Discord in talks to sell to Microsoft for over $10B | E1190

Top Insights

Discord and Slack have had strangely similar journeys

There is a correlation between gaming-focused founders and making great messaging products

  • Rahul Vohra (Runescape > Superhuman), Stewart Butterfield (Glitch > Slack), Jason Citron (OpenFeint > Discord)

Microsoft is paying a premium (likely over 75x price to sales), but Discord fits perfectly into their “Netflix for gaming” ambitions

$10B isn’t too steep considering their market cap is approaching $2T

Background on Discord

Recent history:

Discord is a voice and text-based messaging app that is largely used by gamers for in-game communication, and it was founded by Jason Citron in 2012

A “server” on Discord is the equivalent of a “workspace” on Slack: a dedicated space for people to communicate about a specific topic

In June 2020 after COVID hit, Discord capitalized on the stay-at-home orders and changed their tagline to “Your place to talk.” – targeting fan communities of books, music, art, tv shows, and more to expand beyond just gamers

In January of 2021, Discord ran into some controversy when they briefly banned the r/wallstreetbets server which now has around 600,000 members

  • Wall Street Bets is an infamous subreddit that set off the GameStop fiasco in January – and they use Discord to communicate in real-time via voice chat
  • WSB’s server was banned for one day, and after being reinstated, Discord offered to help WSB moderators due to the amount and intensity of their users
  • We covered the WSB/Robinhood fiasco on an emergency pod back in January

Discord user metrics:

Discord has 140M+ MAUs as of December 2020

  • Other MAU stats: (as of Feb. 2021 via Statista)
  • WhatsApp – 2B
  • FB messenger – 1.3B
  • We Chat – 1.2B
  • QQ – 617M
  • Telegram – 500M
  • Snap – 498M

How they make money:

  • Discord makes money by selling a $100/year premium subscription called Nitro and also by taking fees from games sold on its servers
  • Benefits of Nitro: larger file uploads, HD video screen share, extra server support, personal profiles on servers
  • The core app remains free, so users only pay when trying to access premium features
  • Discord was rumored to be up for sale in 2018 – but did not proceed with buyers due to CEO Jason Citron allegedly opposing an ad-based model proposed by the would-be buyers

Discord generated $130m in revenue in 2020 and has raised $480M since inception

History of Discord and how it’s different but similar to Slack

Discord and Jason Citron had a very similar founding story to Slack and Stewart Butterfield’s

  1. 2002: Launches an MMO (Massively multiplayer online game) called “Game Neverending” which eventually shuts down due to inability to fundraise
  2. Stewart then creates Flickr from the well-received photo-sharing features of “Game Neverending”
  3. 2005: Stewart sells Flicker to Yahoo and starts working there running Flickr
  4. 2008: Stewart leaves and starts a new game called “Glitch”
  5. Glitch eventually fails, so Stewart focuses on the internal chat app they built, which eventually becomes Slack
  1. 2011: Jason Citron sells his social gaming startup OpenFeint to GREE for $100M
  2. While working on his next gaming project, Citron noticed how awful the current voice messaging software was, making it hard to strategize with teammates while playing online
  3. 2012: When his next project showed signs of failing, Citron pivoted to create Discord to meet the needs of its users

Interesting trend: Talented video game designers making amazing messaging products, for example:

  • Rahul Vohra worked on Runescape before Superhuman
  • Stewart Butterfield worked on Glitch before Slack
  • Jason Citron was a successful gaming entrepreneur before Discord
  • Theory: if you can make a game that engages users, you can make a product that engages customers

Deal breakdown: Discord at $10B compared to Slack at $27.7B?

  • Slack 2021: ~$900M in revenue (43% YoY growth), sold for $27.7B (~30x revenue)
  • Slack is geared towards enterprise customers, startups and SMBs
  • Discord 2021: ~$130M in revenue, in talks to sell for over $10B (~75x+ revenue)
  • Discord is geared towards communities, social and gaming

Microsoft is willing to pay a premium for Discord based on its revenue footprint… so what is their thesis?

Microsoft’s major consumer play

Every other FAANG company has a massive, industry-leading consumer business:

  • Facebook – social
  • Apple – hardware/app store
  • Amazon – marketplace
  • Netflix – streaming
  • Google – search

Microsoft’s big consumer bet appears to be in gaming (they own Xbox, Minecraft, and 30+ game studios)

  • With a ~$1.9T market cap, they have the capital to take big swings in M&A

Timeline for Microsoft’s recent gaming acquisition spree:

  • January 2019 – Microsoft CEO Satya Nadella explained his vision for their Xbox subscription:

“We describe it as, ‘Netflix for games'” – Satya Nadella

  • December 2020 – The latest Xbox console release helped Microsoft surpass $5B in gaming revenue during their most recent December quarter (Q2 2021 on their fiscal calendar), up 51% year-over-year (via GeekWire)
  • Xbox content and services revenue increased to $3.5B due to Xbox Game Pass subscriptions
  • Game Pass hit 18 million subscribers in Jan. 2021
  • Game Pass costs $10/month for standard and $15/month for the ultimate package (Ultimate includes XCloud, allowing gamers to play cross-platform)

In summary

Microsoft (~1.9T market cap) sees every other big tech company with a major consumer business and understands that gaming is the clearest path to building its own

$10B for Discord is a fair price to pay if Microsoft integrates Discord into their cloud-gaming subscription products ($10B is well under 0.05% of Microsoft’s market cap)

Microsoft is building a quasi vertical monopoly in gaming – they now own:

  • the hardware (Xbox, Surface, PCs)
  • the software (Bethesda, Minecraft, Xbox Game Studios, dozens of original titles exclusive to Xbox)
  • the communication platform (Discord)

Insights from Giggster Co-founder Hank Leber on building a location marketplace for creators & content production | E1196

Top Insights

  • Building a business on top of another platform is risky, as revenue can go to $0 overnight by no fault of your own
  • Adding simple and easy solutions to archaic industries and business processes can result in rapid adoption
  • Giggster filled their marketplace supply-side first: once there was a large volume of high-quality supply, demand generation was much faster and mostly organic
  • When all sources of revenue are on the line, even archaic industries like film production can adapt quickly
  • Since Giggster has been operating successfully before raising money, they know their unit economics and are comfortable putting together an aggressive growth plan

Intro / Problems with building on other platforms

Guest: Hank Leber | @hankleber

  • Co-Founder & Head of Growth, Giggster (April 2019-Present)
  • Website: https://giggster.com
  • Hank previously was CEO of GonnaBE a planning social media app (they presented at LAUNCH Festival). The concept of planning socially wasn’t embraced by users.
    • Lesson learned: if you put out your plans publicly and no one comes you look like a loser.

