Hitting Internet Escape Velocity (#21)

Hitting Internet Escape Velocity,
w/ Brett BIVENS

Our guest today is Brett Bivens— a venture investor at TechNexus Venture Collaborative, an early-stage venture capital firm — and he is going to talk about why he is so optimistic about Spotify and how the future of audio will be a social experience with various network effects loops. One of the core investment areas for TechNexus is audio and media. And so, in this episode, you’ll hear Brett talking about that, with your host, Ben Robinson, as well as talk about the various concepts that Brett has coined, including ‘escape velocity’ and ‘clampetition’.

Resources:

Resources:

  1. Venture Desktop Newsletter — by Brett Bivens
  2. Brett’s Medium Essays
  3. Brett’ Telegram channel for high-cadence thoughts

Full podcast transcript:

 

I think that a lot of people might actually get their first onboarding into VR-like experiences through audio-first experiences — Brett Bivens

[00:01:51.12] Ben: So, you work in venture capital. The home of venture capital is the United States. You, yourself, are American. So, why practice the trade from Paris?

Brett: Yeah, it’s a good question. I think the first thing is that our investment model kind of dictates it, to a degree. So, we work with a number of large corporates across industries and these companies all have global businesses. And so, as they think about what the future of their company looks like, they need access to the global innovation ecosystem. And so, from day one, we’ve always had a very geographically-agnostic perspective on where we want to invest and the types of companies that we want to work with. And, on top of that, I think we really do buy into the idea that great companies are being built everywhere and have been being built everywhere. And so, that was a big part of it, trying to now, given that we’ve seen so much talent and so many great companies built in Europe, get a little bit more involved over here. And then, why Paris specifically: so, partially family. My wife is from France. I’ve spent a lot of time over here building relationships, following the ecosystem. I was getting just really excited about what was happening with the types of companies that were being built here. So, it was kind of just natural that it worked out that way. And it turns out, actually, that the first investment that we made through this model that we have at TechNexus, about three or four years ago, was a company founded by French founders, partially based in the US, partially based in France. And so, that gave us a perspective, as well, on this distributed nature of teams that were being built. So, yeah, that’s kind of why I ended up here. Our team is still based in the US and we invest in the US, North America, and Europe.

[00:03:28.16] Ben: We could argue that France, within Europe, is probably one of the hottest ecosystems, right? So I think I read that VC money going into French tech is up to something like 5x since 2014. So, I suppose, as you said, it was a bit because of family but it was also because you think that Paris is increasingly becoming the hottest or the hub for tech in Europe?

Brett: I think so. I think there’s great things that you could say about any of the ecosystems in Europe — Berlin obviously has some incredible companies that have come out of air, the cities and the countries in the Nordics just kind of incredible per capita output of innovation, and then, obviously, London being the centerpiece of the European tech ecosystem. But yeah, Paris, again, we were just really excited about the companies that we were seeing here, the attention that was being paid to the region and the ecosystem by investors. And, even apart from all of that kind of stuff, even at later stages, so, sort of beyond where we invest, we were seeing a tremendous amount of talent kind of flow into the ecosystem from all over the world to launch Europe for American companies and doing that from Paris or joining teams in Paris, leaving Silicon Valley companies to do that here. So we sort of saw this confluence of things, all of these different things — capital and talent and attention, and even governmental resources being poured in that just got us really excited about where the ecosystem was headed.

We’re getting new technologies coming to market […] that are expanding the addressable daily hours for audio content to be accessed, creating more social opportunities for audio, creating more contextual opportunities for audio — Brett Bivens

[00:04:57.21] Ben: I wanted to get you next on Spotify because for anybody who subscribes to your newsletter, is a company that you focus on, almost disproportionately, and it’s obvious you’re really excited about the prospects for Spotify. But, if you listen to most commentators on Spotify, most of them see it as a company that has quite difficult unit economics — low gross margins, high variable costs — and a company that’s up against really deep-pocketed competitors. And so, why is it that you rate Spotify so highly?

Brett: Yeah, so, I think there’s a few reasons. So, one, I see it as emblematic or as an embodiment of what’s kind of happening to European tech in this world where you have the American tech giants and the Chinese tech giants kind of squeezing it out and seeing where that lands. And so, I find that interesting. At the same time, at TechNexus, one of the core investment areas for us has always been audio and media and we have a large portfolio of companies there. And so, it’s just natural that we follow that space, try to understand the key players in that market. And I think Spotify is a very central company in the sense that they have to work with, and integrate with, and serve different stakeholders across all different parts of the audio ecosystem and value chain. And so, from that perspective, that kind of speaks to why I follow the company so closely.

Brett: In terms of my optimism about it, and how I see them fitting into the broader picture, I think you’re spot on. I mean, anytime a company puts a competitor slide up, or you build a competitor slide for a company — it includes Apple and Amazon and Google and Tencent and ByteDance with TikTok — it’s a little bit scary. I think that Spotify has done a very good job of delivering a differentiated user experience within the limitations that they have. I mean, it’s well-known at this point, that they have a tough supplier relationship with the record labels, and that’s kind of slowed down their ability to innovate. Like you said, that flows through to their margins and the way that the business functions. So, I would say I’m cautiously optimistic. I think they’ve done a lot of really great things. As a company, I think they have a lot of hills to climb. But that optimism and the upshot of what I think Spotify can be in the future is really just as much about my excitement about where audio is going, and what’s sort of evolving within the audio ecosystem.

