The Playbook: Lessons from 200+ Company Stories

Transcript from https://podmenti.com/t/e31bae3277964d2f

Right.

Let's do it.
Let's do it.
Who got the truth?
Is it you, is it you, is it you who got
No
Is it you, is it you, is it you?
Me down!
Straight!
Another story on the way

Welcome to this special episode of Acquired.
the podcast about great technology companies and the stories and playbooks behind them.
I'm Ben Gilbert and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.
And I'm David Rosenthal and I am an angel investor based
In San Francisco.
And we
Are your hosts.
This episode is something that David and I have been thinking about for a long time.
Years, in fact.
It is called the Acquired Playbook.
And it is
Basically what we've learned from doing acquired. Like people often ask us the question
Okay, cool. You guys have analyzed like two hundred companies and spent
an ungodly amount of hours doing that. Like what are the takeaways?
This episode.
is the takeaways.
It was back in like twenty
eighteen I wanna say that we had a major book publisher come to us and be like
Hey, would you want to do a book on acquired? And this was the idea we had, and then we were just like Maybe at some point. Let's just keep doing episodes instead. But maybe at some point.
So
Consider this the first draft.
We don't know if this talk was good yet. We are in our hotel rooms at Capital Camp and we are about to go on stage and give it. So this is sort of fun. This is the first time we've ever recorded one of these before doing the episode itself.
All right listeners.
Now is a great time to talk about a new partner of ours here on Acquired, Lagora.
The agentic operating system that is redefining how the world's best legal teams work.
Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chat bot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?
So the founders did exactly what great founders do.
operate with obsessive customer focus.
They embedded inside a massive law firm for months.
They sat with the lawyers just watching how the work really gets done.
And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's Bet Here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work.
and do higher value work. And this means that the pie can grow even as each individual task takes less time.
And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.
And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting.
The early Lagora numbers essentially
speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries.
And crazily, they went from one million


Eighteen months.

truly insane numbers. And that is the real test.
Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client.
If your legal team wants to check it out, whether you're a law firm or you're in house at a company,
You can learn more at Lagora.com slash acquired and
And just tell'em that Ben and David sent you.
Now as always, this is not financial advice. Please do your own research. Dave and I do lots of research, but you may come to different conclusions.
And we may have financial interests in the things that are discussed on this show.
Indeed. And speaking of
Different conclusions.
This would be a fantastic episode to discuss.
In the acquired Slack, we want to hear what your favorite lessons are from
All of these like
hundreds and hundreds of hours that we've done at this point.
This would be awesome. So acquire.fm slash slack if you're not already a member. We hang out in there. It's a great, great, great community, as you will hear us talk about in this talk.
All right, join the Slack, and then uh this is twelve of our favorite playbook themes, but there are certainly more. So I'd love to hear from you.
All right.
On to the talk.
So we thought we would be really clever here with our first one. Both because this genuinely is one of our favorite themes, and we thought, well, this will be counterpositioned. Everybody's gonna talk about, you know, it's May 2022, there's doom and gloom. It's gonna be and then of course.
Great friend of the show, Anu Haran, came up earlier tonight and
Alright already beat the optimism drum, but uh we will highlight it once again. So our first
lesson.
from all the stories we've told is that optimism
always wins. So um
Uh for folks here in the auditorium.
Raise your hand if you know who the people are who are on this slide.
Wow. This is awesome. We're getting almost no
Hands raised.
I don't know that we have a single hand up.
Wow, this is awesome. Okay.
The person on the left.
is Accio Marita.
And the person on the right is Masaru Ibuka.
And they were the co founders of the Sony Corporation.
And uh we told this story in about three hours uh earlier this year on Acquired. It is
It is amazing, but we thought it would be the perfect story.
To kick off the night.
because it's it's just so perfect for this moment. So
As we said, there's not a lot of reasons looking out at the landscape at the markets right now to be an optimist.
But the Sony story.
reminds us that things were much
Much, much worse than they are today.
in the recent past.
So
Sony was founded
In
Nineteen forty six.
in Japan.
And uh
Just think about that time in nineteen forty six in Japan.
2022 in America might be a bad time to start a company or a tough time to start a company.
I don't know that in recent history there has been a worse time and place.
To
try and live your life and do any sort of business, let alone start a brand new innovative technology firm. Right. So these two men decided to start a company, which is crazy in and of itself in Japan in 1946.
Even crazier, they decided to start a consumer
Electronics company.
Crazy for two reasons. One
After the war, there were there was no technology left in Japan. So like what were they gonna what were they gonna make? Their first product was a wooden rice cooker. There wasn't uh a market either, because every other technology firm that was making radios and stuff had pivoted to make stuff for the military which was no longer a customer. Yes, no longer existed.
The second reason
why this was a completely
Completely crazy idea.
Was
They were gonna make it
Consumer.
electronic electronic consumer products.
The GdP per capita
In Japan.
in nineteen forty six.
was seventeen dollars.
Not seventeen thousand dollars. It was seventeen dollars. So there was no market, there was no technology. And I think after the war, forty eight percent of Tokyo was homeless.
Thank you.
half the population's homes had been destroyed.
Unbelievable. And so and yet despite all that despite
I I can't even imagine bigger headwinds against them. They built one of the most iconic companies in the world. It's not an understatement to say that.
These two men and Sony changed the course of Japanese history, changed the course of world history, and um
Again, we talked about this on the episode, but uh
Steve Jobs was was to mention earlier tonight.
Accio Marita.
was the inspiration for Steve Jobs.
Uh and he actually did this great, great talk at um
One of uh it was uh not a WW DC an Apple keynote. It was an Apple keynote, uh after Marita passed away where he did a tribute to him.
And I think uh
You know, no Marita, no Sony.
No iPhone.
Um
And so the lesson that we take away from this is like you know.
Even if things are at their bleakest.
It's rational to be an optimist.
Because if you're not an optimist, it's
It's the optimists who drive the world forward.
And then if you're an investor, investing in optimism is the only way that you're actually going to make outsized returns.