“You have an idea that everybody thinks sounds great, then there’s an ugly cultural truth somewhere that makes it not a real thing.”

Hank Leber
  • Hank also had a company called Vytmn which was a “growth as a service” tool built on top of Twitter
  • Twitter shut down one of their key features, the ability for to automate actions like DMs, which killed their revenue ($1M ARR at peak)

“… do not build on the back of another platform, if they can kill you, they will, it’s not your money. That’s their money that you’re stealing.”

Hank Leber
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Giggster’s founding story

  • Hank and his Co-Founder Yuri Baranov were not from the film industry, they are tech entrepreneurs
  • How they discovered the market opportunity with Giggster:
    • Yuri is LA-based and lives in a nice house near the water
    • One day, a production scout knocked on his door and offered him $70K to shoot at his house over two days for CSI: Miami
    • The process included door knocking, clipboards, paper contracts and excel spreadsheets
      • this “business flow” was terrible for a $70K transaction, so Yuri told Hank about it and they started doing some research on the production location industry
      • After realizing the location industry had been run this way for decades, they started Giggster
  • Giggster is a two-sided marketplace for video production, meetings, weddings & events. Think Airbnb for production locations and events.
    • Larger clients would be Netflix, HBO, Hulu, large production companies, etc.
    • Smaller clients would be TikTokers, YouTubers, Vloggers, etc.
  • How Giggster differs from Airbnb and VRBO:
    • Short-term rental platforms do not allow production shoots because they require more overhead: insurance, more people per location then allowed, production parking, waivers, etc.
  • Giggster added a services element because some film production teams need higher-touch support (above $2500-$3000 a day) these services include:
    • Logistics
    • Permiting
    • Power
  • In California, you can rent your home for up to 14 days per year tax free
    • Giggster has some client who shut down their listing after being booked for 14 days for this reason

Creating the marketplace supply-side first

“What we’ve found is, chicken and the egg, locations matter first. As long as we have the supply we can generate the demand.”

Hank Leber on starting a marketplace

Giggster has almost 10,000 locations on the platform

  • In the early days, they filled the supply-side inventory by:
    • partnering with Hollywood agencies, who already had direct relationships with private property owners
    • they also knocked on doors for early customers
    • filling the supply-side first turned out to be a good decision, as it created an immediate flywheels with renters
  • Customers needed a lot of education, so Giggster built out detailed FAQs and comprehensive signup flows
  • Demand has been strong and scouts are now loading their locations onto Giggster
  • If a major client (Netflix, HBO, etc.) needs a location that does not exist on Giggster, they will hire location scouts to go find and matching location and on-board them
  • Giggster saw an opportunity to expand with cheap inventory from pandemic disruption (commercial real estate, restaurants, etc.)

Pitching at Remote Demo Day, raising via Jason’s Syndicate

” (Regarding Jason’s Syndicate), the money is actually secondary to the quality of the network.”

Hank Leber
  • Self-funded for 3.5 years while they figured out the business
    • Took ~3 years to build a solid base and infrastructure, and now they are seeing rapid growth
  • Yuri (Hank’s Co-Founder) told him to go try and land Jason Calacanis as an investor, so Hank started reaching out to mutual contacts and eventually got a slot in a Remote Demo Day session over the summer
  • Remote Demo Day format:
    • Seven founders pitch thousands of investors over Zoom
    • Pitches are three minutes each, with a two minute Q&A with judges after
    • After all pitches are finished, the judges vote on their top three and the audience members (accredited investors) vote for their #1 company in a poll
    • One day later, all 7000+ members of Jason’s Syndicate get an email with the recording and a sheet where they can pre-commit a dollar amount to invest
    • Any companies that receive over $200K in interest are syndicated!
  • Giggster was The Syndicate’s largest investment ever
    • According to Hank, the quality of the network of investors created additional value beyond the capital invested

Giggster’s use cases and emerging content business models

  • Giggster collects 15% from the final host payout as a service fee
  • Daily rates for a shoot range $2-30K per day depending on how high-end the location is
    • the average is around $8-10K
    • Larger long-term deals will hit 7 figures
      • example: ABC renting a mansion for The Bachelor for three months
  • Production came back online quickly during the pandemic, the film industry was really aggressive and inventive about their protocols
    • Even in an industry resistant to change, all of the money drying up overnight caused people to change their minds FAST
  • Giggster holds production companies accountable and cares a lot about reputation.
    • Location marketplaces need to maintain a good relationship with cities & neighborhoods so they can continue to operate
    • Typically the professional production companies have outstanding reputations for taking care of properties, however, a new potential business model is more uncertain…

TikTok content houses are a new media business model

  • Sway & Hypehouse are the most famous TikTok houses
    • These are new media operations that have very different needs and filming styles than traditional production.
    • They don’t have big camera crews but are also notoriously crazier than a film studio.
    • It’s not cut and dry how to service these creators yet, so that’s where Giggster is attacking the opportunity:
      • They are working to pick the right locations (areas with more space and fewer neighbors), and figuring out the insurance needs to service these new smaller-scale customers

Scaling Giggster

  • The importance of network relationships and trust is key for B2B. Cold emails work worse in this category.
  • Since Giggster has been operating successfully before raising money, they know their unit economics and are comfortable putting together an aggressive growth plan

” [once] you get dollars in the door and deliver real value with product-market fit, adding money to scale is a math equation instead of trying to paint a picture and tricking people into buying your vision of the future.”

Hank Leber
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Joanne Wilson’s Top Insights | Angel S5 E10

Top Insights

  • Raising at a juiced valuation can have devastating downstream consequences for a startup.
  • Recent momentum in funding underestimated founders has helped firms realize the opportunity of having a diverse team of investors.
  • It is harder than ever to be a “generalist” investor. To succeed in today’s market you need a thesis.
  • Portfolio management near the peak is key to thriving in a down market.
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Background / Intro

  • Joanne Wilson is a blogger, businesswoman and angel investor with 130+ investments.
    • She mostly invests in women and underestimated founders.
  • Back in the 1990’s, Joanne was Jason’s top sales executive at Silicon Alley Reporter and taught him a very important lesson: sales solves everything. “If you have a great person who can sell, everything goes in the right direction.” – Jason Calacanis

Spotting a bubble, impact of juiced valuations on startups

“… we’ve seen it so many times over the past 20 years. (Founders) end up with a down round even though (they’ve) done a good job.”