Brett: I think, for a lot of the same reasons that a company like Spotify has been forced to innovate rather slowly, I think it’s just true of the broader ecosystem as well. So, I think we often underrate path dependency in the way that technology is adopted, and the audio ecosystem has had that play out in the spades with regards to, again, the record labels and the way that Apple has been an early mover on podcasts and not really done anything there but their scale and size has scared a lot of people away from doing anything interesting there. The same thing has happened in audiobooks with Amazon. People are kind of scared away from that, and so, it sort of slowed down innovation in the ecosystem. But we’re starting to see different things break through and different user experiences develop. We’re getting new technologies coming to market, like AirPods and voice interfaces that are, I would say, expanding the addressable daily hours for audio content to be accessed, creating more social opportunities for audio, creating more contextual opportunities for audio, and kind of having it always with us.

Brett: So, we’re on this path almost to an ambient audio experience where, in a very, I guess, optimistic reading of what the future looks like, we have these different audio experiences and scenes and technologies that can be applied to whatever activity we’re undertaking at the time to just improve our daily lives. And so, that’s kind of the upshot for Spotify and for the company in audio: the engagement surface area just kind of continues to expand, monetization catches up, and they continue to deliver good user experiences along the way and incrementally innovate. And so, yeah, that’s kind of how I view Spotify in the broader audio market, in general, I’d say.

[00:08:59.25] Ben: Yeah, I think there was one really spiffy statement in one of your essays. I think it was something like, “The ear is under-monetized vis-a-vis the eye.” And I think that’s a pretty good starting point, to start to look at the companies in this space.

Brett: Yeah. I think that came from Daniel Ek, the CEO of Spotify, but it’s something that a lot of other executives in the industry have sort of echoed. You have podcasts that really haven’t had internet-scale advertising applied to them. They have always been this hobbyist kind of enterprise where the host reads their own ads and it’s not particularly programmatic, not particularly scalable, which has kept a lot of large brands and companies that are going to spend millions and millions of dollars on advertising through some medium kind of out or just barely dipping their toes in the water. And so, yeah, I think we’re starting to see that all catch up. We’re starting to see social experiences catch up in a significant degree. I mean, not to dip too far into the tech Twitter topic du jour but a company like Clubhouse which recently raised money from Andreessen Horowitz at a pretty lofty valuation — or people think it’s a pretty lofty valuation — kind of gets at this as well, which is, audio as a social experience and the different network effects that can be driven through that.

[00:10:20.07] Ben: You talk a lot about patient investing, in the context of Spotify. And I think the term you use is something like, they have a different investment horizon, compared to some of their competitors. Is that through design, or is that because you almost have to patiently invest, you have to stealthily invest because your competitors are so powerful?

Brett: It seems like a little bit of both. I mean, as a total outsider to the company and not really knowing the inner workings so much, I do get a sense from hearing executives talk and people like Daniel, like the CEO, talk that there is just sort of this cultural patience to the way that the company thinks about building this business and the long-term opportunity that they’re going after. So, again, without knowing anything from the inside, that’s kind of how I perceive their culture a little bit to be. But yeah, I think that, because of the fact that they are squeezed in the middle of all of these different powerhouses, these different monopolies, basically, they have to tread lightly and carefully and sort of eke out what they can over time. They’ve maybe been forced to slow play their hand in social because of the friction that might create with record labels who think they’re trying to go around them; the same thing with Spotify going direct to artists and working directly with artists — they probably had to slow-play that a little bit; their relationship with platforms like Apple or like Google, where they’re reliant on those platforms for distribution to a degree through the app store, but they’re also directly competitive with them creates some challenges. So yeah, I think it’s a little bit of both and they probably feed off of each other. By design, it’s baked into the culture, but it’s also just inherent to the business model and how they have to operate.

I think that most people look to gaming as the first path for immersive social media. And they’re definitely not wrong about that. — Brett Bivens

[00:11:57.16] Ben: Do you think they need to win the podcasting war, in order to completely change the unit economics of their business?

Brett: I think so. I think that that’s one piece of it. I think that that’s only one piece of it. There’s so much more and I think that there’s an interesting comment that I heard once and I agree with, and that’s to say that, “A category isn’t really one until a social product emerges.” And I think that that is kind of the long-term play for a company like Spotify, is to have a more social component to their business. But to get there, I do think that they need to continue to innovate across these different categories and continue to expand beyond music to podcasts, to books, to health and wellness, to all of these different categories that help them build up that user demand and help them build up the leverage against all of the people that they’re working against in the industry, to then layer on additional social experiences.

[00:12:52.10] Ben: And is it the importance of social experiences what makes you think that a marriage between Spotify and Snap might be a good idea? Because you’re the only person I’ve ever seen to put those two names together as a potential merger, and I’m just quite curious about that.

Brett: Yeah. Well, it was sort of a throwaway comment at first, in response to what I just said, which was this idea that a category isn’t one until a social product emerges. And like I said, I agree with that. And I don’t think it’s likely at all that that would happen but it does get you to start thinking about, again, the evolution of audio and social media, how they come together, as well as immersive reality, virtual reality, and how all of these things converge at some point in the future. I mean, I think that most people look to gaming as the first path for immersive social media. And they’re definitely not wrong about that. I mean, we’re seeing that play out in real time with things like Fortnite and these massive games that have created virtual universes, but if we think about the things that create immersive, kind of these metaverse-like experiences, even on a partial basis, and you have things like persistent worlds and synchronous collaboration and communication and the ability for the platform to be populated by content that’s created by a wide range of contributors, and even interoperability across platforms — I think all of those things work well with audio. And so, I think that a lot of people might actually get their first onboarding into VR-like experiences through audio-first experiences — and that’s where Snap as this AR and VR company, they do some really interesting things there; Spotify as an audio company — I think there’s some interesting tie-ins there that just gets you thinking about what the future of the media market looks like. But no, I don’t think it’s likely.

