Cheap Thoughts

The more I think about it the more I believe creating an environment of open and transparent communication is the best things a company can do to create a great culture.  It puts everybody on the same page, eliminates friction and gives each and every employee an ownership mentality.  At Employee Navigator the two biggest changes I helped implement were:

• Comprehensive companywide monthly reports highlighting everything from revenue, churn and development stats.
• A requirement that all meetings with more than 3 employees are recorded, and those notes are subsequently posted on an internal dashboard for everyone in the company to see.  This apply's to everyone, management, sales, support, engineering, etc.

Because we didn't implement these changes until recently there is the added barrier of educating employees on why these things are important and making the notes something that is second nature.  

Ultimately I believe that internal friction results in product friction and creates a poor experience for customers.  The only way to curb that (aside from having an awesome product) is to get everyone on the same page, working from the same information, which enables them to make consistent companywide decisions.

If you're ever wondered how regulation affects innovation just look at the industries that have been the slowest to see any truly disruptive technologies take hold.  Healthcare and financial services stand out to me as two of the slowest moving industries in the US, and it is no surprise that they are also the most highly regulated (and two of the most important).  Progress is slow, changes are incremental, and its my hope that all of this will not dissuade entrepreneurs from attempting to change things.

In a recent interview Google co-founder Sergey Brin was quoted saying that healthcare is so heavily regulated it is not a place where he wants to spend his time.  How bad does it have to be when one of the smartest most innovative thinkers of our lifetime decides its not worth his time?  My firsthand experience dealing with insurance carriers further adds to just how slow and backwards the industry is.  They generally lack any cohesive technology strategy and still rely on processes and legacy systems that are decades old.  There is one insurance carrier who's primary backend technology system is referred to as "the 72," which references the year the system were put in place (yes that is 1972).  Larry Page was also quoted in the same interview as Brin saying, "Imagine you had the ability to search people's medical records in the U.S.. Any medical researcher can do it. Maybe they have the names removed. Maybe when the medical researcher searches your data, you get to see which researcher searched it and why. I imagine that would save 10,000 lives in the first year. Just that. That's almost impossible to do because of HIPPA. I do worry that we regulate ourselves out of some really great possibilities that are certainly on the data-mining end." 

Financial services is not much better, and the financial crisis of 2008 didn't make things any easier.  Regulations like Dodd Frank, Sarbanes–Oxley and the myriad of other  other laws passed over the years have made finance very unattractive for many entrepreneurs.  Not just because entry into these markets is costly and complex but because these regulations end up being used by incumbents as defensive tactics to maintain the status quo.  We are seeing progress though.  Crowdfunding and the recently passed JOBS Act (that allows private companies to start using public markets in their fundraising efforts) are showing a ton of potential.  Additionally, services like Wealthfront and Betterment are targeting another mainstay, financial advisors and their high management fees. Perhaps most encouragingly is Bitcoin, which has the potential to sidestep most of the existing roadblocks in a variety of capacities (which I won't get into here).     

It's my hope that the next generation of policymakers and bureaucrats will see how regulation has brought these and other industries to a relative standstill and will work to create policies that encourage innovation, not hinder it.  It is exactly because these two industries in particular are so important that we should be inviting innovation and experimentation.  The consequences of inaction is greater than the consequences of action!

I’m still spending a fair amount of time trying to dig into Bitcoin and understand both the technology and it’s consequences.  An interesting question I came across is, what is Bitcoin’s impact on interest rates and tax policy if it were to become a truly global currency?  It is the first currency without and interest rate, which is unheard of until now.  How do monetary and fiscal policy evolve in developed countries like the US, China or the EU?  Will the power of the fed diminish? What about fiscal policy?  How does the US or any other government collect taxes on a currency that is not backed by their or anyone else’s government? As soon as you start to talking about governments losing their power to tax citizens and set interest rates things get VERY interesting.

While this scenario seems far fetched in the developed world that is not the case in developing countries like Kenya, which already has a one of the most mature mobile payments network in the world.  There are also a number of small countries who are not capable of managing their own currency like Cyprus, Panama, the Bahamas (to name a few) that would also make great candidates. Another interesting possibility is Iceland.  The Krona has a rocky history at best and badly needs a new stable currency following its collapse during the financial crisis of 2008.   There are clearly a number of major hurdles that Bitcoin has to cross before sovereign nations would even consider adopting it, but I believe they are on the right track.  Accordingly, I expect to see it evolve into a major player on a macro level in the next 5-10 years.   

I should add that at Bitcoin’s total current valuation it is nothing more than a blip on the radar when compared the the value of the US dollar, (the total value is currently just over $7.5bn in US dollars) but isn’t that how all disruptive technologies started?  I think it’s important we at least begin trying to understand Bitcoin's impact on a macro level, otherwise we'll risk playing catchup.  

