Stealing Signs #59
Giving a shit, Death of VC?, Seeing Like a Bank, Multiple Discoveries, & Basel Endgame
Worth Reading
Giving a Shit as a Service
In some ways, that’s the fundamental value proposition of a small boutique, whether it be a furniture shop or a software studio. Giving a shit as a service. Sure, you can always get a commodity good from off the shelf … But sometimes, you want to buy from someone that’s obsessed about the final product.
Also known as “Caring-as-a-Service,” I’m convinced this is one of the most powerful advantages in business and in life. This doesn’t usually require much effort, surprisingly, but sometimes it requires a lot of effort, which is hard. Giving a shit is a competitive advantage and, oh, it makes life a lot more fun and enjoyable. So, whatever you decide to do, give a shit!
Surviving the Death of Venture Capital
Kyle Harrison (Contrary Capital)
Venture capital is dying because it has adapted to focus on returns. The model has crafted an engine that generates returns, not necessarily enduring, generational companies. The same is true of things like the oil industry. Eventually, companies will be forced to bear the brunt of their own externalities. Venture capital is no different.
Kyle suckered me into this post with a Dark Knight reference and delivered the knock out blow with a Moneyball reference at the end. Bravo.
This is a pretty honest and thoughtful response to the criticisms of venture capital. Kyle suggests venture capital has changed and that if wants a seat at the investor table moving forward, should address and correct the flaws of the previous venture era like prioritizing growth at all costs and an obsession with the “new” vs. the “good,” i.e. whatever the current thing is (sup, AI). To his credit, though, he acknowledges that these dynamics have produced some pretty great companies who’ve contributed a lot to society’s advancement.
I think most would agree with these criticisms and that some of the VC preferences of the past have begun to change. Painting with broad strokes here, VCs now prioritize efficiency and a path to breakeven vs high growth and unsustainable unit economics, and tend to be more rigorous in their due diligence. This, naturally, changes a lot about which companies get funded, what companies can achieve, how they do it, and, likely, investor returns.
Here are a few questions worth asking as the venture industry changes:
When is the right time to focus on profitability? Should pre-seed / seed companies strive for profitability?
To what extent does prioritizing profitability and durability sacrifice growth? What kinds of companies should strive for profitability vs. growth?
What happens to companies founded in the previous era (growth at all costs) who must answer to the new set of investor preferences? Hint: it’s not pretty.
How will venture funds change in this new era? hint: I imagine sales of “gone fishing” signs will spike in mega fund land.
What is the new normal for venture-backed outcomes? $1B? $2B? Seems unlikely that $10-20B companies will be included in VC scenario models for some time.
Where is the alpha in venture capital? Is there alpha in venture capital?
2018-2021 was the tail end of arguably the greatest period in venture capital history and the following two years arguably the most destructive. Clearly, venture is different now than it was for the previous 15 years, but is venture capital changing for good? Dunno. Does it deserve to change? Absolutely. Kyle seems more confident that the industry is changing for good than I am, but then again I’ve barely seen one cycle!
Seeing Like a Bank
Patrick McKenzie (@Patio11, formerly Stripe)
the tiered support model is a technology which took us decades to popularize and which made the world much better. It brought down the cost of financial services and supported product innovation which would have been impossible under the mid-century bank staffing model. We could not have credit cards or discount brokerages without the tiered support model. The biography of Charles Schwab makes this point persuasively at considerable length: competent telephone operations were instrumental to bringing equity ownership to the middle class. You should prefer a world with credit cards and discount brokerages to one which doesn’t have them, even as you listen to hold music occasionally.
So, why do our interactions with banks cause us to lose faith in humanity?
The answer boils down to technology, tiered support systems, and incentives.
Patrick is at it again with an excellent dive into how banks triage customer issues and why banks have low NPS scores.
I once heard from a long-time bank executive that when a customer changed their address, the bank had to manually update the new address into seven separate systems. Fun stuff.
Multiple Discoveries
Ulkar Aghayeva, Economics of Science Research Associate at Dartmouth
Along with lab fires and explosions, multiple discoveries are an occupational hazard of science. Scientists are affectively involved with their discoveries: nuggets of knowledge are revealed to them as a result of long, hard work, so it is no wonder that finding out that theirs is “just” another instance of a discovery already made by another is a matter of acute stress.
This is the second of a three part series exploring the phenomenon of “Multiple Discoveries” in science. Ulkar investigates American Sociologist Robert Murton’s hypothesis which states, “all scientific discoveries are in principle multiples, including those that on the surface appear to be singletons.”
So, most significant breakthroughs, especially in science, are or have been discovered by someone else before their official documentation and are often done so over a short time period. This concept is new to me and, frankly, I’m surprised at just how common multiple discoveries are throughout history.