There’s this balance between being a great product or a great platform for your core customers versus going broad and scaling and alienating that core customer set. And so, it’s a delicate balance, and I think ‘internet escape velocity’ is just a way of thinking about that. -Brett Bivens

[00:14:38.25] Ben: As I was saying to you earlier on, I read all of your newsletters in one go. I mean, I’ve read many of them before, but then I read them all in one go. And the thing that’s striking is just how many terms you seem to have coined. It’s like you have your own personal lexical set. And so, if you don’t mind, I’m just going to ask you about some of these terms — what they mean. So, I’ll do one now, and then I think later in the podcast, we’ll cover a couple of others. The first one I wanted to cover was ‘escape velocity’. What do you mean by escape velocity?

Brett: Yeah. So, a couple of weeks ago, or whenever it was, there’s an investor named Gavin Baker, who is a growth and public market technology investor, has really, really interesting thoughts about just the development of a lot of the things that I know you think about and that I think about, and he wrote a piece talking about the two things that he looks at when evaluating competitive advantage for consumer internet companies — and those things being scale and loyalty. And those are really the only two ways to get out of this rat race, where you’re paying Facebook and Google 40% of venture capital dollars that come in or some massive amount of money every year to just maintain your growth and your customers.

Brett: And so, for me, that brought up the next question of, what does the company have to do in order to achieve the level of loyalty that allows them to generate word-of-mouth acquisition, lower their customer acquisition costs, create long-term stickiness in a product, and then how do you translate that into scaling without losing the essence of what helped you get to that loyalty in the first place? Because that’s something that I think constantly happens is there’s this balance between being a great product or a great platform for your core customers versus going broad and scaling and alienating that core customer set. And so, it’s a delicate balance, and I think internet escape velocity is just a way of thinking about that. It’s not a thing that I necessarily have a prescription for. I think there’s a lot of elements that play into it. It depends heavily on the business model and the stage of the company but it is just a way to think about, “Okay, what are the factors that allow us to build community and build word of mouth and build that stickiness? What are the technical features for how we can serve customers if behavior changes? Or, as new competitors come into the market, what are the core features? What are the ways that we stay aligned with our customers from a product and technology perspective? And then, what are the areas of new business that we can go into that keep us aligned with those customers, but don’t sacrifice things like margins and profitability long term?” And so, it’s kind of a loaded analysis to try to do and again, it’s very different for every company, so it’s not necessarily a prescriptive thing. But I think it’s important for companies, for investors to think about if scale and loyalty are the two strongest drivers of competitive advantage for consumer internet companies, what are the core elements that underlie those things and allow you to reach those two points.

[00:17:37.19] Ben: And you said it’s not prescriptive, but you do set out three, almost preconditions, right?

The way that I think about ‘business model leverage’ is you build up your core business on what might be considered a low margin business that presents opportunities to then scale in a way that helps you expand the margin or sets you up to at least scale in a way that helps you maintain margin. And so, when I think of Spotify with […] by owning the consumer demand via the lower margin streaming business, they have the opportunity to expand into those areas. Lululemon, as I talked about, is a similar company — they have a high-margin business, to begin with, relative to peers, but because of the fact that they’ve invested in digital, they’ve invested in all of these community-level features, they also have additional areas to grow that help them maintain their high-margin status. — Brett Bivens

Brett: Yeah. I’m certainly happy to walk through those. I think the notion of responsive instrumentation gets to this idea of loyalty and there’s one company that I talk about in the piece — Lululemon — who I think demonstrates this extremely well. It’s this idea of, again, being able to quickly adjust from an operational perspective, from a product perspective, being able to make sure you meet your customers where you are, and stay aligned with your customers, and no matter what the situation is, deliver on your brand promise. And they’re an example of a company that, in this kind of crazy time that we’re in right now where their stores have closed and people aren’t going to yoga studios anymore, they need to figure out how do they continue to engage those customers, how do they continue to deliver on the brand promise that they’ve always offered. And one of the things that they’ve done early on, and again, this isn’t for every company, but it’s worked for them, is sort of this idea of vertical integration, owning the entire value chain that they use to deliver their product. So, they have a very direct and strict product focus, they don’t have this broad range trying to serve every type of customer; they manage and run and own their own stores. And so, they’ve been able to turn those retail locations into distribution outlets, and they’ve been early — maybe not early — they’ve been active in understanding digital content and how they can use that to further engage their customers. And so, I guess, a short way of saying, it’s adaptability. So, it’s the ability to adapt when situations change rapidly.

[00:19:20.13] Ben: Another one was ‘business model leverage’, I think. Right?

Brett: Yeah, exactly. And that, I guess, goes back to Spotify a little bit. I think that’s a company that has a pretty interesting business model leverage. And the way that I think about business model leverage is you build up your core business on what might be considered low margin, or whatever it may be, but a low margin business that presents opportunities for you to then scale in a way that helps you expand the margin or sets you up to at least scale in a way that helps you maintain margin. And so, when I think of Spotify with that, we talked a little about it earlier, but it’s this low gross margin streaming business where they’re paying a ton of money to the labels, but over time, as they expand and gain leverage, podcasts are a higher margin business, social products are a higher margin business, marketplace products are a higher margin business for them. And so, by owning the consumer demand via the lower margin streaming business, they have the opportunity to expand into those areas. Lululemon, as I talked about, is a similar company — they have a high-margin business, to begin with, relative to peers, but because of the fact that they’ve invested in digital, they’ve invested in all of these community-level features, they also have additional areas to grow that help them maintain their high-margin status. So, there’s probably a million other companies that do these types of things particularly well, but those are two that come to mind, there.

