What We’re Reading (Week Ending 13 June 2021) - 13 Jun 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 13 June 2021):
1. #023 – The A/B sides of the Internet – China Playbook
What’s the number 1 competitive element in an industry?
It’s the status quo, not the competition between competitors. The US has a long commercial history, so many industries and businesses have developed very well over several generations. If we call the last generation companies as the conservatives, then the conservative forces in the US are very strong. In China, the conservative forces are very weak.
When I just started working on the food delivery business, I conducted some market research and found something that surprised me.
The largest delivery site in the US is called Grubhub, but they only had hundreds of thousands of orders a day. Domino’s Pizza had more orders than it did! Big chains like McDonald’s and KFC didn’t want to work with Grubhub either because they can offer delivery themselves. The delivery service has become a standard in established F&B chains. Additionally, the Americans eat pretty much the same things every day, unlike the Chinese, we have a lot of varieties.
This led to the last-gen solution being rather satisfactory, leaving very little room the the next-gen solution.
From the research that I did at the time, there were only three companies in China focusing on food delivery. In total, their orders were less than 100K a day. There’s no wide consumer awareness [of this product experience]. Their finances were not great either. If we see them as our last-gen, when we started, they were very weak.
What does this mean? It means when we started, we were not just bringing the Internet to the food delivery industry, we were building the food delivery industry itself. In fact, since we’re building the food delivery industry itself, our impact to the industry is much greater than just digitalizing the industry, our commercial value would also be greater.
This is a core difference between China and the US. This is a core difference between China and the US. Considering all these factors, we can understand why American investors can’t understand Meituan.
Lastly, a simple judgment – for the LBS [location-based services] category, China is a much better market than the US due to our population density, labour cost, population size and generational competition…
…Categorizing also has implications for which products can be made into one app and which can’t.
Taobao and Alipay have huge traffic, but putting Ele.me there didn’t do much.
WeChat and its Moments have such great traffic, but Weibo is still thriving.
It’s also why Meituan is able to consolidate so many things into one app, because most of them are in B2.
Douyin and Toutiao are separate apps. They didn’t incorporate Douyin into Toutiao despite Toutiao’s huge traffic.
All these have to do with categorizing. Categorizing correctly involves core competencies, resource allocation, consumer psychology, and organisational abilities.
2. How SEA Tech Giants Solved The “Cold Start” Problem – David Fallarme
If you’re introducing a radically new operating model to the industry, your primary constraint will be supply. You’ll use high-touch tactics to onboard sellers. You’ll need to go where they are or tap into existing networks, then manually onboard them to make sure they’re good representatives of your platform.
If you’re competing within well-understood industry dynamics, then you’ll be constrained by demand. You’ll use tactics with high scalability. This could take the form of owning digital marketing channels where you have an unfair advantage, riding the wave of a media narrative, or localizing wider and faster than anyone else.
A final lesson not explicitly mentioned here is that the solving Cold Start Problem is already hard, but even harder in a fragmented market in Southeast Asia.
Solving it in one country doesn’t necessarily give you a tailwind to set up in another country, even if those countries are neighbors or can speak the same language. And when you think you’ve got it nailed, your market can suddenly turn into a red ocean.
3. An interview with Patrick Collison – Elad Gil and Patrick Collison
Elad Gil: Stripe has done an amazing job both in terms of scaling and in terms of attracting people with common values and a shared interest in building infrastructure for the internet economy. I’d like to hear some of your thoughts on how to build a culture, and how to let it evolve.
To start, how do you see culture evolving as an organization scales, and what you think is important early versus later in that evolution?
Patrick Collison: When it comes to culture, I think the main mistakes that companies make are being too precious about it, being too apologetic about it, and not treating it as dynamic and subject to revision.
Generally speaking, and certainly if a company is working well to some degree— if you’re making progress in building the product you want to build and the service you want to create, and if the organization is growing and customers are adopting—there are empirically some things about your culture that are working well. And I often see companies making a mistake by being too abashed about simply being specific about those.
For example, you might believe firmly in the importance of working hard. Or you might believe firmly in the importance of minute attention to detail to the degree that you’re willing to redo something five times over. What often happens is that companies allude to these things, but in overly oblique fashions. They’ll say, “We believe in the importance of commitment,” but won’t be concrete enough to say that, well, we want people who really want to pour their hearts into this for several years, and we expect this to be the singular focus of your working life.