The multiple discoveries concept reminded of a similar concept called “annus mirabilis,” or miracle year, in which a professional (e.g. scientist or author) makes multiple, seemingly independent breakthroughs over a single year or two. Not having dug into the data, I’d guess that many scientists shared the same miracle year or that they are closely clustered, and that many of the discoveries during a miracle year are, in fact, multiple discoveries.
Thoughts on Basel Endgame
“[W]e would have to hold 30% more capital than a European bank. Is that what they wanted? Is that good long term? Why? Didn't we say we have international standards? What was the ---damn point of Basel in the first place?” — Jaimie Dimon, CEO of JP Morgan
Basel III Endgame is the latest update to the Basel Accord, a framework designed to increase the resiliency of the banking system and developed in response to the shortcomings of financial regulation revealed in the global financial crisis.
Among other changes, Basel III proposes an increase of the minimum amount of capital a bank must hold as a percentage of their risk assets, e.g. loans, by more than triple. The proposal ruffled the feathers of many of the U.S.’s top bank executives including JPM’s Jamie Dimon, who was particularly outspoken in opposition to the changes (see above).
The general sentiment among bank executives quoted in this post is that the proposed changes are “manageable,” which to me seems like they’re just ticked off that their bank could be less profitable as a result.
On a recent episode of the Bloomberg podcast Odd Lots, co-host Tracy Alloway asks Michael Barr of the Federal Reserve about Basel III’s impact on the cost of capital for banks. Barr responds:
Look, you know, any time that you change regulation, there are costs and benefits to that regulation.The big benefit of having higher capital is that you make the banking system more resilient….
At the same time, when you have higher capital levels, that increases the private cost to banks. Banks use more equity and a little bit less debt to fund their mortgages or their trading activity or the like. The capital propose that we've put forward mostly changes the rules for trading and other non lending activity. A very small portion is actually related to lending. And when you look at that increased cost to the banks with respect to capital, that translates on average for a typical loan to an increase if all of it is passed through to the borrow, or if there's no competition at all and all of it is passed through to the borrow, the average increase would be 0.03%. So it's a very very small change in the cost of credit and a significant increase in the resiliency of the banking system.
Let’s assume that bank execs are ticked off despite the seemingly small increase in their cost of capital. Fine. To multi-hundred billion dollar banks, a 0.03% increase in the cost of capital means something, especially in a highly competitive market, and there will likely be a slew of increased operational costs associated with responding to the regulations. Fair enough? I guess we’ll see.
Even if increases in capital requirements only impact bank profitability a smidge, there are implications more serious than a ticked off bank executive, like less access to capital for people and businesses who need it most. There are interesting ways to help banks manage capital requirements and make credit more accessible, some of which I’m exploring. Stay tuned.
Other Good Reads
Stuff Weekly
The Funnies
Some things never change…
Funding
Enable raised $120M Series D from investors including Lightspeed Venture Partners, Menlo Ventures, Norwest Venture Partners, Insight Partners, and Sierra Ventures, valuing the company at $1B.
Enable helps businesses manage their rebate programs. Companies sometimes offer their business customers rebates (cash back, discounts) in return for reaching specific milestones like purchase volume or frequency.
B2B rebates are a sneaky massive market and it makes sense, in hindsight, that there’s a big opportunity to build software to help companies manage these programs, which can reach the billions of dollars annually.
It looks like Enable works with customers in a variety of industries, but it’s their foodservice customers that got me thinking. I grew up around restaurants and corporate foodservice, and quickly learned that rebates drive the industry.
For example, the top three or so foodservice companies (e.g. Sodexo) control nearly 80% of the market and this gives them lots of leverage with food manufacturers (e.g. Pepsi, Tyson). Food manufacturers will go to great lengths to attract and retain the foodservice giants’ business, often offering them generous cash back and discount rates in reward for buying lots of their products — this is a rebate program.
So the market dominance of the large foodservice companies allows them to command generous rebates from food manufacturers who will continue to offer generous programs so long as the market leaders commit to buying their products! Naturally, small and local food manufactures suffer the most as they can produce a limited quantity and can’t afford to offer rebates.
All of this is to say that Enable may be walking a fine line. The scale at which some of these rebate programs operate might make the efficiency gains of software worth it, especially for the company offering the rebate (food manufacturers in our example). The rebate recipients, though, may prefer to keep records more… fluid, especially if they’re an important part of controlling hundred-billion dollar markets.
Baseball
Roy Oswalt’s 1978 Chevy pick up truck fixed his shoulder injury:
What I’m Watching
I recently finished the History Channel series The Men Who Built America which focuses on the rise of Vanderbilt, Rockefeller, Carnegie, Morgan and Ford as titans of industry and defining figures of the Industrial Revolution.
I think I finished this faster than any show I can remember. I realized that I knew very little about these titans’ origin stories and what surprised me the most is that these entrepreneurs were tightly connected and their empires highly interdependent.
Great watch.
Peace!
JB