the rational thing to do.
Alright, so point one here, or lesson one, uh
touchy feely, kinda feel good, um, but let's back it up a little bit.
So
We all know Moore's Law.
This next lesson
You know, we wanted to basically
visualize and talk about this trend in a little bit of a different way than than it's normally talked about. So the the number of transistors on a chip, we all know this, tends to double every 18 to 24 months. And with some quick compounding math, that means you get a 10x
Every seven years or so.
And as you can see on this graph that we made here.
Uh the x-axis is time, the y axis is the number of transistors on a leading consumer processor. Uh notice that it's in log scale. You can see every seven years or so, 10x improvement in processing power. And I figured we'd take the sort of greatest hits examples. Uh Intel is 386,
486 Pentium 4 Core 2 Duo, which was in my first MacBook Pro, the A7 in the iPhone in 2013, and of course the recent Apple.
M one.
Uh of course if you look at it in linear and not log scale, it looks like this.
It it's way too difficult to actually observe any progress, and it seems like basically nothing happened and then everything happened. And this is the craziest thing about Moore's Law on exponential scales.
The graph always looks like this. In ten years, the M1 is gonna look like nothing happened between the Trevor Burrus. And in 2000 with Pentium four, it would have looked like this too. It totally every single step along the way felt like this, which is wild. And because of how exponential growth
works, you basically feel like you're always at this crazy top and all this progress just happened. Um
But normally we don't look at charts like this when we're looking at at processing power or at least like processing generations.
Uh we're used to looking at it for high growth, durable technology companies, when we're looking at stuff like their market cap.
So we aggregated that two.
Um the first thing to note is that there's been a drawdown. I don't know if anyone noticed since I We made these slides a few months ago. But the point still holds. This is the market cap of all global technology companies over that same time period starting in 1975.
Um even if you normalize this for the tech bubble in today you'll see that the outcomes of venture-backed technology companies keep getting larger generation by generation.
Uh it's also worth observing the exact same phenomenon that basically it seems like nothing happened save for the the tech tech bubble. Um and then suddenly everything happened at once.
And
The insight is that this
graph and the Moore's Law chart with the processors are actually the same thing.
This is actually Moore's Law at work.
And so we call this lesson the
Mike Moritz.
corollary to Moore's Law, because we didn't make it up. There's a great story that goes with it.
Around the time that Mike Moritz and Doug Leone took over running Sequoia Capital from Don Valentine, Mike looked back on the performance of the past couple of Sequoia funds that had Cisco, Oracle, Apple, these unbelievable venture returns, never before seen venture returns, and they were asking themselves, going, you know, my God, what have I got myself into
How are we ever going to top this? Which would be a reasonable and rational way to respond looking at the greatest returns in history.
in an asset class and thinking okay, well where do we go from here?
But he realized as long as Moore's Law continues to hold and computing power continues to get exponentially cheaper, the markets that technology can attack should keep getting bigger and bigger.
So to put some more numbers behind this, in nineteen ninety a PC with that four eighty six processor cost two thousand dollars and only about forty two percent of America that's just of America used a computer at all. Which is uh that's
Wild.
Uh so today a smartphone with you know literally a million times of the computing power costs two hundred dollars, which is one tenth the cost, and over six billion people have one.
So of course this trend led Sequoia to go on to invest in Google, WhatsApp, Airbnb, Mawan, Byte Dance, Global Markets.
I think this is like
This insight that that
Mike had originally of like oh
As long as Moore's Law holds.
Yeah, there'll be ups and downs in the market, like we've observed in the past year.
Technology should always be able to access bigger and bigger and bigger markets.
If the cost of compute keeps declining.
Yeah.
It's playing out.
And for those of you in the room who want to get like really pedantic, you have to sort of slightly adjust Moore's Law in order to say that it still holds. You change the definition a little bit, but when you look at like what NVIDIA's been doing with GPUs, the it is totally fair to say that this um 10x improvement in computing every five, six, seven years, that is absolutely still happening.
And so therefore the lessons you should take from it on the macro technology scale.
R
To stay an optimist.
Um
Indeed, indeed.
All right. So number three, we talk about Sequoia a lot on Acquired. They've been involved in so many great winners. They've built such a great
Great franchise.
But lest you think
That they are just
Pure geniuses, they can do no wrong.
D.
Lesson number three, which is cue the all in theme song here, Let Your Winners Ride.
Uh this comes from Sequoia's biggest mistake in history, which their biggest mistake in history in one of the most successful companies, if not the most successful company in history.
I think this is probably the single biggest mistake.
Period.
in investment. I don't see I don't think there's any way that it can't be, definitionally.
So
Let's go into the next slide.

They're playing on the stage where they could make
a mistake that it was the single biggest in history, so they're doing something right. But
Uh so the story goes, one day
in the late nineteen seventies. I think it was nineteen seventy seven.
Uh Nolan Bushnell.
Called up.
who is the CEO of Atari.
called up Don Valentine, his main venture investor, and Atari was actually the very
First, sequoia capital investment.
after Don started the firm and he said, Hey, I've got this young kid.
That's been working for me here at Atari.
Uh his name's Steve Jobs.
And he started a company and I think you should meet him. I think you should take a look at him. And uh
Don talks about this in the way that only only Don can. He says that uh Steve came in and he, quote, looked like Ho Chi Minh. And uh and I think this was during the phase where he wasn't showering, so like he smelled really bad. But uh they funded him anyway.
Uh Don invested one hundred and fifty thousand.
And
Apple computer.
Yeah, nineteen.
Seventy seven.
And then
Eighteen months later.
They had an opportunity to realize one of the greatest venture returns of all time. They made a 40X.