“(After raising a down round) that company is damaged. And then institutional investors have moved on into something new and something else and you’re f****d.”

Joanne Wilson
  • How raising during a bubble can create downstream issues:
    • Founders raise at an inflated valuation, and then have to put up crazy numbers to justify a higher valuation in their next round of funding
    • So, even really good companies can “get ahead of their skis” and fail to justify their mid-bubble valuations
    • If a company then raises a down round, that puts a black mark on their resume that is hard to erase, especially if VC money starts drying up
      • or, as Joanne puts it: “You’re f****d.”
  • There is a direct correlation between media sales and the strength of the overall economy
    • According to Joanne, you can check the thickness of each issue of her four decade Vogue collection to see how the economy was doing that year
  • Ad-based companies should bank as much revenue as possible (and even create new inventory if necessary), because high demand won’t last forever

Positive changes to diversity in venture capital over the past 15 years

“There is a whole group of amazing black founders that no one who is a white investor has ever seen. It was the same thing when I started investing in women, there were all these amazing women out there but no one wanted to meet them…” – Joanne Wilson

  • More women and people of color are starting companies and becoming venture capitalists, so the industry is being changed from both sides
  • It’s been 15 years in the making, but the venture industry is finally starting to see real change with funding dollars moving in the right direction
  • Seeing a team page with a bunch of white males on it is an immediate red flag for some investors
  • Investors are funding and hiring people of color for different reasons:
    • some are doing it because they care about making real change
    • others are ashamed at the lack of diversity in their portfolio and on their team
      • both reasons are helping drive change

Difficulty of being a “generalist” investor in 2021, portfolio management in a bubble

“…as an angel you need to take money off the table when it has gotten silly.”

Joanne Wilson
  • Being a generalist investor was great 15 years ago when there were fewer startups overall
  • To be a generalist investor in 2021 you need a team of people around you for market research, diligence, etc. since there are so many startups doing similar things
  • Portfolio management in a bubble:
    • Some greener VCs have never seen a down market
    • Selling a percentage of your winners at or near the peak is a great way to hedge against a rapid downturn
    • For example, Joanne’s husband Fred Wilson lived through this during the dot-com crash of 2000

Watch/Listen to the full episode:

Snack App’s Kim Kaplan PLUS 3 key metrics for consumer, enterprise SaaS & marketplace startups | E1195

Top Insights

“Every 8 to 10 years there’s a new dating app that kind of enters into the space and Tinder’s now nine years old. So it is the right time for that next dating app to come in and usurp them. And I fundamentally believe that’s what Snack is doing with a video-first approach.” – Kimberly Kaplan

  • Snack was created to optimize a single dating platform for Gen Z
    • What was the problem?
      • Users, especially Gen Z, would match on Bumble or Tinder and immediately move the conversation & interaction to other apps like Snap & Instagram
      • On those platforms, users would reply to each others’ stories and casually flirt, rather than carrying on in a more high-pressure DM conversation on the dating apps
  • Learning different lessons from different Match.com properties:
    • Tinder: design-driven
    • Match: marketing-driven
    • Plenty of Fish: data-driven”Match has done a phenomenal job at working with different companies and acquiring different companies.” – Kimberly Kaplan
  • It has been significantly easier to raise capital for Snack post-Bumble’s IPO.
    • A sector can become stale to investors, especially after being burned repeatedly.
    • Proof of a publicly traded challenger company makes picturing startups’ success easier.

Ask Jason

From TWiST Slack member Alan from (msb.ai):

Aside from a PR news wire or DIY PR methods, how else can a company with over $1M in revenue let people in VC know about us?

Jason’s Answer:

  • Celebrate your wins, write a short blog post when you hit milestones (300-500 words).
  • Content Marketing on Twitter, LinkedIn (social media), start following VCs and engage with them. Host conversations where you can share your expertise.
  • Run targeted promotions of your best blog posts to VCs and like-minded individuals.
  • Send monthly updates to non-investors.

From Jacob:

As a new investor – what key metric would you look for in these 3 different types of startups: consumer subscriptions, marketplaces, b2b saas?

  • Consumer Subscriptions (Calm, Netflix, Spotify)
    • What is the user profile of your top users, and what is the retention and churn like for those top-tier users?
    • Customer acquisition cost
  • Marketplaces (UberEats, Doordash, Zillow)
    • Frequency of use (transactions per customer)
  • Bottom-up Enterprise SaaS
    • Land-and-expand, or net dollar retention (NDR)
    • NDR measures impact on revenue generation from existing customers
    • If your net dollar retention is over 100%…
      • It means your startup will grow revenue only from its existing customer base, without needing to acquire any new customers
      • It also means you have achieved net negative churn:
        • which is when revenue gained from existing accounts exceeds revenue lost from churned accounts – (see David Sacks on churn)
        • an example would be: more existing Slack customers expand from free to paid accounts then churn or downgrade from paid to free
        • According to David Sacks, the master of bottom-up SaaS, this is a great signal for your B2B company

Kimberly Kaplan

  • CEO & Co-Founder, The Snack App (Nov 2019-Present), launched in 2021
  • Website: https://www.thesnackapp.com
  • Funding
  • Formerly worked at Plenty of Fish (2009-2018)
    • Started as VP Marketing & Advertising (3rd person at company)
    • Became VP Product Management, Revenue Optimization & Marketing
    • Grew Daily Active Users (DAUs) from 1M to over 4M and Annual Recurring Revenue (ARR) from $10M to over $100M
    • sold to Match Group for $575M in 2015

The Snack App

“You shouldn’t have to date across two platforms. That’s why we built Snack to pull the best of the two together.” -Kim Kaplan

  • A video-first dating app that asks users to create a video and post it to a feed.
  • Users can scroll through a feed (like Instagram) and when someone likes a video, it opens up the ability to comment.
  • Once two users have liked each others’ videos, DMs are open.
  • She reached out to a Gen Z focus group to name the app and come up with the logo. Snack is a Gen Z term for cute/attractive.
  • Snack is not a static app where you update 5 photos. Snack has more dynamic profiles to show off and interact.