For us as early-stage investors, it really does come down to the founding team and the way that they set the vision for the company and the way that they think about culture; and so an interesting way to frame that is maybe ‘followability’ — Brett Bivens

[00:20:40.15] Ben: I’m going to quote you from one of your essays here. You wrote, “Company culture is the bridge between theory and action. It is the operationalization of a company’s values and it expresses itself as a set of frameworks that a company uses to make decisions under uncertainty.” I thought that was a really eloquent definition of culture. It’s clear that culture is really important for you when you assess companies you invest in, but how easy is it for you, and how practical is it for you, as an outsider, as an external investor, to get a really good gauge over a company’s culture, whether it’s private, or whether it’s public?

Brett: Good question! And it’s a challenging thing to assess, quite frankly, I think, especially in a world like venture capital, where at times, you don’t have full control necessarily over the timeline in which you get to invest. There are companies that raise funding rounds, and maybe the opportunity doesn’t exist for too long. And so, you have to figure out a way to build that conviction and build an understanding of that culture very quickly. I think that there’s a few ways — and this is not comprehensive by any means, and I think everybody has their own way of assessing these things. But when I think about it, from our perspective, as early-stage venture investors, we’re often trying to understand a few things. I mean, if there’s a team that’s already been built up around the core founders, it’s always helpful to understand why the next person, why that first engineer, first salesperson or whoever are some of the more recent people to the team, why they’ve joined the team? Why they’re excited about the mission? What that mission is, in their mind? Does that mission align with what you’re hearing from the founders that you’re talking to? And really, is there this true north that the whole company is pushing towards? I think that’s one interesting way that we try to test for that and solve for that.

Brett: And that gets back a little bit to this idea of alignment with customers and being very customer-centric. I think if companies are very clearly focused, first and foremost, on delivering the kind of value like that to customers, that can be a hint of a really strong culture and an aligned culture. And then, for us as early-stage investors, it really does come down to the founding team and the way that they set the vision for the company and the way that they think about culture and so, one of the things that we always talk about and I think is an interesting way to frame that maybe is, ‘followability’. It’s this idea of, are these people that are leading this company, that have founded this company, maybe key early executives, are they going to be able to attract and retain talent and capital and customers and tell a story and stay true to that story personally, that is going to help them compete over the long term? And so, these are a few different ways that we look at it and think about it. But, I think, regardless whether it’s an early-stage company that you have access to, whether it’s a growth-stage company, or a public company, it’s always a challenging thing to really assess out how that plays out.

The (venture capital) investment thesis […], surely becomes sort of a marketing vehicle, a way for you to tell the market who you are and what you stand for and how you think. The challenge comes when you start to overly believe your own view of the future and close your mind off to the ideas that founders are coming to the table with and some of the emergent opportunities that develop in the ecosystem. And that’s really where the friction comes in between bottom-up investing and being overly thematic. — Brett Bivens

[00:23:42.08] Ben: And how important is it, relative to everything else? So, for example, if you came across a company, and you love the business model, you’re really comfortable with the unit economics, it had responsive instrumentation, it had business model leverage, but you didn’t like the culture. Would that be a red flag that would lead you to potentially not invest?

Brett: Absolutely. I think that, for us, as early-stage investors, all of those things are important. You know, there’s always this, ‘is the product great? Is the market great? Is the team great? And how do you weight all of those?’ And the answer is, it kind of depends on the company and the market and everything like that. But yeah, for us, that’s the first checkpoint — is this a team with whom we have intellectual and emotional alignment on where they’re going as a business? Because all of those other things can fall apart very, very quickly if you don’t have the culture right, if you don’t have the leadership right, product decisions can go awry, new market development can certainly go awry, talents and how you keep that around, that’s so core to building the business can sort of go awry. And so, I always think that, yes, the culture and the leadership team at the early stage is so, so critical to making sure that the right market is captured and the right product is built and the right strategy is applied for the long term.

[00:24:59.28] Ben: Just another question on investing. So, one of the articles I really enjoyed reading at the time, and then I also really enjoyed rereading it in the weekend was the one about bottom-up versus top-down or thesis-driven investing. It sounds like you see the thesis is the marketing narrative, and then the bottom-up stuff is the hard work you need to do to actually arrive at the right solution. So, it’s almost like the thesis helps you to raise money, and the bottoms-up investing helps you to deploy the money, and you shouldn’t confuse the two, almost.

Brett: Yeah, I think that’s true. I think that even applying thematic investing at an operational level is totally fine. I mean, there’s a circle of competence element to it, where, if you’re truly just saying, “I’m going to invest in everything”, there’s challenges with that, as well. So, there’s a give and a take. I certainly hope that that’s the case, that there can be those two opposing forces at once, just because that’s, as you mentioned with Spotify and the way that we invest in our funds, this vertical focus that develops. But you’re right. The investment thesis and the way that you talk about where you invest in the venture capital world, surely becomes sort of a marketing vehicle, a way for you to tell the market who you are and what you stand for, and how you think, and all of these different things. The challenge comes when you start to overly believe your own view of the future and close your mind off to maybe the ideas that founders are coming to the table with and some of the emergent opportunities that develop in the ecosystem. And that’s really where the friction comes in between this bottoms-up investing and being overly thematic. I think that if you’re trying to predict the future and do all of that, I mean, that’s the job of the founder, in my opinion, and the team that’s kind of building the company. So, that’s definitely the way that I think about that.