I have spent a fair amount of time over the past few months reading about Bitcoin.  Living in San Francisco has definitely opened my eyes up to this new technology, especially because it is a city where everyone has an opinion on Bitcoin .  More importantly is the fact that most of those opinions are informed, as opposed to the constant barrage of speculation and fear mongering that seems to consume the media's attention.  Like so many subjects today the people who are making the most dire predictions about Bitcoin and while it will fail are often in no position to make those judgements at all.

It has also been comforting to know that even some of Bitcoin's most ardent supporters have not fully grasped the technology, and are not shy about admitting as much.  Below is a quick summary of some of the benefits of the technology from Stripe's blog followed by a few of the most worthwhile articles I have found on the subject. 

Less than 12 months ago it would be fair to say that I did not have an opinion on Bitcoin, and even if I did it would have been a slightly negative one.  Over the course of the past year however, I have become much more bullish on the technology and am beginning to see why it has some of the smartest people in  the world excited and some of the wealthiest people in the world putting their money where the mouth is, investing hundreds of millions of dollars into Bitcoin related companies.

"There would be three major improvements to the existing financial system.

First, the resulting ecosystem is technologically open. Open ecosystems have a way of getting better much faster than their closed counterpart. Anyone can enter, connect to the network, and start building good tools and applications on top of it. The emerging  regulatory landscape may change some of the constants, but this fundamental advantage will remain.

Second, this model unbundles the existing financial system into layers run by independent companies. To see the value of this, contrast with the US mobile carriers, who used to own the entire stack. They owned the handsets, the operating systems, the applications running on the phone, and the service. This meant that most of the stack never had anything pushing it to get very good, and there were even incentives to hold it back in order to preserve legacy revenue-generating facilities like SMS. By enabling competition at individual layers of the financial system, each one should improve.

And third, this would be the first truly global payments network: anyone would be empowered to start a gateway in their country, rather than relying on it eventually making sense for some centralized actor. This is especially powerful for people in countries with underdeveloped banking systems, which many traditional payment systems never reach."

• Stripe 
• Marc Andreessen
• USV
• Coindesk
• Chris Dixon

Every once in a while I read a really good blog post about a company that I find particularly interesting.  Most recently it was an article by Bill Gurley, a GP at Benchmark and board member at Uber.  The article did a fantastic job of laying down what makes Uber such an exciting company, and attempts to explain why their $18bn valuation is not out of whack.  Additionally, it's also a nice lesson on the kind of thinking that is necessary when investing in new companies operating with new business models.  To hammer the point home he briefly discusses how in 1980 McKinsey & Co. had told AT&T that they expected the cellphone market to amount to only 900,000 subscriptions.  Obviously that estimate was off by several billion users and to this day remains on of the biggest miscalculations by the worlds most prestigious consulting firms.  I'm an optimist at heart, which probably leads me to overestimate what a young company like Uber can amount to.  In this case however, I think they are a once in a decade company that will have a lasting impact on a huge portion of society.   

A quick story to end this post.  One of my dad's simple pieces of investing advice was to "just use common sense".  He saw that my brothers and I as well as all of our friends had an unhealthy obsession with Chipotle so he decided to invest.  A few years later their stock had skyrocketed, and he told me it was one of the best investments he's ever made.  Using that logic it's easy to see why I find Uber so exciting.  Anyone who uses it is immediately impressed with how much it improves on the existing taxi model.

I was doing some poking around looking into different companies that interested me when I came across something quite surprising.  I noticed that Chipotle has a higher P/E ratio (56), than Google (32), Apple (15), HP (11), and IBM (12).  That means people value Chipotle’s profits more than each of those technology companies.  I did a little more digging and discovered that McDonalds has a higher market cap than Twitter and eBay combined, Panera is valued 4x as much as Zendesk, and Yum Brands (Taco Bell, KFC Pizza Hut) has as P/E ratio that is 2x higher than Oracle.  

I would venture to guess that most food/consumer goods companies are listed at the less risky end of the investment spectrum when compared to technology companies.  Does that really mean that food offers a greater upside and less downside risk than those high growth businesses  everyone loves to talk about?  I guess “changing the world” isn’t as important as eating out.  Now obviously there are thousands of different ways to dissect each of these companies, but I do find it interesting that investors believe food has more potential than technology. After all, it seem's much more difficult to create a new Google than a new Panera.  

I finished reading Walter Isaacson's bio on Steve Jobs a few months ago and was delighted with the book overall.  One of the stories that stood out to me was the final conversation Jobs have with Google CEO, Larry Page.  Jobs' advice to the new(ish) Google leader was to focus.  He told him to try to do a few things insanely well (I'm paraphrasing).  Anybody who has studied what made Apple great knows that it was the result of intense focus on building a few great products, more wood behind fewer arrows.  Fast forward to today and it is clear that Page did not heed that advice.

Google is involved with everything from search to enterprise, healthcare to wearables, autonomous vehicles and delivery services, browsers and operating systems.  The list could go on.  Since finishing the book I've tried to understand how Google is positioned as a company moving forward.  Apple is a consumer company, which Google is as well, but their scope obviously extends well beyond smartphones and search.  So what is Google?

