Firehose #189: 🥸 Hiding in plain sight 🥸
Small is the next big thing. Plus: oil crops and the environment, vibing out to mix tapes, speed running Pi, and peak shounen anime.
One Big Thought
Great investments tend to exploit information asymmetry.
While some information does a lot of work hiding from you, requiring years of research to unearth, a surprising amount hides in plain sight. Case in point: you could have invested in Apple* the year after iPhone came out (2008) and beat the NASDAQ by a cumulative 31% CAGR return through today. Or, you could have also invested in Amazon* when it first publicly broke out the financials for AWS (2015) and beat the same index by a cumulative 23% CAGR. On a risk and fees-adjusted basis, these returns are comparable with top quartile VC fund performance. Anyone with a brokerage account could have benefited from these investments.
Those who invested in Apple and Amazon over this period likely held a contrarian viewpoint on the potential of mobile and cloud computing, respectively.
How do you like ‘dem Apples?
At the end of 2008, the App Store was only 6 months old, with only a few thousand apps. The top free apps included a flashlight utility, several casual games (Tap Tap Revenge, PAC-MAN Lite, etc), and an HTML-5 based Facebook* app that the company later scrapped and Zuck called “the biggest mistake we’ve made as a company.” All the top paid apps were casual games.
With this app lineup, it would have been relatively easy to relegate the App Store to the junk bin of tech. Furthermore, not only was Apple a minority in PC sales, but its late entry into the smartphone market earned the infamous derision of Steve Ballmer, then CEO of Microsoft:
“That’s the most expensive phone in the world, and it doesn’t appeal to business customers!”
Ballmer’s critique turned out to be irrelevant. iPhone was a blockbuster for consumers, who later brought it forcibly into the enterprise with the “bring your own device” movement. The toy-like apps that littered the early App Store charts gave way to Uber, Foursquare, Instagram, HotelTonight, and many of those early native iOS apps that extended the platform’s utility. The rise of the iOS ecosystem was hard to predict looking at the App Store charts in 2008, but, if you were paying close attention, you could have identified the growth in apps and bet on the Apple stock.
Head in the clouds?
The same contrarian setup applied to cloud computing in the mid-2010’s. Below is the Gartner Hype Cycle for Cloud Computing, published in mid-2012, which shows cloud computing in the so-called “trough of disillusionment” on a 2-5 year journey towards the “plateau of productivity.” Other similar concepts (elastic multitenancy, PaaS, dbPaaS, public cloud storage, IaaS, etc) were at similar or longer lead times.
IT professionals threw a ton of shade at the cloud back then. I recall hearing a lot of arguments like this one around the security model of cloud computing. We also saw regulatory pushback around the geographic residency of data, or specific industry requirements around the collection and storage of personally identifiable information that the public cloud couldn’t easily support.
You needed to be one of the minority of IT professionals connected to the startup ecosystem to see the potential of the cloud at the time. Almost no one in Silicon Valley purchased servers. As startups grew into large companies, they set the standard for how progressive, flexible infrastructure would be deployed in the enterprise.
I recall a watershed moment, in 2015, when Mark Pincus returned to Zynga as CEO after a brief ouster. In cost cutting mode, he announced that the company was moving its massive computing infrastructure to AWS from its private cloud. He said Zynga would spend $150M with Amazon to do so:
“There’s a lot of places that are not strategic for us to have scale and we think not appropriate like running our own data centers,” said Pincus.
“We’re going to let Amazon do that.”
That last sentence was particularly telling. Here’s how some more progressive industry observers viewed AWS at the time:
It won't be long—maybe not in 2016, but soon—before any computing project that doesn't happen in the cloud will have to spend many cycles justifying what will be seen as an old-fashioned and inefficient approach.
A few companies still generate their own electricity, but they're rare and special cases. That's the kind of market dominance cloud computing is headed for. And we're likely to get there faster than we think.
Of course, this was the right point of view, but given the concerns about information security and regulatory prohibitions, even in 2015 the public cloud’s dominance in IT infrastructure was not an obvious call. The information was out there, but you needed to speak to the right IT people to appreciate its gravity.
Small is the next big thing.
Small businesses are quite literally everywhere.
According to the SBA, the U.S. has 20 million businesses with fewer than 20 employees. In sectors like food services, construction, wholesale trade, real estate, and agriculture the majority of businesses are SMBs. Yet, while SMBs are ubiquitous, they are notoriously difficult to monitor, track, and analyze.
For example, when we made our initial investment in Faire* in 2018, I spent months looking for data on independent retailers. Because of the industry’s fragmentation and informality, I could only rely on official U.S. Census data from 2012! Beyond that, I had to rely on my intuition and past knowledge of the retail ecosystem. To most outside observers, while independent retail was admittedly everywhere, few thought of it as a large market. I knew enough to believe it was.
Working on a new SMB-focused investment opportunity this week, I realized that the lack of data on this category might, however, be a temporary problem.