A really interesting term that I learned about a couple of months ago, called ‘accumulated accidents’, […] and it basically prompts us to say about different societal behaviors or institutions, whether this is actually representative of an ideal expression of society, or whether is built upon a series of accidents that can actually be unwound in the right circumstances. And, really, for lack of a better term, it’s creative destruction. It’s how new innovation comes to market. And in a lot of cases, you can unwind some of these accidents via a better business model or via better technology but some of the really, really big things, some of the things that we’ve really screwed up in the past that have just accumulated on themselves and where incumbent interests have become extremely entrenched and difficult to pull away, I think that’s what this crisis is giving us — an opportunity to rethink and reset with. — Brett Bivens

[00:26:54.24] Ben: And it sounds like you shouldn’t shut yourself off from opportunistic opportunity, as well, by being too sticky and too rigidly to thesis. I just wonder, does that happen to you? So, as much as you do have sectors you prefer and business models you prefer, I guess you’ve had instances of where founders pitch to you and even though it wasn’t something that was on your radar, you were struck by the passion and the vision and the team. Would you argue that it’s almost unhealthy to deny yourself the chance of being opportunistic?

Brett: Oh, yeah, absolutely! And it’s something that I think about a lot, and our team thinks about a lot because we do have a handful of different verticals that we focus on, different funds that are completely divergent from one another. I mentioned audio quite a bit, we do a lot in travel and recreation, and public safety, and industrial markets. And so, we’re touching all these different areas and I think that’s exactly right. I mean, this idea of thinking about new technologies, new business models that founders are coming to you with, new angles for how to bring a product to market is benefited by this broader approach of understanding, “Okay, what did we see over here in this market that worked or didn’t work? And how can we apply it to this completely different area?” And if you do just get overly rigid, you kind of miss out on those opportunities for, I guess, transferred learning, in a way.

[00:28:23.19] Ben: I think we’ve done an amazing job because we’re at the halfway point and we haven’t talked about the pandemic yet. I am actually going to start to steer us in that direction now, by asking you about remote work. You wrote an essay on remote work, and if I were to summarize it — and badly, by the way — but if I were to try to summarize it, your view is that a lot of the “easy” solutions to remote work have been tackled but we’re only at the very early stages of starting to tackle some of the harder aspects of remote work. So, I suppose the question is, what are those harder aspects and those harder problems that we need to solve?

Brett: The thing about remote work and distributed work is it’s very challenging to crack, as a company that’s trying to do it well, and as a company that’s trying to build products and services for that market. And so, because it’s been so hard to do historically, as a company — and really many have shied away from actually even trying it until the pandemic sort of hit — maybe the addressable market hasn’t been big enough, or companies looked to build solutions that could be purchased and used by companies that were maybe trying remote, but also had people in an office. And so, you had that fact in play. You also had the fact that a lot of the easy things — we talked about video conferencing and all of these different tools that we’re using for remote work — every company and every use case is so idiosyncratic, that it’s easy to say, “Oh, well, this doesn’t work. This doesn’t work. So I’m going to build to scratch my own itch here”, which is great. I mean, it’s how a lot of great innovation occurs. So, that was kind of the reason that a lot of these easy solutions get a lot of attention and a lot of traction, that are maybe fun to play with and test out and are buzzy.

Brett: But yeah, you’re right about the hard solutions and I think that’s something that hasn’t been paid enough attention to until I would say before the pandemic; I think it was really becoming clear for a lot of companies who were trying this and a lot of onlookers who were starting to spend more time thinking about how distributed work would develop, that there were a lot of infrastructural things, whether that’s around how do you do a payroll across borders for a company without being this massive Fortune 500 company that has teams of lawyers and regulatory people who can handle that kind of stuff, or how do you manage insurance across countries, how do you handle security — cybersecurity — for people that are working from home now. One of the things that I think has really come ahead with this pandemic is just mental health and how you manage the psychology and wellness of all of the people that are working in this situation. And so, I think all of those challenges present new opportunities for companies that in the past, maybe it didn’t seem like it was worth it to go through all the legal and regulatory headache because you couldn’t really predict when we were going to hit that inflection point to really start seeing that curve go up super, super fast in terms of adoption of distributed work. But we’re kind of there now. I think, every day, there’s a news item that comes out about XYZ massive company is letting employees work from home forever. And so, the reality is that the market, so to speak, is big enough for people to go after now and I think we’ll see a massive amount of innovation happening there. And the good thing is there’s a lot of companies already that have been doing great stuff there for a while to kind of build out that infrastructure layer.

The pandemic has given a lot of companies this carte blanche to do innovative stuff that they may have not had the boldness to do before. The way that I think about this term, ‘clampetition’, it’s a word that just joins together competition and classiness, which is essentially companies using this totally disjointed economic situation to make moves that are classy in terms of helping their customers or helping their suppliers, but also double as these smart customer retention or acquisition tactics. — Brett Bivens

[00:31:50.10] Ben: It’s almost like what you’re saying is we’ve got very excited about the first-order effects. So, we need to work from home, therefore we need to communicate, therefore buy Zoom — we get excited about video conferencing. And what you’re saying is actually, the second and third-order effects, in terms of stuff that are potentially overlooked at first, like mental health. So, beyond just remote working, what do you think are some of the most interesting second-order, third-order effects of what’s happening with the pandemic?