Similarly, on the attention-to-detail front, it’s easy to describe things in overly milquetoast terms without being really explicit, like: “If you work with us, you’re going to have to be okay with your work being repeatedly designated as inadequate, and okay with it being redone several times over.” These aren’t things that everyone is looking for. And you’re going to have to be okay with some people having that conversation with you and deciding that it’s not for them.
If you aren’t having these explicit conversations about what your culture is, the downsides are threefold: You don’t have the right people joining you, and you’re being unfair to those who do join you, in the sense that they end up being surprised by this emergent friction and tension in work styles. Thirdly, and I think this may be the non-obvious one, people’s disposition with regard to the company is actually a function of what they feel like they signed up for. If they feel like they signed up for an all-encompassing project, they’ll be much more willing to treat it that way than if they discovered it by surprise later on. And so you can actually change the outcome simply by being explicit at the outset…
…Elad: How do you think about reinforcing or reminding employees about an organization’s cultural values? Do you incorporate it as part of performance reviews, incorporating it into weekly all-hands?
Patrick: I think the macro thing to bear in mind with a lot of culture stuff is that a rapidly scaling human organization is an unnatural thing. The vast majority of human organizations that we have experience with, be it the school, the family, the university, the local community, the church, whatever, these are not organizations that scale really rapidly. And so the cues and the lessons and the habits you might learn from them are not necessarily going to be sufficient for the kind of human organization you’re building, which is perhaps doubling—or even more—in size, year over year.
As a consequence of that, you’ll often hear people talk about things like using explicit cultural values in performance reviews or in weekly all-hands. And you think, “Well, most of the other human organizations I see don’t do that,” and so it seems sort of contrived or whatever. But the difference is that you actually have a much more difficult challenge, which is to maintain a high degree of cohesion despite the really rapid evolution in the group of constituent participants.
So I’m a big fan of all the things you just mentioned. I think most companies start to explicitly encode and articulate their principles or values too late. I would try to produce a provisional revision literally when you’re just a handful of people. Then continue to update it on an ongoing basis, because assuredly there will be things you realize or come to appreciate are wrong over the course of the company.
But I would start with something right from the outset. And I would absolutely weave it into your product development, your collective communications with each other, your decision-making in general. For example, when you’re choosing the right series A investors, say, I think it would be ideal if the principles by which you ran the organization and the culture internally could help guide you to the right kind of investor for the company…
…Elad: As you look across the Valley now, it seems like there have been some shifts that have created almost a culture of entitlement. People get enormous benefits, then start to complain about things that may not be that important, like the number of times they can get a free haircut on campus. How do you manage that? As people get bigger and bigger benefits, how do you make sure they don’t feel that they deserve everything?
Patrick: I think that this is simply a challenge that we collectively have in the U.S. and in the Bay Area in this era of history. Such wealth has been created by our predecessors that we’re short-term benefiting from that it’s easy for that to have spillover effects in the culture and to distract from focus or lead to a loss of determination.
And again, if you just study and read a little about the early days, and ideally talk to people who were around, you see that at the first semiconductor companies and the early software companies and, up to Seattle, early Amazon and Microsoft, there was nothing to be entitled about. People thought that software companies were inconsequential add-ons to the hardware. They were dismissed, they were subject to brutal release cycles, companies were going out of business left, right, and center, there was a lot of concern over competition from Asia. It was a tough market to grow up in. Of course the survivors have done well. But while people are attuned to how successful a cradle for technology Silicon Valley is, they pay less attention to, and are I think less aware of, how densely populated a graveyard it is.
And so while I think that selective pressure was good for the surviving companies, it really kind of screws with our intuitive sense for what’s required to actually build one of these. You have some early success or you raise series A or gain some early traction, and it’s easy, even subconsciously, to start lining up the plots in your head: “Well, Facebook raised its series A in 2005, and went on to be worth $15 billion in 2008 or 2009 or whatever it was,” and so on. And I think the effects of that, in blunt terms, are really pernicious. In many ways it’s harder to create an organization with the kind of focused, determined, disciplined, non-complacent mindset that you need today than it was 20 or 30 years ago. That’s just a structural headwind that we all face.