If we more see companies like Faire, or Slice, or Toast, succeed, we will necessarily start mapping out the surface area of the SMB ecosystem for the first time. It will be like exploring the ocean’s depths with a new submersible that can dive deeper and reveal the unknown. We’ll make new discoveries, and some of them will influence the way we think about the world. I suspect that these discoveries will validate what has mainly been intuitive to me so far — that SMBs are still vastly underinvested in from a technology perspective and present an economic opportunity similar to mobile and the cloud did in their respective generations. In the context of data yet to be unearthed, what will be seen as contrarian today will therefore be seen as consensus tomorrow.
Tweet of the Week
Links I Enjoy
Drowning in vegetable oil.→
More land globally is devoted to vegetable oil crops than all fruits, vegetables, legumes, nuts, roots, and tubers combined. Oil crops are second only to cereals in their global land area, but are growing significantly faster — doubling since the 1970’s.
Oil crops are some of the most land inefficient crops in existence, requiring an order of magnitude more land per kg of food product than barley or potatoes, for example. Higher land use leads to more deforestation, which furthers the outsized climate impact of these crops. And for the benefits of their caloric density, oil crops are some of the most nutritionally poor crops available. They account for 30% of global crop lands, but 0.01% of the world’s essential nutrients.
It’s a vibe. →
Like many in my generation, my friends and I grew up making and trading mix tapes. We would often capture songs off the radio, or later rip full CDs of bootlegs from concerts downloaded over the internet. These mixes could be a flex — showing that you had that rarest of rare performance of a Pearl Jam B-side — or the expression of a vibe — unrequited love, teen angst, etc. Sometimes a list of songs can say something that is hard to put into words.
All that’s old is new again, as “oddly specific mix tapes” are starting to emerge on Spotify* and Facebook.* They appeal to a similar need that I found in my middle and high school days, but with the context of a global pandemic:
All of the admins I spoke to say that they have seen the group’s membership grow over the past year—not just a natural incline, but one that they believe is a result of the coronavirus pandemic. As increased loneliness and stress have contributed to declining mental health, people have turned to online communities to seek reassurance and companionship. “I guess loneliness is, more than ever in recent memory, a common experience for many,” says Eli. “This has driven perhaps more extroverted people online to find social interaction, and the chance to find like-minded people worldwide has, and speaking from a personal perspective, really helped me through some dark times.” While he doesn’t believe that everyone in the group is looking for this kind of deep connection, even the posts that are only intended to “get a giggle” out of their audience still inspire and drive the community.
Enjoy “Eating Painkillers at McDonalds” to get a sense of what they’re talking about.
Who disrupts the disrupters? →
Packy McCormick at Not Boring wrote an important piece about what comes after the web aggregator phase of the internet. We’ve heard a lot recently about how crypto will enable a new set of disrupters, but not so much how this magic will occur. Packy leans on Clay Christensen’s theory of disruptive innovation to illustrate how crypto tech can enable “better than free” platforms:
While the Aggregators definitionally serve nearly everyone, they actually do overlook a segment of their users: the people who aren’t happy to just use the products for free, but who want to earn ownership, privileges, and money for their participation, and who are willing to accept a lower-quality user experience to get those things. This is where they’re susceptible -- while they generate tiny profits on each user, they’re not willing to go negative and actually pay those users.
So how do you low-end disrupt a high-quality, ultra-low-margin or even free product? How do you get a price lower than the $0 they’re paying today? You go negative; you actually pay people to use the product, in a currency that gets more valuable as more people join.
Speed running Pi. →
At age 23, Isaac Newton completely changed the way we calculate the irrational constant Pi. For 2,000 years, upper and lower bounds for Pi were approximated by subdividing polygons into distinct shapes. Newton played around with the binomial theorem and used the calculus he invented to create an infinite series that converges to Pi much faster than the polygon method. This video by Veritasium walks through how Newton derived his brilliant insight.
Peak shounen. →
Anime and manga (the Japanese comic books from which anime are derived) have very specific genres that are designed to be marketed to different groups of fans. The “shounen” genre is marketed towards high school age boys and often follows a teenage protagonist through a progression of battles and obstacles towards a stated goal. Many shounen anime can be fairly predictable — they all have similar plot notes and progression dynamics.
Within the last year, however, anime fans have been blessed with two genre re-defining shows that will become classics. One is Attack on Titan (I’ll write about this one later because it’s incredible), and the other is Jutusu Kaisen. I wouldn’t watch this video unless you’ve spent some time on the series (spoilers!), but if you have it does a great job laying out why Jutusu is the future of shounen in so many ways.
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Disclaimer: * indicates a Lightspeed portfolio company, or other company in which I have economic interest. I also have economic interest in AAPL, ABNB, ADBE, ADSK, AMT, AMZN, BABA, BRK, BLK, CCI, COUP, CRM, CRWD, GOOG/GOOGL, FB, HD, LMT, MA, MCD, MELI, MSFT, NFLX, NSRGY, NEE, NET, NFLX, NOW, NVDA, PINS, PYPL, SE, SHOP, SNAP, SPOT, SQ, TMO, TWLO, VEEV, and V.