| 👉 Zuck on buying Unity (June 2015) / Subject: VR / AR strategy and One (PDF) ❓ Why am I sharing this article? I think it is a great strategy lesson and depth of thinking. I liked particularly the importance of owning your platform, deciding when you have to decrease the risk yourself, and how to price the strategic value of an asset.
Owning your platform: From a timing perspective, we are better off the sooner the next platform becomes ubiquitous and the shorter the time we exist in a primarily mobile world dominated by Google and Apple. The shorter this time, the less our community is vulnerable to the actions of others. Therefore, our goal is not only to win in VR / AR, but also to accelerate its arrival. This is part of my rationale for acquiring and increasing investment in them sooner rather than waiting until later or derisk them further. By accelerating this space, we are derisking our vulnerability on mobile.
➡️ I like the strategic thinking here. When you are dependent on a platform, how do you accelerate the emergence of the next one? Mix of build vs. buy: Given our own strengths, we will probably be best served building most apps and platform services internally while using acquisitions opportunistically, and then acquiring most of the core VR / AR and 3D tech where we have little experience. This is why I am supportive of acquiring Unity, expecting we will acquire an AR company in the next few years and opportunistically acquiring VR app teams, while also consistently encouraging us to ramp up our internal investment on our platform services ourselves. At some level, it’s important to own the core technology you depend on to achieve your mission. Even if there is potentially a path forward with it, owning it increases integration opportunities and decreases risk.
➡️ I think this approach about building yourself what is core to your mission is really important. That is why I want us to own telemedicine. How to manage competition: On the flip side, if someone else buys Unity or the leader in any core technology component of this new ecosystem, we risk being taken out of the market completely if that acquirer is hostile and decides not to support us. Again, this likely wouldn’t be a sudden proclamation that Unity no longer supports Oculus, but Google or someone else would just never prioritize improving our integrations. To some degree, this downside is such a vulnerability that it is likely worth the cost just to mitigate this risk, even if this deal didn’t come with all of the upsides for which we originally contemplated it.
➡️ Analyse the defensive and the offensive cost of an acquisition. M&A: Given the overall opportunity of strengthening our position in the next major wave of computing, I think it’s a clear call to do everything we can to increase our chances. A few billion dollars is expensive, but we can afford it.
➡️ It is not about the price of the asset per se, it is about the strategic value.
👉 Michael Willar - Adyen: A First Principles Payment Platform (Join Colossus) ❓ Why am I sharing this article? I think that Adyen is an example in terms of scalability, and efficiency. Even if they sell to very large companies, and have integrations all over the world. I also believe in the importance of vertical integration, and owning your platform from A to Z. Some elements of their culture are close to ours, some others trigger good questions below.
Scalability: They currently have about 2,200 full-time employees, which is incredibly small for their age and scale Adyen has a 64% EBITDA margin business and converts 90% of that into free cash flow. 64% EBITDA margins puts them in the top 5% globally. Even Stripe now has over 6,000 employees. So Adyen is significantly more efficient than their competitors.
Thanks to verticalization: The other reason why Adyen is so lean, is they built everything in-house and from scratch. And when I say everything, I mean everything. Their entire payment stack on a single code base to all their products. They do not outsource anything. So they want to control everything. And this naturally takes out a lot of their operational running costs. They even design and produce their own earnings videos, all in-house, which, if you haven't seen, they are simply a work of art.
Culture:
➡️ Decentralised ownership helps scale. ➡️ Close to our weekly cycles. They really talk a lot about making sure every decision that gets made has a high probability of being a good decision. Making small, but good decisions every day can compound over time. It also ensures that if there's a bad decision made inside Adyen it is identified immediately and is completely eradicated and they move on.
They have what they call separate work streams for new and ongoing projects. They can quickly decipher what they're doing is adding value or complete waste of time. The laws of the Adyen formula stipulate that you report into someone who actually knows what you're working on because he or she has been there before. It also stipulates being typically Dutch and to the point. So pick up your phone and don't hide behind your email is what they often preach. And when you are on the phone shoot me straight, let's not talk about the weather.
➡️ I feel that Alaners should also pick up the phone when they don’t understand the comment from someone in an issue or where there is a big misunderstanding. Asynchronous does not mean that we can’t quickly solve misunderstandings. ➡️ I’m aligned with the importance of focusing on the right types of profiles for your company, that aligns to your values, that are committed for the very long-term, even if they are more “rare”. Second example is how closely Adyen works with merchants to solve problems. Adyen's engineers will travel once a year to see merchants, to check in and chat about the products that he or she has built, and how they can tweak it to improve it. Again, that's just very rare. I think winning Nike's business back in 2014 or 2015 is a great example of this. Nike wanted to build a better offline solution, and Adyen allocated developers to Nike developers, and they built this fully customized application.