There are many natural benefits and tailwinds that Silicon Valley enjoys, but I think this is one of the challenges we face. And if Silicon Valley is supplanted by another region, or even just more broadly by a general diffusion, I think this is one of the top contenders as to why that would be the case. It’s because we had too much wealth, we had too much early success, and it caused us to lose our hunger and our edge.
People who’ve spent any time with the great software companies in China— JD, Tencent, Alibaba, and now the next generation of startups—will tell you in no uncertain terms that there is a lack of entitlement, a lack of complacency, and a real determination to succeed that is at least not uniformly present here in Silicon Valley. And so I really think it’s something that should be top of mind for everyone.
4. Boxes, trucks and bikes – Ben Evans
The traditional way to think about ecommerce penetration is to look at share of total retail sales, and then deduct things like car repair, gasoline and restaurants – to get to ‘addressable retail’. On that basis, US ecommerce was at 16% penetration at the end of 2019 and increased to 20% or so in 2020, adding 12-18 months of growth in a year.
The obvious problem with this analysis is that penetration of different retail categories varies a huge amount – penetration of makeup is different to books, which is different to shoes. This reflects how different the buying journey can be for different kinds of products – we sometimes talk about ‘high touch’ versus ‘low touch’ goods. The chart hides a lot of variation.
However, there’s also another way to split this, that I think is becoming increasingly important – instead of looking at the product category and the buying journey, look at the logistics model.
For Amazon, makeup, books and shoes are all just interchangeable SKUs with the same buying journey that can all be stored in the same fulfilment pod and all go into the same brown cardboard box, but a cucumber, a stove, a bag of cement or a bowl of soup do not fit this model at all – they might need a different buying journey, but they definitely need a different logistics model. So, as well as thinking in terms of hardline versus softline, or high touch versus low touch, we should also think of parcels versus collection or delivery versus bikes.
5. Getting the Goalpost to Stop Moving – Morgan Housel
Paul Graham wrote a few years ago about what happened to the U.S. economy after World War II:
“The effects of World War II were both economic and social. Economically, it decreased variation in income. Like all modern armed forces, America’s were socialist economically. From each according to his ability, to each according to his need. More or less. Higher ranking members of the military got more (as higher ranking members of socialist societies always do), but what they got was fixed according to their rank. And the flattening effect wasn’t limited to those under arms, because the US economy was conscripted too. Between 1942 and 1945 all wages were set by the National War Labor Board. Like the military, they defaulted to flatness.”
Indeed, a few years after the war historian Frederick Lewis Allan wrote:
“The enormous lead of the well-to-do in the economic race has been considerably reduced. It is the industrial workers who as a group have done best – people such as a steelworker’s family who used to live on $2,500 and now are getting $4,500, or the highly skilled machine-tool operator’s family who used to have $3,000 and now can spend an annual $5,500 or more. As for the top one percent, the really well-to-do and the rich, whom we might classify very roughly indeed as the $16,000-and-over group, their share of the total national income, after taxes, had come down by 1945 from 13 percent to 7 percent.”
This went beyond income – even the variation in consumer goods flattened out. Harper’s Magazine wrote something in 1957 that was so important to the era:
“The rich man smokes the same sort of cigarettes as the poor man, shaves with the same sort of razor, uses the same sort of telephone, vacuum cleaner, radio, and TV set, has the same sort of lighting and heating equipment in his house, and so on indefinitely. The differences between his automobile and the poor man’s are minor. Essentially they have similar engines, similar fittings. In the early years of the century there was a hierarchy of automobiles.”
If you look at the 1950s and ask what was different that made it feel so great?, this is your answer. The gap between you and most of the people around you wasn’t large. It created an era where it was easy to keep your expectations in check because few people lived dramatically better than you.
It’s the one thing – maybe the only thing – that distinguishes itself from other periods.
The lower wages felt great because they’re what everyone else earned.
The smaller homes felt nice because everyone else lived in one too.
The lack of healthcare was acceptable because your neighbors were in the same circumstances.
Hand-me-downs were acceptable clothes because everyone else wore them.