How Kim got the idea

  • Saw that people were trying to date on TikTok (making a video with bio about themselves), 13B views of #single on TikTok
  • Users, especially Gen Z, would match on Bumble or Tinder and immediately move the conversation & interaction to other social media like Snap & Instagram
  • On social, users would reply to each others’ stories and more casually flirt, rather than carrying on in a more high-pressure DM conversation on the dating apps

Dynamics of modern Dating Apps

  • Snack app is breaking out the gender categories to better reflect society.
  • Snack is looking more toward social media instead of what the legacy dating apps are doing.
  • Most dating apps are now using a freemium model where people can pay more to get more features or matches.
  • Match.com is the dominant company in the dating apps space:
    • 10.9M average subscribers
    • $2.4B in revenue
    • Brands include: Tinder, Hinge, Match, Meetic, Pairs, BLK, Plenty of Fish, OurTime, Upward, and Chispa
  • Bumble has been a strong competitor and allowed more investor confidence for dating apps challenging Match’s dominance.
  • Kim learned from each different portfolio company in Match.com
    • Tinder: design-driven
    • Match: marketing-driven
    • Plenty of Fish: data-driven
  • Facebook is a massive channel for dating app acquisition
  • Apple is stingy about dating app approvals, Kim had to pull strings to get it approved. Apple has a high quality bar for these apps.

Startup vs. Large company

  • In the early days of Plenty of Fish “we could sit around a table and drink wine in the afternoon because there were only 6 of us.”
  • There are clear changes in how an organization feels at 30, 60 and 90 employees.

Did we mess anything up? – Email our Producer

Paul Judge on helping lead SoftBank’s $100M Opportunity Fund, the future of VC & more | This Week in Startups Blog

Top Insights

  • Investing over zoom expands the top of the funnel and lowers the barrier to entry for all founders
    • Investors can take 2-5x more meetings with founders from anywhere in the world
  • Paul’s thesis: Investing in overlooked founders will likely generate outsized returns
    • The American Southeast and Midwest include 44% of the US population but only receive 14% of VC funding
    • Despite this, 36% of last year’s Inc. 5000 reside in these regions with a median growth rate of 161% year-over-year
  • The “either-or” debate between making existing firms invest in underrepresented founders from their main funds OR raising “opportunity” funds that are specifically focused on underrepresented founders isn’t helpful, both are necessary to make VC funding more equitable
  • Jay-Z had the best Q1 2021 of any entrepreneur or investor
    • Tidal was acquired by Square for $297M, he sold 50% of Ace of Spades to LVMH for ~$300M, launched $10M cannabis-focused fund to back black founders, Oatly filed for IPO
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Intro

  • Paul Judge, Ph.D. is Managing Partner of Panoramic Ventures, a VC fund that invests in “underserved geographies and overlooked founders” prioritizing the American Southeast and Midwest. Paul is also Co-Founder & Executive Chairman of Pindrop, an information security company that provides risk scoring for phone calls to detect fraud and authenticate callers). Pindrop’s most recent valuation was $900m in 2018.
  • Paul also serves on the investment committee for SoftBank’s $100m+ Opportunity Growth Fund to invest in Black, Latinx and Native American founders
  • Paul is based in Atlanta, but has become a Miami regular.
  • Atlanta’s startup scene is heating up:
    • Airbnb just located it’s East Coast engineering team there
    • Local Unicorns: Calendly ($3B), Greenlight ($1.2B, consumer fintech), Rubicon ($1B, recycling technology), SalesLoft ($1B, sales software)
    • Strong talent pipeline from Georgia Tech

The virtual-first investing paradigm shift

“I see more companies than I would have seen otherwise, the top of funnel is wider. From the entrepreneur’s standpoint, it’s easier to get a meeting with an investor than it was traditionally. That means a whole new generation of entrepreneurs that wouldn’t have had access, now have more access to venture capital funds & angel investors.”

Paul Judge
  • Paul has made 25 investments in 2020, all over Zoom. He has met 2 founders in person, but only after investing.
  • Being an active investor in 2020 required going virtual. Most investors never considered this a viable method prior to the pandemic. Both Paul & Jason discovered that virtual investing offered a new set of benefits:
    1. Investors can take 2-5x more meetings because intro meeting times went from 2-3 hours to 20-30 minutes. How?
      • Commutes and pleasantries are eliminated, and everyone gets down to business ASAP.
      • Conversations now start with hard numbers. Entrepreneurs have become more direct in their approach, making the information needed to diligence an investment up-front in their first email.
    2. Investors now have much greater access to founders outside their city. Travel and cost of living in the Bay Area are high and are no longer an obstacle for founders.
      • By taking more meetings from broader geography, investors are able to reduce their bias.
      • With more meeting slots available, it’s easier to take a chance on a founder you wouldn’t have met with pre-COVID.
    3. Virtually, the pattern-matching necessary to be a great VC becomes more about assessing the founder based on their performance, rather than by charisma or presentation skills.

How Paul Judge invests

  • Paul’s Techsquare Labs was focused on backing top talent (students & professors) from local universities like Georgia Tech, funding founders at the pre-seed and seed stages.
  • He is now expanding to be involved at Series A & B both at SoftBank and Panoramic Ventures, which just launched a $300M fund.
  • Paul knew 2/4 other members of the Softbank Opportunity fund’s investment committee from being a part of the 2016 class of Aspen Institute’s Henry Crown Fellow Program.
  • Panoramic’s thesis: investing in overlooked founders will generate outsized returns.
    • The American Southeast and Midwest receive only 14% of VC funding even though they include 44% of the country’s population.
    • 36% of last year’s Inc. 5000 reside in these regions with a median growth rate of 161% year-over-year.

How to make investing more equitable

“Black founders are not just solving black problems, they are solving some of the most meaningful problems that exist.”

Paul Judge
  • The “either or” debate between making existing firms invest in underrepresented founders out of their main funds OR raising “opportunity” funds that are specifically focused on underrepresented founders isn’t helpful, we need both to make venture capital more equitable.
  • VC firms typically don’t change their partners often (turnover typically occurs with a new fund every 3-7 years), so adding new diverse partners to existing firms is a slow process.
    • The industry needs to evolve in this way, while also meeting fiduciary responsibility to limited partners who invested in the fund.
  • Purpose-built investment vehicles like SoftBank’s Opportunity Fund have a clear mission and can make an impact right away.
    • Another benefit is creating an ecosystem where some of the top underrepresented entrepreneurs can support & inspire each other.