➡️ I’d like our product team (including engineers) to be a lot on the field.
👉 Hamish Corlett - Block: Square, Cash App, and Economic Access (Join Colossus) ❓ Why am I sharing this article? Block has many, many products. It works if you tie it to one single mission. The idea that some of the best ideas come from hack weeks The difference between low gross margin and good net profit :)
Product suite: It's got over 40 products. And one of the special things it does is that it combines its capabilities in hardware, software, and financial services, which is quite unique. But if you look across all those businesses, the common thread is its mission, which is around economic access and empowerment. So if you look at all the big strategic moves they've made, it all ties into that one common mission. There are two main ecosystems. There's the Square ecosystem and the Cash App ecosystem, which you can think about as essentially a merchant ecosystem and a consumer ecosystem.
➡️ We could have both: members and doctors. Hackathon:
➡️ How can we make our hack week even more impactful? Margin: It's like a 33% gross margin business. At the gross level, a low gross margin business, but then below that, a very good margin business. Square isn't just offering that payments, call it the payments processing service, but it's also providing traditional software products. Call that a ballpark 80% gross margin business, typical software margin business.
Marketing: Cash App has been acquiring customers at $5 or better, until last year, they put pedal to the metal, and it's more like $10 now. But even $10 now compares to hundreds of dollars for traditional financial institutions.
➡️ P2P and community are really powerful.
👉 Charles Schwab: The 8 Trillion Dollar Gorilla (Join Colossus) ❓ Why am I sharing this article? Because they managed to make money “on something else”, which allowed them then to get cheaper for consumers which allowed them to grow. That is why I’m pushing for us to invest in “Shops” on other “third parties” ideas because when they take off, we will be able to be even more aggressive on insurance as per our flywheels.
Your experience as a Schwab customer is very similar to that of an Amazon customer. You're getting a great deal. You are pretty delighted that you are getting a lot of service for not a lot of money. This is the sort of Amazon and finance if you like, in the sense that they are investing and growing and investing and growing and more and more customers come back to them because of the fact that they are giving the customer a great deal. They earn modest amounts of income from other lines of the business, which is why the customer thinks they're getting such a great deal because majority of Schwab's income is coming from effectively 10% of customer assets, where the customer is not even paying a fee on. They're just forgoing some interest rate benefit on cash. There's two types of businesses in terms of the asset custody business. There's the asset light business, which was TD Ameritrade as it was, and Hargreaves Lansdown as it is today, where you clip customers for a very small percentage of their asset value. They're generally happy to pay it. They're very sticky customers and you pay 100% of that on dividend or share buy back because it's a very asset-light business model. Equally, there's an asset heavy business model over here that involves building an incredibly complicated bank type balance sheet that has to be regulated by the SEC and everyone else. And we're not got a charge customers very much, and we're just going to make quite a volatile revenue stream that comes from that interest income line that goes up or down.
What Schwab are doing is basically giving people less and less reasons to leave and more and more reasons to come.
👉 Jokr and Personalized Instant Commerce (Turner’s Blog) ❓ Why am I sharing this article? This superior customer experience is why vertically integrated models will win over the long-term. Vertical integration generally has higher fixed costs and lower per unit costs at scale. In JOKR’s case, these cost savings can fall to the bottom line, be reinvested, passed to consumers in the form of lower prices and fees, or any combination of the above. To accomplish this, JOKR uses a robust inventory procurement and city management system. It maps each city into 300x300 meter sections. Customers are then segmented by these neighborhoods to predict demand, which has historically been done at an aggregate, high-level globally by suppliers.
👉 Shopify’s Evolution Follow-up, Spotify Acquires Chartable and Podsights (Stratechery) ❓ Why am I sharing this article? I really like the analysis from Ben Thompson. I believe that vertical integration, going where it makes sense strategically, is what generates long-term differentiation. In our case, our investment in insurance as the wedge is going in the same direction.
An investor writes, “Fulfillment centers don’t get the same multiple that software-based platforms do. Major mistake for SHOP – lost their investor base.” This certainly makes sense, but the degree to which it is correct speaks to the challenges of being a public company and why it often requires a founder to make hard decisions. The reality is that the world in which it made sense to be a software platform floating above the fray, leaving advertising to Facebook and fulfillment to disparate 3PL companies, is one that is going away.