Camping was an adequate vacation because that’s what everyone else did.
It was the one modern era when there wasn’t much social pressure to increase your expectations beyond your income. Economic growth accrued straight to happiness. People weren’t just better off; they felt better off.
And it was short-lived, of course.
By the early 1980s the post-war togetherness that dominated the 1950s and 1960s gave way to more stratified growth where many people plodded along while a few grew exponentially. The glorious lifestyles of the few inflated the aspirations of the many.
Rockefeller never yearned for Advil because he didn’t know it existed. But modern inequality mixed with social media has made it so you do know that people drive Lamborghinis and fly in private jets and send their kids to expensive schools. The ability to say, “I want that, why don’t I have that? Why does he get it but I don’t?” is so much greater now than it was just a few generations ago.
Today’s economy is good at creating two things: wealth, and the ability to show off wealth. Part of that is great, because saying “I want that too” is such a powerful motivator of progress. Yet the point stands: We might have higher incomes, more wealth, and bigger homes – but it’s all so quickly smothered by inflated expectations.
That, in many ways, has been the defining characteristic of the last 40 years of economic growth. And Covid-19 pushed the trend into hyperdrive.
The point isn’t to say the 1950s were better or fairer or even that we should strive to rebuild the old system – that’s a different topic.
But nostalgia for the 1950s is one of the best examples of what happens when expectations grow faster than incomes.
And all of us, no matter how much we earn, should ask how we can avoid the same fate.
6. How Startup Founders in Southeast Asia Should Value Their Company – Monk’s Hill Ventures
One of the real challenges Series A founders face is identifying a reasonable valuation for their business before they engage with VCs. At MHV, Peng’s team looks for ‘win-win’ valuation scenarios where both founders and investors agree on valuations that reflect first principles.
Founders need to avoid making the mistake of calling out a company’s valuation upfront. As a founder, you’re typically focused on your own business – and rightly so. However, this means that walking in with a ready-to-go valuation is a mistake. Simply put, you’re going to be wrong when you propose a valuation because you’re not the experienced party. VC’s like MHV see 50 – or more – deals a year in your domain, and see valuations across the board.
Instead, Peng suggests there’s a good way to answer the question about what your company’s valuation is – and that’s to not reference yourself.
“For instance, you could say something like ‘I’ve seen another company get funded at this level and the revenues were X, and the valuation was in Y range’. Give two or three examples. That’s how you answer that question. It shows you’re smart enough not to put forward a number you’re not sure about.” Indicate that you’re fine with what the market offers.
Founders need to take onboard that the principle of a win-win is all about both parties bringing an educated view of a company’s valuation to the table. Being educated means doing your homework and knowing how similar companies in your sector, region, and stage of growth are valued. The idea is to settle somewhere in a range where both parties think it could have been better for them but come out saying ‘it’s reasonable’.
Later in the session, one founder asked Peng whether one approach founders may employ is to establish how much they need to raise based on their strategic goals.
“Absolutely. If I asked what the valuation is for your company, as a founder, that’s something you should avoid answering upfront.”
“But then if I asked how much you need to raise, which is a typical follow-on question, then you’d better have that answer and be able to back it up.”
7. What is Zero Trust? – Muji
Today’s enterprise networks are fractured, moving farther and farther away from a centralized location. Zero Trust is the next-gen security paradigm that is capable of helping to secure today’s scattered networks, but it’s becoming so heavily used a term that the definition is getting blurred.
Let’s look at what Zero Trust is solving, how the ecosystem has evolved, and look at the moves major players like CrowdStrike, Okta, Cloudflare and Zscaler are making within it.
Traditionally, the primary usage of an enterprise network is interconnecting infrastructure which runs services hosted internally, handling traffic from enterprise users who use some type of device to access the network. Remote workers had to use connection tools, like a VPN, in order to get onto the trusted company network to access internal services.
The old method of castle & moat security, where you maintained a trusted network across all of your enterprise infrastructure, apps, devices and users – with a secure perimeter around it all – is becoming a thing of the past, as all of those areas continue to sprawl outside of the perimeter (and IT’s grasp).
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 Amazon, Facebook, Meituan, Okta, and Tencent (owner of WeChat). Holdings are subject to change at any time.