Jay-Z’s groundbreaking Q1 2021

“I was just talking with somebody about who had the best quarter, Chamath or some other venture capitalist and I was was like, ‘No, I think Jay Z had the best, he just sold half Ace of Spades to LVMH.'”

Jason

“I love that love Jay-Z’s going after industries that have traditionally been unfair to the people that have been creating value. The music industry is traditionally unfair to the creators, so he did Tidal. In food and beverage, the Crystal CEO got shot himself in the foot, so [Jay-Z] went after that. Then if you look at the cannabis industry, I mean, it’s not exactly tech, but it’s creating tens of billions of dollars of value. It’s one of the most valuable crops that this country’s ever seen. But if you look at everyone that’s going public, there’s no diversity, but we all know this country was built on the backs of blacks tending to crops.”

Paul Judge
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Companies Paul shouted out during the episode

Kevin Rose’s product philosophy, Reddit & Digg’s inverse journeys & Twitter’s new product innovations | This Week in Startups Blog

Kevin Rose

Top Insights

  • Products must begin with only 2-3 key features. Once there is traction, you can prioritize what features to build next by asking users for feedback.
  • Fewer features allow you to launch quicker, at a lower cost, and actually determine if there is product-market fit.
  • Replacing a founder with “professional management” to commercialize a business often kills the product and company culture. (See Tobi’s Rule EP 1184)
  • Twitter’s new product roadmap offers an antidote to the chaos of text-based social media, a natural extension that compliments their core product.
  • NFT & blockchain technologies will revolutionize the ways we manage rights & ownership, despite most projects in the space likely being worthless.
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Intro

  • Kevin Rose is a partner at True Ventures, a consumer-focused venture firm with early bets on Peloton, Fitbit, Blue Bottle, Ring and more. He hosts the “Kevin Rose Show” Previously, he founded the social news site Digg, the intermittent fasting app ZERO, and the meditation app OAK.
  • His most notable investment include: Twitter, Facebook, Zynga, Square, Medium, Foursquare, Nextdoor, Blue Bottle Coffee, Clever, Ripple, Oura.
  • Kevin’s past This Week in Startups appearances:

Experience as a founder vs. investor

“Nothing beats the rush when you launch a new product. The ultimate peak as a founder is to have people using something that you created.”

Kevin Rose
  • Some downsides of being a founder include managing people, making hard initial engineering hires, fighting for talent, and having difficulty sleeping.
  • Kevin prefers building a product in the early stages over trying to scale a growth-stage startup.
  • A common mistake founders make is not asking for help when they don’t understand how to do something. Great founders seek out mentors and soak up information like a sponge.
    • For instance, when Mark Zuckerberg visited Digg in the early days of Facebook, Kevin was surprised at how unafraid Zuck was to ask questions and be vulnerable.
  • Investing is fun because you get to identify companies early on and try to imagine how it could become a multi-billion dollar business (and sometimes that happens!).
  • There will always be a randomness in investing:

“Some investments, I really did a good job getting the deal done. I tracked down Jack [Dorsey], I had him on my podcast, I convinced him to be an Angel in Square. But the crazy thing is that I’ve had cryptocurrency investments outpace that return, just because somebody asked ‘hey, do you want to throw in some cash on this crazy new up-and-coming project?’ and I put a little bit of money in and it returned a boatload.”

Kevin Rose

Product philosophy

“Pound for pound as product person [Kevin is] part of an elite top 10 alongside Elon, Steve Jobs, and Alex from Calm. When [Kevin] makes a product it just comes out great.”

Jason
  • Creative people are filled with ideas, but you need discipline to boil it down to the simplest version of your product vision.
    • Pick only two or three things that absolutely must exist and do them really well.
  • Building fewer features shortens the development timeline down to just a couple of months versus 6-8 months.

Case study on Kevin building Zero Fasting

  • Problem: Kevin read promising research on intermittent fasting from Dr. Valter Longo at USC. There were human placebo, double-blinded, “gold standard” studies showing autophagy, improved glucose levels, and reduced chemotherapy side effects. In short, fasting was helping people live longer with less disease.
  • Market Research: There was nothing on the App Store dedicated to fasting. Using your phone’s timer was inadequate because it didn’t track historical fasting data.
  • The essential features: Timer + Calendar. Allowing for historical performance, average fast duration, streaks, etc.
  • Kevin’s subtle fingerprint on Zero: Showing the live number of simultaneous fasters on the platform in order to create a feeling of community, due to the difficulty of fasting – especially in the early stages. “570,345 people are fasting with Zero”
The Zero app, note the “active faster” count at the top
  • Essentialism creates a clear user value proposition & lets you bring it to market quickly.
  • Once you have traction, there is an opportunity to add the other features you wanted to build. More importantly, your community is going to start telling you what they want.
  • Digg would survey 1 in 100 users, asking them to stack-rank the list of features the Digg team wanted to add. By combining the team’s product insight with the input from users, the community was engaged and excited.
  • Kevin invented the “Like” Button on Digg (called “diggs”).
  • Don’t get high on your own supply as a product person. Keep trying and keep iterating.

“If you try and fail as many times as I can, you will get some home runs from just the sheer number of times you’ve had the at-bat.”

Kevin Rose

Lessons from Digg & Mahalo

  • Jason saw Digg early in 2004 and was impressed with how quickly it became a top source of traffic for his company Weblogs, Inc
    • Jason got a verbal OK from Weblogs investor Mark Cuban to try to buy Digg for $1M.
  • Jason’s idea for Mahalo was 10 years too soon: “I knew that search would change from 10 blue links to what it is now. I even came up with that name, ‘comprehensive search.’ What if the images and the video and content were mixed with the search results? -Jason
  • Branding Mahalo: Jason considered which companies and products had the most beautiful logos. Thunderbird and Firefox came to mind, so Jason tracked down the designer Jon Hicks.
Mozilla Firefox & Thunderbird Logo
Mozilla Firefox & Thunderbird logos
  • There was a 6-month wait due to the demand for Jon’s design genius, so Jason made a series of aggressive offers to jump to the front of the line. Jon’s Mahalo logo was an instant hit amongst “product-people” like Kevin Rose.
Mahalo Logo
  • Beware of relying on one source of organic traffic: Mahalo was making thousands of dollars per day from ad revenue. But when Google released the Panda update for search, 90% of Mahalo’s traffic went away overnight. Even with influential connections at Google, Jason was told search was a “black box” and nobody was able to help.
  • “Professional management” can destroy a product and the culture around it: Digg’s 3.0 redesign made it more commercial, prioritizing publishers instead of the content the community loved. The goal was to become a bigger business, but it destroyed the core product value and eventually led to Kevin’s departure.

