’s rotation by nine days. I’ve read a few papers where authors suggest probability of this scenario at ~0.7% per year and <2% for the next decade. However the data to support this is (understandably) limited.
DeFi is definitely cool. I’m still unclear whether cryptocurrencies are actually currencies or more accurately defined as religions but it appears they’re going to stick around. One thing is clear: this pivot to a digital economy is significantly increasing the impact that a solar driven non-extinction event (a mathematical certainty) will have. Digital requires electricity.
This is obviously not an anti-technology rallying call. It’s really just thinking aloud about how we’re unintentionally increasing risk profile/fragility with a new technology. I am categorically not an expert on anything in this post but a few questions that I haven’t found answers to:
- For countries planning to introduce a digital currency (e.g. digital Yuan), have they run assessments on the impact of prolonged electricity blackouts?
- Should there be (deep breath) regulatory requirements for DeFi continuity of service plans?
- Why isn’t anyone in a hurry to replace our solar monitoring equipment, most of which are now operating beyond their expected lifetimes? 😱
Is US household wealth becoming a national emergency?
I never trust single factor explanations. It usually means that I don’t understand things well enough. However I’ve been obsessing over this graph for a week, because I feel it’s such a huge contributing factor to a range of current phenomena:
This declining economic position for young people (on the current trajectory the next generation of thirtysomethings will, on average, be technically destitute) is now cited as a major factor for the continuing drop in US birth rates:
The toy industry is already starting to debate what this is going to mean for medium term product planning (Less toys? Higher prices? More nostalgia?) . This is a short (8 min) discussion between Chris Byrne and Richard Gottlieb that replicates several conversations I’ve had over the last few days with senior toy company folks:
It goes without saying that toy companies didn’t do brilliantly in Children of Men. I wonder how long it will take other sectors to start running the same calculations? Immigration reform will help but the data suggests US household wealth needs to be almost equal billing with climate change as a priority.
A Visa model for scaling moderation
This weekend I mostly ended up thinking about quality of content, primarily due to some things I was reading/listening to:
- Mark Little’s (CEO Kinzen) great summary of the containment trends around content infodemics (I love this term)
- China announced new content moderation rules to regulate live-selling on streaming services
- Acquired’s interview with Rec Room’s CEO Nick Fajt about building creator economies
It’s clear the consequences of bad quality (inaccurate, false) content are increasing. It’s equally obvious the means of production (tools, distribution) of bad quality content are also increasing.
I’m generally not a huge fan of top down regulation of technology problems. Although there have been successes (e.g. kids digital privacy laws), it feels like we don’t have anywhere near the level of technical expertise and experience in most western governments relative to what is required. However private companies haven’t exactly proven adept at solving challenges like this either.
Maybe it’s time to try something more radical? In the sixties, Visa was born as an organisation backed by all the major banks but without any one having control. It was to all intents and purposes independent, designed to sustain a credit card ecosystem without the bias of the established banking institutions. I wonder if something similar would work with the challenge of content moderation? A dedicated content moderation organisation, backed and integrated by all platforms (FB, Google, Amazon, Apple etc) ensuring published content is factually correct, but crucially which is not controlled by any single entity (Visa asked for and received an anti-trust waiver as the organisation was being set up).
I don’t think I’m comparing the quality of content to credit scores (more the organisational challenges) but it feels like there might be some merit there too. I wonder who is moderation’s Dee Hock?
The next Amazon and Coinbase will probably emerge from a game
I think a lot about ecosystems. Mostly as a mental hack to get around those odd cognitive blockers which humans have when conceptualizing really big things. Especially that category of really big things which everyone agrees will probably be pretty big anyway but which could be really big. The best examples are entirely obvious: Google, Microsoft, Amazon-you get the idea.
Dean Takahashi just wrote a great status piece about the emerging metaverse ecosystem(s). He describes what’s happening as a content Big Bang and I feel the universe analogy is spot-on: there is a whole new internet of content being created e.g. Roblox, Fortnite etc. Core is the latest interesting example of a worlds generator (built on Epic’s Unreal engine). Jon Radoff’s (excellent) market map of the metaverse is another way to visualise what’s going on. Game engines (and more specifically their content) are truly eating the world. This metaversification trend is clearly going to be a big thing but I think maybe also a really big thing.
I’m particularly interested by the services which emerge from within the ecosystem of really big things. If you think about how AWS and AMS stemmed from Amazon (albeit as first-party solutions), you can begin to grasp the opportunities embedded in the scale and (theoretical) interoperability of these games/content universes. Discord and Twitch are the best known gaming examples but they’re ultimately artifacts from a much earlier environment (when games were worlds rather than universes).
Somewhere around the world, a handful of centacorns whose business models are symbiotic with today’s game universes are being born. But this cohort will go far beyond just games functionality, in <10yrs I fully expect one of the pervasive consumer internet services (ecom/search/food delivery/wallet/etc) to have bootstrapped its growth from these connected games universes.
Is it still an opportunity if the pricing is nuts?
This post originally started as an exercise to structure my thoughts on current private tech company valuations. Between Deliveroo’s brutal IPO experience on the London market and Clubhouse’s hold-my-beer financing rounds, do valuations even have a purpose?
Take, for example, some of the recent investing activity around kids financial services:
- Greenlight, Current and Step (US-based) are each raising multi-hundred million dollar rounds at $1-$2b valuations.
- Vybe just raised a seed round to launch a challenger bank for teens in France
- A few months ago GoHenry (UK) raised $40m
On the surface it looks like ‘fintech startup y raises quadrillion dollars at 25x revenue multiple’. However amidst the favourable financing fervour lurk the occasional truly large market opportunities. Kids (<13), young teens (<16) and kidtech are one of those spaces:
- Under-16s are now ~40% of all new internet users every year
- Kids and young teens are now major consumers of games and videos
- Digital privacy laws designed for these audiences (COPPA, GDPR-K, AADC) mean that existing adult solutions can’t easily be scaled down
- Major technology platforms have materially ignore the audience (too difficult, limited ROI)
The idea that ten years from now virtually all minors will a) have a digital wallet (probably parentally controlled) and b) receive only digital allowance seems entirely plausible. It may even be legally mandated. Roblox won’t be the only company built on kids’ digital suffrage.
Giant opportunities remain, even in times of madness (but make sure you hold preference shares). Final final words to the perennially wise Jason Lemkin:
(I’m not an investor in any of the companies mentioned)