They sold their shares for six
Million dollars.
before the IPO.
And they completely cleared out their position.
Yeah.
Apple.
And of course we all know what happens.
Since the next slide.
We uh we we just for fun, we we we so we put on we're uh
Where our friends Ted and Todd over at uh at Berkshire uh with Warren's approval started buying and uh
You have the hair beating the uh or you the the tortoise certainly beating the hair on this.
Yeah, I think they did better than than Squad did on this one.
So n you know, because we use one gigantic global most successful technology company of all time to illustrate this, we figured we'd pick another example too, just to show it's not an isolated incident.
So uh Amazon IPO'd at eight dollars per share.
And just for fun, I want to point out that subsequent run-up there in the dot com bubble to$120 a share. Then of course that crash from the dot com bubble.
So two thousand one to two thousand three there?
Uh looks like a pretty amazing buying opportunity.
But actually that's a ludicrous statement because
every year for the next two decades was a great buying opportunity in this company.
And so
What are we illustrating here?
If you had held that Amazon IPO share for thirteen years, you would have a nice 10x from the beginning of this graph to the end of this graph.
But you really should have continued to hold. If you zoom out here, so you can see the little crosh hairs there illustrate uh where the previous graph ended.
Basically any growth of the stock before twenty twelve just looks cute.
And uh
You know, at that point in 2012, I think we all would have described Amazon as a mature company.
Uh it was almost twenty years old.
If you had just held for another 10 years, then instead of that 10x and 13 years, you could have had a 170x.
And of course, the difference between those two on an absolute dollar basis, whatever you invest in at IPO is incredibly meaningful. Incredibly.
So the key insight this on and letting your winners ride and when to let your winners ride and when not.
It's not your growth rate in any given year that matters. Frankly, that doesn't matter.
At all.
Uh what matters is how many years of growth do you have left. Like that is the ultimate question. And in the case of Amazon, in the case of Apple, I think that's a good thing.
If you have
Decades of growth left.
Again, th that's all that matters.
It leaves you in this interesting place where you're thinking, well, okay, do I always continue to hold
Um
And this is why venture capitalists tend to be totally obsessed with market size, because it's this idea that like you basically need to be able to run forever or decades and decades and decades and continue to grow and those markets continue to be this globally addressable, m absolutely massive opportunity.
Because
The compounding the funny thing about it is
all of the value tends to show up in the out years.
And the trick is figuring out, like, okay, when am I in the out years. Yep. And so there's this great uh like everything in startups, there's a great Paul Graham quote to go along with it. Of course, he remarked in December 2020 that an astonishing 99.98 of Amazon's growth had happened since IPO.
And uh
I I just love this'cause it I I I actually printed it out and I have it at home. It reminded me like how much Yeah uh just how much running room Amazon had ahead of it after
It's IPO.
Alright, number four.
One of our very favourites. I love this picture.
Jensen Huang.
Showing off his own.
NVIDIA logo tattoo that he has on his shoulder. I think it's from the Tegra two processor line. Like name a more badass tech CEO than Jensen Huang. I think he might be more badass than Elon.
I mean they both wear leather jackets.
Our number four lesson is nothing can stop.
a will to survive.

One is because his will to survive is
unparalleled. Uh we'll tell the story in a minute. Um but two, we actually started our two part series on NVIDIA.
With
This great quote from him, which is that
My will to survive exceeds everybody else's will.
To kill me.
So
One of the key things that we realize looking back on all the stories that we've told, um
We kinda have a formula that acquired.
It just happens to be like the best formula of all time, and it's Joseph Campbell, and it's the hero's journey. And all the great companies, whether it's Apple or Amazon, or NVIDIA or TSMC, they're all the hero's journey.
And
The thing about the hero's journey is you face adversity along the way. You're fighting a dragon, it looks like you're gonna die. And uh
The thing about company building is that unlike
Fighting dragons.
Game over only happens when you
Decide to quit.
As a founder.
Like
You you can't get eaten by the dragon. Like the market can turn against you, but the market can't actually eat you. There is always
Always a way.
to survive. It's just a question of do you have the will.
Yeah.
And uh
The NVIDIA story just illustrates that.
better than anybody. So when they were funded, Sequoia funded them.
Uh shocking. Right. It was uh Jensen uh and a couple of his buddies from Sun. Jensen was at LSI Logic, and uh his two co-founders were from Sun, this amazing technical team, this new market, graphics accelerating and gaming on PCs.
giant wave led by Doom and home adoption of PCs.
This was like a you know great team to pursue it.