Twitter Spaces and Clubhouse

  • Not needing to download a new app reduces friction and it’s easy to get “40 blue checkmarks in a room” on Twitter, since influential people are already there.
  • Twitter has been slow to add features or change the core product, which they have been lambasted for by power users. However, it’s also a secret sauce to success. Reddit is in a similar boat with their product history.
  • Twitter Spaces is a natural extension the platform. Audio has the power to create a meaningful dialogue to offset the “dunking” and tensions created from the current lack of tone/context on Twitter.
  • Social media founders didn’t set out to create chaos online, and these new features can help realize an idealistic vision of an at-scale social product. “I think that you’ll use text until you feel misunderstood or the conversation devolves significantly and someone says ‘you guys should talk it out in a Twitter Space.'” -Jason
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NFT & blockchain technologies hold promise & potential pitfalls

“I’ve been tracking NFTs for a long time. I believe there’s going to be a lot of garbage in the space when every artist with Photoshop can become an ‘NFT Master’. But there’s a lot of really credible projects reimagining rights, distribution and ownership.”

Kevin Rose
  • Tokenized ownership can allow the creator of an object to receive a portion of the proceeds every time the asset changes hands.
  • Some potential revolutionary use cases:
    • Unisocks has dynamically priced socks where the token can be exchanged for the physical product (it’s silly because these are socks but imagine them as Yeezy’s or other high-end collectibles). This allows for price speculation on objects without needing to hold physical inventory.
    • Backing early musicians, where the owner of the token is entitled to residual music royalties.
    • Media licensing on the blockchain, where every artist/creator can set the price to license their creation.

If you have your own notes, tag @twistartups on twitter and we will link them here.

Lessons from Shopify CEO Tobi Lütke: what he learned from scaling Shopify through the pandemic | This Week in Startups Blog

Tobi Lütke on This Week in Startups

Top Insights

  • Removing friction creates new opportunities and increases market size.
  • Shared priorities of some of the best companies in the world:
    • Priority #1: Go build the best product you can possibly build
    • Priority #2: Make some revenue so that you can do more of Priority #1
    • Priority #3: Never do #2 at the expense of #1
  • Important technologies of the future look trivial today (like games or toys), just like the Internet did in the ’90s.
    • Examples: Crypto, NFTs, Biohacking sensors
  • Software innovation compounds.
  • Going forward, the best companies in the world will be built fully-remote, with in-person events deliberately distributed (all-hands gatherings, etc.)
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Background / Intro

  • Tobi created Shopify to solve his own problem: running his online snowboard store was really hard, and the only reason he could do it successfully was due to his background in software development.
  • Jason first interviewed Tobi on TWiST at Accelerate Ottawa in 2013
    • At the time, Shopify had ~200 employees with a “crazy” thesis: Amazon would not win it all, and some retailers would want to run their own online stores
    • Jason was originally in Canada to interview Chamath Palihapitiya
  • In their initial interview, Jason was struck by Tobi’s laser-like focus and thought Shopify had huge potential.
    • He remembered:

“… in that interview [Jason made] some statements about the potential size of [Shopify] being hundreds of millions. I thought ‘I’m gonna roll with this but I’m not entirely sure if Jason is serious or not.'”

Tobi Lütke

Shopify’s growth & comparing ecosystems with Amazon

“I have an unbroken track record of underestimating the potential of my own company, which I hope will continue.”

Tobi Lütke

Jump to this part of the episode on Youtube – 4:57

  • 85-90% of all the world’s money exists in databases. The world economy is almost fully digital.
    • The old concept of the e-commerce market is outdated and incorrect.
  • Shopify mainly differs from Amazon regarding direct-to-consumer brands
    • How? By giving them a “home base”, so they can own their storefront on the Internet, rather than “renting” shelf space from someone else.
  • Amazon has a very good sales channel for certain products, and people should use it if it’s appropriate.
  • Shopify’s App Store has helped fuel their growth “Commerce is complex, it’s very hard to build software that can address a lot of different use cases. The inspiration [for the app store] was operating systems.  An operating system that does a good job modeling the primitives can then be used for everything.” – Tobi

“Commerce is complex, it’s very hard to build software that can address a lot of different use cases. The inspiration [for the app store] was operating systems.  An operating system that does a good job modeling the primitives can then be used for everything.”

Tobi Lütke

Removing friction creates new opportunities

“Friction shapes the world a lot more than policy in most cases.”

Tobi Lütke

Jump to this part of the Episode on Youtube – 9:42

  • There were roughly 40,000 online stores in the early 2000s. This was because it was so difficult to run an Internet business due to payment processing, order fulfillment, software development, etc.
  • When Tobi started fundraising, investors that said “no” would point to Shopify’s “low” Total Addressable Market (TAM) of 40,000 stores.
  • Shopify grew its TAM by greatly reducing the friction of setting up an online store, thus encouraging more and more people to either start new online businesses or to create a digital version of their physical store.
  • How’d they do it? Initially by building a payment gateway to make it easier to deal with merchants and collect payments.
    • The goal was to allow sellers to collect payments easily, and once they made sales, the entrepreneur could tell Shopify where to send the orders for fulfillment.
  • Like e-commerce, setting up a blog also used to be time-consuming and difficult, involving servers and coding. Now it’s been made nearly frictionless by companies like Squarespace or WordPress, and their markets have expanded as well.

“Every time an entrepreneur makes it easier, more people participate.”

Jason

Lessons learned during the pandemic

“Almost every model and theory I had about how to work together [and] how to build things got either invalidated or got a significantly higher resolution. For instance, I believed that there was no way to replace proximity as a factor in building fantastic products, the proximity of a team is just so powerful, and so multi-dimensional… clearly that was incorrect.”

