The Playbook: Lessons from 200+ Company Stories
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Right, two episodes in a row from the hotel .

room onto do IT let's do IT who got. true. Easy, you with you, with you see me down, say state.

Welcome to this special episode of acquired the podcast about great technology companies and the stories and playbooks behind that. I'm been gilbert and I am the co founder and managing ing director of seattle based pioneer square labs in our venture fund, psl adventures.

and i'm David rose all and i'm an Angel investor based in separate cisco.

And we are your hosts. This episode is something that David and I have been thinking about for a long time years. In fact, IT is called the acquired playbook, and IT is basically what we've learned from doing acquired.

Like people often ask the question, okay, cool. You guys have analyzed like two hundred companies and spent an ungodly dly amount of hours doing that. Like, what are the takeaway? This episode is the takeaway. IT was back in .

like twenty eighteen. I want to say that we had a major book publishers come to us, and he like, hey, what you wanted do a book are required. This was the idea we had.

and that we were to sly. Maybe at some point.

let's just keep doing episodes instead, but maybe at some point. So considered this the first draft.

We don't know if this talk was good yet. We are in our hotel rooms at capital camp, and we are about to go on stage and give IT. So this is sort of fun.

This is the first time we've ever recorded one of these before doing the episode itself. okay. Listeners, now is a great time to tell you about long time friend of the show service now.

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Yep, so learn how you can put A I agents to work for your people by clicking the link in the shower notes or going to service now dot com slash A I dash agents. Now, as always, this is not financial advice. Please do your own research, David. I do lots of research, but you may come to different conclusions, and we may have financial interest in the things that are discussed on this show. Indeed.

and speaking of different conclusions, this would be a fantastic episode to discuss in the guards lack. We want to hear what your favorite lessons are from all of these, like hundreds and hundreds of hours that we've done at this point, is the awesome. So acquire that F, M, slash slack. If you're not heard a member, we hang out. There is a great, great, great community, as you will hear a talk about in this talk.

All right, join this lack. And then this is twelve of our favorite playbook themes, but there are certainly more so love to hear from you right onto the talk.

So we thought we would be really clever here with our first one, both because this genuinely is one of our favorite teams and we thought this of the counter position everybody's going to talk about, you know, it's may twenty, twenty two glue. There's dooming glue. It's going to be good.

Then, of course, great friend of the show, I knew her hard and came up earlier tonight and already beat the optimism drum. But we will highlight IT once again. So our first lesson from all of the stories we told us that optimism always wins.

So for folks here in the auditorium, raise your hand if you know who the people are, who are on this slide. Wow, this is awesome. We're getting almost no hands raised here for focus at home, where where I don't know the way of a single hand up.

Well, this is awesome. okay. So the person on the left is ohio murata, and the person on the rate is mr.

U. A bookcase. And they were the confounders of the SONY corporation. And we told this story about three hours earlier this year on acquired IT is IT is amazing, but we thought that would be the perfect story to kick off the night because it's it's just so perfect for this moment.

So as we said, there's not a lot of reasons looking out at the landscape of the markets right now to be an optimist, but the SONY story reminds us that things were much, much, much worse than they are today in the reason past. So SONY was founded in one thousand and forty six in japan. And just think about that time in one thousand nine hundred and forty six in japan.

like you think twenty twenty two in amErica might be a bad time to start a company or a tough time to start a company. I don't know that in recent history, there has been a worst time and place to try and live your life and do any sort of business, let alone start a brand new innovative technology firm, right?

So these two men decided to start a company which is crazy and enough itself in japan in nineteen sex, even crazy, they decided to start a consumer electronics company. Crazy for two reasons. One, after the war there, there was no technology left in japan. So where were going to where they are going to make? The first product was a wooden rice cooker.

There wasn't a market either because every other technology firm that was making radios and stuff had pivoted to make stuff for the military, which was no longer customer.

just no longer exists. Um the second reason why this was a completely, completely crazy idea was they were going to make consumer electronic, electronic consumer products. The GDP per capita in japan in one thousand forty six was seventeen dollars, not seventeen dollars.

Lars IT was seventeen dollars. So there was no market. There was no technology.

And I think after the war, forty eight percent of tokyo was homeless. Like half the populations homes had been destroyed.

unbelievable. And so and yet, despite all that, despite I I can't imagine bigger headwinds against them, they built one of the most iconic companies in the world. It's not an understatement to say that these two men and SONY change the course of japanese history, change the course of world history.

And again, we talked about this on the episode. But Steve jobs was was to mentioned earlier tonight, oko mara was the inspiration for Steve jobs, and he actually did this great, great talk. One of IT was not W, D, C.

An apple.

There was an apple cano a after marita passed away where you did attribute to him. And I think, no, no maria, no SONY, no iphone. And so the lessons we take away from this is like, you know, even if things are at their bleakest, it's rational to be an optimist because if you're not an optimist, it's it's the optimist s who drive the world forward. And then if you're an investor, investing in optimisim is the only way that you're actually going to make outsize returns and build great companies. So that is genuinely the rational thing to do.

It's a point one here, less than one could touch. You feel you kind of feel good. But let's back IT up a little bit. So we all know mores law.

This next lesson, we wanted to basically visualize and talk about this trend and a little bit of a different way that it's Normally talked about. So the number of transactions is on a chip. We all know this tends to double every eighteen to twenty four months.

And with some quick compounding math, that means you get a tennis every seven years or so. And as you can see on this graph that we made here, the x axis time, the y access, is the number of transistors on a leading consumer processor. Notice that it's in log scale.

You can see every seven years or so, tex improve in a processing power. And I figured we'd take the sort of greatest hits examples, intel ls three eighty six four to six pennon four cortege o which was in my first macbook pro, the eight seven in the iphone in twenty thirteen, and of course, the recent apple. And one, of course, if you look at IT in linna and not log scale, IT looks like this, it's way too difficult to actually observe any progress. And IT seems like basically nothing happened, and then everything happened.

And this is the crazy thing about morals, law and expansion. Al scales, the graph always looks like this. In ten years, the m one is going to look like nothing happened between.

And in two thousand, with pennon four IT would have looked like this. Two IT totally. Every single step along the way felt like this, which is wild.

And because of how exponential growth works, you basically feel like you're always at this crazy top and all this progress just happened. But Normally, we don't look at charts like this when we're looking at at processing power or at least like processing generations. We're used to looking at IT for high growth durable technology companies when we're looking at stuff like their market cap.

So we aggregated that too. Um the first thing to note is that there's been a drawd down. I know nothing since few months, but the point still holds. This is the market cap of all global technology companies over that same time period starting in one thousand nine hundred and seventy five.

Um even if you Normal ize this for the tech bubble and today you'll see that the outcomes of venture back technology companies keep getting larger generation by generation. It's also worth observing the exact same phenomenon that basically IT seems like nothing happened for the tech bubble, and then suddenly everything happened at once. And the insight is that this graph and the morals law chart with the processors are actually the same thing.

This is actually mos law at work. And so we call this lesson the mike Morris correy to morse law because we didn't make IT up. There's a great story that goes with IT around the time that mike mora and doug leoni took over running to quite a capital from dawn. Valentine might look back on the performance of the past couple of sqa funds that had cisco, oracle, apple, these unbelievable venture returns never before seen in venture returns. And they were asking themselves going, no, my god, what if I got myself into.

How are we ever going to top this, which would be a reasonable and rational way to respond, looking at the greatest returns in history in an asset class, and thinking, okay, where do we go from here? But he realized, as long as more law continues to hold and computing power continues to get exponentially cheaper, the markets that technology can attack should keep getting bigger and bigger. So to puts more numbers behind this, in one thousand nine hundred and ninety, a PC with that ninety six processor cost two thousand dollars and only about forty two percent of america, that's just of america, used a computer at all.

What is that? That's d .

right that recently. So today, a smart phone with literally a million times of the computing power costs two hundred dollars, which is one tenth the cost, and over six billion people have one. So of course, this thread LED sqa to go to invest in google. What's up? Airbnb, made bite, dance. Global markets.

Yes, but I think this is like this insight that that my cat, originally of, like, oh, as long as more as law holds, yeah I will be up and downs in the market like grief observed in the past year. But technology should always be able to access bigger and bigger and bigger markets. If the cost of computer keeps declining, it's playing out.

And for those of you in the room who want to get like really piano, you have to sort of slightly adjust more as law in order to say that it's still holds. You ve changed the definitional little bit. But when you look at like what in video has been doing with GPU, that IT is totally fair to say that this tenets improvement in computing every five, six, seven years that is absolutely still happening. And so therefore the lessons you should take from IT on the macro technology scale are .

to stay an optimist indeed, indeed. alright. So number three, we talk about zoia. A lot on acquired.

They're been involved in so many great winners that are built such a great, great franchise. But less you think that they are just pure genius, they can do no wrong. The lesson number three, which is cue the all in dim song here, let your winners ride. This comes from sqa z biggest mistake in history, which the biggest mistake .

in history in one of the most successful companies, if not the most successful company in history.

yes. And I think this probably the single biggest mistake period .

investing history.

Ah I don't see I don't think there's anyway that I can be definitely. So what's gone to the next side? Now to be fair to do to aoa, they're playing on the stage where they could make a mistake that there was the single biggest histories that are doing something right.

But uh, so the story goes, one day in the late nineteen seventies, I think he was one thousand nine seventy seven. A no in bushnell called up who is the C O of ata, called up don valentine, his main venture investor. And atari was actually the very first scope capital investment after dawn started at the firm.

And he said, hey, i've got this Young kid that's been working for me here at the tory, his named Steve jobs, and he started the company. And I think you should mean, I think you should take a look at him and done talks about this in the way that only done can says that Steve came in and he caught, looked like hot in. And I know this was doing the phase where he wasn't showering, so he smelt really bad.

But they funded in anyway, then invested one hundred and fifty thousand in apple computer in nineteen seventy seven. And then eighteen months later, they had an opportunity to realize one of the greatest venture returns of all time. They made A X on that investment.

They sold their shares for six million dollars before the IPO. And they completely cleared out their position in apple. And of course, we all know what happens since. And we in the next line, we just refund. We still we put on where where our friends ted and tod, over at a picture with warrants .

approval.

started buying hair, beating hair and hair in the yeah I think they did Better than quite IT on this one.

So not, you know, because we use one gigantic, global, most successful technology company of all time to illustrate this. We figured we pick another example to just to show it's not an isolated incident. So amazon IPO to eight dollars per share.

And just for fun, I want to point out that subsequent run up there in the dot com bubble to one hundred and twenty dollars a share that, of course, that crash from the dot com bubble. So two thousand one to two thousand three looks like a pretty amazing buying opportunity. But actually that's a udi ous statement, because every year for the next two decades was a great buying opportunity in this company.

And so what are we illustrating here? If you had held that amazon IPO share for thirteen years, you would have a nice ten ex from the begin of the craft to the end of the graph, but you really should have continue to hold if you zoom out here so you can see that little crossed hairs, they illustrate where the previous graph ended. Basically, any growth of the stock before twenty twelve just looks cute.

And you at that point in twenty twelve, I think we all would have described amazon as a mature company. IT was almost twenty years old. If you had just held for another ten years, then instead of that ten x and thirteen years, you could have had a one hundred and seventy x and of course, the difference between those two on an absolute dollar basis, whatever you invested a IP is incredibly meaningful.

incredibly meaning. And so the key inside this, letting your winners ride and you when to lead your winner, right and went, not it's not your growth rate in any given year that matters. Frankly, that doesn't matter at all.

What matters is how many years of growth you have left. Like that is the ultimate question. And in the case amazon, in the case of apple, if you have decades of growth left again, that's all that matters. IT leaves you in this interesting .

place where you're thinking, well, okay, I always continue to hold. And this is why venture capitalists tend to be totally obsessed with market size because it's this idea of IT like you basically need to be able to run forever or decades and decades and decades and continue to grow.

And those markets continue to be this globally addressed, absolutely massive opportunity because the compounding the funny thing about IT is all of the value tends to show up in the out years. And the trick is figuring out like, okay, my in the outyears yes. And so there's a great like everything in in startups.

There's a great pol gram quote to go along with IT course. He remarked in december twenty twenty that an astonishing and ninety nine point nine eight of amazon's s growth had happened IPO. And I just love this because I I actually created IT out and I have IT at home. IT reminded me like how much, yeah, just how much running room amazon had ahead of IT after its IPO.

Number four, one of our very favorites. I love this picture of jen wang showing off his in video, a logo tattoo that he has on his shoulder.

I think it's from the tegor two processor line. Like name a more bad as taxi than john on.

I think he might be more bad as than elon I did, both for a leather jackets. A number for a lesson is nothing can stop a will to survive. And the reason that we put genser on this slide, one is because his will to survive is unparalleled.

We will tell the story in a minute. But two, we actually started our two part series on in video with this great quote from him, which is that my will to survive exceeds everybody else is will to kill me. So what are the key things that we realized looking back on all the stories that we've told, we kind of have a formula that required IT just happens to be like the best formula of all time and is josef cambell.

And it's the heroes journey. And all the great companies, whether it's apple or amazon or in video or tmm c, they're all the heroes journey. And the thing about the heroes journey is you face diversity along the way.

You're sitting a drag and IT looks like you going to die. And the thing about company building is that, unlike fighting dragons, game over only happens when you decide to quit. As a founder like you, you can't get eaten by the dragon.

Like the market can turn against you, but the market can actually eat you. There is always, always away to survive. It's just a question of do you have the will to do that? And h, the invidia story just illustrates that Better than anybody.

So when they were funded, it's a coy and funded them. Shocking, shocking, right? IT jenson and a couple of his buddies from sun. Jenson was a lsi logic and to cofounder were from sun, this amazing technical team, this new market graphics accelerating and gaming on PC giant wave LED by dom and home adoption of this was like great team to pursue. IT can't mess investment.

no brain or venture bet, no brain. Why the venture capitalist bet on everyone over and over and over over, which is the problem .

with no brain or venture bets, everybody thinks they're no brainer. Venture bets and tons .

of competition. Eighty separate companies making graphics .

cards got fed. yeah. Seventy, eighty separate companies making graphics cards are found sounds quite today, but there was a lot back then. And then IT gets even worse.

Intel came after the graphics card industry and decided that they were going to integrate graphics into the motherboard, which they had done with sound chips and networking chips and everything else. Like how many people have a dedicated networking card in their pcs? These nobody.

So put yourself in jenson and and video shoes here. You just got funded. It's not a lot of capital a zile. Other people just got funded with the exact same amount of capital that you have. We don't have this in our sort of discussion. Here's some freewheeling, but it's worth knowing that and video is a original approach to how they wanted to render graphics on cards was actually basically wrong. IT was novel, but I was like, not the way that everyone else decided to go.

And so IT was difficult to program. Natera s instead of triangle gas.

which is not as efficient as a three sided shape anyway, had a lot of merit is so not only are you not on the same footing as everyone else, you're competing against for a pure commodity, on a thing that takes eight to twenty four months to ship, you are a step behind because you've burned up under capital.

chasing the wrong approach first, told you. So what did they do, jenson, and laid off seventy percent of the company, and they did to completely crazy things. And if you're not just focused on survival like you wouldn't do these things, one, he decided that the only way they were gonna win and survive was in this brutal commodity industry, was by shipping six months ahead, shipping new technology six months ahead of their competitors.

And the way they did that was they decided they were just onna yellow IT. So they had designed all of their chips in software emulation as supposed to what everybody else did, which was theyve work with their founding partners. And they would get some prototype chips, me and y'd send him over formation, and they test them out. They makes sure they worked in videos that, no, we don't time for that.

They literally only ever ran the chip and software. And then once that past, send IT to the production run. And then the other .

thing that they did, which we didn't talk about this as much on the episode, is, of course, you're going to have a lot of errors and defects by doing this. So like a large percent of the chips, like the chips worked sort of an aggregate, but like a lot of functions that you would want to call as a game developer just didn't work. So they were like, guys, a feature, not a bug. We're going to go to simplify your life with game different Prices.

So they would ship on broken and they were just disabled that they would make IT so that you couldn't access set in software. And then they would go around all the developers and say, you just actually don't want to .

use that blood mode.

Trust us. Trust us. Like, I feel like instead of all twenty four blood modes, those eight are just going to be really good.

So you should figure out how to write your your games using just those eight blend modes and like, I can't imagine unless you are actually forced with you're back up against the wall to decide, sure, i'm going to only ever emulate my chips before production run. And sure, i'm going to ship on broken and then tell the market to deal with IT like these are. I mean, I guess that goes back to the necessity is the mother of invention.

There was a lot of necessity, yes, a lot of necessity. So jensen in video, just the og goat story of this. But there's another a great example that we had to include because we literally just talk to this CEO a week ago, and that's arqu on from zoom. This is from my interview with him a week ago.

And after I started the company, I realized, oh, it's so hard with capital, right? And the best of the money, the invisible they give to you, don't think about that money, you know, that's a trust. Know every dollar matters, right? That's why everyday I was thinking about how to survive, how to survive, how to survive even today.

Seriously, I still think about wow, the night. And so the interesting thing about that comment is I asked eric the question, did you try to create a gigg antic, multibillion dollar world beating company with zoom? Or were you just thinking about sort of um how can I make a great product? And he like didn't even really answer my question. He was just obsessed with this notion of survival and that when he started the company, although we even through to today, what he's thinking about is how do we, you know, ship create product and services?

Yep, it's it's a mindset of so many great .

bounders.

yes. Number five.

strength leads to strength. So there's a chance that we picked this one mostly just so we get show mark and reason on this very, very large screen on the cover of time magazine at the height of the dot com mania on a throne bear fit simple times.

I feel like there needs to be some sort of similar image for twenty twenty one .

yeah to think about the long time acquired listeners will know this one. Well, this really starts with the idea of reflexivity. So if you go acquire new resources, your company know if you go get more capital or that next most important customer or a great hey, higher, you bring on the right executive to your team. You are now, by definition, more valuable than you were before you require that resource.

And so the question becomes, well, how do you leverage your now more valuable asset into getting the next resource and becoming even more powerful, even more successful? And an extreme example that I always think of about this comes from a conversation that I had right here at capital camp last year with Michael mobiles, which was if you looked at tesla market cap in twenty twenty, you would say that there's no way they're worth that and that would be a very reasonable thing to say. But what they definitely did do is use that share Price to sell new shares at very little and and raise over ten billion dollars of cash for the baLance cheet that year.

So whatever you thought they were worth, they're definitely worth more now because they have a fresh ten billion dollars in cash and they know how to use IT. So IT really comes down to sort of the ability to uniquely martial resources and to bring you back to mark and reason. In two thousand and and nine, when a sixteen z raised their fund, one, they came out swinging for folks who were sort of observing the tech industry at this point.

They raised three hundred million dollars for fund one in two thousand nine, in two thousand and nine. So mark and then knew this principle very well. They realized what we made, this huge splash.

We've got this big brand. People already think we're like a top venture firm just because we did this crazy thing out of the gate, how do we solidify that position? So the very next year, they raised a six hundred and fifty billion dollar fund million. And sorry, decade IT was we're not the twenty .

twenty two yet. no.

But I mean, as you can tell, like they basically kept going with this mindset of just yesterday .

they raised another foreign alf billion .

egyed fund and there somewhere between thirty and forty billion and management now in what thirteen years since founding, they basically never took their resources and and took that is like a static notion of like, oh, good, now we can do some interesting things with this. They basically always looked at everything they had and say, okay, I we're a strong position. How do we get stronger, how we do more, faster and and compound what we have. So I think there's really something to just always thinking, okay, I just got more valuable and that puts me in a position to get even more valuable again and always just be really thoughtful and super aggressive about seizing that next to opportunity.

The other example that we have to mention on this one from quired cannon is literally the O G O G O G american capitalist business, which is standard oil. Did this? Ran this .

playbook to A T G G. He's like actually a gangster.

may actually a bit of gangster. He was never satisfied no matter how big standard I got IT was never enough.

no matter what competitor he would acquire into the fold by whatever means necessary, or no matter what railroad he just did A A A deal with. Um he would always use that to say, okay, tomorrow morning I wake up and we figure out how to use that. My new, more valuable company.

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All right. Number six, this is another one that is near india. To my heart, it's never too late.

And they're actually two meanings to this lesson. One is also another great mark entry, eries and piece of wisdom. So there's a great famous quote of his from interview.

I think this was in twenty fourteen that he did. Where is he said, I came out here in one thousand nine hundred and ninety four to silicon valley, and the valley was in hybernation. My big feeling was, I just missed IT.

I missed the whole thing and had happened in the eighties, and I got here too late. And silicon valley, who was over? Obviously, that was completely natural.

And what's go about this is that, like silicon valley, and technology moves in waves. It's related to more law. Every time there's a texting computing, there's a new market, there's a new paradigm, there's a new technology that gets created.

And so yes, mark was right. He missed the PC wave. IT was too late for that, but he was right on time for the internet wave. And as long as more as law holds, if you work in technology, if you invest in technology, if you build technology enabled products, it's never too late. You are always right on the cusp of the next generation that's coming.

The other meaning of its never too late uh folks are viewing the video and here here and delicti um will notice we have not mark and reason on this slide the doctor morice jane, the founder of tsf c and so this is I think, the other lesson that that I really taken from acquired, which is that on in this pain, which is that more chain was fifty six years old when he found A T sm c. And t sm c is today, I believe, the element most valuable company in the world. And it's so easy. You know, the flip side of the coin of there's always another generation.

there's always another way we say that maybe the thing keeping in IT geopolitical tensions at rest, and I IT maybe the force that nobody wants to destined ze, and therefore we have peace. Like it's not just a company.

but it's easy to think you know if you listen to to marker that there's eyes another wave that's for Young people like it's it's Steve jobs, it's mark zuberi, it's fatal future and it's these Young kids who get these new waves of technology. And the reality is that just not true. It's just a mindset like you have to be willing to dive in and do IT, and you can do IT at fifty six years old and still build the eleven most valuable company in the world.

We were doing this made putting this together. I was arguing with David that like this isn't novel. This is only novel recently. Like if you think back to what venture capital was, the sixties and seventies IT was funding veterans of the cisco's of the world and you know the the fairchild's of the world who had designed five chips before to go start a new company and build the sixth chip of their life in their fifties.

And it's all the the advent of the internet with cloud computing, with you super low cost to start a company, that there has been this wave of very Young founders creating these consumer internet companies. But that's actually a lip in history. It's funny that now the pendulum has swung so far to the law being, oh, these Young hotshot founders that we have to even make this crazy point of fifty six year old can start an important world changing .

company yeah the trader say, or you know not there twenty years yes.

the right is a familiar face that many of you will recognize. Point number seven is don't mistake options for cash flow. This is from our episode with Michael mobs, who we mention we met here last year at camp.

So what do we mean by, don't mistake buying options for investing in cash flow? Well, there's this word, investing come up a lot this week. IT is used for multiple purposes.

This is sort of an overloaded word. And classically defined. Investing in the bend gram sense is that you are looking at a series of cash flows that a business generates from today into the future. You apply some discount rate, you value those cash flows what they're worth in this present day.

And you look at things like characteristics of the business, like potential margin expansion or their growth rate, and you make all sorts of assumptions based on, again, the cash flows that you know to exist today. And you try and come up with some Price that, that business is worth of thing. You try and puts the money and .

invest at that Price. The man, that doesn't sound all what we do.

No, David and I are professional seed stage venture capitalism, and people call what I do investing. But while it's the same word, IT doesn't involve literally any of the things that I just mentioned, you know, in that, that previous common IT is funny to me that that IT is is called investing like IT is it's typically just a founder, an idea on an papon. So how can you make any assumptions about the cash flows?

And and were like, well, that founded that ideas worth twenty IT is so funny .

to me that that people think it's complete voodoo math, how venture capitalists come up with with valuations. This is where I think that the of Michael common and his his his thoughts on this make a lot of sense because once you admit that there is no dcf and you stop trying to say, in what world is that worth twenty million dollars or ten million dollars or seventy million dollars in an idea stage, which we've seen recently, well, then if you're willing to let that go and you meditate and take your deep breath and say, okay, well, how do we Price this thing then if it's not based on classic investing, dcs, really venture capital in the early stage is not at all cash flow based investing. It's actually options investing.

And as you sort of think about IT, that way that the world starts to make more sense because how do you value an option? Well, you look at the range of potential outcomes and the probable isc likelihood of that option in the entire range of of outcomes, which is actually what venture capitalists are doing, whether they're cognitively thinking about IT that way or not. You're basically saying, what's the chance that this is a billion dollar company or a hundred billion dollar or zero? And of course, this leads to the idea that you need diverse portfolios rather than just investing in single large companies because this range of potential outcomes is so wide that you need to find ways to sort of smooth that risk while still benefiting from the potential of an asymmetric return.

IT also completely explains why venture capitalists are so obsessed with tam was one of the things. So I first got into the industry as like why every care so much about the time I aren't there. Other aspects that you should care about? Well, that's what's most sensitive to the valuation of the option IT is the the magnitude of the outcomes that, that are possible. Like you can then debate the probable waiting of IT, but the higher of the magnet of the outcomes, the more valuable the option is going to be.

right? If I think there's some x percent chance that this thing becomes the next apple, what should I pay for IT? Now that is actually the question you are asking rather than dcf in your way to something there. But of course, it's it's sterile and kind of terrible to talk about people's life's work as buying an option. So there's an important .

corner of this, yes. And this is from our friends over IT altos venture and in particular, and he makes this great point, he actually just remit on twitter the other day, which is yeah okay. Like you probably should think about valuations and venture capital investing more like options than you do thinking about investing in public companies, the cash basis.

But don't mistake startups for a lottery tickets. These may be options to you from an investing standpoint, but these founders are real people with families and lives and bank accounts and employees. And the other the other thing that is fundamentally different about venture capital versus, say, public market investing is, is a multitude game, not a single turn game.

And so how you behave and how you treat these founders, even if it's clear that your option is going to expire worthless, you don't know what those founders are going to go go do next. You don't know who their friends are, you don't know who are going to talk to, you don't know what the other investors are around the table might think about the way you behaved or didn't behaved during that period of time. So it's this interested. I think these two dynamics really explain the culture and silicon value at which is you're doing options based investing but it's .

a muli turn game yeah and in practice, nobody y's actually just doing one or the other everyone the style of investing is somewhere on the spectrum here because other than the peer play value investors, who are you looking at the book value of a company or the seed stage investors at the proceed like me, who are looking at a nap in sketching and a founder with an idea, or sometimes even no idea, most people are actually in the middle.

So most people have to blended some notion of what are the chances this could be big and how big with the idea that, hey, we're actually generating revenue and sometimes even cash flow as a start up. And I actually can apply some. Multiple to that. And obviously, multiple can can change rapidly on you and then you have to adapt. But everybody's doing a little bit of one and a little .

bit of the other are at for our next lesson, focus on what makes your beer taste Better. So we brought up this little thing yet on a whole bunch of episodes on acquired. But this is in the image of jeff s at the two thousand and eight y combat or start of school, which was a little, which is a, which is a moment in history, a very important moment in history. So I see, at least used to do, I don't know if they still do, is probably virtual. Now we put on these physical and silicon valley .

I went to on in the billion m civic atrium.

That's right. I went to one to, and they were bring founders and come and talk and inspire the next generation of founders, and basically to inspire applications to, I see. And so in two thousand and eight bases came, and this was right after AWS had launched. And he used IT as a marketing opportunity to market to all of these startups s and future startups s about why they should build on au s instead of rolling their own infrastructure.

which we should say this strategy worked ludicrously well, like a got probably a five year lead on cloud by piling people on the plane from seattle, going down to the border of vanilla zing, like crazy to all the start.

tiny startups who, in that very room at the two thousand and eight yc start up school I started, that had not even been built yet, was airbnb. The three airbnb founders were at that Y, C, start of school and that's why they decided to apply to Y C. That year. And the rest of .

IT worked for basis and .

IT worked for ice to indeed but if you go watch the talk, which I highly recommend is really great um jeff uses this sort of a odd analogy for AWS where he talks about european beer disorder. Beer buries around the turn of the twenty eth century where you go with this. And the point, the analogy he makes is electricity had just been invented.

And this was this massive boom enabling technology for consumer product cpg, like, like beer. They could now brew vastly more quantities of beer than you could before using electricity. But the first reveries to adopt IT, they built their own power generators.

They made their own power, and that work fine for a few years. The super capital intensive required all this Operational labor to run the power generators. And then the utilities companies came along.

And the next generation of bruises, they didn't make their own power. They just rented IT from the utility companies, and they ran rush out over the first generation of buries to use power. Because, guess what, whoever makes your electricity has no impact on how your beer taste IT. Literally, making IT yourself does not make your beer taste Better.

But IT does raise .

your cost structure. IT does raise your cost structure. And so jeff s. Argument, all of the startups was focus on what makes you bear takes Better. So there's two lesson here.

One is what he's arguing that as a start up, you should focus solely not just start up any company. You should focus solely on the attributes of your product that your customers are onna care about everything else. Your infrastructure .

doesn't matter. outsource.

The second, perhaps more important, take away from this. If you look at what bazas did not, what he said is that being a utility company is an exceedingly, exceedingly great business and particularly being an unregulated utility company.

I mean, that's the reason that amazon became a profitable business.

absolutely. And and not just amazon. If you think about it's a profitable .

company where they piled up too much cash to reinvest other cash lies.

But if you think about this model of like what is an unregulated utility company in technology, IT can be so defensible and powful like that's what square is. That's what sharply fy is. That's what I think two thirds of our sponsors and acquired. That's what vantage modern ery vought you a mystery, all of the if you can provide a critical mission, critical piece of infrastructure that other companies can use that they need, but doesn't make their actual beer tase Better, the great place source said.

I think you about this just to go off script again because it's fun up here. I think that this is actually the same thing as like the economic theory of specialization of labor, but applied to businesses where is basically well understood at this point, that GDP tends to go up when people get really good at a thing, focus their time on doing that thing and then turn to their neighbor, who's good, a different thing, to provide that service back to them, rather than everybody doing everything for themselves in their lives. And this is just that on a business scale.

totally alright.

The next one is one that is near dear to my heart. And I had a lot of fun illustrating this, so bear with me answer me these visuals. So this one is scale up or niche down.

And I want to start first by talking about kitching down. So this photo is, uh, ripped with love from Brooks runnings website. It's a great picture company.

We had jim webber, the CEO, on stage with us for our rena show a couple years back in seattle. So for folks who don't know, Brooks is a pretty special company. Back in two thousand and two, when jim came in, they weren't, Frankly, they were everything to everyone.

They didn't just make running shoes. They made everything, shoes, including twenty dollar shoes that you would wear, a family barbecue. And they made all sorts of a parol for all sorts of sports. The company was losing money, I think, five million a year in the red. They were doing about sixty million in revenue, but obviously not able to to capture a lot of value out of that.

And so when jim came in to turn the company around, the first thing he did was decided we are going to be a running company, and we are going to be a running company for performance runners, for people who care about they're running. And so immediately went to a bunch of their distributors, big box stores, slashed entire product lines. So they went from sixty million in revenue down to thirty years or something like that.

They ve got rid of all their unprofitable product lines. They've d of anything that wasn't performance running. They blew up their whole distribution channel and they started caring only about these performance, running shoes, focusing on R D, and really investing in building brand with brunners.

Well, i'll save you the whole story and just flash four to twenty years. IT worked. They grew slowly at first. But then over time, IT really started to pay off, and they really started to be known as one of the best running shoe companies in the world.

In fact, there they're one of the top couple, and I need big marathon that you'll see you when they take the high speed cameras. Brooks, Brooks, Brooks, Brooks. And of course, some assets and some some newer brands to and of course, the the new crazy nike shoes, but they just realized we are not going to beat nike like we are not going to beat nike at the everything game.

So we have to niche down and play a different game. So I mentioned that sixty million to thirty eight million in revenue last year. They did close to one point two billion and had a great year last year through the pandemic and are continuing to write this wave of running. Becoming one of the the largest and fastest growing athletic apparel opportunities in the .

world is such an amazing compounding story and burger story. I have been growing at thirty to forty percent a year for like the last twenty years. It's amazing duration.

duration. So IT also works to scale up. So a quick case study. We did an episode on the new york times a couple years ago. And while every midsized newspaper in the us.

Was going bankrupt, thanks to disruption brought by the internet, the new york times became gigantic and a healthier business than ever. And the time saw the idea to be sort of the one national brand and one of a few trusted global brands in the space. The internet, as we know, can be brutal to people caught in the middle, because they enable everyone in the world to access any reporting, basically for free, pretty easily.

And so then whoever has the best reporting in the world on global or national stories, of course, sort of gets all of the traffic and every one of the middle stock. So this obviously has an enormous cost associated with IT. You need to basically hire all the best reporters.

You need to have the most reporters. You need to build out. I mean, massive technology investments that the new work times is truly a technology come to at this point.

So super high fix costs. So you gotta believe that you're actually going to be able to Operate at that global scale to justify all of these fix costs. So the point here is, sure you can edge down, sure you can scale up, but you really don't want to get caught in the middle.

Now on the media side is kind of funny. You've got these tiny little businesses like acquired strategy, are good friends at glosses. The internet, while being extremely punishing to the middle, also enables these deep niches to form.

It's sort of this interesting barbell effect where if you keep your core structure low and your super, super focused on a niche, you can aggregate all the people who are weird on the internet about your niche in the entire world and basically aggregate them together and create community of people who like three hour business technology podcasts. And I think like it's important to realize that this may not happen overnight for require. IT has taken seven years for us to get to corner millions subscribers.

But if you're just like repeatedly loud and specific about the value proposition that you can bring to people by following your immediate publication, people find their way, you know, time and enough distribution and enough content kind of does IT think so. I I always sort of focus back on i'm glad that we didn't decide to be, you know, a midd scale media company and it's really like, all right, it's u and irons and microphones and the new york times can have that market. So couple other points here.

I don't think this is unique to media. I think media was the first to experience this sort of wishing in the middle, but it's gonna happen to everything. The internet is still rippling out in all of its effects.

You can see that in venture capital, for sure, you've got big funds like sqa and rison that get massive and then niche funds, especially for the early stage, emerge and there's great opportunities for small funds who are are very focused. Those caught in the middle are in a tough spot and they're super undifferentiated. And you can imagine this happening with universities at harvard and stanford.

Brands are gonna be just fine like those will continue to probably grow in value. As they're able to address more and more people using the internet, obviously, that happens, slow leaks. No one wants to devalue their brand.

But as that becomes more and more widely accepted that I think those brands will just continue to get more powerful. You could imagine this happening in a bunch of other industries. Two, besides just media, capital, education.

So as a final little illustration at this point, I just want to pull up a couple of a market cap slides. So in one thousand nine hundred ninety seven, there were three companies in the top ten in the world that were technology companies. Today is eight of the top ten.

What happened between them are now while the internet penetrated the whole world. And obviously that returns to scale got massively concentrated here, where you can see that the most value companies in the world, not only of technology, internet companies, they're much more valuable than they were before. So there's a sort of counter intuitive thing that the internet was a decentralized network that started as servers at universities and then somehow IT massively concentrated the returns to scale for the platforms that underlie everything that we do all day, every day.

And on the flip side, IT also enabled the viability of the long tail. It's not that we have thirty midsize retailers in the us. Anymore the way that we used to, not at all.

There's amazon and then there's how many merchants saw they are on shop fy. Now we've got something like two million shop fy merchants and over thirty million amazon sellers. The platform fiction that the the internet sort of broad really enabled viability, the long tail. At the same time, we want to think our long time friend of the show, venter, the leading trust management platform, venta, of course, automates your security reviews and compliance efforts. So frameworks like soc two, I saw twenty seven o one gdpr and hyper compliance in motoring vento takes care of these otherwise incredibly time and resource training efforts for your organization and makes them fast and simple.

Yeah, fanta is the perfect example of the quote that we talk about all the time here and acquired jeff basis, this idea that the company should only focus on what actually makes your beer taste Better. I E. Spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. IT plays a major role in enabling revenue because customers and partners demand IT, but yet IT add zero flavor to your actual product that IT takes care .

of all of IT for you, no where spread sheet, no fragment to tools, no manual reviews to cobble together your security and compliance requirements. IT is one single software pain of glass that connects to all of your services via is and eliminates countless hours of work for your organization. There are now A I capabilities to make this even more powerful. And they even integrate with over three hundred external tools, plus they let customers build private integration with their internal systems.

And perhaps most importantly, your security reviews are now real time instead of static, so you can monitor and share with your customers and partners to give them added confidence.

So whether you are start up or a large enterprise and your company is ready to automate finance and streamline security reviews like vantage seven thousand customers around the globe, and go back to making your beer taste Better, head on over to vent a outcomes lush required and just tell them that then. And David sent you, and thanks to friend of the show, Christina anta CEO, all acquired listening ers get a thousand dollars of free credit vantage com slash acquired .

and down the home stretch, staying on the media theme. So we did this episode on Opera two years ago now, and and harper studio, and there was surgery. And what our big take away from that was a line that was said to Opera, right, as he was starting her own show and meter.

Momentous business decision, which was don't be talent on the business. And the sort of way that i'd like to think about this is, if you want to be a millionaire in the media business, you should work really, really hard. You should own your craft.

You should become, must see, content, totally unique, the opposite of a commodity. You should be steff, curry, Leonard to carrio. Know what have you?

If you want to be a billionaire in the media business, you should do all of those things, and you should never, ever, ever, ever give away the rights to your content or salary rates to your content. And that's that's what open did. We also told the tAiling swift story earlier this year, Taylor started as just another country music artist and then just another pop artist. And and then in the past few years, she's completely changed the whole structure of the industry by figuring out ways to get back the rates to her original music, which is an incredible story.

And this is fairly unique for media, right? Like for content, it's this is easier to do. Then if you were saying a basketball player.

yes, yes, it's it's hard for athletes to do so these in their sports.

like athletes can own their personal brand and they can leverage that into building something on the side. But the thing that they do, they're playing with someone else's game. The interesting thing about content is you can always just make IT your own game because the internet enables this thing.

That's the last whole thing about this, which is that thanks to sub stack podcasting, youtube, tiktok, instagram, it's never been easier. You don't need nbc. You don't need universal music group. In fact, they might hold you back. Anybody can publish anything on the internet.

all right? This one is reasonably self explanatory ory, but it's another basso ism. And so I want to bring up in the very first shareholder letter in one thousand nine hundred ninety seven, he wrote, because of our emphasis on the long term, and people probably might know how to recite this by heart, at this point, we may make decision and way trade us differently than some companies.

We will focus on growth with an emphasis on long term profitability and capital management. At this stage, we choose a prioritized growth because we believe that scale is central to achieving the potential of our business model. This is absolutely BIOS way of basically saying if you're not on my bus, get off because this is what we're doing.

They stayed true to their word for twenty years without turning a profit. As we talked about earlier. You could argue they still wouldn't be profitable today if they weren't for AWS.

They've reinvested every dollar of the retail business for two decades. There is zero chance that they would have been able to execute the strategy that they did if IT weren't for their ability to be loud and proud about their intentions. And as we sort of drift toward the clothes here, i'll be a little bit less bashful about acquired specific examples as i've wanted to highlight other businesses.

But this one sort of close to home, we're obsessed with this idea of treating our audience like they're smart. And this wasn't the fastest path to growth because I think we could have listen to what everyone told us podcast epsom need to be a half hour podcast. You need to drop every single week so you keep this content cats.

But we wanted to be weird on the internet about something, and we wanted to basically be unabashed about IT. And so i'd say that the people that we get to interact with now in the community and all the folks that we met here who we mention, I ve listened to the show. We ended up with exactly the listeners that we wanted and the people that we want to spend time with, because there is a long game to play. If you're saying if you don't want to be on the bus with us, that is fine. Please get off as soon as possible.

Indeed, which is the perfect leading to our final lesson from seven years of required, a speaking of getting on the bus, we all need to do that to go to the party. And what are we going to do the party? We're going to have fun. And that is what this is all about.

If you can find something that you can do with your business, with your life, where you have genuinely have fun doing IT and for other people who do the same thing, it's work you are going to run farther and longer and faster and Better than everybody else. And there's actually another take way to this. We put the an image of of us and our our friends packing, according c in mario, every earlier really showed the other week up here, I was just such a place, this whole thing, this whole dirty.

It's been so fun. But when you're going to a work harder than people for whom this is work, and bill early makes this great point in his running down the dream talk, which we've talked about on acquired, everybody should go watch that on youtube. But the other point is that it's so much easier to evandale ze and grow and market and have people attracted to whatever IT is you're doing if you genuinely have joy in doing IT and and joy is not something you can really fake.

So that's our biggest lesson. We have had such a blast during these past seven years. We've got ten to meet amazing folks like Patrick and brand whole capital camp team. And what is so thankful?

All right, listeners, hope you enjoyed our talk from capital camp. Please let us know your feedback. Acquire dott F M. slash. slack. Would love to hang out with you in there and hear some of your favorite themes from all the playbooks. Over two hundred dish episodes actually didn't count exactly.

but it's a lot I didn't think it's .

two hundred include pildes, so currently skipped a lot. I had eighteen and David maybe trimmed down to twelve. I'm curious if some of the ones that we didn't talk about, our ones that.

that you want to bring up, I originally want a ten, and then was bought too hard that I gave him two extras.

yes. Well, thank you so much for being with us. Uh, this season and on these special episodes spent an awesome six months were super pumped for the next six months. We have some great stuff planned. He will see you next time.

See you next time. Easy you, easy you, busy you. who? We got the.