I think Google is the next generation GE.  When put in that context it became easier to understand why they are trying so many different things.  And while a vast majority of their revenue still comes from their search business it is not difficult to see Google as a major player in a number of industries in the coming decades.  In fact, if you look at GE's business lines and compare them to Google's you can already begin to see some parallels.  

I don't think Google will ever create consumer products to match Apple, mainly because that's not they're exclusively focused on doing so.  My belief is that an open OS is much harder to control and thus results in an inferior user experience, see here.  That isn't to say Google won't continue to mitigate the effects of device fragmentation and improve the consistency and UX of it's devices, I just don't think it will ever be as delightful as a closed ecosystem.  I think we can also all be sure that Apple isn't interested in becoming the next GE either.

There has been an enormous amount of research done on the decline on brick and mortar stores and the emergence of e-commerce as the preferred method of shopping.  Analysts continue to forecast that more and more people will do their shopping online, leaving traditional retail outlets in a difficult position, and the numbers are certainly there to back them up.  Personally, I can see a world where most Americans do their shopping online (obviously, not an earth shattering prediction), rendering the traditional shopping mall a fraction of it's former self.

But there is one interesting trend that came across my mind this week after reading about the release of Amazon's long rumored smartphone.  While traditional retailers are having their business models upended, the worlds most powerful technology companies are actually moving into the retail space.  Apple opened it's first retail store in 2001, since becoming the most profitable retail space in the world. More recently we have seen Microsoft and Google express desire to open retail locations as well.  Following the release of their Fire phone, I don't think it will be too long until we see Amazon enter the fray either.  Yes, I think the worlds largest e-commerce site will soon open retail locations, pretty ironic.  All of these companies have entered the consumer product market, making it obvious that there is still some significant value in the consumer being able to touch and play with the products before they purchase them.

I don't quite know what this means.  Maybe its a reflection of the decline of the Best Buy's and Radio Shack's of the world, or maybe retail isn't as dead as everyone thinks.  Or it could point to a very niche specific retail model where store become showrooms and playrooms for consumers.

If you could go back in time 25 years and tell people what the world will look like today, they would probably label you as insane.  All you would have to do is describe to them what they can access via their smartphones.  I guess you would actually have to describe to them what  smartphone is.

A smartphone gives us maps of almost every city and town on the globe, GPS, email, phones, cameras, radios, encyclopedias, the list could go on and on.  We live in a world where billions of people have access to a significant amount of human knowledge in their pockets.  And did I mention that it's almost all free?  Some people would say you're lying, others that the economics don't make sense.  How can businesses make money if they're providing access to all this stuff without charging for it?  How can all of this information be stored on a device the size of a deck of cards?  

To me, the exciting question is what do the next 25 years hold in store for us? We will one day describe to our children the types of occupations, difficulties and inconveniences we had to endure, only to be met with dumbfounded looks of confusion.  I believe that we haven't even scratched the surface of what technology an innovation will provide humanity.  In fact, I believe the innovations in the past 25 years will pale in comparison with what lies ahead.

Anybody who believes the best is behind us risks being left behind themselves.

I was talking with a friend about startups and we began discussing the different types of corporate entities and which ones are most popular.  I found myself stumbling to answer his questions so I decided to read up and make sure I understood the different types of corporate structures at a 30,000 foot level.  Below are my brief notes.

You incorporate for 3 main reasons

1. Investment- Even before we get to investing you may want to split the ownership of your company with a co-founder, incorporating allows you to do so.  If you want to bring in outside investors you must have a corporate entity that allows you to do so.This is an exchange of shares in your business for returns on capital.  
2. Taxes- There are two types of corporate entities for tax purposes; flow through entities and tax paying entities.  Flow through corps. don’t pay taxes, they pass the income through to the owners of the business who then pay personal taxes.  Tax paying entities on the other hand, pay taxes at the corporate level, meaning the owners do not pay taxes on income earned by the business.
3. Liability- You don’t want to put yourself at personal risk for the actions taken by your company.  Incorporating protects you from lawsuits, promises, and accounts payable.  This is probably the most important reason to incorporate.

The 3 main types of corporations are

1. LLC- Most small businesses start out as an LLC.  It “limits the liability” of the owners of the business and the taxes are flow through.  The owners are typically referred to as members and investors as membership interests.
2. S-Corporations- Are a middle ground between an LLC and C-Corp.  The taxes are still flow through, but the biggest drawback is that you can't do as much with the ownership structure .  They also only work if you have fewer than 100 shareholders.  
3. C-Corporation- Most companies that a normal person would invest in are C-Corps (Apple, Google GE, etc).  As a business becomes bigger and the ownership structure more complex it is beneficial to move to a C-Corp.  They still provide the limited liability and they also become tax paying entities, meaning the founder no longer pays taxes on income earned by the business. Most VC’s will want to invest in a business that is a C-Corp for tax purposes as well as the benefits of having a more developed governance structure.