Tobi Lütke

Jump to this part of the episode on Youtube – 31:28

  • Early remote work pioneers like Matt Mullenweg (Angel S5 E7), and Jason Fried (E1099) were right. Business efficiency increasing while remote proved Jason and Tobi wrong.
  • The problem with pre-pandemic distributed work was that companies needed 100% remote participation, which was very hard to achieve before lockdowns were enforced.
  • High-quality product creation comes from high-fidelity teamwork, which proximity inherently creates.
    • However, this can also be created by great video conferencing software (Zoom), a solid setup (strong internet, good camera/microphone), and a way to mimic a whiteboard (productivity apps, screen sharing).
  • We are still in the early days of remote work, and the software will only become more seamless in the future.

“This is the worst the software will ever be for remote work, it will only get better from here.”

Tobi Lütke
  • Jason’s remote management checklist (SOD > EOD > EOW)
    • Start of Day (SOD): At the start of the day put in Slack what you’re working on in 1-3 bullet points
    • End of Day (EOD): At the end of the day when you’re done working, reply to that same post with what you got done and what you need help with
    • End of Week (EOW): On Friday, taking no more than five minutes, share the most important things you got done during the week

“It’s a contest to see who can inform everybody and how in sync we can be with the least amount of meetings.”

Jason

According to Tobi, the best companies in the world going forward will be fully remote:

“I think I think the best companies in the world will be built completely remotely, at least with no stated headquarters. Being together in person is still going to be very important, but more deliberate.”

Tobi Lütke

Forced focus of lockdowns

Jump to this part of the episode on Youtube – 1:05:39

  • Shopify zero-budgeted at the start of the pandemic and realized how unfocused they were.
    • Zero-based budgeting entails redoing an entire budget from scratch, rather than just modifying the previous year’s numbers
  • Due to the initial pandemic scare, Tobi became focused on building an “antifragile” business
    • An antifragile business is one that performs better under duress or in times of uncertainty
    • Antifragile is a book by Nassim Nicholas Taleb
    • Examples:
      • Uber – When people went into lockdown and stopped ordering rides, the demand for UberEats went up. When people come out of lockdown, demand for rides will rise.
      • Disney – When parks shut down, they centered their business around Disney Plus. They surpassed 100M subscribers in the first 16 months after launching in Nov. 2019.
  • Antifragility in practice: Many businesses will take the e-commerce lessons they learned during the pandemic and apply more software when running their physical locations.

Compounding nature of software innovation

“The narrative around programming is more interesting than people realize.  Since blacksmithing, we haven’t had a craft where the craftsmen actually make their own tools.“

Tobi

Jump to this part of the episode on Youtube – 47:00

  • Humans are genetically the same as we were 75,000 years ago. The main difference between then and now are the tools we have available that and the stories we tell each other.
  • Innovation compounds when creators build on the innovations of others Hardware example: Battery revolution
    1. Billions of smartphones are produced, competition leads to fast-charging and long-lasting battery technology
    2. Tesla uses batteries in their cars and makes them cheaper and more effective
    3. Battery-driven Vertical Takeoff and Landing (VTOL) aircraft are now made possible due to the advancements in battery technology
  • Software is the ultimate play of leverage for innovation because it combines zero marginal cost with infrastructure that everyone on Earth can add to and constantly improve.

1,000 True Fans

“We want to make entrepreneurship trivial on the Internet.”

Tobi

Jump to this part of the episode on Youtube – 1:06:40

  • Spending money on creators via the Internet can now be seen as voting for something to exist.
    • Everyone can now be a “Digital Medici” and sponsor the art/artists/products they want to see exist.
  • The promise of Kevin Kelly’s 1,000 True Fans essay becomes more attainable for a broader set of people with each new technological commerce innovation.

“…there is a home for creatives in between poverty and stardom. Somewhere lower than stratospheric bestsellerdom, but higher than the obscurity of the long tail. I don’t know the actual true number, but I think a dedicated artist could cultivate 1,000 True Fans, and by their direct support using new technology, make an honest living.”

Kevin Kelly
  • Shopify’s Fulfillment Network abstracts logistics away from the seller (just like the Payments Network did before it).
    • they reduce complexity by removing unnecessary information/hassle/steps
  • Jason claims to have seen a 100x increase in high-quality direct-to-consumer companies in the past few years, largely due to Shopify making it easier to run an e-commerce business by handling the technical and fulfillment aspects and allowing entrepreneurs to focus on the product.
  • Example: One founder is selling ~$60K worth of hoodies per month with minimal effort on the fulfillment side. Here’s how she does it:
    • Uses influencer partnerships to market the product
    • Takes orders through a Shopify storefront, which handles payments processing
    • Orders hoodies from a contract manufacturer and routes them to a Shopify fulfillment center because the logistical side of the business was automated, the founder was able to focus on perfecting the product, and is now building her own version of “1,000 True Fans”.
  • Most of the modern Internet has been condensed into 3-5 major players. According to Tobi, it’s important to preserve the opportunity space so that achieving “1,000 True Fans” can still be possible.
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Fan notes about this episode

@abhishek – Added some great links for exploring the creator economy

The All In Podcast and Syndicate

A couple of months ago my pal Chamath texted me and said “I want to do a podcast with me and you.”

We discussed some names and landed on “All In,” as a tribute to our mutual friendship over poker. This was during the pandemic and in an election year, so there was plenty to talk about above and beyond technology, finance, and entrepreneurship, so we had a full docket of issues to work from.

We invited two other poker buddies to come on the pod, David Sacks and David Friedberg, and got into a quick rhythm given the massive brainpower of the two Davids.

We’ve now done 14 episodes and the podcast quickly went from the top 50 to 25 and then top three technology podcasts on Apple’s quirky podcast rankings.

People have responded in a deep and meaningful way to the podcast, tell us that it’s their favorite listen when we drop an episode every couple of weeks. People say they love the friendship and comradery they feel as we laugh it up while discussing and debating the most important issues of our time.

Fans tell me they wish the rest of the media world was more like the All In podcast, where folks listen and appreciate each other–even when they disagree. In fact, I think we appreciate each other MORE when we disagree, because it feels like we’re learning, evolving or simply getting to some central truths.

Anyway, I’m not sure if many of you come to the blog any more, but I thought I would post this to give a little background on how this whole thing got started and let you know how to find the podcast.