Brett: I think if I’m going to answer this, honestly, I’ll kind of answer with a non-answer, and saying, I don’t think any of us know at this point. But I do think that you’re right, there are these really interesting second and third-order effects that are going to occur that, as investors, as analysts, as people watching this space, you almost just have to really keep your eyes open, keep an open mind towards how demand is trending in these different areas, how some of the things are changing. I think that a couple of areas that I think of that will be ripe for interesting things to happen: certainly cities is one — and that means both in terms of transportation and mobility, but also in terms of retail and physical locations; of course, offices and stores and things like that. There’s this interesting, potentially nonlinear jump that might occur as a lot of small businesses are going out of business and what happens when we need to start backfilling that and people are reopening restaurants or starting new restaurants or trying to start new gyms or what does that new experience look like? How does it now bridge digital and physical experiences in a different way than maybe before? So, I think there’s a lot of things to look out for, there, but I guess the short answer would be it’s tough to say.

[00:33:45.22] Ben: And are you excited as an investor? Because, as we know, it’s difficult to displace incumbent organizations, whether it’s Facebook or whether it’s a local restaurant. I suppose it’s even harder if it’s an online company. But what we’re seeing is there’s this one-off discordant event, this discontinuity, which must, therefore, create opportunities for companies to move in and do something different. And so, are you very excited? I mean, it seems almost paradoxical to ask if you’re excited in a time of pandemic. Are you very optimistic about the silver lining, the opportunities that will come out of this?

Brett: There’s a really interesting term that I learned about a couple of months ago, called ‘accumulated accidents’, which originated with an analyst and a writer named Clay Shirky, and it basically prompts us to say about different societal behaviors or institutions, whether this is actually representative of an ideal expression of society, or whether it’s sort of built upon a series of accidents that can actually be unwound in the right circumstances. And, really, for lack of a better term, it’s creative destruction. It’s how new innovation comes to market. And in a lot of cases, you can unwind some of these accidents via a better business model or via better technology but some of the really, really big things, some of the things that we’ve really screwed up in the past that have just accumulated on themselves and where incumbent interests have become extremely entrenched and difficult to sort of pull away, I think that’s what this crisis is giving us — an opportunity to rethink and reset with. I think about healthcare in the United States and just the layer upon layer upon layer of difficult things to unwind with that, that we hadn’t been able to do forever, that are now just becoming completely undone with consumer products playing the role of helping early-warning and telemedicine and regulations coming down there and things that could never have been done without this. And so, does that create an opportunity for a reset? I think it does in really interesting ways.

Brett: The same thing with higher education and doing a lot with being more precise in helping people learn at their own pace, on their own schedule in a way that aligns with what they want to accomplish throughout life — whether that’s an elementary level or adults that are needing to change careers and do things there. And so, I think that we’re at a unique opportunity where we have business model innovation that can come to market, technology innovation that can come to market, and this massive catalyzing force, which is in our face on a daily basis, that’s saying, “You need to change because the world as you knew it does not represent this ideal state.” And you may have known that, but now you have the opportunity to actually take action and move in the right direction.

[00:36:41.15] Ben: I thought one of the interesting points you made in one of your essays was, I think you called it, ‘daily active crisis’. So this is just providing air cover, if you like, for innovation in a way we haven’t seen, and then you draw the distinction from climate change, which is clearly a more pressing issue than the pandemic, but it can’t achieve the same headspace, the same focus with regulators and innovators and business people because it’s not a daily active crisis. It’s something that periodically we hear about, you know, a forest fire, we hear about a drought. But it’s not every day in our consciousness, in the way that this pandemic is.

Brett: It’s a bit of a damning statement on human psychology and our inability to plan for the long term and think about the future, I guess. But yeah, I think that’s just the reality of the situation. Without this kind of a crisis hitting us in the face, reminding us daily of the impact that’s having on our lives, there’s really less of an impetus for people, at large, to really try to change their behavior and push for behavioral change. And, who knows, I think that we are the way that we are for a good reason in a lot of ways. I don’t think we’re going to suddenly change overnight with this and start thinking at a societal level much more about the future. I mean, that could be the case, but at the very least, this can help us, again, reset, and at least at this point in time, do the right kind of planning for the future so that maybe we compound some happier accidents, I guess, in the future than what we’ve done in the past.

[00:38:15.27] Ben: Yeah. And out of previous daily active crises, we have achieved great things, right? The Second World War was a daily active crisis, where we built the welfare state. I wanted to actually just take you back for a second to the second-order, and third-order effects of the pandemic. It’s almost like I don’t want to let you off the hook, but I’m not asking you to necessarily make predictions, but I thought you had a really nice framework for thinking about the future, which is what you call ‘economic oceans’. And, actually, what we’re talking about, is we’re talking about clusters of attention. And so, what businesses do you build that leverage those clusters of attention?

Brett: Yeah, that’s maybe a good thing to focus on. Yeah, I’ve called them ‘economic oceans’. I like this oceans analogy to describe the way that attention is flowing in our world today because we can’t really think about the economy and everything that exists out there, as defined by verticals or just specific areas because there is so much overlap between the types of companies that are being built, the types of innovation that’s being brought to market. I mean, I think if we look at all the companies that have been built over the last decade, maybe just take a couple of companies like Square or Uber or even Zoom — they’re built at the intersection of these different pools of attention: the way that we think about work, the way that we think about cities, the way that media is evolving, the way that commerce is evolving. None of those are industries in and of themselves, but they’re, again, these areas where, at the intersection of those things, is where some really, really interesting innovation can kind of be created. And I think that more than anything, as we think about where value gets created in the future, it is less about predicting, and it’s more about staying close to where those areas are overlapping, and how, for example, to take one area, how does this new approach to wellness and well-being and managing our health and understanding our health in the wake of this, change the way that cities are constructed or change the way that we consume media, or change the way that we think about work and value work and prioritize work in our world. And so, I think that there’s going to be some really interesting bundling of these categories that is sort of not predictive, and it’s hard to say exactly how it’s going to play out, but to try to focus on those intersections is maybe the right approach.