bet on everyone over and over and over and over.
Everybody thinks they're no brainer venture bets and tons of competition in the eighty separate companies making graphics cards got funded? Yeah, it was seventy or eight.
separate companies making graphic cards all got funded. Which sounds quaint today, but that was a lot back then. And then it gets even worse.
Intel.
came after the graphics card industry and decided that they were going to integrate graphics into the motherboard, which they had done with sound chips and networking chips and everything else.
How many people have a dedicated networking card in their PCs these days? So put yourself in Jensen and Nvidia's shoes here. You just got funded. It's not a a lot of capital.
A zillion other people just got funded with the exact same amount of capital that you have.
We don't have this in our sort of discussion here, so I'm freewheeling, but um it's worth knowing that NVIDIA's original approach to how they wanted to render graphics on cards was actually
It was novel, but it was like not the way that everyone else decided to go. And so it was difficult to program for quadrilangles as qu quadrilaterals as polygons instead of triangles as polygons.
Not as efficient as a three sided shape. Anyway, uh had had a lot of merits.
Not only are you
not on the same footing as everyone else who you're competing against for a pure commodity on a thing that takes
eighteen to twenty four months to ship.
you are a step behind because you've burned a bunch of capital chasing the wrong approach first.
Totally.
What did they do?
Uh
Jensen laid off seventy percent of the company.
And they did two
completely crazy things that if you're not just focused on survival, like you wouldn't do these things.
One, he decided that the only way they were gonna
win and survive.
was in this brutal commodity industry.
was by shipping six months ahead, shipping new technology six months ahead of their competitors. And the way they did that
Was
They decided they were just gonna YOLO it. So they designed
All of their chips in software emulation.
as opposed to what everybody else did, which was they'd work with their founding partners and they'd get some prototype chips made, and they'd send them over from Asia and they'd test them out, they make sure they worked.
NVIDIA said no, we we don't have time for that. They literally only ever ran the chip and software, and then once that passed, sent it to the production run.
And then the other thing that they did, which we didn't talk about this as much on the episode.
is uh
Of course you're gonna have a lot of errors and defects by doing that. So like a large percent of those chips
Like the chips worked sort of in aggregate, but like a lot of functions that you would want to call as a game developer just didn't work.
So they were like it's a feature, not a bug. We're going to go simplify your life as game developers. So they would ship them broken and they would just disable that. They would make it so that you couldn't access that in software, and then they would go around all the developers and say, Yeah, you just actually don't want to use that blend mode.
Trust us. Trust us. Like I I feel like instead of all twenty four blind modes, those eight
are just gonna be really good. So you should figure out how to write your your games using just those eight blend modes.
And like
I can't imagine unless you are actually forced with your back up against the wall to decide, sure, I'm gonna only ever
emulate my chips before running a production run. And sure I'm gonna ship them broken and then tell the market to deal with it.
Th these are uh
I mean I guess it goes back to the necessity is the mother of invention. There was a lot of necessity. So Jensen and and NVIDIA are just the OG goat story at this. But there's another thing.
uh great example that we had to include because we literally just talked to the CEO a week ago.
Uh and that's Eric Yuan from Zoom. This is from our interview with him a week ago.
And after I started a company I realized, wow, it's so hard to raise capital, right?
And uh the the by the way with the money that you basically g they give it to you don't miss think about that's a money.
You know, that's a trust. You know every dollar matters, right? That's why every day
I I was thinking about
How to survive. How to survive. How to survive. Even today. Seriously, I still think about
I woke up of the night.
You know, hold just the lie.
So
The interesting thing about that comment is
I asked Eric the question
Did you try to create a gigantic multi-billion dollar world beating company
with Zoom, or were you just thinking about sort of um how can I make a great product? And he like didn't even really answer my question. He was just obsessed with this notion of survival. And that when he started the company all the way even through to today, what he's thinking about is how do we you know ship great product and survive.
Yeah.
It's such a
It's the mindset of so many great founders.
Yes.
Number five.
Strength leads to strength.
So there's a chance that we picked this one mostly just so we could show Mark Andreessen on this very, very large screen, uh on the cover of Time magazine at the height of the dot com mania.
On a throne, uh barefoot. Simpler times.
Similar image for twenty twenty one. Yeah. Yeah, we'll contest later.
Uh so longtime acquired listeners will know this one well. This really starts with the idea of reflexivity.
So if you go acquire new resources, your company, um, you know, if you go get more capital or that next most important customer, uh, or a a a great key hire, you bring in the right executive to your team, you are now by definition more valuable than you were before you acquired that resource.
And so the question becomes, well, how do you leverage
your now more valuable asset.
into getting the next resource and becoming even more powerful, even more successful. And an extreme example that I always think of about this comes from a conversation that I had right here at Capitol Camp last year with Michael Mobison, which was if you looked at Tesla's
market cap.
In
2020, you would say that there's no way they're worth that. And that would be a very reasonable thing to say.