This linktree will take you to all the places to listen:
https://linktr.ee/allinpodcast

and you can see us on Zoom if you subscribe on youtube

For fun Chamath suggested we launch an angel syndicate, so we put up a form for accredited investor to sign up at here: https://www.thesyndicate.com/allin

At the time of me posting this, 3,000 of you signed up to invest with us–which is nuts! It took me six years to build my angel syndicate to 5,500 members (!!!). Note: if you signup for the All In syndicate you’ll also seem my deal flow, but not the other way around. So if you’re a member of my syndicate at thesyndicate.com you need to signup again for the All In syndicate.

A fourth option: how #microschools will save our children

It became clear to me during July, when coronavirus cases spiked at precisely the time they told us it would take a break, that school would not start in September. 

Realizing this, I started floating the idea of creating a “microschool,” a concept that sits between two of the most polarizing points on the education spectrum: private school and homeschooling.

Many consider the flight of the rich to private school, combined with the recently uncovered hacking and corruption at elite colleges, as a fundamental breakdown of the fellowship of the American public education system. 

[Click to Tweet (can edit before sending): https://ctt.ac/daT56 ]

Every conversation I’ve ever witnessed about homeschooling went to the same place: with people marginalizing it as a wacky, hippie-dippie pursuit that created smart but socially weird kids. 

A “microschool” sits between these two options, because in the model — as defined by me — you have a teacher at your home with multiple students. 

A microschool, by my definition, achieves the following:

  1. You remove the social isolation concern of homeschooling.
  2. You drop the class size dramatically, from the standard 20-30 students down to four to 10.
  3. During a pandemic like coronavirus, I would guess that every logical person of science would state that smaller is safer (you can research this yourself online).
  4. You drop the cost of a private school from $30-50k a year to $5-10k.

As an investor in highly disruptive companies, that last point is the one that got me in hot water with the hysterical Twitter mob this past week. 

In my blunt, capitalist fashion, I tweeted that I was looking for the best teacher for my microschool. I would beat their current compensation and give anyone who referred me this person a $2,000 gift card to UberEats.

As an early investor in Uber, this last part was considered extra elitist to the salty, radical left on Twitter. That contingent doesn’t give anyone the benefit of the doubt, instead, immediately they make everything about class, wealth, politics, identity politics, and generally dunking on anyone who is easy to hate (which, I’m self-aware enough to know, I am). 

So, I wound up on TMZ, the New Republic, and the DailyMail, which is something I never expected in this lifetime, as well as talking with an ABC news reporter. 

Dr. Phil’s producer has asked me to come on (debating that one), and essentially I went viral for 48 hours.

It was a level of attention, for what is a super pragmatic idea, that I didn’t expect, but in reality this flareup feels akin to about 20 minutes and 20 seconds in the life of Kanye West and Trump, respectively. 

The punch line of all of this is that the concerns folks had, that I was “stealing” a teacher from other students, and that this was another example of the growing chasm between the rich and poor, flies in the face of, well, math!

First, 95% of the people applying for the position were out of work. Making this $60-70k position with benefits a net new job created in the world. 

Second, we elected to give 50%+ of the slots in the school to folks who wouldn’t be able to afford private school.

Third, we are currently in public school. Everyone just assumed because I had some success in the second half of my life that I was an elitist in some $50,000 private school — wrong! 

Fourth, and most stunningly, microschools are the opposite of elitist — they are socialist and capitalist at the same time. 

Basic Math:

  1. Ten students
  2. $50,000-$75,000 teacher (all-in cost with benefits, based on the average salary — do some Google searches, teachers are underpaid)
  3. That’s $5,000 to $7,500 per student, which over 40 weeks (200 days) of school is $25 to $37.50 per student, per day

This model assumes the 10 parents manage the teacher, live in a reasonable distance of the school, and at least one of the 10 families has a backyard or extra space for the students. Even if you add $12-$24,000 to the total cost, say if you wanted to rent a space, you are still at 10% to 20% the cost of a private school.

So, today parents have three options:

  1. free public school
  2. homeschooling
  3. $35,000 to $50,000 a year private school 

This changes the competitive landscape for education into four options:

  1. free public school
  2. homeschooling
  3. $5,000 to $7,500 for a microschool
  4. $35,000 to $50,000 a year private school 

Does anyone believe that inserting a 4th option to schooling options is a bad thing?

Only one group seems to think this is a horrible idea, and it’s not parents or students, it’s the teacher’s unions and the administrators at public schools. 

Consider the big picture: 

  1. U.S. outspends every other country in the world on education.
  2. U.S. trails countries that spend less than us.
  3. The average American gets paid ~$25 an hour. 
  4. Based on our average hourly wage in America, sending a child to private school is ~2,000 hours of work.  In this model, sending one child to a private school would eat up a parent’s entire salary.
  5. In the microschool model, a parent would have to work — paradoxically — one hour for every day their child went to school (on average). If you made $10 an hour, obviously you would need to work about three hours.

I’m not an expert on education, but I am an expert at identifying and investing in disruptive models — and microschools feel really, really disruptive in the best of ways.

We all want what is best for all of our kids, and we all know that school ain’t starting in September. 

Given these universal truths, I suggest we all start thinking creatively and share our learnings while ignoring the crazy, vocal minority of virtue-signaling communists who hate innovation and want their lives run by our dysfunctional government … you know, the same government that has us spending more and getting less from education today, and which is performing in last place when it comes to dealing with the crisis. 

Our politicians and institutions are failing us right now, so while we slowly work to fix our broken system my best advice is to be as radically self-reliant as you can — and that’s what #microschools are.

Best, Jason 

PS – There is a pandemic pod hack that drops these numbers down even further, which I will write about tomorrow. 

For now, if you could hit reply (or comment) and give me your most deeply considered feedback on:

  1. How to make a microschool more available to more students. 
  2. How to run a microschool better. 
  3. How you are addressing the 2020/2021 educational year. 

I started a Slack room called #microschools in my podcast’s Slack, which you can join at:

http://thisweekinstartups.com/slack

Microschools are the future–how do we start one?

vacant white painted classroom with chairs, tables , and map on the wall

It’s becoming very clear to me that school isn’t going to be the starting, or be the same, this September, as many of us hoped it would.

As nimble as educators were to move to remote education, something is lost when we put our kids in front of a webcam as opposed to a group of their peers.

Given this, our family has decided to start a microschool in the Bay Area starting this fall. We expect somewhere between one to five students, and we are starting the search for an teacher who wants to be apart of the microschool revolution/evolution.

If you’re teachers with five years of experience or more and you want to come on this adventure, we set up a quick application form.