[00:40:46.12] Ben: Yeah. And I think that’s very consistent with what you said earlier on, which is it’s very difficult to have a winning business model unless you’ve captured demand, right? Or, I think you said, what was the term? To introduce a business model without social aspect. Because it’s almost that. I mean, look, if we think about finance, for example, it doesn’t have that social aspect, therefore, it’s a service that almost increasingly lends itself to be bundled with other activities within an economic ocean, because in itself is obviously intrinsic to economic activity, but it’s not something where you have particularly strong social network effects, for example.

Brett: Yeah, it’s kind of the way that any company on the internet seems to trend. Those commoditized services get bundled into a company that owns significant demand in one area or another. It’s sort of like, you know, that you always hear the term every enterprise SAS company becomes a FinTech company at some point because you get deeply enough integrated with the workflows of your customers that then you can start offering them just different features, different financial products, etc. And I think the same thing is happening in the consumer internet world as well, as you see the proliferation of digital wallets across the board with every company trying to offer them, thinking about how to offer them. It’s sort of the same thing. So, yeah, if you can identify the companies, I think, that are owning that demand and generating that demand, and I guess going back to that idea of generating intense loyalty from a customer base and finding the right ways to scale that loyalty, then you can really figure out where the next steps lie for that company and where the next features and monetization paths are.

[00:42:25.28] Ben: I want to ask you about another term, which I think is yours. I think it’s another one of your idioms, which is ‘clampetition’. What is clampetition? And can you give us an example? Because, again, it’s quite specifically used at the moment, within the pandemic, I think.

Brett: You touched on it earlier, where the pandemic has given a lot of companies this cover to do different things or interesting things or this carte blanche to do innovative stuff that they may have not had the boldness to do before. The way that I think about this term, ‘clampetition’, it’s a word that just joins together competition and classiness, which is essentially companies using this totally disjointed economic situation to make moves that are classy in terms of helping their customers or helping their suppliers, but also double as these smart customer retention or acquisition tactics. And a lot of these moves are pretty minor. I mean, I’ve probably gotten a million emails from companies saying, “Our product is free for 30 days during the pandemic” or something like that, that are just really lightweight attempts to acquire new customers when they may not have otherwise had a channel. To assume upgrading its education users to a free plan is one example of that.

Brett: There’s others that run a lot deeper and I think the food delivery space provided an early interesting model of that. So, in the US, at least, there’s sort of these four companies that are vying for the leadership role in that world and it’s Grubhub and Uber Eats and Postmates and DoorDash — and Grubhub is the only one of those companies that’s actually profitable. Postmates and DoorDash are kind of these venture-backed companies that are burning a ton of cash, Uber Eats burns ton of cash as well. And DoorDash used this opportunity to do something that their competitors couldn’t, because they’re burning so much cash and have this existential runway threat where Grubhub suspended commission payments from restaurants and was able to do that, and it’s a classy move — it helps restaurants, in theory, not have to pay and save working capital and things like that — but at the same time, it’s pointed directly at their competitors and saying, “We can do a thing that you can’t, and hopefully that’ll allow us to serve our customers better, acquire more customers, pull them away from you and hurt your business long term.” So, I think it’s a type of thing that’s been happening quite often across the board and it’s just an interesting, unique thing that’s been birthed by the pandemic.

There’s a new paradigm — places where there’s a significant gap between engagement and monetization, where companies have been positively impacted by spatial economics, where there is network effect developing or positional scarcity developing. But, the market hasn’t quite caught up to that or understood that yet. — Brett Bivens

[00:44:53.05] Ben: Square is another company that you’ve consistently been really bullish on and a company where, a bit like Spotify — maybe that’s changing with Spotify, and it’s certainly changed with Square — but where, for a long time, you were almost contrarian in really rating the prospects for Spotify and for Square. Why is it you’re bullish on Square and what have they done in terms of clampetition? Because I think you used the example of Square a couple of times in the essay.

Brett: Yeah. So, Square is a really interesting company as well, just because they are one of those companies that have hit that internet escape velocity state. They’ve driven so much demand with this Cash App, and they’ve just understood culture to such a degree and have driven so much loyalty within that product that their biggest challenge or threat as a business right now is their SMB customers just going out of business. That’s a massive threat to them. They’re the type of company that has this sort of responsive instrumentation, this ability to adjust incentives, adjust operations in real time. And because of the fact that they’ve built up this two-sided business where they’ve got SMB customers on one side, massive demand with Cash App on the other side, they can actually drive significant relief to those SMB customers over time by doing things like offering rewards to their digital wallet customers for shopping at those places and recommending different Square SMB customers, so they can be the force that drives the recovery of a lot of their customers. And I think that’s a really, really interesting company to keep tabs on and follow and yeah, I’m very bullish about their prospects and where they’re going.

[00:46:36.12] Ben: They’re almost a good example, as well, of patient investing, right? Because they started with that card reader that a lot of people saw as just being almost like perpetuating the same because it ran on all the same networks. But from there, they’ve innovated and innovated, and I suppose they did it under the radar to some extent or patiently because, again, they’re formidable competitors, and they’ve run on other people’s networks. And so, they’re a little bit the same as Spotify, in the sense that they’re operating in a space where they’re surrounded by very, very powerful players. And then, would you also argue that they’ve got business model leverage, i.e, they’ve now established a really good unit of exchange, and a loyal customer base and scale, and are in a position where they can start to layer on new product offerings and expand within their economic ocean? I’ve tried to use as many of your terms as possible.