Shopify could stay lightweight and perhaps keep their multiple, but at the cost of significantly increased strategic risk. As I note below the future is about larger businesses, not smaller ones, and Shopify has no choice but to adjust.
👉 How Bill Foley built several multi-billion dollar businesses and generated one of the best long-term investing track records. (Exploring Content) ❓ Why am I sharing this article? Because I think it is an interesting story about controlling your distribution (something we do at Alan), and why it is so important to do this hard work. It can also be inspiring to think about M&A.
Arguably the most important change Foley and Frank Willey made at FNF was to pivot the business towards direct distribution. Historically (and to this day), title insurers relied on independent agents, not unlike many other types of insurers. Title insurance on its own can be a relatively commoditized product. Local independent title agents retain 70%-90% of the premiums they originate, passing on only a small fraction to the title insurer. Foley recognized this and aggressively rolled up independent agent firms. While rolling up distribution in every single town and city across the US is a tough slog, the cost savings are striking. Instead of paying independent agents 80 cents of commission for every dollar of title premium, doing the entire process in-house cost only about 50 cents per dollar of premium. Keep in mind that the industry was earning mid single digit pre tax margins at best!
It’s also far easier to hold your own employees accountable for the quality of their work than independent agents. Over the years, FNF has acquired hundreds of independent agencies. Even to this day, they routinely acquire 10-15 agent practices a year, spending to the tune of $100-200M. It’s gotten to the point where there simply are almost no large independent agencies up for grabs. Mostly it’s just small $2-5M agencies that hit the market. Foley rolled these agencies up at 4-5x EBITDA which (1) erected barriers to entry into the industry, (2) improved FNF’s economics, and (3) expanded FNF’s competitive advantage by taking share away from its competitors.
He has, for instance, broken one of his long-time corporate vows--to avoid bureaucracy--by hiring a regional manager to handle the company’s East Coast operations. “He’s not allowed to have a regional staff; just him and a secretary,” said the red-tape-hating Foley. His tenet now is “minimize bureaucracy.”
👉 An Interview With Rippling Founder Parker Conrad (Stratechery) ❓ Why am I sharing this article? Because I think the tool (Rippling) could be interesting for Alan as a company I think that integrations on the insurance side will be key to our success and to increase switching costs from Alan. If all relevant information can be on the Alan dashboard, we win. How they approach new products (once per quarter), and the time it takes to get them to $1m ARR. In our case, the question is: do we upsell new products or do we increase the membership fee for everyone?
Rippling is the first way for businesses to manage all of their HR & IT — payroll, benefits, computers, apps, and more — in one unified workforce platform. By connecting every workforce system to a single source of truth for employee data, businesses can automate all of the manual work they normally need to do to make employee changes. Take onboarding, for example. With Rippling, you can just click a button and set up a new employees’ payroll, health insurance, work computer, and third-party apps — like Slack, Zoom, and Office 365 — all within 90 seconds.
➡️ Should we check it and see if it works in France (both for us, and as an integration for our customers)? So we do two things. One is that we build integrations with a lot of different third parties and those integrations are basically to do user management: to provision and deprovision users, to manage configuration and policies and groups within that system based on the role data inside of Rippling, and then lastly, to pull in the data from that service. We pull in all kinds of data from these third party systems that’s then available in this employee graph inside of Rippling. You can pull in your Zendesk tickets, your GitHub pull requests, and then you can build reports or workflows or even policies and rules engines based on employees outstanding Zendesk tickets or their most recent GitHub pull request or something like that.
➡️ It feels that becoming stars at integrations will be a key differentiating factor for Alan. How do we approach this? One of the things that we do that I think is somewhat different than other startups, is that there is some conventional wisdom in Silicon Valley that I think is wrong, that companies should be extremely focused and do one extremely narrow thing, but go very deep. I think that now in order to really make a dent in a lot of these markets, you need to build something which is a coordinated set of interrelated services that interoperates seamlessly, and that’s a lot of our philosophy of building products. Our goal is to launch one new product a quarter going forward, and one thing that we’ve seen is that the time for these new products to get to a million dollars in ARR keeps shrinking. We have the latest product that we launched that’s inventory management that I think will get there within five months. So basically this product is, when you terminate an employee, we’ll send them a box, they put their computer in it, it ships back to our warehouse or actually our partner’s warehouse where they wipe it, rate the condition, and store it for you so that the next time that you hire an employee, you can just use it from a list of computers when you hire someone and it ships out directly from them.
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