But what they definitely did do is use that share price to sell new shares at very little dilution and raise over ten billion dollars of cash to the balance sheet that year.
So whatever you thought they were worth, they're definitely worth more now because they have a fresh$10 billion in cash and they know how to use it.
So it really comes down to sort of the ability to uniquely marshal resources.
And to bring it back to Mark Andriessen, in two thousand and nine when A sixteen Z raised their fund one
They came out swinging. For folks who were sort of observing the tech industry at this point, they raised$300 million for fund one. In 2009. In 2009.
So Mark and Ben knew this principle very well. They realized when we made this huge splash, we've got this big brand, people already think we're like a top venture firm just because we did this crazy thing out of the gate. How do we solidify that position?
The very next year, they raised a six hundred and fifty billion dollar fund.
Yeah.
Million. Sorry, I forgot what decade it was. We're not in 2022 yet. No. But I mean as you can tell, like they they basically kept going with this mindset of Just yesterday they raised another four and a half billion dollar crypto. And they're somewhere between thirty and forty billion under management now.
Uh in in what, thirteen years since founding, they they basically never
Uh took
their resources and and took that as like a static notion of like, oh good, now we can you know do some interesting things with this. They basically always s looked at everything they had and say, okay, we're in a strong position. How do we get stronger? How do we do more faster and and compound what we have.
So
I think there's really something to just always thinking, okay, I I just got more valuable.
And that puts me in a position to get even more valuable again and always just be really thoughtful and super aggressive about seizing that next opportunity.
That we have to mention on this one from uh the acquired canon.
is literally the OG, OG, OG.
American capitalist business.
Which is standard oil. Did this ran this playbook to a T. John Rockefeller was a good idea.
He's like actually a gangster. He may he may actually have been a gangster.
You know, the he was never satisfied. No matter how big Standard Oil got, it was never big enough. No matter what.
competitor he would acquire into the fold uh uh by whatever means necessary or no matter what railroad uh he just did a deal. A deal with um he would always use that to say, okay, tomorrow morning I wake up and we figure out how to use night my new more valuable company.
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All right.
Number six.
This is another one that is uh near and dear to my heart.
It's never
Too late.
Uh and there are actually two
Meanings.
Uh to this lesson.
is also another great Mark Andreessen um piece of wisdom. So there's a great uh famous quote of his from a interview I think this was in twenty fourteen that he did.
Where he said I came out here in nineteen ninety four.
to Silicon Valley.
And the valley was in hibernation.
My big feeling was I just missed it.
I missed the whole thing.
It had happened in the eighties and I got here too late.
In Silicon Valley was over, obviously.
That was completely not true. And um what's cool about this is that like
Silicon Valley and technology moves in waves. It's related to Moore's Law. Every time there's a 10X in computing, there's a new market, there's a new paradigm, there's a new technology that gets created.
And so yes Mark was right. He missed the P C wave. It was too late for that.
But he was right on time for the internet wave. And as long as Moore's Law holds
If you work in technology, if you invest in technology, if you build technology enabled products, it's never too late. You're always
Right on the cusp.
Of
The next generation that's coming.
The other meaning of it's never too late.
Uh folks who are
viewing.
The auditorium will notice we have
Not
Mark Anderson on this slide.
But Doctor
Maurice Chang.
the founder of TSM C.
And so this is I think the other lesson that um
that I've really taken from acquired, which is that uh on the in this bane, which is that Morse Chang was fifty six years old.
When he founded TSMC.
And TSMC is today, I believe, the eleventh most valuable
company in the world. And it's so easy, you know, the flip side of the coin of there's always another generation, there's always another way to say yet. It may be the thing
Keeping
geopolit political tensions at rest.
Like it it may be the force that nobody wants to destabilize and therefore we have peace.
Like
Yeah.
But it's easy to think, you know, if you listen to the
to mark or that there's always another wave, that's for young people. Like it's it's Steve Jobs, it's Mark Zuckerberg, it's Vitalik Buterin, it's these young kids who get these new waves of technology.
And the reality is that's just not true. It's just a mindset. Like you have to be willing.
And you can do it.
fifty six years old and still build the eleventh most most valuable company in the world.
Putting this together, I was arguing with David that
Like this isn't novel, you know, th this is only novel recently. Like if you think back to what venture capital was in the the sixties and seventies, it was funding
veterans of the Cisco's of the world, uh and and you know the the Fairchilds of the world, to who had designed you know five chips before to go start a new company and build the sixth chip of their life, you know, in their fifties. And it's all the the advent of the internet, with clo computing, with
you know, super low cost to start a company that there has been this wave of
uh very young founders creating these consumer internet companies, but
That's actually a blip in history.
It's funny that now the pendulum has swung so far to the lore being, oh, these young hotshot founders, that we have to even make this crazy point of, wow, a fifty-six year old can start an important world changing company. Yeah, the trader S were not in their twenties.
Yes.
All right.
This is a familiar face that many of you will recognize.
Uh
Point number seven is don't mistake options for cash flow.
This is from our episode with Michael Mobison, who we mentioned we met here last year at camp.
So what do we mean by don't mistake
buying options for investing in cash flow. Well there's this word investing.

It is used for multiple purposes. This is sort of an overloaded word. And classically defined investing in the Ben Graham sense is that you are looking at a series of cash flows that a business generates from today into the future. You apply some discount rate, you value those
you know, cash flows uh at what they're worth in this present day.
And you look at things like characteristics of the business, like potential margin expansion or their growth rate, and you make all sorts of assumptions based on, again, the cash flows that you know to exist today, and you try and come up with some price that that business is worth, and you try and put some money in and invest at that price. But Ben, that doesn't sound at all like what we do. No.
David and I are professional seed stage venture capitalists, and people call what I do investing, but while it's the same word, it doesn't involve literally any of the things that I just mentioned.
You know, in that previous
Comment.


It's called investing. Like it is it's
typically just a founder and an idea on a napkin. So how can you make any assumptions about the cash flows?
And then we're like, well,
That founder and that idea is worth.
$20 million. Oh, it's so funny to me. That people think it's complete voodoo math how uh how venture capitalists come up with with valuations. This is where I think that the sort of Michael's comment and his his his thoughts on this.
Um make a lot of sense because once you admit that there is no DCF and you stop trying to say, in what world is that worth, twenty million dollars or ten million dollars or seventy million dollars at an idea stage, which we've seen recently.
Well
Then if you're willing to let that go and you meditate and take your deep breath and say, okay, well how do we price this thing then if it's not based on classic investing DCFs.
Really?
Venture capital in the early stage.
is not at all cash flow based investing. It's actually options investing.
And
As you sort of think about it that way, the the world starts to make more sense because how do you value an option? Well, you look at the range of potential outcomes.
And the probabilistic likelihood of that
option in the entire range of of outcomes.
Which is actually what venture capitalists are doing, whether they're cognitively thinking about it that way or not. You're basically saying, what's the chance that this is a billion dollar company?
or a$100 billion company, or a zero. And of course, this leads to the idea that you need diverse portfolios rather than just investing in single large companies because this range of potential outcomes is so wide that you need to find ways to sort of smooth that risk while still benefiting from the potential of an asymmetric return.
It also.
completely explains why
Venture capitalists are so obsessed with TAM. It was one of the things when I first got into the industry. I was like, why does everybody care so much about the TAM? Like aren't there other aspects that you should care about? Well, that's what's most sensitive to the valuation of the option.
uh the magnitude of the outcomes that uh that are possible. Like you can you can then debate the probable weighting of it.
But
The higher the magnitude of the outcomes, the more valuable the option is going to be. If I think there's some X percent chance that this thing becomes the next Apple, what should I pay for it now? That is actually the question you are asking, rather than
DCFing your way to something there. But of course it's it's sterile uh and kind of terrible to talk about people's life's work as buying an option. So there's an important corollary to this. Yes. And this is from the
Yeah.
Altas ventures and in particular Honam.
Uh and he makes this great point. He actually just remade it on Twitter the other day.
Which is
Yeah, okay, like
You probably should think about valuations and venture capital investing.
more like options than you do thinking about investing public companies on a cash flow basis.
But don't mistake startups for lottery tickets. Th these may be options to you from an investing standpoint.
But these founders are real people with families and lives and bank accounts and employees.
And the other um
The other thing that is
fundamentally different about
venture capital investing versus
say public market investing is it's a multi-turn game, not a single turn game. And so how you behave and how you treat the same thing.
these founders, even if it's clear that your option is gonna expire worthless.
You don't know what those founders are going to go do next. You don't know who their friends are. You don't know who they're going to talk to. You don't know what the other investors around the table might think about the way you behaved or didn't behave during that period of time.
It's this.
Interesting.
really explain the culture in Silicon Valley a lot, which is
You're doing options based investing, but it's a multi turn game.
Yeah.
And in practice, nobody is actually just doing one or the other. Everyone's style of investing is somewhere on the spectrum here because we have a lot of the other things.
other than the peer play value investors who are looking at the the the book value of a company, or the seed stage investors or the pre-seed like me, uh who are looking at a napkin sketch and and a founder with an idea or sometimes even no idea, most people are actually in the middle. So most people have to blend some notion of
What are the chances this could be big and how big with the idea that, hey, they're actually generating revenue and sometimes even cash flow as a startup, and I actually can apply some um multiple to that. And obviously the
multiple can uh can change rapidly on you and then you have to adapt.
Um everybody's doing a little bit of one and a little bit of the other.
All right.
For our next.
Lesson.
Focus on what makes your beer
Taste.
Better.
So we brought up uh this little vignette.
on a whole bunch of episodes on acquired, but this is an image of
Jeff Bezos.
At the two thousand eight
Y combinator startup school.
Which was
A li which is a um Which is a moment in history. A very important moment in history. So YC at least used to, I don't know if they they still do. It's probably virtual now.
Physical events in Silicon Valley. I went to one in the Bill Graham Civic Auditorium. That's right. I went to one too.

Founders and luminaries to come and talk and inspire the next generation of founders and basically to inspire applications to YC.
And so in two thousand eight

And this was right after AWS.
had launched.
And he used it as
a uh marketing opportunity to market to all of these startups and future start ups about why
they should build on AWS instead of rolling their own infrastructure.
Which we should say this strategy worked ludicrously well.
Like AWS got probably a five year lead on cloud by piling people on the plane from Seattle, going down to the Bay Area, evangelizing like crazy to all these startups.
At the two thousand eight.
Y C Startup School, a startup that had not even been built yet.
was Airbnb.
The three Airbnb founders were at that YC startup school, and that's why they decided to apply
T Y C that year and
The rest is history.
But
If you go watch the talk, which I highly recommend, it's it's really great.
Jeff uses this sort of uh
Odd analogy for AWS.
Where he talks about European beer

around the turn of the twentieth century, nearly.
All right Jeff, where where are you going with this?
And uh
The point the analogy he makes.
is electricity had just been invented. And this was this massive boon enabling technology
For
consumer product, CPG like like beer.
uh they could now brew vastly more quantities of beer than you could before using electricity.
But the first breweries to adopt it
They built their own
Power.
They made their own power. And uh
That we know worked fine for a few years, but it was super capital intensive, required all this operational labor to run the power generators.
And then the utilities companies came along, and the next generation of breweries
They didn't make their own power. They just rented it from the utility companies.
And they you know ran roughshod over the first generation of breweries to use power because
Guess what? Whoever makes your electricity has no impact on how your beer tastes. Literally making it yourself.
Does not make your beer taste better.
But it does raise your cost structure. It does raise your cost structure. And so Jeff's argument to all of these startups was
You know, focus on what makes your beer taste better. So there's two lessons here. One is what he's arguing, that
As a startup.
You should focus solely, not just startup, any company, you should focus solely on the attributes of your product that your customers are going to care about.
Everything else, your infrastructure doesn't matter.
The second, perhaps more important takeaway from this, if you look at what Bezos did, not what he said, is that being a utility company.
is an exceedingly, exceedingly great business. And particularly being an unregulated utility company.
Yes. I mean that's the reason that Amazon became a profitable business.
Yeah.
Absolutely is and not just Amazon. If you think about you know I should say profitable company where they piled up too much cash to reinvest all their cash flows. But if you think about this model of like what is an unregulated utility company and technology.
it it can be so defensible and powerful. Like that's what Square is. That's what Shopify is. That's what I think two thirds of our sponsors on Acquired are, you know, that's what Vanta is, modern treasury, vouch, uh even mystery, all of you know if you can
provide a critical mission critical piece of infrastructure.
That other companies can use
That
they need but doesn't make their actual beer taste better.
It's a great place to source it.
Um

I think the
This is actually the same thing as like the economic theory of specialization of labor, but applied to businesses.
Where it's basically well understood at this point that um GDP tends to go up when people get really good at a thing, focus their time on doing that thing, and then turn to their neighbor who's good at a different thing to provide that service back to them, rather than everybody doing everything for themselves and their lives.
And
This is just that on a business scale.
Totally.
Alright.
The next one is one that is uh near and dear to my heart, and uh I had a lot of fun illustrating this, so bear with me on some of these visuals. So this one is uh scale up or niche down. And I want to start first by talking about niching down.
So uh this photo is uh
uh ripped with love from Brooks Running's website.
It's a great Berkshire company.
We had Jim Weber, the CEO on stage with us for our arena show a couple weeks back in Seattle.
So for folks who don't know, uh Brooks is a pretty special company. Back in 2002, when Jim came in, I think it's a very important thing
Uh they weren't.
Frankly.
Um they were everything to everyone. They didn't just make running shoes, they made everything shoes, including$20 shoes that you would wear at a family barbecue.
And they made all sorts of apparel for all sorts of sports. Um the company was losing money, I think five million a year in the red. They were doing about sixty million in revenue, but obviously not able to capture a lot of value out of that. And so when Jim came in to turn the company around, the first thing he did was decide
We are gonna be a running company and we are gonna be a running company for performance runners for people who care.
About
they're running. And so immediately went to a bunch of their distributors, big box stores, slashed entire product lines. So they went from 60 million in revenue down to thirty million or something like that. They got rid of all their unprofitable product lines. They got rid of anything that wasn't performance running.
caring only about these performance running shoes, focusing on RD, and really investing in building brand with runners.
Well
I'll save you the whole story and just flash forward 20 years. It worked. They grew slowly at first, but then over time, it really started to pay off, and they really started to be known as one of the best running shoe companies in the world. In fact, they're they're one of the top couple at any big marathon that you'll see when they take the high-speed cameras.
Brooks, Brooks, Brooks, Brooks, and of course some ASICs and some um some newer brands too, and and of course the the the new crazy Nike shoes, but they just realize we are
not going to beat Nike.
Like we are not going to beat Nike at the everything game, so we have to niche down and play a different game. So I mentioned that sixty million to thirty ish million in revenue. Last year they did close to 1.2 billion.
and had a great year last year through the pandemic, are and are continuing to ride this wave of running becoming one of the the largest and fastest growing um athletic apparel opportunities in the world. It's such an amazing
compounding story and Berkshire story. They've been growing it.
Thirty to forty percent a year.
for like the last twenty years. It's amazing.
Duration. Duration.
So
It also works to scale up.
So a quick case study. We did an episode on the New York Times a couple years ago, and while every mid-sized newspaper in the US was going bankrupt thanks to disruption brought by the Internet, the New York Times became gigantic and a healthier business than ever.
And
The Times saw the idea to be sort of the one national brand and one of a few trusted global brands in the space.
The internet, as we know, can be brutal to people caught in the middle because it enabled everyone in the world to access any reporting
basically for free pretty easily. And so then whoever has the best reporting in the world on global or national stories, of course, sort of gets all of the traffic, and anyone in the middle is stuck. So this obviously has an enormous cost associated with it. You know, you need to
Basically hire all the best reporters, you need to have the most reporters, you need to build out
I mean massive technology investments. The the New York Times is truly a technology company at this point. So super high fixed costs. So you gotta believe that you're actually gonna be able to operate at that global scale to justify all of these fixed costs.
So
The point here is sure you can niche down, sure you can scale up, but you really don't want to get caught
in the middle.
Now on the media side

Tiny little businesses like Acquired, Stratchari, uh, our good friends at Colossus, the Internet, while being extremely punishing to the middle.
also enables the these deep niches to form. It's sort of this interesting barbell effect, where if you keep your cost structure low and you're super, super focused on a niche, you can aggregate all the people who are weird on the internet about your niche.
in the entire world and basically aggregate them together and create community of
People who like three hour business technology podcasts.
And I I think like
It's important to realize that this may not happen overnight. For acquired, it's taken seven years for us to get to quarter million subscribers. But if you're just like repeatedly loud and specific about the value proposition that you can bring to people by following your media publication,
People find their way. You know, time and enough distribution and enough content kind of does its thing. So I I I always sort of focus back on
I I'm glad that we didn't decide to be i you know a mid scale media company. And it's really like all right, it's it's it's you and I and some microphones and the New York Times can have that market.
So uh couple other points here. I don't think this is unique to media. I think media was the first to experience this sort of squishing in the middle, but it's gonna happen to everything.
The the internet
is still rippling out in all of its effects. I mean you you can see it in venture capital for sure. You've got big funds like Sequoia and Andreessen that get massive, and then niche funds, especially for the early stage, emerge and there's great opportunities for small funds who are are very focused.
Those caught in the middle.

In a tough spot.
And they're super undifferentiated.
And you can imagine this happening with universities, uh Harvard and Stanford brands are gonna be just fine. Like those will continue to probably grow in value as they're able to address more and more people using the Internet. Obviously that happens slowly, because no one wants to devalue their brand, but as that becomes more and more widely accepted, I think those brands will just continue to get more powerful.
Um
You could imagine this happening in a bunch of other industries too, besides just
media capital education.
So as a final little illustration at this point, uh I just want to pull up a couple of uh market cap slides. So in 1997 there were three companies in the uh uh top ten in the world that were technology companies. Today it's eight of the top ten. What happened between then and now? Well the internet penetrated the whole world.
And
Obviously the returns to scale got massively concentrated here, where you can see that uh the the the most value companies in the world, not only are they technology internet companies, they're much more valuable than they were before. So there's this sort of counterintuitive thing that the internet was a decentralized network, it started as servers at universities.
And then somehow it massively concentrated the returns to scale for the platforms that underlie everything that we do all day, every day.
And on the flip side, it also enabled the viability of the long tail.
It's not that that we have thirty mid size retailers in the US anymore the way that we used to, not at all. There's Amazon, and then there's how many merchants are there on Shopify now? We've got something like that.
two million Shopify merchants and over thirty million Amazon sellers.
uh the platformification that the the internet sort of brought really enabled viability the long tail at the same time.
All right listeners.
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Staying on the media.
Theme. So we did this episode on Oprah.
uh two years ago now and uh and hard studios and it was so great. And um
What uh our big takeaway from that
was a line that was said to Oprah right as she was starting her own show and made a
momentous business decision which was don't be talent.
Own.
The business.
And uh the sort of way that I like to think about this is if you want to be a millionaire in the media business,
You should work really, really hard. You should own your craft, you should become must see content.
totally unique, the opposite of a commodity.
You should be Steph Curry, Leonardo DiCaprio, you know, what have you.
If you want to be a billionaire in the media business, you should do all of those things, and you should never, ever, ever, ever give away the rights to your content. Or sell the rights to your content. And that's that's what Oprah did. We also told the Taylor Swift story earlier this year. You know, Taylor started as
Just another country music artist, and then just another pop artist. Uh and uh and then in the past few years, she's completely changed.
The whole structure of the industry.
Bye.
Figuring out ways to get back the rights.
Two
And this is fairly unique.
for media, right? Like for content it's
This is easier to do than if you were
uh say a basketball player.
Yes. Yeah it's it's
Hard for athletes to do this, at least in their sports. Like athletes can own their personal brand and they can leverage that into building something on the side, but the thing that they do, they're playing within someone else's game. The interesting thing about content is you can always just make it your own game because the internet enables this institution.
That's the last cool thing about this, which is that
Thanks to Substack, Podcasting, YouTube, TikTok, Instagram. It's never been easier. You don't need NBC. You don't need Universal Music Group. Uh in fact they might hold you back. Uh anybody can publish anything on the internet.
All right. This one is reasonably self-explanatory, uh, but it's another basosism. And so uh I want to bring up in the very first shareholder letter in nineteen ninety-seven, uh he wrote
Because of our emphasis on the long term, and people probably might know how to recite this by heart at this point, we may make decisions and weigh trade-offs differently than some companies.
We will focus on growth with an emphasis on long-term profitability.
And capital management.
At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.
This is absolutely Bezos's way of basically
saying if you're not on my bus
get off because this is what we're doing. They stayed true to their word for 2 years without turning a profit. As we talked about earlier, you could argue they still wouldn't be profitable today if it weren't for AWS. They've reinvested every dollar of the retail business for two decades.
There is zero chance that they would have been able to execute the strategy that they did if it weren't for their ability to be loud and proud about their intentions.
And as we sort of drift toward the the close here, uh I'll be a little bit
less bashful about acquired specific examples. I've wanted to highlight other businesses, but this one's sort of too close to home.
We're obsessed with this idea of treating our audience like they're smart.
And this wasn't the fastest path to growth, because I think we could have listened to what everyone told us. Podcast episodes need to be a half hour. Podcast episodes need to drop every single week, so you keep this content cadence.
But we wanted to be weird on the Internet about something, and we wanted to basically be unabashed about it. And so I'd say that the people that we get to interact with now in the in the community and all the folks that we met here who who mentioned, oh I've listened to the show, we ended up with exactly the listeners that we wanted and the people that we want to spend time with because
There is a long game to play if you're saying if you don't want to be on the bus with us, that is fine.
Please get off as soon as possible.
Indeed.
Which
Is
Perfectly then to
Our final.
lesson from seven years of acquired.
Uh
Speaking of getting on the bus, we all need to do that to go to the party. Uh and what are we gonna do at the party? We're gonna have fun, and that is what this is all.
about if you can find something that you can do
With your business, with your life.
Where you have genuinely have fun doing it.
And for other people who do the same thing, it's work.
You are gonna run farther and longer and faster and better.
than everybody else. And there's actually another uh takeaway to this. So we we put the uh an image of of us and our our friends Packie McCormick and Mario Gabrielli at our at our arena show the other week up here.
It was just such a blast. This whole thing, this whole journey has been so fun. Um
But one, you're gonna work harder than people for whom this is work.
Uh and Bill Gurley makes this great point in his running Down the Dream talk, which we've talked about on Acquired. Everybody should go watch that on YouTube. But the other point is that the U.S.
It's so much easier to evangelize and grow and market and have people attracted to whatever it is you're doing.
If you genuinely have joy in doing it. Uh and and joy is not something you can really fake. So
Um
That's our biggest lesson. We we have had such a blast.
doing these past seven years. We've gotten to meet amazing folks like Patrick and Brent, the whole capital camp team.
And uh
We're just so thankful.
All right listeners.
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All right, listeners.
Hope you enjoyed our talk from Capital Camp.
Please let us know your feedback. Acquire.fm slash slack. Would love to hang out with you in there and hear some of your favorite themes.
from all the playbooks over
Two hundred ish episodes. I actually didn't count exactly, but it's a lot. I didn't either. It's I think it's well over two hundred when you include all the LP episodes.
Yeah, it's two fifty with those. Ah. Wow.
So we definitely skipped a lot. I had eighteen and David maybe trim it down to twelve, so I'm curious if some of the ones that we didn't talk about are ones that uh that you want to bring up. I originally wanted ten and Ben was
Fought too hard that I gave him two extras.
Yes. Well thank you so much for being with us uh this season and on these special episodes. It's been an awesome six months.
We're super pumped for the next six months. We have some great stuff planned.
and we'll see you next time.
See you.
Next time.
Who got the truth?
Is it you, is it you, is it you Who got the truth now