Brett: Yeah! I think that’s spot on and I think it’s true for both sides, if you think about their SMB customers, again, because they can potentially drive so much demand to those customers, because they’re so deeply embedded in their workflows. They have an opportunity to offer additional services over time that, again, they’ve got this captive audience, they don’t need to acquire them for a huge cost or anything. They’ve got them right there, so they can just continue to upsell. And that’s great. And then yes, on the customer side, this sort of digital wallet, the Cash App, the payments, the peer-to-peer stuff is a great starting point. But then, they get into areas like stock trading and other places like that where they can just keep serving out new services, new features, new products to these users over time. And that whole flywheel just kind of keeps spinning. Yeah, I mean, it sounds easy. It’s certainly not easy. I think, for any of these companies, there’s massive competition from all sides for a company like Square but they certainly do sit in a pretty advantaged position.

[00:48:36.02] Ben: So Brett, I want to ask you also, now, about the shifting economics of distance. So, I’m going to quote again to you from one of your essays. You said, “We are seeing, for the first time an economic shock create a discontinuous divergence in the spatial economics — the cost of distance between the physical and the digital worlds.” What did you mean by that? And also, if you don’t mind, can you also talk us through this matrix that you’ve got? It puts people in quadrants based on positional scarcity versus spatial economic impact of COVID-19. Because it’s a great diagram.

Brett: Yeah, absolutely. I think over the last few decades, we’ve seen a broad-based decline in the cost of distance across digital and physical worlds. It’s cheaper to ship things, it’s increasingly cheaper to travel all around the world. So, doing things in the physical world, at a long distance, is increasingly less expensive. So that cost has been coming down. The cost of doing that, from a digital perspective is coming down even faster. It really hasn’t been necessarily significant enough to break the status quo that’s kept many things functioning as they have — I mean, the cost of delivering education or the cost of doing a business meeting digitally has gotten less expensive for higher quality over time. But, because of the fact that the other pieces of the physical world side of it have also been declining in value and because of the fact that there is an element of positional scarcity to these things — there’s prestige tied into jumping on a flight and going to a business meeting or there’s prestige in being on location at a university, getting your degree there — they really haven’t decoupled and I think that this pandemic situation has totally decoupled those things from, again, health to education to the way that we do business, and it’s really broken down those things, and it’s having a pretty significant impact on capital and attention flows. I think you can see this play out. There’s a really good tweet from Chamath Palihapitiya of Social Capital, that talks about just the different terms that a company like Slack who has significantly benefited by this rapid decoupling in what they were able to get as they went out to the markets to raise debt versus a company like Airbnb, who has been really, really challenged and put in a tough position through all of this.

Brett: And so, the quadrant that you’re talking about, or the chart that you’re talking about, looks at four different areas. So, is a company negatively impacted by the spatial economic shifts of COVID-19? On the negative side, you get things like movie theaters or non-elite secondary education institutions. And then, on the positive side, you get things like digital wellness and telehealth and teleconferencing and distance education and things like that. And then, on the positional scarcity side, sort of high and low, it again kind of comes back to, is there prestige or legitimacy tied up in this activity? Is there a physical or regulatory monopoly around this activity? Are there network effects that will come back as we sort of start to ease away from this? So, the four categories, if we look at it, there’s a resilient recovery category, which is sort of this high-level…

Ben: It’s top left in the quadrant, right?

Brett: Exactly! Top left, and it’s sort of high positional scarcity, high signaling value, high degree of assets that will be valuable over time — and that’s things like Airbnb, or the NBA, or Harvard; those are things that will have a dip but should recover pretty resiliently.

[00:52:34.01] Ben: Yes. These fit in the bounce-back category, right?

Brett: Exactly, yeah. And then, there’s the side of that where an activity or a company has been negatively impacted, but does not have the benefit of prestige or legitimacy and has seen significant brand impairment or a massive shift in the value chain. And again, that’s what I talked about a second ago with movie theaters and non-elite institutions. There’s the obvious growth category, which is, these companies that have been positively impacted, but don’t really have that positional scarcity or any kind of real signaling value. And again, things like Zoom, things like distance medicine, etc, where it’s kind of obvious that those are going to grow — if you’re already invested in those categories, great; if you’re not already invested, it’s possible that the valuation gap has closed already on those things and it’s not really clear where the alpha is, so to speak, in there. And then there’s, I guess, a new paradigm, and this is maybe hard to judge or hard to understand exactly where it plays out. But places where there’s a significant gap between engagement and monetization, where companies have been positively impacted by spatial economics, where there is network effect developing or positional scarcity developing. But, the market hasn’t quite caught up to that or understood that yet. And, again, who knows what this category is going to be. If any of us knew that, we’d be in a pretty good situation, but potentially things like gaming and distance primary education fit into this category. But yeah, we’ll see how that plays out.

Ben: Fantastic! Brett, thank you so much for coming on the podcast. That’s been a fantastic conversation! And I think not only have you opened our eyes to lots of different opportunities that we maybe weren’t thinking about, but I think you’ve also given us a new vocabulary to talk about those opportunities. My last question to you, before we conclude is, where do people find your writing? How can they engage with you because I think you’ve also got a Telegram channel now, right?

Brett: Yeah. So, Twitter — I’m pretty active on there, @brettbivens. I have a weekly newsletter that I put out where I talk about a lot of this stuff, at venturedesktop.com, and then, like you said, I also have a Telegram channel where I have more high-cadence thoughts, rapid thoughts on different things, share different links that I’m reading, stuff like that. It’s been a fun experiment to try to connect with some new people and share more thoughts in real time. So, those are probably the three areas to connect with me.

Ben: Brett, thank you so much, indeed!

Brett: Thanks, Ben! I appreciate the time.

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