Working at a small tech company has perks. You want to fix a bug? Push a change to production. A user has problems? Connect to the database and look up, and hopefully fix up, their data.

Large firms work differently. When you are a large enterprise, you promise your customers that the product won't change under them or that their data won't be snooped on. It’s why they have large customers, and large sums of money.

So what do you do as a small company when you want to sell your product to a large company? How do you bridge that trust gap? Well, these days, you check your bank balance and then call up Vanta to ask about SOC2.

In related news, Vanta just raised a bunch of money:

Vanta, a startup with software for managing compliance with cybersecurity and privacy standards, said Wednesday that it closed its latest fundraising round at a roughly $4 billion valuation.

The $150 million round, which included funding from CrowdStrike’s venture arm, represents a valuation increase from $2.45 billion last year.

What is SOC2, anyway?

SOC 2 is essentially a way to tell people that you have undergone certain security checks. You hire an auditor, who gives you a huge spreadsheet and tells you to start acting like an adult. You start doing criminal background checks on employees, write up all sorts of policies (all the way from password rotation policies to what happens if your CTO gets stranded in a remote island), tighten up the security of your data, code, and a bunch of other stuff. It’s a lot, and feels like it won’t ever end. You put all that into the spreadsheet over the course of weeks, or even months.

If the auditors like what you've put into the spreadsheet, you get a Type 1 certificate, which is more of an IOU. What you really want is the Type 2 certificate, which requires a 6 month wait. During this "observation period", the auditors continuously check if you've been following your own procedures. Then, if they are convinced, you get the Type 2 certificate as a fancy PDF. You put the SOC2 logo on your website, write a blog post, tell all your prospects you are now a secure company. And, of course, the observation period starts again. The cycle continues.

So, where does Vanta fit in all this? They make and fill in the spreadsheet for you.1 As "the compliance automation platform", they sit between your company, "the service organization" and the auditors. Auditors look at the spreadsheet created by Vanta and give you a pass/fail score.2

The "tech" angle behind all this is connecting to all your systems like AWS and Github and verifying things are locked down. Vanta also syncs up with your HR systems like Google or Workday to make sure people follow their training schedule, accept their policies, and pass their criminal checks. It's a big value add for Type 1, and a true life-saver for Type 2.3

Now, in a pure business sense, Vanta should be good for the world. If they are lubricating the wheels of commerce by making sure even small companies can cross the enterprise chasm, it's fair for them to get a cut of the marginal transactions they are enabling. After all, that’s why most SaaS companies exist. We all make the world a better place, in our small ways.

There's, however, a cynical view that SOC2 (and other compliances) is essentially now a tax that you have to pay. You do it not because you have to, or because it makes your product more safe and secure, but because the industry undertow makes you do it. With a conservative 20x multiple, Vanta could be making $200M a year. What percent of that is the enterprise value their customers have created that they are capturing and what percent is just a tax?

Problems with SOC2

First, the perverse incentives and the pay for play. The auditors work for you, the client. It's in the auditors' interest to keep you happy, so it doesn't take a lot to convince them you are doing the right thing. The enterprise customers often don't even know who the auditors are before seeing the SOC2 report, because seeing the report requires an NDA. And these customers rarely, if ever, choose their vendors based on their auditors, if they ever read the report at all. Having read a few SOC2 reports for my company's vendors, I can tell you the quality of reports, and the security postures, vary wildly. And, needless to say, no one cares if the product is good but the report is bad.

Second, the entire process is incredibly janky. A shocking amount of the SOC2 process is built on screenshots. If that sounds extremely insecure, you are correct. You take screenshots of your tools. You take screenshots of your JIRA tickets. Whatever you need to “prove,” you take a screenshot, and upload it to Vanta as evidence. The word "evidence" belies a forensic approach, but it's a lot more TSA checkpoint than actual detective work. There’s no chain of custody, authentication, anything. The entire system largely hinges on your auditor’s trust in your screenshots.

Third, the network effects. The entire thing spreads like a virus in the system, in two ways. First, it's via the technical dependencies embedded in the SOC2 process. Even the smallest of SaaS companies run on other SaaS companies' products4. In order to get your auditors' approval for SOC2, you end up having to validate all your vendors' security practices. You can already see where this is going. That, of course, also requires you to get their SOC2 certificate. Turtles all the way down!

And then, more subtly, there's the social pressure. Sure, SOC2 makes your company more secure. But ultimate security is an elusive, platonic ideal. No company with SOC2 is immune to a rogue employee or a dedicated hacker. Things always slip through the cracks.

However, with everyone around you getting SOC2, your investors being investors in various players in the ecosystem like Vanta, the FOMO to "just get SOC2 and be done with it" is immense and hard to argue against. Not only that, it comes earlier and earlier in companies' lifecycles now. Companies without product-market fit or even a sales team spend weeks on SOC2. Is that the best use of anyone's time or are we just watching a very elaborate Kabuki theater?

It’s Just Business

Look, this is not to say that Vanta is a bad actor. It’s a hugely successful business. And clearly, many people love it. I know lots of great people who work there. And I keep mentioning them as a placeholder for this industry because they are the leaders.

Making it easy to get SOC2 earlier in a company's lifecycle is a great idea. A company that has a security mindset earlier on is going to be a Fort Knox compared to a large company that bolts on a bunch of policies later on. It'll also be more pleasant for everyone, and cheaper. These are undeniably good things. Any time technology makes something hard easier, I err on the side of celebrating that.

Not only that, I know people who have had to get their SOC2 before Vanta and those people would have killed to have the automations and integration tools that Vanta provides. It's a clear value-add for those who need it. It’s a lot more fun to click buttons than to fill in those spreadsheets.

Yet, in this case, I am not convinced the tech industry has become better thanks to our newfound love for SOC2. Vanta is not a villain, but they aren't heroes either. Currently, they are the enablers of a flawed system, not unlike TurboTax and the IRS.

Ask yourselves. Are we all more efficient at sales and go-to market now that we are all SOC2 certified? Are everyone's products safer as a whole? As a customer, have you ever checked if an app you are using is SOC2 certified. As a professional, did seeing SOC2 on your vendors’ security page give you more confidence or did you just feel good about CYA?

What many won't tell you is that the real secret to SOC2 is less about using the right platform and more about finding an agreeable auditor. Like I alluded to before, most SOC2 reports aren't read. If a company wants to use a vendor, and their vendor's report is awful, it won't stop them. But everyone's stuck doing the right thing, even when it's the wrong thing.

Breaking the Screenshot Tax

The irony is thick. Small companies used to sell the dream of being a cowboy: pushing to production, fixing problems directly, moving fast. Then we built tools to help small companies act like big companies so they could sell to big companies. Now those same small companies spend their precious early days filling out compliance spreadsheets instead of finding product-market fit. Where did the fun go?

It is now time to replace SOC2 with something better5; something continuous, programmatic, and discrete. A compliance scheme that monitors security in real-time, just like we monitor our apps. One that updates automatically when you fix a vulnerability, not six months later when the auditors check back in. The good thing is Vanta now has both quite a bit of leverage and expertise on both sides of this market. They have the integrations, the customer base, and now $150 million in fresh capital. They should use their powers (and new coffers) for good. Enterprises won't like giving up their familiar PDFs, but someone has to drag them into the 21st century.

The same ingenuity that created this compliance-industrial complex can tear it down. We've already transformed how we build and deliver software—from waterfall to agile, from shrink-wrap to SaaS, from annual releases to continuous deployment. We monitor our systems in real-time instead of waiting for post-mortems. We scan for vulnerabilities continuously instead of scheduling yearly pen tests. Hell, we even moved from PDF manuals to living documentation.

So why are we still treating compliance like it's 1995? Imagine getting dinged for a security issue you fixed three months ago, just because the auditors haven't caught up. Or passing your SOC2 while harboring vulnerabilities that appeared yesterday. It's time to ship the future of trust, not just automate the past. All that's missing is our collective will to stop paying the tax so I can go back to pushing code to prod.

AI makes people do weird things, and ask even weirder questions. Is it going to destroy us all. That seems insane; No. why not just pull the plug? Okay, but what if it destroyed us before we could? Be serious. You are veering into omnipotence. That won’t happen. OK, an easy one: Is it going to take away all our jobs? Probably.

Yet, the most important AI questions have nothing to do with whether it'll achieve consciousness or destroy civilization. The real questions are much more boring—and much more important. Questions like who's going to control the models we use, whether we'll ever stop relying on a handful of companies, and why some models are just... better, despite all logic suggesting they shouldn't be.

So, today, I want to pose a few of them and see what kind of answers I can come up with.

Open vs. Closed: Who Controls the Future?

Let's start with a simple one: open or closed? Here’s another way to put it. Do we expect companies like OpenAI, Google, Anthropic, and a few others to always maintain an edge? Or do we expect open‑weight (i.e., open‑source) models to ever catch up to frontier models from private companies?

This has big implications. Are we forever going to rely on third parties, or at some point do we get to deploy these on-premises on our (cloud) servers? Or is it going to be like databases, where Oracle serves a few big customers and everyone else uses open-source software?

On the closed side, we don't really have much evidence, except for the most compelling one: past performance. Take coding models, for example. While models like Qwen are always impressive, when it comes to mind‑share and pure developer productivity, most people are still using models from Anthropic (Claude) or Google (Gemini). Even Facebook, which has made a big show of keeping its models open, has recently switched to Claude.

The "open" side, however, has history on its side. At some level, all LLMs are a bunch of data and code. There's no magic, and eventually people figure out your tricks. You can even see OpenAI thinking this way too; why else would it be ramping up their own consulting arm deploying their models in enterprises?

Even the most advanced models would fit on a thumb‑drive, and even if you did not have access to that drive, you can extract much of the magic sauce remotely, like Deepseek allegedly did. Why do you need OpenAI's models if you can get 90  % of the way there with an Accenture contract?

Why Are Some Models Just... Better?"

Yet, this question raises another question: why are the closed models still so far ahead of other models? Or, even a narrower question: why do Anthropic models seem to be significantly better than models from companies with access to larger datasets and more GPUs?

The answer seems to be that we don't really know what makes one model “better” than another. There are so many benchmarks that every model developer picks the one they rank the best in when they announce their model’s supremacy. While many developers I talk to prefer Anthropic models, there are many others who prefer Gemini. I think Claude Opus (from Anthropic) is the best writer, but it could also be that I don't have access to o3‑pro just yet. And I didn't even talk about Grok at all yet.

The other part is that these are such cutting‑edge technologies that the talent really matters; you can get materially different models if you have the right people on staff. Zuckerberg's $100 M+ offers sound a lot less crazy once you realize those same people—and not much else—made OpenAI worth hundreds of billions. I mean, they said it themselves just a few months ago.

Should We Even Care About Safety?"

This brings me to another question: should companies act with safety in mind when developing and releasing these models? Or is it at best a way to keep some trust‑and‑safety‑minded people busy and generate good press, and at worst, a way to build some regulatory barriers for new entrants?

I generally think companies should act responsibly and should try to put the well‑being of humanity somewhere in their spreadsheets. But I am also aware that most companies will do whatever makes sense for their shareholders as they wont to do, and it's the job of regulators to make sure the negative externalities are folded into those models.

For example, Grok—the brainchild of Elon Musk—released its models with practically zero safety precautions, to exactly no one's surprise, drawing the ire of many in the industry.

Yet, I've not seen a lot of people care about the safety of these models when they are deploying them in their enterprises. They care about cost, of course, and care quite a bit about how these models use their companies' data.

Should We Sell AI Chips to China?

Speaking of safety, yet another question: should we be selling our most advanced AI chips to China for training and inference?

The knee‑jerk answer seems to be no. Clearly, one of the few things we still do better than anyone else is design these chips (even though we do make them in Taiwan and South Korea). At the same time, as the Huawei experiment has shown us, the more we restrict the exports, the more we encourage and enable them to build their own advanced chips.

The long‑term solution here seems to be actually attracting the talent to build chips (and the chip factories) to the US, not repel them like the Trump administration wants to do. We need to play both the long and the short game. The short game is the talent, and the long game is the supply chain resilience.

The short game is obvious. The long game, less so. But here’s an anecdote. An Apple executive once told me that the Bush administration once kindly asked them to start buying precision glass lenses from US suppliers so they'd keep their spy‑satellite building pipelines and the talent supply intact. Turns out both the people who know how to make them and the machines take years to develop. What happens when (if?) run out of people who know how to design chips from scratch? Has our Boeing experience not taught us well?

The Boring Futures We Can't Predict

While it's fun to consider doomsday or post‑scarcity scenarios, the future is probably going to be more boring than we expect in the short term and more unpredictable in the long term.

We first feared mass unemployment from steam engines, then electricity, but no one thought air‑conditioning—a boring technology made possible by electricity—would upend entire countries' industries. The UAE wouldn't exist as we know it without AC. Singapore wouldn't be a financial hub. The entire American South would have developed differently.

The grand questions are fun to ponder, but the future rarely announces itself with fanfare. Sometimes, it’s a proviso in a policy paper. But most often, it shows up as a line item in someone's IT budget, solving a problem we didn't even know we had.

Today, I'm going to be writing about something a bit different than our usual content. My daughter, Samaya June Roy-Yang passed away on November 18th, 2023, exactly one year ago today.

She died from a condition called FIRES (Febrile Infection-Related Epilepsy Syndrome). It's a condition where someone with no prior history of seizures, after developing a fever, enters status epilepticus—prolonged or, essentially, non-stop seizures.

I've been needing to write about the whole journey for a while. For longtime readers, thank you again for spending time with us over the years and giving me the privilege of your inbox for something like this.

A few ground rules as we start this post:

• I’ll divide this into first recounting the nightmarish five days of her hospital stay, and then how I’ve been dealing with the grief.

• For reference, my wife is Janie and my 5 year old son is John Jay. They've naturally gone through unimaginable sorrow alongside me, but this post will primarily be an account of my journey. One day, I hope to help them tell their stories.

• This post is long. It’s easier to click the headline Technology and Grieving and read on the web versus trying to read in your inbox.

• If you don’t regularly read my writing, please excuse the casual, sometimes sarcastic tone given the serious nature of the topic. It’s how I write and deal with things.

• I'm going to try to somehow weave the theme of technology throughout. This is a newsletter about the business of technology and I don't want to veer too far away. I've swam pretty far into the griefluencer industrial complex over the past year and in no way aspire for that. Don’t worry, regular readers, there is some talk about Generative AI!

Finally, we’ve launched The Samaya Fund to further research both into FIRES and the intersection of neurology and immunology. I’ll cover it in a bit more detail at the end. We’ve never put button CTAs in our newsletters, but this one time, I’m going to do it. Please email me at ranjan@samayafund.org if you want to know more.

The Samaya Fund

Well, here we go. Wish me luck.

Day 1 - Tuesday, November 14th, 2023

The day began like so many other days in our current post-COVID world. Samaya had a fever that started the prior Friday and lasted through the weekend. Janie stayed home with her on Monday and took her to the pediatrician. We have a running joke that every time we’ve gone to the pediatrician with a kid’s fever, they just ask "is she peeing? Okay, just monitor her." This was the case again.

Tuesday, I stayed home with her. I'm normally in-office, so each call would start with some kind of off-hand joke, especially if the other person was a parent, "Fever, yeah, you know how it is once winter starts." Every parent who is reading I imagine has gone through this routine.

Samaya's fever had mostly subsided that day but she was kind of out of it. She wasn't eating though, and after giving her some Hawaiian Rolls (IYKYK) she threw up. Janie called the pediatrician, and we were given the "just monitor her" again. She was fairly lucid but just had no appetite. I consoled her and after she fell back asleep, I went back to taking calls. I’ve still been working through that guilt.

Rainbow Baobing

Around 4pm, I made her shaved ice. I cook a lot and have an unhealthy obsession with cooking gadgets. The more gears and app connections, the more I’m interested. Janie will uncomfortably smile as I outfit our tiny Manhattan kitchen with ridiculous things like a Combi Steam Oven or a $200 thermometer. I also have a bit of an Asian grandmother personality (or Latin, Italian, or whatever else) where I'm at my happiest concocting some new recipe and seeing my family happily eat it.

I also have an arsenal of Kitchenaid Stand Mixer attachments, and had recently bought a Shaved Ice mixer. For a bit of context, Janie is half-Taiwanese, and we go to Taiwan regularly. She speaks exclusively in Mandarin to our kids and wants to make sure they're truly bilingual. Baobing is a popular Taiwanese dessert where you freeze milk and cream, shave it down, and add fruits, syrups, and other toppings.

Samaya was my cooking buddy. Her favorite thing was probably making pizza (and covering herself in flour), but she was always ready to dive into some new culinary project with me.

She was more hyped over the shaved ice maker than any previous gadget, and we made it for a sleepover she had with her best friend.

Samaya even helped me make this TikTok, and I'll never forget her asking "Daddy, what is that voice?" and I said, "Samaya, that's the TikTok voice." She just kind of nodded.

That afternoon, the last thing she ever ate was some milk shaved ice. She had no appetite, but with every spoonful, she smiled and ate the entire thing.

And the last words she ever spoke to me were about this idea she had for making rainbow baobing. We had started experimenting with incorporating different berries directly into the blend to make them different colors.

She said "Daddy, can we make rainbow baobing this weekend? We'll use strawberries for the red, orange juice for the orange, lemonade for the yellow, and food coloring for the green."

She paused and I said "blueberries for the blue?" She stopped me because we had already tried that and she said it was too “suan 酸” or sour. I always loved when she mixed Mandarin words when talking to me.

She then said for purple we could use grapes. I said, "I'm not sure even purple grapes will really look purple.” And she smiled. She smiled. It was a totally lucid conversation.

That was the last exchange I ever had with my beautiful daughter. I think about it a lot. It reminds me of all the things I did with her. Cooking was one of those things where we spent so much time together. Spend time with your kids. Every one of those moments will really matter. But, Samaya had been talking about making rainbow baobing for over a month and it had been a really busy few weeks for me. I lost that chance.

She fell asleep and looked peaceful.

The Beginning of the End

Janie had put John Jay to bed in a separate room and fallen asleep with him. I laid down next to Samaya and around 10:45pm I noticed she started smacking her lips in an odd way. I tried to wake her up and she was very oddly non-responsive. It was unlike anything I had ever seen with her. Her eyes were open and she was awake, but she couldn't talk. As a parent when your kid is sick, there are so many moments where you try to not over-react and I wasn’t sure what to do. I shook her a bit and she just stared blankly.

I ran over to wake Janie up. Janie kept talking to her, kept shaking her, and there was no response. We picked her up and took her to the bathroom to splash cold water on her. She physically responded but couldn't speak. Janie called 911 and the ambulance came.

Janie went with the EMTs in the ambulance with her. I took this picture, and vividly remember thinking I'd show it to her years later to recount that crazy instance. It's the last time I ever saw her somewhat conscious.

She had a seizure in the ambulance, and as they wheeled her into the hospital, which is only 10 blocks away from our apartment, she had blood and foam coming out of her mouth.

The First Night

I loaded John Jay into a stroller it was faster to walk to the hospital than wait for an Uber. As we walked, I was dictating searches about fevers and seizures in children and saw endless info about "Febrile Seizures". I felt an ounce of comfort, as this seemed to be a somewhat normal thing.

When I got to the hospital, there was a lot of doctors and nurses around her. She had been intubated. A doctor told us, "She's critically ill, but she's stable."

Critically ill.

That night, I still assumed everything would be fine, but those words still stick out to me. It was the first sign this wouldn't be a walk in the park.

Around 230am, they attempted a lumbar puncture (spinal tap) to try to start to check for meningitis or other infections. Something went wrong and they didn't get the sample needed to evaluate these conditions. I took John Jay home around 3am and managed to sleep a few hours. Even with the critically ill comment, if I were to give a Hopefulness Score™, I was still probably around a 9/10.

Febrile seizures were normal. Right?

Day 2 - November 15th, 2023

I went back to the hospital around 7am, and learned that Samaya had another seizure at 322am. There were tubes coming out of her throat and sensors all over her head. We sat by her through the morning. Her eyes were open through the morning, and around 1pm was they closed.

Around 2pm, Janie noticed her foot twitching. She told the doctors, shortly thereafter we saw seizure activity on the EEG monitor. This is when all the more serious discussions started.

Now, a recurring theme in this piece will be about the care we received. Even given the tragic circumstances, I’m not angry. In fact, there were so many doctors and nurses at NYU Langone who were incredibly knowledgable and empathetic and the more we learned, the more we realized this was one of the best places she could be given the circumstances. But, I’ll write about both the good and the bad.

As the serious conversations started, I had begun ChatGPT’ing terms. Some of the doctors were amazing at conveying complex medical concepts into accessible language. Some weren’t. This entire experience solidified my belief that generative AI can help bridge communication gaps in medicine because why shouldn’t every patient be able to understand what’s happening in language accessible to them?

The conversations begin…

The first conversation that took on an incredibly serious tone was a doctor telling us they’d need to insert a central venous catheter (CVC).

Then we had a talk with the neurologist team who explained to us if the seizures continued, they'd have to increase the dosage of anti-seizure drugs and there could be a possibility of a medically induced coma. This is also the first time we ever heard the term FIRES. We didn’t even really process it because the term ‘coma’ was so traumatic that we didn’t realize in a few hours we’d be praying for a coma.

Enter the Rheumatologist

And around 3pm, we had one of the most seemingly innocuous conversations that will live with me forever. After intense discussions with grave-looking doctors, an overly friendly rheumatologist came over and started telling us they would potentially give her Intravenous immunoglobulin (IVIG).

It was one of the oddest experiences, because after hearing about catheters and comas, he went on and on about giving her antibodies from plasma and something called Kawasaki’s Disease. The other doctors seemed to ignore him. When I pressed him on what the risks of IVIG were, he basically said there were very few. I was so confused why he was just so nice and cautious about this seemingly non-critical topic, especially after all the horrible conversations we’d been having.

After that conversation I texted one of my main bro-chats, where the majority of bro-participants are surgeons. I asked what a rheumatologist was as I’d never heard of the field.

It's only after beginning my journey into learning about FIRES, that I’ve realized that conversation was the pivotal moment it became clear this was going to be something far, far different from a febrile seizure. The interaction of the immune system and nervous systems was now part of the equation. This is the moment we were moving away from just anti-seizure medication into immunotherapies.

One of my surgeon friends asked “FIRES?” It turned out he had a friend from high school whose son went through this.

The First Long Night

This is where things started to get really intense. Samaya was physically still at this point, so any seizure activity wouldn't be seen externally but only via her EEG readings.

There were a series of anti-seizure drugs administered in regular and increasing doses.

We sat there as they started with Midazolem. Then there was Ketamine. Then there was Pentobarbitol. Then there was Propfol.

Each time, someone would say something like “Bolus 3mg” and we’d wait. This went on for hours. At first the seizure activity was showing no signs of stopping, but then as the harder medications were administered, we’d see moments of respite. Those lines would calm down for a moment. And then they’d be back.

I've written before how I love financial graphs and charts. That embedded in every set of chart lines lives a true story. Unfortunately for me, that night, those charts told the worst story. Samaya's brain simply could not rest. I have stared at charts almost daily since I began trading in 2002, but for a few months after this all went down, opening any kind of chart was genuinely traumatizing.

My Hopefulness Score™ had dropped to probably a 5/10.

The Nurses

Throughout all this were the incredible nurses. Those first few nights there was a nurse named Jess who, long after most others had left, was running around the room, taking vitals, checking medications, and consoling us. She was apparently supposed to have the next few days off, but came back to work for the next few nights. Janie and I still talk about her.

Day 3 - November 16th, 2023

Samaya 'achieved' a stable comatose status in the early hours of Day 3. There was an overnight PICU doctor who came in and we were chatting with her. I brought up the term FIRES and she said, "Don't google FIRES."

Of course, after that initial conversation with the neurologists about 18 hours earlier, I had already googled FIRES.

The first featured snippet indicated the outcome of FIRES ‘can be poor’:

The second featured snippet was a bit more intense. It said mortality rates were up to 30% with a 66-100% chance of long-term cognitive impairment. I didn't tell Janie right away what I had seen.

I think I slept a few hours. I also realized, I'm a pacer. I would just pace back and forth through the hallways. I’d step outside the hospital and pace on the sidewalk as very early morning commuters passed me. I wonder how often those commuters see someone outside the hospital pacing and crying.

One of the most fascinating things about the entrance to the NYU Children's Hospital is a giant dalmatian statue with a taxi balanced on the tip of its nose (this is not AI, this is real).

Both Samaya and John Jay were born at this same hospital. The dog was apparently built in May 2018, which makes sense, because I didn't remember it when Samaya was born on December 13th, 2016. When John Jay was born on April 18, 2019, I vividly remember Samaya and I walking outside and her loving this crazy statue.

The creator had said:

“It’s a privilege to be able to do this for the kids. I wanted to make something so astounding it would distract even those arriving for the most serious procedures, and so lovable that young patients coming back again and again with chronic conditions would see it as an old friend."

It really did help. John Jay always comments on it when we pass the statue driving by on the FDR. He still doesn't know this is where his sister died.

A diagnosis of exclusion

Day 3 seemed....okay? Yes, she was in a medical coma but a very senior doctor who had been brought in seemed to reassure us. Of course, there were plenty of caveats around potential brain damage, but in these types of rare cases, this was not unprecedented. He told us a story about a patient who recovered from FIRES and, while in a separate schooling process, the patient recently went skiing with his family. That patient was apparently in a medical coma for months.

Samaya was taken in for an MRI and everything came back 'clean', which both seemed 'good' but also reinforced that this could likely fall into the FIRES category. FIRES is a 'diagnosis of exclusion' meaning you don't diagnose "this patient has FIRES" but instead, when you can't pinpoint any other cause attributed to the specific sequence of events, it's FIRES.

That day still seemed okay. My sister came up from Boston. My mother-in-law flew in all the way from Asia. Our nanny had been watching John Jay, and now a bunch of family were coming in to keep an eye on him. Everyone kept telling Janie and me to sleep. I was able to. She still couldn't.

Code Blue

Around 8pm, there was a bunch of doctors in the room and they were doing an echocardiogram. I remember thinking it looked like those first doctor's visits when Janie was pregnant and we'd see Samaya's tiny body in the sonogram.

That's when things really went south.

Suddenly, there was a lot of beeping. A lot of commotion. Her heart rate had dropped and doctors started yelling she had lost her pulse. A bunch of people started rushing into the room and it felt like a medical drama on TV. We were still in the room when the chest compressions started but were then ushered out.

This moment was as bad as you can imagine. Alarms blaring. Incessant beeping. A booming chorus of voices that balanced panic and professionalism. Lots of people counting out loud. And in the middle of it all was tiny Samaya. So many of the other moments that week were slow, drawn out, painful things, but this was just so awful.

Doctors and social workers stood by us in the hallway. Janie fell to the ground. There was a pediatric critical care doctor who dropped down next to Janie and helped her breathe while tightly grabbing her hand.

For six minutes, Samaya had no pulse. It came back. I later learned the term ROSC (Return of Spontaneous Circulation).

Her heart was still pumping but it wasn’t effectively functioning with the rest of her body. Some doctors said some stuff but my brain was in a fog. I felt completely helpless.

Someone pushed over some kind of computer on wheels. I later learned these are actually called COWs (computer on wheels). They told me they needed to put her on something called ECMO. They said something about given how dysfunctional her heart and lungs were, the ECMO machine would act as an artificial system. It stands for Extracorporeal Membrane Oxygenation which kind of gets to the point.

At that moment, I asked if we could please speak to one of the previous critical care doctors we liked and trusted. Instead I got an aggressive response, "we don't have time for this." So, I signed some digital screen with some kind of stylus, and we agreed to whatever ECMO was.

Day 4 - November 17th, 2023

While Samaya was in surgery to be 'cannulated', I asked a few different doctor friends about ECMO. The reactions were consistent. Up until that point, I got a lot of "think positive thoughts", "kids are resilient", and "it'll be okay’s." This was the first moment I got a bunch of "oh shit’s.” I remember finding this WSJ article from a month prior which reaffirmed it was only for the sickest patients. The article had an image of big tubes by a patient's bedside, but nothing prepared me for walking into the room.

This picture is from the WSJ article and not of Samaya because I just can’t bring myself to share the photos of Samaya’s little body with those giant tubes coming out of her. I guess, that is the point of the machine, to act as an external heart and lung system, but my god, was that shocking.

My Machine

So to give my layman's summary of where we were right now (confirmed by poring over 1200 pages of medical records with a combination of Writer’s Palmyra Med and Claude), when Samaya's seizure activity would not stop, they had to give her more and more medication (the ketamine, pentobarbitol, propofol etc.) The sequential problems from the heavy medication were things like propylene glycol toxicity and lactic acidosis. Her internal organs were just not working.

Once she was on ECMO, there was another conversation with a friendly doctor from Spain. So many doctors. Many of them, including this one, were genuinely caring, friendly, and tried their best to explain what they were thinking and doing. But there were just so many doctors.

This doctor would be implementing CRRT or Continuous Renal Replacement Therapy. She proudly kept referring to this external, artificial kidney as "my machine" and seemed reassuring about her “machine helping Samaya” and clearing the toxins in Samaya's blood that her kidneys no longer could.

More wires. More machines. She was still with us, yet her heart, lungs, and kidneys were all replaced with machines outside her body. It was bad. My Hopefulness Score™ was maybe at a 2/10 at this point.

I paced and paced. I just stared at the monitors on the walls, seeing if she still had a heart rate and baseline oxygen levels. Just staring at charts. Pacing and staring at charts.

The first "conversation"

Around 11am, the older, experienced doctor called us into his office. The day before he had seemed a bit positive. Today he seemed somber. This felt a bit like "the conversation" without officially being the conversation. All night we were dealing with internal organ issues, but he took us in a whole other direction. Her EEGs were showing almost no cerebral activity. He very cautiously used the term 'brain death' while reinforcing we were not there yet.

I think it's in how he spoke. He looked sad. I'm sure this man has seen some shit over the years, but he genuinely looked sad.

Janie and I walked to a waiting room and cried together. I said "she's gone" a few times. But she wasn't gone yet.

Hopefulness Score™: 1/10.

The last night

That night is a bit of a blur. As one can imagine, the connections of an artificial heart, lungs, and kidneys with two completely distinct systems (ECMO and CRRT) is complex to say the least. There were nonstop issues with the machines. There were doctors and nurses untangling and re-plugging in endless wires.

Another thing that happened was her body started to swell. Like, really swell. There were so many machines and wires, but you could see her face ballooning up. Her blood vessels were leaking into her tissues with the official term being facial edema. Giant tubes. Her body and face was so swollen.

A few days later, when we had to coordinate her body being transported from the morgue to the funeral home, they send you a picture of the deceased to confirm it's actually them. The morgue guy on the phone warned me before sending the photo that it might be traumatic. I told him I already knew.

There was another code situation late into the night. They turned of the CRRT after that. There was almost no brain activity, except for a few bursts of seizures.

Day 5 - November 18th, 2023

That morning, during the rounds, one of our favorite PICU doctors walked up to Janie and gave her a hug. I saw some tears from her.

Hopefulness Score™ officially was 0/10.

Up until that point, almost all 'the conversations' were in the waiting areas or Samaya's hospital room. That morning we were asked to go to a conference room.

Janie, my sister, my mother-in-law, and me all sat on one side of a table. I remember maybe four doctors across from us. They walked through everything. The complications from the medications. The lack of brain activity. They explained how they could slowly remove the ECMO and any other life-sustaining technologies. There was a Do-Not-Resuscitate order we'd need to agree to.

I tried to remain composed. It's almost comical to me in hindsight, but the deep-brain-business-MBA in me uttered something about "we agree and assume will certainly be some procedural questions along the way." I think the doctors just kind of stared at me. I genuinely wonder what other people say when you agree to let your child die.

And then I looked out the window and saw the East River. It was a sunny morning. Samaya was born at the same hospital, and this was almost the exact same view we had that night in December 2016 when Janie and I first held her tiny body in our arms. She was our firstborn and we were nervous. But she made us feel everything would be okay.

Yeah, that view and memory was the end of my attempt at feigned composure. The doctors left the four of us in the room.

Goodbye

Over the next few hours, friends and family went into the room to say goodbye. Then around 2pm we all gathered together in the room. This might sound weird but it was the most beautiful of goodbyes. Samaya had this way of bringing beauty and poignancy to so many around her, and even in her final moments, she delivered that same energy.

I can’t bring myself to share photos from that moment, but instead here is Samaya asleep with a green hair attachment thing a friend had given her. She was growing up. But more important, she has her pink blanket she called bùbù (Chinese word for cloth). It was gifted to her by a former client of mine when she was born and she held that thing every day of her life. It laid over her body as the doctors started unplugging the machines. The whole thing felt properly funereal.

I think it was on Day 2 that a friend had brought over a bluetooth speaker. We had been playing music for Samaya throughout this nightmare and I wondered what should be her parting song. She loved Let It Go, but it didn’t feel quite right.

Samaya had always loved You Are My Sunshine. There was a version by a folk singer named Elizabeth Mitchell we had found on Spotify and Samaya would always sing it in the car. She loved to memorize song lyrics. I remember when she was memorizing Let It Go, I told her that the 'frozen fractals' verse was too hard and she said "Daddy, I always know all the words." My little girl knew all the words.

Around 2pm, as our family and friends gathered in the room, and Janie kneeled by Samaya and I stood behind her, I put on You Are My Sunshine, making sure to hit the Spotify repeat button twice.

There's the first verse we all know well. We sang it in elementary school. It's the joy and happiness we all associate with the song:

You are my sunshine, my only sunshine

You make me happy, when skies are gray

You'll never know, dear, how much I love you

Please don't take my sunshine away

What I will never forget is, mentally registering the second verse as we stood there. As the machines were unplugged, and that caring PICU doctor knelt next to Samaya and listened to her heartbeat with a stethoscope until it forever stopped at 2:18pm on November 18th, 2023, that was the first time I actually thought about the words in the second verse:

The other night, dear, as I lay sleeping

I dreamed I held you, in my arms

When I awoke, dear, I was mistaken

So I hung my head and cried

There were plenty of times I’d be sitting in the front seat of our car as Samaya sang this song. I even remember smiling a bit as she'd go into the second verse and thinking "my little girl knows all the words." But I never actually thought about its meaning.

From a bit of searching, I later learned that the second verse (and sometimes there’s a 3rd and 4th) is usually sanitized out of the happy kids versions.

The song was not just about love but about loss. Part of loving someone so much can be grief and loss. And it’s okay. The grief is so strong because the love was so strong. And in that moment, Samaya sent me the message we could and should still feel her sunshine, even amidst the grief. Somehow, even as her brain had long stopped working, and her heart beat its final beats, she made sure to remind us we'd be okay.

The After

Everyone waited around the hospital for a few hours as we moved her body to be transported to the morgue for an autopsy. We had a conversation with a social worker who read off a script. We had a conversation with a friendly counselor who talked about how to tell John Jay his sister had died. We signed some forms. We headed home.

That night, we gathered with our family members who were in town at our apartment. We drank some wine. We talked about Samaya. We talked about other things. We cried.

Waking up the next morning was tough. It was surreal. A friend had dropped off some jugs of coffee at our doorstep. Food delivery seemed to be the most common thing from friends in the subsequent days and I get it. There's so little you can do but you want to do something. A bunch of business school friends pooled together a Grubhub gift card (and I confirmed later, they were very cognizant to not make it Doordash).

How to Grieve

And thus began the grieving process. I still think about this illustration one of the art directors at my company sent me:

Therapy. Books. Podcasts. Conversations. I started trying to process things.

Messages

People sent messages. Lots of messages. If I didn’t respond at the time, I’m genuinely sorry, but I know you get it. I had previously never quite realized the power of the emoji reaction and viewed them as a cop-out to communication. But in this case, the heart emoji reaction became my go-to ❤️. It simply told the sender, I’m still here.

Most of the messages fell into the “I can’t imagine” and “I have no words” category. That’s why I’m writing this. So I can help you try to imagine and tell you in my own words. Some of the words that impacted me most positively fell into the category of Robin Williams in Good Will Hunting delivering the classic “it’s not your fault.”

I went to dinner with a friend of a friend whose son had FIRES. I made a comment about how Samaya had noticeably ‘spaced out’ a few times and maybe we should’ve caught potential seizure activity. She looked straight at me and said that’s wouldn’t have changed anything with FIRES. One of the comments that I think about to this day was a doctor friend saying, “you could’ve been given the exact date this would happen a month in advance and it wouldn’t change anything.”

The loss is tough. The guilt is tough, too. People have really helped.

The other perfect thing to say was “we know Samaya was loved” or “we know Samaya was a happy kid.” I remember my sister and mother-in-law both saying this, independently, at the hospital. That’s all I ever want to know for certain. Her time was brief but it was full of love and happiness.

I think she was happy.

Relative Grief

Another thing I noticed was a lot of comments in the category where someone shared a story of grief with the caveat “I know yours is so much worse.” I want to write here that, it’s okay. You don’t need to say that.

My grief is so specific. It’s gargantuan, but it’s specific. Samaya was almost 7 so there were so many clear memories. She was just at that age where you started to get real glimpses about who she’d be as she grew up. She wanted to be a ballerina.

That hospital stay ravaged us in its brevity, but would a long hospital stay be worse? The median hospitalization from FIRES is 87 days. Would a long drawn out stay that still ended in tragedy taken an even greater toll on us?

I don’t know the answer to any of these questions, but what I have learned is grief is grief, and those people who surprised me with stories that they had been living with grief right under my eyes, those really helped. Sure, if someone told me “I get your pain, my goldfish recently died,” I might not be quite as understanding, but my main takeaway from this journey has been to try harder to recognize the grieving that may exist behind someone’s daily life.

Online Communities

It wasn’t just people I personally know. I’ve been a longtime Redditor and in September 2021 I wrote in this newsletter:

"Reddit is probably the social platform that has brought me the most uncomplicated joy over the past decade."

I had been a regular reader of r/daddit as we raised our kids and that afternoon, I posted this:

Seriously, read through the replies. It’s incredible. It was so perfect at that moment. Over the next few days, reading through helpful, caring responses was such an amazing complement to the IRL love. A friendly reminder, please don’t screw up Reddit.

The Funeral

Right away we had to start planning the funeral. I gave a bunch of specifications to a coworker and friend who called around and made a Google Sheet of options. It might sound ridiculous, adding comments back and forth on a Google Sheet helping, but those little acts of routine with familiar tools really helped. I never thought of Google Sheets as exactly therapeutic, but here we are.

I’m glad I had someone helping me because from initial searches I ended up with reviews like this (I’ll admit I laughed):

We found a funeral home about 20 miles from us. Samaya would be cremated and we could choose some items to send her off with. We debated over what to do with her blanket and ended up cutting it in half. Half went in with her, and our half is still in our bed every night.

We chose some books. Samaya had gotten this book from a classmate for her birthday and had started getting into telling jokes.

She always loved me asking Alexa to tell us a joke. When she was younger she would have no idea what the joke was about, but if I laughed, she’d laugh.

We weren’t planning on flipping the switch to start the fire after the coffin was inserted into the cremation chamber, but they asked us if we wanted to, and in that moment, Janie and I stood together and sent her off.

How We Remember

We held a memorial for Samaya on December 2nd. It was held at her school, Avenues The World School, where Janie has worked for over a decade and John Jay is now a kindergartner. The entire community was so incredibly supportive throughout this. The school let us use the gymnasium and provided all the food and logistics to bring over 200 people together to celebrate Samaya.

This whole experience made me realize just how valuable it is to have coworkers who truly care for you. I feel genuinely #blessed about my family and friends, but we also spend so much our lives at work. To have that additional layer of support from this other group of people makes such a difference. Thinking about going back to work as a respite rather than a responsibility makes such a difference. And you know when your coworkers really know you.

Janie’s coworkers were also so supportive during this, and with some of the other parents, dedicated a playground at the school in Samaya’s honor. They arranged flowers there today.

Editing Videos

In those first days, I couldn’t watch any videos of her. It was too painful. Photos were slowly becoming okay, but videos were too visceral. The organizers insisted we didn’t have to prepare anything, but I was not about to turn down the chance to create some content to celebrate Samaya.

I’ve long enjoyed toying around with video editing and I had started using an app called Videoleap about a month before Samaya passed. Around Halloween, Samaya and I were playing around with it—we were going to be Spidey & His Amazing Friends and she was going to be Ghost Spider (I know…😢). She asked if could create a video of Samaya talking to Ghost Spider.

It’s…a work in progress that we’ll never get to finish. Samaya wrote down her script on a post-it and put it on the floor. That high-five at the end 😆. It’s so beautiful, and probably a bit haunting, for me.

I was determined to make some videos for the memorial. I’m still not sure if this was the right approach, and perhaps therapy sessions years from now will indicate otherwise, but it turned into some sort of grief bootcamp. I ended up going through pretty much every single photo and video we ever had of her. Watching them multiple times. It started incredibly painful but after a while it became cathartic.

Hours and hours of sifting through photos and videos to make something we felt captured Samaya. After a while, Janie got into it too, as she wanted to handle the video of Samaya and her school friends (as she knew everyone far more closely). I found this picture I took of her late into one of the nights:

We created a few videos, including the You Are My Sunshine one above and this one below of her “early years”. Looking back at the title, it’s a cold reminder of how young she was taken from us.

The song is Yellow, the Chinese version, from the Crazy Rich Asians soundtrack. Samaya knew all the words.

I think it helped me.

Making Memories

As the months have passed, I’ve thought a lot about how we remember. The memories that live purely in your head versus those triggered by photos and videos. I learned there are Spontaneous or Voluntary recall memories which are driven by pure internal retrieval. Apparently, these activate the prefrontal cortex and hippocampus and are more focused on the information retrieval.

Memories triggered by photos and videos trigger Cue-dependent recall and more actively engage the amygdala and evoke emotions. Basically, photo-triggered memories are supposed to be more emotionally evocative.

In some ways, I get it. If I want to spend time remembering Samaya, it’s a lot easier to just pull up some albums and sift through photos and remember the associated moments. But there’s also something stronger for me when I just take a moment and think about her.

How we remember is something I’ve thought a lot about in relation to technology. I have thousands of photos and videos to help me. I think about what it must’ve been like to lose a child a century ago. Maybe you’d have a photo. What about a few centuries ago? How did people preserve the memories? Were they as strong?

While we haven’t been writing Margins for a while, I have been guest-hosting the Big Technology podcast with Alex Kantrowitz on Fridays. On the February 2nd episode, we were talking to Joanna Stern of the WSJ about her experiences with the Apple Vision Pro (remember that whole thing?).

Around 26:31, she brings up how technology like the Vision Pro, combined with AI, could change how we think about preserving the memory of people and the afterlife. It took everything to maintain my composure and I wasn’t ready to talk publicly about Samaya, but this is something I had been thinking about.

If Apple had only released spatial video capabilities on the iPhone just a bit earlier could I have more immersive memories? I had created a deepfake of my own voice on Descript, and Samaya wanted me to create one for her. Unfortunately, the sample paragraph you had to read was too complex and I didn’t push it. Would I want to have her voice like that? I probably could if I tried now but really don’t want to. Is that so different from having all the videos I have the privilege of owning in 2024? I’ve been toying a bunch with AI music, but the one subject I won’t make an AI song about is Samaya. Needless to say, there are a lot of questions that are going to be really weird and complex in the coming years around how we remember. These are the Margins-y things I think about a lot.

And the memories are all I have now.

The Music

Well, that and the music.

Music has always been a big part of my life. My dad played guitar and I still have his 1974 Fender Mustang up on my wall next to my Gibson SG and Yamaha acoustic. In the days after, all the music hit extra hard. In the immortal words of Wesley Snipes, you really move from hearing to listening. Every lyric, every chord, every note. You feel it.

My Spotify searches became things like “music for grief” or “songs about losing loved ones”. I wondered if I’d get some kind of “please seek help” notification (there weren’t any). I made a grieving playlist. That Wiz Khalifa Paul Walker tribute song was good. Forever Young by Bob Dylan and Keep Me in Your Heart by Warren Zevon worked. I’ll admit it, I’ll Be Missing You by Diddy is on there (it was before we really knew everything!).

But there really aren’t that many songs about losing a child. I guess that’s a good thing. There was one, Who You’d Be Today by Kenny Chesney that captures things pretty accurately, but the gold standard has to be Tears In Heaven by Eric Clapton. I learned to play this years ago and remembered the story of Clapton losing his 4 year old son. I remembered it well enough that I couldn’t listen to the song for a few weeks. When I did, it delivered.

There was this one video, where Clapton debuts it live on a news program. I could not get over it. I checked the dates and it was six months after his son died. To go in front of the world and deliver something like this astounds me. As I’m writing this piece, I keep thinking of him doing this. Thank you, Eric.

Music and Samaya

But music isn’t just for healing. It was such an integral part of my time with Samaya. We’d sit in our little music corner. She had started to really get into this singing app called Yousician where you sing and it scores you. There’s an intro-level song called “Oh no!” where she got a perfect score and was so proud of herself. “I got ALL the stars, Daddy!” I’ve still been using the app but I can’t ever do this song again. I don’t want to lose that score.

And then there were the movies. Frozen and Let it Go were naturally up there, but Sing and Sing 2 were our family favorites. It’s about a bunch of animal characters that put on grand musical shows.

There was a “prickly teenage porcupine with a punk rock attitude” named Ash (voiced by Scarlett Johansson). Samaya absolutely loved the song Set It All Free. Watching this video just guts me, but I’ve watched it hundreds of times. The way she looks at me a few times. Even details like, she learned how to scroll the trackpad. She’s learned to read and is reading lyrics in real time. When I stomp my foot, she responds with clapping. This is my favorite video.

As a family, we’d dance along and mimic some of the scenes from Sing 2. There’s a dance battle featuring a British-accented mountain gorilla named Johnny that would get us all involved.

But there’s a scene at the end of Sing 2 that would feature Samaya and me.

There is a curmudgeonly, leather jacket-clad lion named Clay Calloway (voiced by Bono) who was a former rock star that withdrew from the world after his lioness wife died. He’s been brought out of retirement for the grand show, and is supposed to do a duet with Ash.

Ash is starting to sing U2’s “Still Haven’t Found What I’m Looking For” while Clay is backstage. He’s nervous and afraid to go onstage. Around 0:50 he has a vision of his deceased wife, who nods at him to let him know that it’s okay to go out there. When we’d recreate this, it made me uncomfortable when Samaya once exclaimed “that’s his dead wife!” I wasn’t sure how to talk to her about death.

I’m not going to say that the “go ahead, it’s okay” ghost-lioness head nodis my inspiration in writing this post, but I do know that if Samaya was next to me right now, she’d say, “go ahead Daddy, it’s okay.”

Calloway walks out on stage. Samaya and I would mirror their movements, our height difference about on par with the lion and the porcupine. Around 1:41, I’d lean down and we’d sing face-to-face. Around 2:11, we’d stand back-to-back. Usually, we’d just pretend to play instruments, but sometimes, when we were ambitious, she’d hold a ukelele and I’d grab an electric guitar. And we’d laugh and we’d sing.

I miss her.

And After

We had a trip planned to LA in mid-December. Janie’s close friend was getting married and we were going to celebrate Samaya’s birthday at Disneyland. We went.

We went to the wedding. It was good for Janie to see so close friends. At dinner, someone who didn’t really know us asked me, “have you ever thought about having a second kid?” That was one of the first moments where I had to make the split-second decision of “do I get into it?” At that moment I didn’t. Sometimes, depending on the moment, I do.

We were having dinner at some chain crab shack the night before Disneyland and an odd guy that resembled Kip from Napoleon Dynamite came over and asked if we wanted a picture. He said he was from the restaurant and Janie said to go ahead. It got a bit weird because after he took this picture, he asked Janie and me “do you want to kiss for a picture?” We declined.

We have this picture on our fridge. It’s the first family picture where she is really just not there. There’s a bit of guilt that we’re all smiling, but it also reminds me that we’re letting her knows we’re still going. We haven’t given up.

And Time Passes

I thought all of this happening in the dead of winter would make those first few months exponentially tougher. The darkness of it all. But as Spring came, I realized it was a different kind of tough. As kids started filling the playgrounds where she’d play, and we started going back to the places where she’d go, it was a whole new set of dormant memories triggered.

We’re still living in the same apartment in Peter Cooper Village. A lot of people asked us if we’d move, either apartments or even cities, to help move on. But I like having the memories triggered. I want to remember it.

Samaya was a New York City kid. She insisted on using her Metrocard every morning to buy her bus ticket for the M23 crosstown bus even though I told her the cops probably wouldn’t ticket her.

She Was Growing Up

All the NYC kid memories you might imagine. The Natural History Museum. The Central Park Zoo. We spent a lot of time in the East River parks. In recent years, there were so many playdates and birthday parties with her friends.

There was that sleepover she had with one of her best friends, Natalia, just a few weeks before this all happened. It the biggest deal ever for her. She sent her a video invite. She wrote out all these signs around the house. It’s all she talked about for a few weeks.

The event lived up to the billing. There were movies and baobing and dancing an dress-up and a lot of chaos coming from the kids room. The next morning Natalia’s dad came to pick her up. They had prepared a whole performance thing, and he was in a rush. But he sat down, and we all watched them do some kind of musical number. He still talks to me about how that tiny decision now carries so much meaning.

That silly little sleepover will remain one of the more significant moments in Samaya’s life. In her short memory and life, it mattered. It mattered so much.

Shelter-in-Place

When she was 6 months we moved to Stuytown / Peter Cooper Village and have lived there ever since. For those who don’t know, there’s a lot of green space in the complex. It was a life-saver during COVID. We’d sit right outside our apartment in a field, sometimes for hours on end. I remember hitting send on the Doordash piece while in a portable chair outside as John Jay and Samaya played. So many memories in Stuytown.

When Samaya was born, my startup, Informerly, was on its last legs. I had started consulting and had a pretty flexible schedule. Then the pandemic hit. I almost look at it as a blessing now, because it meant I got to spend so much more time with her. At the time, with two toddlers in a NYC apartment, it was certainly stressful, but looking back, I am so thankful for that time.

Samaya loved to cheer every night at 7pm for healthcare and essential workers. She’d remind us every evening a few minutes before. Remember that whole thing?

Spend Time With Them

Which brings me towards the end of this post. This has been the worst journey imaginable, but one of the few things that keeps me going is the memories. There are so many memories. We spent time. We laughed. We hugged. We danced. We sang. We read. We cooked. There were tantrums. I watched her start to grow up.

Make the memories. Keep making the memories.

I know things can get busy. I’m guessing most Margins’ readers are doing some important professional things. In the past three years, my work got a lot busier (those bras ain’t gonna sell themselves!) while Samaya’s school and friends’ life started taking more shape. It was less time together.

Make that effort. Focus on your kids. Pay attention. I’m not pretending I was ever perfect at this, and even as I’m writing this newsletter, John Jay is hovering around me. It’s not easy!

But for those moments, when you start to feel your focus being drawn away from your kids, when that phone notification or outstanding email starts to distract, maybe say “Samaya” in your head. Her name, after all, is connected to Buddhism meaning a sacred vow.

All you have are the moments and the memories.

Samaya’s Bench

We spread some of Samaya’s ashes in the East River right near our house. There’s a bench at the very end, around maybe 21st street. We call it Samaya’s Bench. It’s where Janie is sitting there on the far right with the black jacket, and if you follow me on Strava, you’ll see its where I always end my runs. I sit there and listen to our songs. I think about her. I remember her. I miss her.

The Samaya Fund

If you’ve made it this far, thank you.

Right after Samaya passed, we talked about starting a fund. My same coworker friend who had done the Funeral Google Sheets for me started working with our corporate lawyers, who took on the incorporation pro-bono.

There were a lot of conversations. With medical researchers and professionals, with other bereaved parents who had started similar things, and with people focused on healthcare innovation. It was quickly clear, this was not something to rush into. We needed to find something that we could genuinely see as relevant and important in the long-term.

Janie and I were connected with the NORSE Institute and an incredible woman named Nora Wang whose own son had passed years earlier. This was the only organization focused on NORSE (which FIRES is a subset of, you can read my layperson’s glossary here. There are a lot of acronyms.) Through the NORSE Institute, we’ve been connected to other families who have gone through the same thing. Those family Zoom sessions are probably the most therapeutic thing I’ve experienced so far. We will definitely continue working with this organization.

But in many of those early conversations, that exchange with the rheumatologist kept coming back to me. That’s when it was no longer just epilepsy. FIRES is one of the most extreme interactions of the immune and nervous systems, but we are just beginning to understand the connections between the two. Neuroimmunology only became a field a few decades ago. There have been major breakthroughs within the last decade changing how we think about these systems. Technology is helping us understand how these systems interact in completely new ways.

What started with Samaya’s journey is something I’m excited to work on for the years to come, and I’m sure you’ll be hearing a lot from me on this (yes, there will be a newsletter). Please learn more here at SamayaFund.org.

The prevailing narrative around the SVB collapse has been that it was just really bad risk management by the bank, and exacerbated by chatty and panicked VCs. The WSJ:

The culprit wasn’t the kind of exotic derivatives and risk-taking that doomed banks in the 2008 financial crisis. Rather, it was a mismatch between deposits and assets—the building blocks of the vanilla business of commercial banking.

The idea that this was simply borne out of errors in banking basics ignores just how unique the depositors in the SVB saga were, and why I think they should garner a bit more scrutiny.

So. Much. Money.

I’m sure most Margins readers have likely been following the SVB story. The threadbois and girls have been hard at work delivering us some great content, but let’s start with a quick refresher on how I think about money:

Maybe it's because I was an economics major or a currency trader, but I think of money as a living thing. Not as a sentient, conscious being, but more like one of those prehistoric, single-celled organisms. Or maybe sperm swimming towards an egg. Just millions and trillions of tiny little living things driven solely on biology towards some unforeseen source of nourishment; some instinctual goal.

Money moving around like an organism, hankering for more yield, was how I tried to make sense of a distorted economy. ZIRPsurdity helped me make sense of multi-million dollar monkey jpegs and 15 minute delivery and whatever else popped up, but I never thought it’d be a central character in the collapse of a bank that just bought a lot of treasuries.

This whole thing has been such a fascinating new wrinkle in the larger ZIRP tale. Over the past few years, SVB’s customer deposit growth graph looks like the fundraising graph for every late-stage, Tiger-funded startup:

All that new money being created needed a home, and SVB became that place. SVB more than tripled deposits between 2019 and Q1 2022, while the overall banking industry grew deposits by “only” 37 percent in the same period.

The amazing part is that it was so much money that SVB couldn’t even act like a normal bank and simply lend it out. Most of you know the next chapter: SVB invested it in supposedly safe long-dated US Treasuries and highly-rated mortgage-backed securities. That portfolio dropped in value as interest rates rose through 2022, which hurt SVB’s overall economics, which scared depositors. SVB depositors had already been withdrawing money, and then panicked and withdrew $42 billion in a day. The bank collapsed, the depositors were rescued, and here we are.

Et tu, Moral Hazard?

The general sentiment seems to be depositors were protected and that is good. “Investors”, or the bank's shareholders and management, were wiped out, and that is good. Even President Biden, in his speech on the bank rescue, said:

First, all customers who had deposits in these banks can rest assured — I want to — rest assured they’ll be protected and they’ll have access to their money as of today. That includes small businesses across the country that banked there and need to make payroll, pay their bills, and stay open for business.

and then more importantly:

Third, investors in the banks will not be protected. They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.

That narrative that an equity wipeout with a depositor guarantee would kill the fat-cats and save Everyday-Farmer-Payroll-Mom-and-Pop, was echoed by a guy who founded an $18 billion fund:

Even his newsletter-highness, Matt Levine, pushed the idea that the backbone of the banking system is the need for customers to not worry about deposits:

But I think the modern bank-regulatory view is that the point of a bank deposit is that you shouldn’t have to worry about it, and that it is a failure of bank regulation if depositors of any size have “to actually give a moment’s thought to the riskiness” of a bank. (Bank deposits are meant to be “information insensitive.”) There are vast areas of life where we don’t worry about moral hazard. We don’t say things like “the moral hazard of food safety regulation is that we’ve greatly reduced the incentive for consumers to give a moment’s thought to the riskiness of their supermarket’s supply chain.” That’s not a thing you’re supposed to think about!

But not all deposits are created equal. All the SVB problems come back to that monstrous deposit growth over the past few years. It’s what led to bad risk management, bank runs, and bailouts. That deposit growth, which was nearly 6x the industry average, was the direct result of the unique way SVB did business. This was, in turn, an important part of the engine that drove incredible wealth creation for its concentration of depositors.

SVB helped enrich depositors just as much as it did its shareholders. There have been headlines decrying how SVB executives sold $84 million in shares over the past two years. That’s not a great look, but that’s like one founder’s net worth after a solid late-stage Tiger round.

These depositors weren’t innocent bystanders.

Wine and Cringe

Let’s start here, because you need to spend your afternoon listening to Jason Calacanis talk about how SVB bankers would ply him with wine while giving him a personal mortgage:

It’s cringey, but it’s important.

I had heard murmurs about SVB giving founders and VCs preferential rates on mortgages in the past, but loved catching this slide (h/t deebosa) where they proudly advertise 14% of their loan book are in low LTV mortgages to “innovation economy influencers” (more cringe).

The WSJ additionally noted:

It (SVB) owned warrants in 3,234 companies, which gave the bank the right to buy shares in them. The bank also offered invitation-only mortgages to company founders and venture-capital executives.

Take a moment to recognize the interconnected nature of SVB buying shares in startups it counts as clients, while those startup founders can get personal loans from the bank. We’ll get back to this.

Venture debt is a unique market. Lending to startups that have unpredictable (if any) cash flows makes for difficult debt pricing, but SVB was very there for their clients:

Meanwhile some venture capital investors wonder where startups will be able to get such good terms, as SVB was known for providing more attractive loans compared with other lenders.

“It made no financial sense to go with anybody other than SVB, for sure” for their venture debt. This startup got an $8 million loan in total with certain parameters for drawing on it, at a 4% interest rate in late 2021, and said the next best interest rate they were offered while shopping around for their loan was 13%. “It was not even, like, a little bit better. It was way better.

Let’s add on how venture debt has been a quiet, vital cog in helping keep private market valuations inflated as many companies (and VCs) would rather startups take on high-interest debt versus issuing new equity and doing a down-round.

Let’s also add on, most of SVB’s loan business was capital-call lines of credit, which were lines that VCs could draw down to quickly fund an investment while waiting for their limited partner to eventually provide the committed capital:

The firm’s Silicon Valley Bank played an outsize role in financing funds that couldn’t access global investment banks. An under-the-radar market, the $1 trillion-dollar fund-financing industry provides leverage to fund managers to help them boost returns and grease dealmaking.

More than half of the bank’s $73.6 billion loan portfolio comprised fund financing, according to SVB’s most recent annual report. That came primarily in the form of subscription credit lines that funds could draw on to ease capital calls.

Subscription credit facilities have become a staple for private equity, allowing managers to make investments without having to repeatedly ask pensions and endowments to give up that cash. Silicon Valley Bank provided those loans to midsize firms, even as major lenders grew more cautious about issuing such debt and the financing became more expensive and harder to come by.

This is a very reasonable piece of banking infrastructure, but has been another vital cog in creating the environment where capital became “better, faster, and cheaper.” None of the late-stage craziness happens without this type of product.

Then you get into SVB investing directly into many of these top-tier VCs:

The unit manages $9.5 billion with stakes in many of Silicon Valley's top-tier venture firms, including Sequoia Capital, giving it indirect access to some of the tech industry’s most valuable startups, such as Stripe. Previously unreported documents show SVB Capital invested $234 million in Sequoia Capital through two SVB funds as of May 2022. The SVB unit also invested $173 million in Andreessen Horowitz funds through the two vehicles, which were raised in 2018 and 2021, along with $145 million in fintech-focused Ribbit Capital’s funds

There are just so many self-reinforcing variables at the micro and macro level that enriched SVB depositors in ways community or regional banks could never dream of.

A prominent VC partners with SVB and their capital call credit business to help speed up the pace of investing. SVB then invests in the VC’s new funds. SVB also might invest alongside the VC in various startups. Those VCs pressure potential investments to bank with SVB. SVB gives preferential mortgages to startup founders banking with them. I’m sure I’m missing other variables in this equation, but just think about the incredible accelerant for wealth creation among this concentration of clients that SVB played. There’s no way your typical SVB depositor generated as much wealth without the very unique structure of SVB’s business. Memestocks don’t happen without Robinhood, and the COVID-ZIRP manic tech boom doesn’t happen without SVB.

And as depositors got richer, and as tech valuations skyrocketed and companies IPO’ed, more and more money came into SVB. It was the magnitude of those deposits that set off the shitty risk management chain of events that got SVB into trouble. And the greatest irony of all is, it was the same depositors, who got disproportionately rich thanks to SVB and whose wealth was too much for SVB to handle, that brought down the bank by both withdrawing their own money and advising all their startups to as well.

WHY PANIC?

So about those innocent depositors.

When the news of the receivership broke, I’ll admit, I did have worries we’d enter a world of chaos where depositors wouldn’t have access to anything over 250k for months. Maybe the payroll fear was real. But all it took was a quicking Bing (yes, I used Bing, not Google. It’s happening.) of IndyMac and WaMu to remember that in bank failures, the regulators wind things down in an orderly manner and customers are always made almost whole.

What made things even more confusing about the apocalyptic screaming was old-fashioned math. That same $120 billion portfolio of treasuries and MBS that caused problems was so liquid that markets that regulators could sell them off in a matter of hours and probably not even move the markets by doing so. The $75 billion loan portfolio would take longer, but it wasn’t the end of the world. Yes, there would be realized losses, but this would not be utter chaos. Both Cats on Twitter and bankers from Jeffries seemed to agree:

Even Sheila Bair, who ran the FDIC from 2006 to 2011, noted that these companies would’ve received a sizable dividend per normal procedures (also calling the resolution a dangerous precedent):

Some start-ups that banked at SVB argued they needed their uninsured deposits to make payroll. But under the FDIC’s normal procedures, they should have received a sizeable dividend this week to help with their cash flow needs.

It would just take a basic understanding of banking history to know depositors would get enough cash right away to keep operating, and probably, at worst, take a minor haircut in the long run. But instead, the chaos monkeys were unleashed, and suddenly every the beneficiaries of the SVB machine were worried about the farmers, or this would be an extinction-level event for startups, or they were hearing rumors that foreign adversaries were going to spur contagion, or this was all JPow’s fault, and whatever else. I don’t discount the panic founders were feeling. I spoke with plenty of people who were genuinely convinced their businesses might fold on Monday or they’d have to furlough huge portions of their team because that’s what their investors told them.

Again, the probability of something like that happening was so small, why were the VC’s whipping everyone up into a frenzy? This is the part that still genuinely confuses me. The most generous explanation is they just continued getting each other worked up in private chats and convincing themselves the world would end. But I genuinely would give (many) of these investors a lot more credit than that.

The most ridiculous explanation was that these VCs were suddenly worried about layoffs and really cared about the consequences for the little guy (Note 1). The VCs certainly leaned into this one, after months of telling us how companies have gotten fat and need to cut like Elon.

Brad Gerstner, the Altimeter's founder, probably did it best. This was the guy who had written an open letter in October to Zuck for Meta to “get fit” as a company (it’s actually a great letter). His very last tweet before the SVB panic was calling Meta’s big layoff announcement Zuckerberg’s Steve-Jobs-back-to-Apple moment.

Then, for a few days, Gerstner pivoted to wanting to wipe out fat-cats, and worrying about the ex-McKinsey $5k butler startup’s employees.

Then, the very day after the rescue, he went back to tweeting about how Zuckerberg’s new layoff announcement should be an HBS case study in brilliance.

So what was it all about? This is something I’m genuinely curious to get a better understanding of. These VCs put their own companies and the public through a short spurt of hell. Why? Whatever the motivation for the freakout was, it’s certainly nice for the tech investment community that the odds of a Fed Fund 50bps hike have gone down by historical proportions since last Friday and risk assets are suddenly back in vogue.

What Now?

Where do we go from here? My one takeaway from sitting on a trading floor through the 2008 crisis is this stuff does not happen everything, everywhere, all at once (sorry!). This was another hiccup in a financial system that continues to unwind years of ZIRP-y buildup that has leveraged things in so many ways that hadn’t previously made headlines. As we all collectively watch for what’s next I’ll leave you with this from Christopher Leonard’s the Lords of Easy Money:

Now that the Fed had reshaped the financial markets, how could it ever withdraw its support? The world had reorganized itself in ways that would be painful to undo. “Think about it,” Hoenig said. “You had seven years of basically zero-interest rates. Now, what happens in an economic system over seven years? The entire market system develops a new equilibrium—around a zero rate. “An entire economic system. Around a zero rate. Not only in the U.S. but globally. It’s massive. Now, think of the adjustment process to a new equilibrium at a higher rate. Do you think it’s costless? Do you think that no one will suffer? Do you think there won’t be winners and losers? No way. You have taken your economy and your economic system and you’ve moved it to an artificially low zero rate. You’ve had people making investments on that basis, people not making investments on that basis, people speculating in new activities, people speculating on derivatives around that, and now you’re going to adjust it back? “Well, good luck. It isn’t going to be costless.”

Note 1: I love the “it’s all about the little guy” playbook. A quick recent hall-of-fame in this category would include Facebook’s “Speaking Up for Small Business” campaign and Doordash’s “A Neighborhood of Good”. Even TikTok just announced it’s fighting its proposed ban with a new docuseries about how it helps small businesses.,

I don’t talk about my work at Felt often on Margins but today marks a big day for us. Finally, we are removing our beta label and launching our 1.0 version. For those in the back, Felt is the best way to work with maps on the internet. I’ve written about why Felt needs to exist before, and things gotten even more dire since then.

But it’s not just our 1.0 launch today — March 2023 loosely marks the 2-year anniversary of Felt. So I thought it would be interesting to go through some of the fads / innovations / grifts that have come Felt’s way, one way or another, and talk about how I’ve personally thought about them. And just as I was writing this piece, I saw this amazing tweet by Tim Wu. Perfect way to write a piece! So, let’s go.

Metaverse

I love the metaverse. Or is it The Metaverse? Truth be told, I have spent a total of 20 minutes in the metaverse wearing a friend's Quest 2 headset. And of that 20 minutes, most of it was spent in the black-and-white see-through mode where you paint the safe zone in your room. Not even a game, and definitely not some magical universe. So, I don’t know much about VR, but AR is truly amazing! God knows how I’d have felt if Zuck had shown up with his dead eyes.

The main reason the metaverse has been good for Felt is how no one seems to like it other than Zuckerberg himself. In the past 2 years, I have talked to more people wanting to leave Facebook and pointing to Metaverse's general mediocrity and how top-down it’s been than any other reason since I’ve been in the tech industry.

Long-time readers know that a big chunk of my online persona is built around hating Facebok, but I have also long admired the Zuckerberg's ability to build a cult-like following among his wildly-talented yet morally-lost employees. Things have been going in the opposite direction in the Ideological Compliance department since Trump, sure, but the Metaverse seems to have uniquely broken the company's spirits. Anything that makes Facebook engineers easier to recruit is a good thing in my book.

Not that I think the idea of metaverse is dead. There’s something there. As I mentioned, the see-through functionality of the old Quest headset was compelling. Some games like Beat Saber are actually fun. And yet while VR is sweaty and gross as well being antisocial, a good AR experience can at least make it less awkward. Someone is going to make it work. I just don’t think it’s going to be Meta.

And really, on a more dystopian note, it seems like if someone found a way to actually overlay personalized ads on the last few photons that don’t originate from screens, it’d be a worthwhile investment. I think it’d suck, but someone will find a way to make a ton of people strap them on. God, I hate adtech.

Number of people who aren’t Zuckerberg who like the Metaverse: Less than 100

Number of people who are Zuckerberg: ??

Fad or Trend: Fad — but good for Felt

Crypto

This is an easy one — I don't get crypto. I have written a lot of words on it before, and most things have become stupider since then. But some things also gotten better; SBF is in handcuffs and being a crypto-skeptic does not immediately make you a persona non grata in the upper echelons of the technorati. Good thing Sequoia didn’t put their unhinged SBF hagiography on the blockchain since they already scrubbed it. Some people even removed .eth's from their Twitter usernames and they no longer lead conversations with how they too were an angel in Coinbase. Nature is healing. No one has asked for a FeltCoin.

Margins by Ranjan Roy and Can Duruk

Who is Web3 Really Good for?

Hi! Can here. Long time, no see! I started a company. It’s called Felt and it is about maps. And yes, we are hiring! Scroll to the end to learn more…

Read more

4 years ago · 33 likes · 4 comments · Can Duruk

NFTs, though, had become a talking point a few times. Since Felt allows you to make maps and share them, and our maps actually look like something you'd want to share, some have asked us about our NFT strategy. We don’t have one. Just like we don’t have a Mars strategy or a post-Zombie-apocalypse strategy. The good thing is since I have been pretty open about where I stand on all things crypto, I would simply grumble and roll my eyes and people get the message when this happens.

As I’ve said before, I have tried to like crypto more than a few times. The math is fascinating on its merits and anyone who’s interacted with the American financial system would be hard-pressed not to want to throw it all out and build it again, with better computers this time. Most importantly, I genuinely love the optimism of the entire scene; it warms my crotchety Turkish heart.

But I don’t see it becoming a thing. I keep an eye on a few projects like Blur and Solana and occasionally read their blog posts. They seem interesting, and maybe at some point the crypto industry will cross the chasm into the real world but so far, it feels like an ecosystem held up by an infusion of cash versus building anything of value. Felt is safe from crypto, and crypto is safe from Felt until further notice.

Number of words in Sequoia’s SBF memo: 13000

Number of words in Antoine de Saint-Exupéry’s Petit Prince: 15000

Fad or Trend: Fad — Felt doesn’t care

"A. I."

Look, there's no way to not be amazed by the work of OpenAI. Again, Margin fans know that Ranjan and I are often accused of being pessimists and seeing the bad in everything, but I love these newfangled generative AI tools. Maybe it’s that every time I post on Margins, I get a few emails about how there are so many typos and errors, and yet the god-damn ChatGPT never makes one. Or that it simply works, but even its creators cannot really make head or tails of why and how?

There’s a lot of bad in it, for sure. I have yet to make up my mind on whether the generative AI tools are essentially plagiarizing other people’s content without attribution, or that they are ideologically biased way or another. For starters, I think the entire industry would benefit from way more transparency. For example, we still don’t know exactly what GPT-3 or its successor GPT-4 is trained on.

But the bottom line is that this stuff works. People are already using ChatGPT with Felt. In fact, I have used OpenAI’s API a few times before ChatGPT came along to clean up some data. I gave the OpenAI Playground a list of country names and asked it to make a table with their ISO codes and it did. I could have written a script to do it, but I didn’t have to. In fact, two of the country names I put in had typos in it (see a pattern?) but the robot didn’t even budge. It. Just. Worked. What?

And I’m not even counting how half our engineers already use Github Copilot, which is powered by OpenAI, or how many times someone at work asked ChatGPT a technical question and was surprised by the answer. It just literally happened, once again, today. It’s there. My company’s product is already, somewhat, OpenAI-powered.

My real fear with the AI stuff isn’t really the AGI taking over the world, but the companies building them doing so. The amount of capital required to both build and maintain systems is so large that this stuff will become monopolized faster than we can imagine. OpenAI started as a non-profit, but they soon realized the only way to build what they wanted was to sell half the company to Microsoft, the world’s largest company. And, sure, Google and Facebook have their own competing models, which they can build because they are respectively the 4th and the 11th largest companies on the planet.

What’s a company like mine supposed to do? Productivity gains are a good thing, and the neoliberal in me wants to be excited, but what’s the end game here for the rest of us? I don’t have to think about that today, and I’ll happily use whatever API gets me to product-market fit faster. But the light at the end of the tunnel might very well be a freight train coming my way.

Microsoft’s Investment in OpenAI: $10B

Likelihood of AGI Killing us All: Greater than 0%, less than 100%

Fad or Trend: Trend — Good so far, until it kills us all

The real takeaway from the last 2 years of building Felt has been that most things that happen outside of Felt doesn’t matter. Trends come and go. Most fads disappear. Grifters grift, and hustlers hustle. We keep on chugging away more-or-less the same roadmap Sam and I wrote two years ago.

I am under no impression that Felt is successful, yet. But one thing we are good at is going fast, iterating quickly and maintaining a high quality bar. And I think a big reason we can do that is that we don’t allow ourselves to be (too) distracted. That requires an incredible amount of effort.

I always thought, naively, that focus came for free but it wasn’t obvious to me early on how not doing things you never said you’d do is something that requires work. Being still is not being passive. Being still, staying focused is another form of being active, and that requires disciplined effort.

I joke here and there but when the entire ecosystem is around you is talking about how VR is going to change the world one day, and then every engineer you want to hire is now working at a crypto company and is into Rust, and all of a sudden the world stops because ChatGPT came on — it’s hard to turn Twitter off and log off HN and ignore wide-eyed VCs. It’s not just the day to day distraction but maintaining that belief we need to work on what we work because it’s more important than anything else — that’s hard. And that requires effort.

But we do it! Now, go, tell your friends about Felt.

I have four Echo devices in my household. For years, we used them to control the lights in our apartment, created endless timers, asked for the weather thousands of times, and destroyed my Spotify algorithm as my kids learned to say “Alexa, play Baby Shark.” It’s gotten a bit ridiculous as we don't have any physical clocks in our house and regularly ask Alexa the time. Is this not quite on brand for someone who rants about topics like data privacy and Amazon's competitive stranglehold? Yeah, I know, but we're complicated here at Margins.

Over the past year there is one thing that has gotten progressively worse: annoying follow-up questions. An increasingly typical interaction:

"Alexa, what's the weather?"

"It's 41 degrees and cloudy. Did you know I can also create a shopping list for you?"

When looking around on how to stop it, there were hacks or temporary fixes from Amazon staff, but it seems Amazon made the strategic choice to make this part of the Alexa experience.

The other day was the final straw. Someone in my household made a request, and during the follow-on prompt, in a terrifying concert, my wife, my 3 and 6 year-olds, and me, all, in a tone that no parent should ever encourage for their kids, yelled, "Alexa, NO!!!!" This really happened and was probably the impetus I needed to write again 😀.

The Promise

Amazon debuted the Echo device on November 6th, 2014. I just went back through my Amazon history and saw I purchased the speaker in March 2016.

For those who feel we're sometimes overly critical about tech at Margins, this was probably my peak "tech-can-do-no-wrong" phase. As you can see from these early tweets, it was a time of pure fascination and excitement.

I became a full convert for the magic of Alexa after having my first kid in December 2016. Cradling a newborn and then being able to turn off the lights (I had a Philips Hue setup) while starting some white noise, all without putting down your kid was a genuinely emotional thing.

What made Alexa so special relative to its cousin Siri? A big part of the magic was just how fast it responded to your query. There was nothing more annoying than asking your iPhone something and just watching a squiggly line think and process. And think and process. And think and process.

It was cool to learn that was part of Bezos’s master plan. This April 2016 Business Insider piece talked about the invention of the Echo:

One major concern for Echo was latency, or the time it took for Alexa — the name of the talking virtual assistant that powers Echo — to respond to any query.

The average latency of existing voice-recognition technology at the time was around 2.5 to three seconds, so the Echo team initially set the goal at two seconds, according to an early team member.

But when the team presented its plan to Bezos, Amazon’s CEO countered with a much more ambitious target.

“I appreciate the work, but you don’t get to where it needs to be without a lot of pain,” Bezos told the team in a meeting, according to one early team member. “Let me give you the pain upfront: Your target for latency is one second.”

The team was “shell shocked” because even companies that worked on voice recognition for decades were only able to bring latency down to three seconds at the time. But at the same time, Bezos' directive also motivated the team to go for what seemed like an impossible goal.

I love this story. It's so perfectly tech in early 2016. Bezos getting his teams to do the impossible. Going to war on those seconds of latency would launch the next revolutionary new computing platform. As a content guy, I really believed it would open up a whole new world of interactive storytelling. We'd be querying data and getting lost in choose-your-own-adventure audiobooks and sending emails, all with our voice.

It's seven years later, and in many ways the Echo's ended up the "glorified clock radio" Benedict Evans called it in 2019. The difficult thing to reconcile is my family still uses it tens, if not hundreds, of times a day. It should not be a failure. But as Amazon just laid off thousands in the division, former employees call it a "a colossal failure of imagination," and "a wasted opportunity," and as no one talks about voice-as-a-platform anymore, it certainly feels like it is.

Et tu, Voice?

The Gartnerian hype cycle around the Echo and voice perfectly captures so much of tech in the 2010s. Big promises cut down simply because of how things worked at the time. Maybe our primary means of interacting with computers shouldn't be speaking to a computer, but I really would've thought that 12 years after the launch of Siri, the potential of voice would’ve been realized. Maybe my parents would be talking to computers as much as they typed, and at the least, I’d be talking to my Airpods more than I take out my phone while I walk around NYC.

Closed Off Ecosystems

I think there were four reasons that stunted the promise of voice: closed off ecosystems, overly ambitious proclamations, distorted monopolistic incentives, and of course, too much capital. The first culprit is best represented by Apple and the closed-off ecosystem it built around Siri. Thanks to its device stranglehold (which certainly has some benefits) it was allowed to let Siri continue to be the hot pile of garbage it continues to be.

With Siri, there are the little things, like preventing Spotify from being your default music player in order to keep pushing Apple Music. Calling up a song while walking or driving should be the most logical and simple use case for voice. Living partially in the Apple ecosystem, I still try things like quickly dictating a task to Asana and it somehow ends up trying to create a Reminder (and that's even having spent countless minutes trying to figure out Shortcuts).

For all the hype around AI, Siri still regularly confuses me asking it to "call Janie", my wife who I've called maybe 10,000 times in the past few years, with "Jennie Grouper", a girl I met once on a Grouper (anyone remember that?) date over a decade ago. Sure, I should clean that contact (I’m going to get in trouble for writing this), but after listening Eddy Cue spouting off the promise of Apple's AI while wearing his classic untucked shirt, I'd hope simple algorithmic logic would be able to solve this.

That’s my mini-Siri-rant, and I acknowledge Google and Amazon were better about building more open platforms. But each still built its voice platform to push its own peripheral services, often to the detriment of the user. Apple is the worst here, but the relatively closed nature of the overall voice ecosystem played a big role in kneecapping any transformative potential. Maybe, it's being overly optimistic, but imagine if some new company was solely focused on the voice platform, was able to integrate into androids and iPhones, and had its entire team focused on building seamless connections to other apps, services, and devices (Note 1). Imagine a world where you paid the company that delivered your voice platform and had customer service. I know, it’s crazy.

Let’s Change the World

Then there's the bigger issue - how the tech zeitgeist of the mid-2010s meant every innovation had to be an earth-shattering, wholly transformative thing that would change every facet of our lives. It wasn't enough to simply build the best 'glorified alarm clock' and then leverage that network into a larger computing promise. From day one, voice had to be the next platform. Instead of focusing on making the core use cases incredibly simple (smart home aficionados will know well the pain of trying to make basic things just work), Amazon had to sell us all on a new world where all commerce and computer interaction was via spoken word.

Adam Neumann is probably the most famous version of this - WeWork couldn't just be a real estate company. It had to be some utopian future of work. Uber is another good one - a few years ago Can, who worked at Uber a while ago, introduced me to a video they had released called Bits and Atoms:

Uber, which was at its core a better taxi company, had to connect the physical and digital world and completely transform the way people and things moved around. Self-driving cars would traverse the land, forever transforming logistics and travel. Even the nature of work could evolve as we rented out our cars to send packages and move other people. Or something. I remember when Can first showed me that video in 2019, I still thought it was kind of profound. When I go back and watch it, it feels just so perfectly 2016. And the sad part is Travis played it perfectly. His net worth of billions never would’ve come to be if he just told the world he was making better taxis.

ZIRP

Of course I'm going to go there: ZIRP played a huge role. Just think about every cycle we saw over the past decade. There would be some new technology like Blockchain, IoT, AI, VR, (and I'm sure I'm missing a few), and instantly everyone had to pretend it would change everything. All of these technological advancements could’ve been implemented gradually, finding product-market fit and building solid businesses from there. But instead, every startup in the space had to spout off big ideas to then be force-fed capital like a goose bred for foie gras. Then they’d never live up to their potential and be pushed into the trough of disillusionment. Startups that tried to grow responsibly would be blitzscaled into oblivion.

10x not 10%

Then you had the big tech companies. As each one sat comfortably on its own monopolized territory, gradual innovation simply didn't make any economic sense. If you're churning out profits, the incremental benefit from steady growth built on a new innovation would be a boring distraction. I still remember (and at the time buying into it) reading about the head of Google X saying that it was easier to create a 10x innovation than build a 10% improvement. People had to make statements like that because the 10% improvement would never get you the resources or promotions.

Voice couldn't simply be a cool feature that just gave you sports scores and told you the weather, and then evolve into something grander. