What We’re Reading (Week Ending 10 October 2021) - 10 Oct 2021
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 10 October 2021):
1. Unit Economics and The Pursuit of Scale Invariance – Tribe Capital
When we think about unit economics we are primarily thinking about the following quantity:
gm*LTV – CAC
The three quantities in the above equation are meant to be somewhat impressionistic. From an analyst’s point of view there are choices with regards to what to count in gross margin, CAC and LTV (lifetime value).
To explain the quantities, consider the example of a prototypical SaaS company that sells some software to business customers. In that case gross margin is usually fairly high – in the 80% range. LTV here means empirically observed LTV_n or realized cumulative revenue collected after n months. CAC means all sales and marketing costs needed to acquire and onboard the customer. The salient question that we start with is “how long does it take to get paid back” or, analytically, for what value of n does gm*LTV_n = CAC. This leads one to a payback of n months and the rule of thumb for most venture investors is to consider n<6 months to be great and n>2 years to be not so great and everything in between to be the range of normal. From an investor’s point of view, shorter paybacks translate to leverage on the invested dollar because capital spent on S&M can be recycled faster when paybacks are short. Note that this approach doesn’t use extrapolated LTV. Oftentimes people will compute full LTV using some formula involving imputed parameters (see discussion here). We don’t use that because we’d rather not assume things about the long tail of customer lifetime and instead focus on what has actually transpired. As a result, we tend not to look at quantities such as LTV:CAC because it includes these often spurious extrapolations. Instead, we tend to focus on gm*LTV_n – CAC which we refer to as the “unit (or contribution) margin after n-months”.
2. David Fialkow – Paint Outside the Lines – Patrick O’Shaughnessy and David Fialkow
Patrick: [00:16:03] Can I ask you a question about that painting the lines thing? You mentioned creativity as a key ingredient, not just for what you’ve done, but your background is very atypical to build such a large investment firm. But it’s what makes it interesting.
What have you learned about identifying real creativity in potential founders? Because that’s a renewable resource, I’ve found. It’s not just a moment of inspiration early on and then you build for 10 years. You constantly have to be creative. How do you underwrite that? If you’re backing people very early, you don’t know much about the business. There is no business. You have to lean on that creativity, I’m sure, a lot. How do you do that? How have you learned to identify that early?
David: [00:16:37] Let me be very direct and answer the question in a soundbite. It’s only is always a founder that loves their products so much. Nothing else, man. They don’t hear the other conversations in the room. They certainly don’t hear criticism that you’re making of it. They don’t view the difficulty of the execution as a problem, which is a great thing. Hopefully, they address it by bringing in people around them. There are four things that we get turned on by, in our filter. I hate to say a checklist, because it’s another checklist. Number one, does that founder love their product and is willing to do anything to get Patrick and David to use their product? And will run through walls to make sure the world… Because they believe that the world needs their product more than they need oxygen.
Number two, do they know how to sell? And selling means can they storytell? Can they make it clear to others? How important this product and this mission is? The third thing is that they absolutely have to have some form of modesty so that they listen to other people. The smartest people in the world are smart because they listen to others. Now they may not always follow the advice of others, but they listen. If we feel that somebody isn’t going to listen to us or others who are maybe smarter than us, then it’s hard to back them because you know at some point there’s no room for a pivot, which is the major part of where venture capital returns come from. And the second thing is they’re not going to take feedback in a way from many people, including people on their own team that’s positive.
And then the fourth thing is a true north. And that mission that I talked about earlier is deeply important to us because it’ll get tested and challenged, often. There will be interpersonal decisions that that founder will make about their lives, their team, investors, their marketplace. It’s hard to tell, but you can get a feel for somebody, whether they’re going to be a standup person.
Because the expression that’s my guiding principle here is adversity does not teach character, it reveals it. We talked about Icarus. Bryan Fogel is one of the greatest founders of all time. He was the director and the character in Icarus. You’ve got to have that person that you feel that, when bad shit goes down, wherever it does, they will be in a position of being able to make the right decisions. And don’t rely upon a rule or some principles written down somewhere. They have a gut instinct about doing the right thing all the time. And those are the four things you look at, Patrick. And I’ll tell you if you do it, it’ll be very, very selecting for you as an investor.
Patrick: [00:19:26] And there’s one on that list that really stands out because I’ve never heard anyone say it quite this way, which is the first. That they love their product. What is the inverse of that look like? What does it look like when someone clearly doesn’t love the product that they’re building?
David: [00:19:38] Meatball question. Perfect. It’s somebody that comes in and says they want to do a startup. And we’re like, “Great.” I don’t know. I’m looking at all these different industries. Well, Sean he has a really good podcast. Maybe I’ll do a podcast. The Alco’s got a good venture firm. They’re focused on the commercial part of this. You want somebody who’s commercial, but that’s not going to get them to the promised land. Normally what happens is, and we can give some examples of this, but people come. They want to have a discussion with us or other firms, that is, “I got to tell you about what I’m building.” And we’re like, “Great.” And let’s not focus on margins or CAC, LTV or any metrics yet. Let’s just get straight what this product is. Because here’s what happens, and this leads to the pivot. When somebody is so obsessed about their product, and then they get feedback.
If they’re good, they don’t believe their product is a failure. They believe their creative instinct and their right brain can pivot it to be able to do something else. They never lose track of the fact that this is still their product. They don’t say, “Okay, this is water. And nobody liked water and therefore, I’m going to turn it into beer.” Here’s a great example. I joined the board five years ago of Boston Beer Company, Sam Adams. Why? Because my neighbor is Jim Koch, the founder. And in one of my impulsive moments, which I’ll share later, I almost bought a brewery. And Jim said, “It’s a bad idea.” The brewery I was going to buy and why I was going to buy it, it was in Northern New England and it would have been like a boat anchor. So Jim and I became really good friends over the years. He’s just a fabulous friend. He built a good business.
But about five years ago, Sam Adams was in deep dodo. It had declining sales. And it was trapped between really hip micro-brews and the big guys who had gotten really good. So Jim said, “Hey, it’d be great if you could join the board and help me in my team turn the business around.” I didn’t do much to turn it around, but I watched an unbelievable turnaround. This is the story. Jim Koch walks into a board meeting one day and we’re looking for a new CEO because our CEO who had been like a co-founder with Jim, who was done. And done a great job and gotten the company to a point. And now it was time to move on. And Jim says, “A lot of you have been talking about how one product is going to kill the beer business.” We had told him that one product that was going to kill the beer business was tequila because no sugar, it’s light. It’s an up, it’s a great experience. And young people started doing tequila and not drink as much beer.
So Koch takes that away and comes back and says, “I have a product that can compete with tequila.” So we’re going, “What?” And he pulls out this can that he had made over the weekend, a Red Bull can, a thin cylinder, 10 ounce or whatever it is. And it was vile tasting flavored soda water. And he goes, “Forget about what you think today. 90 days from now, this will be the biggest product on the market.” And he invented, with our board member who became CEO, the two of them invented Truly, which went in three years from zero to a billion dollars. Zero to a billion. It took him 40 years to get to a billion dollars in beer. And in less than three years, Truly is over a billion dollars. What an amazing founder? He never said, “Beer is failing.” He said, “It’s just innovated. It’s changed.” And he used beer malt, which is how he got around a beer company selling it because beer companies can’t sell spirit, tequila and vodkas. But he built it out of beer malt because that’s what great founders do.
It was that love of his product, beer. But what really changed it for him was understanding the tastes and needs of other people. So that’s the kind of stuff I need. When we look at a founder, we look at, are they going to be that person that is going to be capable of making those pivots and stuff when they have to? And if you paint between the lines, you get too frustrated and you look at yourself as a failure. Because you went to an Ivy League school and then you went to a business school and you went to Goldman Sachs, whatever. Your life had been about getting gold stars. I’m not saying that’s not a bad life. It’s just not the life you and I had. But you tend to look at risk as painful. “I don’t want to lose a gold star. I don’t want to have a blemish.” We’re embarrassed all the time. Like, oh my God. You’re going to ask you later, I know, about failures. Well, I mean, really? You’re going to need me back all week to record it. Because we get this stuff so wrong all the time and we got to look at it as a learning experience. And then we got to do it with empathy and dignity. And make sure that the people around us do too…
…Patrick: [00:40:54] I have to pull the amazing bookend that everyone’s been waiting for and tie this back to Icarus.
David: [00:41:00] Are you saying that this is over? It’s over?
Patrick: [00:41:02] No, no, no. I’m just using my opportunity to tie off at least one loose end.
David: [00:41:08] All right.
Patrick: [00:41:08] When I saw the movie, the documentary, what struck me was, again, what we opened with, which is you’ve told the story of the opposite, people that love their product and have … The fourth thing you said was North Star. They’ve got, I think of that as almost ethics or integrity or morals or something like they’re doing it for a bigger purpose or a certain way or both. And what struck me about Icarus was how far people can go doing things the wrong way to achieve an end or an outcome that we think of as good or as a win or whatever. What did you learn there? Is this a counter pattern that you can deploy in your investing?
David: [00:41:40] Let’s get facts straight. This is a movie that failed pivoting. Bryan Fogel was introduced to us by Dan Cogan and this woman Geralyn Dreyfus introduced us. Two film partners of ours introduced Jim Schwartz and me to Fogel, who wanted to make a movie, which he described as Supersize Me for biking, for doping. I’m going to race one year and we’re going to film it. I’m going to race a second year on dope and I’m going to do better and it’s going to be fun. Okay.
But here’s what happened. Here’s what happens. The movie doesn’t work. He races on dope and he does really well. He then goes through a year of protocol, and this is Fogel, and he dopes and he does worse. Now he does worse for a variety of circumstances, not relevant why, other than maybe he was doped. I don’t know. But he didn’t do well. So he is sitting there like a founder on the floor, in the fetal position in Geneva, Switzerland. “I did worse. The movie failed.”
Well, not exactly. So Jim and I said, listen, we’re VCs. This happens all the time. How do we pivot this to give you your next thing? And Bryan was not a founder of a tech company, so it wasn’t something that he was as connected to take a headshot on. And over dinner, we said to him, “If you were going to do one thing to do something extraordinary, what the hell would that be?” He go, “I’d get tomorrow morning, I’d go to Moscow, and I’d find Gregory Rodchenkov, and I’d figure out how he helped the Russians cheat in the Olympics.” And we’re like, “That sounds like a really good pivot. This one’s in the rear view mirror. It didn’t work. Let’s go.” And we re-upped. We gave him a series A. We gave him more money. And what happened next is the guy made one of the greatest films of all time. He held on.
All we did was helping him pivot. Now along the way, yeah, some help in the Justice Department ended up being important. Jim Schwartz found this great lawyer to help us with the US judicial system. But we never abandoned him. The same thing that Jim and I do with early-stage companies, we did with Fogel. We provide him air cover. We provided encouragement and nutrition along the way to keep going. And then when things got really ugly, and they did, we were getting all hacked. The Russians were going to try to kill Rodchenkov. It was all this kind of stuff. And we couldn’t lose our resolve. We had to tell Bryan, “Listen, hang in there, buddy. We’re going to get this.” And Bryan was great founder, filmer. Me and Jim were really great partners. He was fabulous.
And I think a lot of it is that we had some experience together doing deals in the VC. And I knew that this was a guy who wouldn’t crack and would not ever do the wrong thing by Bryan or another founder. So that transformation was Bryan’s vision, and we were there to support it. Now what also got lucky was you had a character in Rodchenkov, who’s right out of central casting. I mean, if we were going to make a feature movie, meaning with actors, we’d have to have Rodchenkov play himself. I mean, the guy’s so good at playing himself, I mean, he’s a character and he’s a dynamo. So everything lined up.
The third thing is just luck. Okay. So I use this quote without a connection to factual numbers. Okay? 40% of every return is what the market’s doing at the time. Some number like that. You can build the best company in the world and in a shitty market, you’re going to get lower. How lucky could we be, Patrick O’Shaughnessy, that the day the movie premiered at Sundance, the exact day, is the day that Trump gets inaugurated. Okay? And by the way, we talk about the [Collisons] , how good of guys are they? John Collison comes to that premier in Sundance for me. I hope you liked the movie. But he came. Nobody knew what this movie was.
Patrick: [00:45:43] Showing up is big.
David: [00:45:44] Well, no, no. We couldn’t even promote what the movie said. We couldn’t say we have prima facie evidence of Russian doping. We would have been laughed out of the world or Rodchenkov would have been killed or something. So we had to go to Sundance. This woman, Carrie Putnam, deserves a shout out. She ran Sundance. We went to her and we showed her a clip and she was like, “You’re kidding me. You have proof that the Russians doped in the Olympics?”
I go, “We’ll show it to. We’ll show it to you.” Dan Cogan, one of our producers, said to her, “Listen, you should see this.” And Dan said to her, “You got to let us in so we can play the movie, but we can’t promote what’s inside the movie.” And Carrie is just a very, very, very fine CEO of Sundance, loves filmmakers, same thing. She’s just protecting a founder. She goes, “You got it.” So much so that we didn’t have the film printed and finished until 3:00 AM the morning of Sundance because of all this stuff that was going on. And she allowed us to load it in the middle of the night.
There’s this protocol that a film has to be loaded by 9:00 PM the night before, for the whole day, so they don’t have technical screw ups. And we said to her, “This thing’s arriving at 3:00 AM. We’re going to have to load it then.” She’s like huge believer. By the way, isn’t it great to have all these analogies? So here’s a film. It’s exactly … She’s a VC, a great VC, supportive of her founder. If she hadn’t of let that movie play at Sundance, it would have never gone on to the prominence that it did, one of the top docs. There’s been a lot of great docs made, but it certainly was a very transformative documentary. So that’s the story of Icarus.
3. China, Semiconductors, and the Push for Independence – Part 2 – Lilian Li and Jordan Nel
There’s conflicting desires around using local semiconductors in China. – Though the government broadcasts supply chain independence, private companies are not simply government drones: they have to be simultaneously global and local. Given the global sprawl of the semiconductor value chain, local-only companies don’t make it. Yet, Chinese company executives have just watched Huawei, SMIC (China’s leading foundry) and others get nailed by US restrictions. They are carrying heightened inventory to buffer against possible restrictions yet must balance this with the demand and supply mismatch in the industry. They are also fielding requests from local leadership for regional development, and they are dependent on CCP goodwill for local policy, talent, and cheap funding. Together, this combination of uncertainty, local policy, and strategic necessity means many local companies will prefer to buy local “commodity tech” (like CPUs/GPUs) if they can. It just helps with the tick-the-Buy-China-box stuff.
Local policymakers are facing the rush of non-semi companies, lured by the easy money, into semi-manufacturing.2 This is not unusual for Chinese industrial plans. There’s a finely crafted, handpicked set of national company “champions” who the policymakers are expecting to succeed.3 However, provincial leaders always have their say in the exact details of implementation.
The net result? Delinquency and low-return investment is common. It’s one thing to have the money and the drive, but it’s entirely different to be able to effectively pull the talent, IP, tech, and market dynamics together. This sows thorns in the path of leading-edge development.
As far as semiconductor buildout goes, China is progressing well in areas wherein lower labour costs are an advantage and where high capex is the main barrier to entry. This is mainly lagging edge logic, flash memory, some fabless, and all but the most advanced edges of outsourced assembly and packaging. They rely heavily on US EDA tools. They continue to lag in foundry growth, with national-champion foundry SMIC being refused EUV and critical semicap access and struggling to replicate the necessarily sophisticated talent and processes. They have a very low market share in equipment and materials – both are industries with high barriers to entry, scaled incumbents, and steep learning curves at advanced nodes. The critical chokepoint here is thus semicap, and design tools…
…China’s goal of locally fabricating 70% of the semis used by 2025 is highly ambitious. The best odds of this would be for YMTC to rapidly gain NAND and low-end DRAM market share, and target building scaled capacity for >28nm. Measured in dollar spend, China is unlikely to produce even 50% of its chips this decade (Figure 15), in terms of actual chips used, 70% may be achievable around 2028. These would be mostly lagging-edge.
Even to achieve a semblance of leading-edge independence, China is at least a decade away. The need for lithography and design tools is only going to increase for tech beyond 7nm, and neither SMEE, nor Empyrean are close enough to ASML and Cadence/Synopsys to offer competitive systems. Like the US, China relies on TSMC and Samsung (among others) to produce 100% of their advanced chips. It’ll be interesting to see what levers China can pull with TSMC going forward to move the needle here.
Increasingly, Chinese firms could begin to challenge Western competitors – both as they creep up the lagging edge (as YMTC has done) and begin developing their own technologies (as the semicap players are experimenting with). There have been some investments into non-silicon processes as a workaround, particularly with the advent of electric vehicles increasing the demand for power-focused chips. However, the outlook for these is mixed at best. Still, it’s a good reminder that in the 1990’s the incumbents took a speculative fling on ASML’s immersion lithography machines to avoid buying machines from Japan. Sound familiar?
As for true independence, I’m sceptical. The entire supply chain is so globalised today, and the benefits of specialisation so entrenched that it’s almost impossible. Having one country design, fab, package, and sell a leading-edge chip is already super tough. To do that all without that chip, or any of the equipment that helped make it, ever crossing a border is almost unthinkable.
Yet China has no interest in true-blue isolationism. China’s interest lies in strategic removal of dependence on the US. To this end, semicap and design tools are the biggest hurdles.
4. What happened to Facebook? – Justin Gage
Outages are a fact of life: if you work in software they are bound to happen to your company sooner or later. There are a lot of different types of outages: they can be related to your application, your infrastructure, or even the infrastructure that supports your infrastructure.
Teams set up all kinds of monitoring, graphs, and alerts to catch these incidents before they happen. But you simply can’t prevent them all. This particular incident (again, we think) seems to have been related to DNS, so let’s dive into what that is exactly.
Someone famous once said that the internet is really just a bunch of cables, and that’s basically true; it just refers to all the computers in the world, networked together via cables or wireless. When you load a website on your laptop, what you’re really doing behind the scenes is just connecting to another computer – in this case, a server – far away, via a bunch of transfers and switches. You ask that server for the web page you want, and it sends it over.
In that interaction between you and the server, there’s a lot going on behind the scenes. As you can probably tell, there’s no single cable that’s going from your laptop to Facebook’s server. There’s an entire set of infrastructure in the internet’s “middle” that takes care of taking your laptop’s request, routing it towards Facebook’s servers, and getting the answer back to you. A big part of that is DNS – the flashy subject of our next section.
5. Nobody Really Knows How the Economy Works. A Fed Paper Is the Latest Sign. – Neil Irwin
It has long been a central tenet of mainstream economic theory that public fears of inflation tend to be self-fulfilling.
Now though, a cheeky and even gleeful takedown of this idea has emerged from an unlikely source, a senior adviser at the Federal Reserve named Jeremy B. Rudd. His 27-page paper, published as part of the Fed’s Finance and Economics Discussion Series, has become what passes for a viral sensation among economists.
The paper disputes the idea that people’s expectations for future inflation matter much for the level of inflation experienced today. That is especially important right now, in trying to figure out whether the current inflation surge is temporary or not.
But the Rudd paper is part of something bigger still. It reflects a broader rethinking of core ideas about how the economy works and how policymakers, especially at central banks, try to manage things. This shift has also included debates about the relationship between unemployment and inflation, how deficit spending affects the economy, and much more
In effect, many of the key ideas underlying economic policy during the Great Moderation — the period of relatively steady growth and low inflation from the mid-1980s to 2007 that also seems to be a high-water mark for economists’ overconfidence — increasingly look to be at best incomplete, and at worst wrong.
It is vivid evidence that macroeconomics, despite the thousands of highly intelligent people over centuries who have tried to figure it out, remains, to an uncomfortable degree, a black box. The ways that millions of people bounce off one another — buying and selling, lending and borrowing, intersecting with governments and central banks and businesses and everything else around us — amount to a system so complex that no human fully comprehends it.
6. Why we do not own shares in Alibaba – Aikya Investment Management
The starting point in our assessment of stewardship is to study a company’s incorporation history. We are looking to avoid companies with strong government ties and hints of crony capitalism, because these businesses are not as resilient as they may first appear. We also prefer to steer clear of businesses that are influenced by the government as these are not run with the best interests of shareholders in mind.
Emerging Markets often have fragile institutions and limited rule of law. If a business is built with the help of the government, what happens when the political powers change their minds? Or what happens if the key people in the government are replaced? If the government decides to start challenging a business, there is no recourse at all. Such government connections can go from being a powerful moat to a liability at the stroke of a pen.
A number of Alibaba’s pre-IPO investors in 2014 had strong connections to the Shanghai faction of the government under President Jiang Zemin. There was Boyu Capital, established by Alvin Jiang, the grandson of Jiang Zemin; New Horizon Capital, which was co-founded by Wen Jiabao’s son, Winston Wen; and CITIC Capital, headed by princelings Wang Jun and Chen Yuan.
This CITIC connection was evident for the wrong reasons soon after IPO, when Alibaba bought a company called CITIC21CN where Wang Jun and Chen Yuan served as Chairman and Vice Chairwoman. The business, which had not made a profit in eight years, did not even have a functioning website and growth prospects were limited. Nevertheless, Alibaba’s investment resulted in a windfall profit for Ms Chen worth a reported $500 million…
…History dictates that it is difficult to trust Jack Ma. In 2011, he controversially spun off Alipay (later renamed Ant Financial) and took control of the asset, in what remains the most notorious abuse of the VIE concept. With no means of recourse, Alibaba’s foreign partner Yahoo! was forced to accept significantly diluted commercial terms on their investment in Alipay. The Alipay controversy had such a negative impact on the Alibaba share price that management decided to delist the stock and take it private. To recall, Alibaba has now been listed three times.
Controversy around the shareholding structure of Ant Financial has persisted over the years. In 2019, Alibaba converted its profit share into a 33% stake in Ant Financial, making it the second largest shareholder after Junshun Equity Partnership, a vehicle controlled by Jack Ma, Simon Xie, and close associates. The continued presence of an increasingly outspoken Jack Ma influenced the recent suspension of the Ant Financial IPO. It was the latest reminder of how Alibaba, or at least Jack Ma, appears increasingly misaligned with the political status quo.
Alipay is not the only episode to raise questions around trust. Related party transactions and acquisitions have been a matter of habit for the Alibaba Partnership. In April 2014, Alibaba gave Simon Xie a $1 billion loan which he used to purchase a 20% stake in Wasu Media5 through an entity that was jointly owned by Jack Ma and Simon Xie. Alibaba claimed that they were not able to invest in Wasu Media directly because of Chinese regulations and that investing through Mr. Xie’s entity was the only way. In fact, Alibaba has regularly invested alongside Yunfeng Capital, a Shanghai based private equity company that was established by Jack Ma in 2010. The list of such related party transactions runs long and as recently as 2019 Alibaba Pictures gave a $103 million loan to struggling film studio Huayi Brothers Media in which Jack Ma has a considerable stake6. The lines between Alibaba’s shareholder interests and Jack Ma’s personal interests are very blurry, and at odds with our philosophy of backing clean and well aligned ownership structures.
Alibaba’s share-based compensation expenses are also alarmingly high. Over the past five years, Alibaba has paid its management nearly $17 billion in stock-based compensation, which equates to a third of stated net income. In contrast, for Tencent and Netease these figures were at 10% and 15% respectively…
…Which brings us to the second concern that we have, the recognition of gains associated with the acquisition of related companies. Alibaba employs a “step up valuation” approach, which works very simply as follows: Firstly, Alibaba acquires 49% of a company at $100, meaning they book an asset entry of $49. Next, they buy a further 2% of the company for $6 determining the value of the company to be $300, meaning their original investment needs to be re-marked. However, with the subsequent investment Alibaba now owns 51% of the company, so is obliged to reclassify its original equity investment as a subsidiary company. This reclassification values the overall investment at $153. All considered, for spending $6, they recognise an accounting gain of $104.
This is not a hypothetical example. Going back to the Cainiao Network acquisition, Alibaba invested $803 million in the company in 2017 which took their ownership from 47% to 51%. Having consolidated Cainiao Network as a subsidiary, Alibaba was at liberty to take a positive revaluation gain of $3.6 billion on their original investment, which was made a few months earlier.
Not all such step-up acquisitions have detailed footnotes like the Cainiao Network example. Often hundreds of millions of dollars of write ups have no explanation at all.
Is this revaluation of assets material? In short, yes. Almost half of Alibaba’s earnings are explained by such revaluation techniques, and the opaque methodology and convoluted ownership structure raises serious questions about the intentions of such aggressive accounting.
7. Note to Facebook Employees – Mark Zuckerberg
Second, now that today’s testimony is over, I wanted to reflect on the public debate we’re in. I’m sure many of you have found the recent coverage hard to read because it just doesn’t reflect the company we know. We care deeply about issues like safety, well-being and mental health. It’s difficult to see coverage that misrepresents our work and our motives. At the most basic level, I think most of us just don’t recognize the false picture of the company that is being painted.
Many of the claims don’t make any sense. If we wanted to ignore research, why would we create an industry-leading research program to understand these important issues in the first place? If we didn’t care about fighting harmful content, then why would we employ so many more people dedicated to this than any other company in our space — even ones larger than us? If we wanted to hide our results, why would we have established an industry-leading standard for transparency and reporting on what we’re doing? And if social media were as responsible for polarizing society as some people claim, then why are we seeing polarization increase in the US while it stays flat or declines in many countries with just as heavy use of social media around the world?
At the heart of these accusations is this idea that we prioritize profit over safety and well-being. That’s just not true. For example, one move that has been called into question is when we introduced the Meaningful Social Interactions change to News Feed. This change showed fewer viral videos and more content from friends and family — which we did knowing it would mean people spent less time on Facebook, but that research suggested it was the right thing for people’s well-being. Is that something a company focused on profits over people would do?
The argument that we deliberately push content that makes people angry for profit is deeply illogical. We make money from ads, and advertisers consistently tell us they don’t want their ads next to harmful or angry content. And I don’t know any tech company that sets out to build products that make people angry or depressed. The moral, business and product incentives all point in the opposite direction.
But of everything published, I’m particularly focused on the questions raised about our work with kids. I’ve spent a lot of time reflecting on the kinds of experiences I want my kids and others to have online, and it’s very important to me that everything we build is safe and good for kids.
The reality is that young people use technology. Think about how many school-age kids have phones. Rather than ignoring this, technology companies should build experiences that meet their needs while also keeping them safe. We’re deeply committed to doing industry-leading work in this area. A good example of this work is Messenger Kids, which is widely recognized as better and safer than alternatives.
We’ve also worked on bringing this kind of age-appropriate experience with parental controls for Instagram too. But given all the questions about whether this would actually be better for kids, we’ve paused that project to take more time to engage with experts and make sure anything we do would be helpful.
Like many of you, I found it difficult to read the mischaracterization of the research into how Instagram affects young people. As we wrote in our Newsroom post explaining this: “The research actually demonstrated that many teens we heard from feel that using Instagram helps them when they are struggling with the kinds of hard moments and issues teenagers have always faced. In fact, in 11 of 12 areas on the slide referenced by the Journal — including serious areas like loneliness, anxiety, sadness and eating issues — more teenage girls who said they struggled with that issue also said Instagram made those difficult times better rather than worse.”
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in ASML, Facebook, and Tencent. Holdings are subject to change at any time.
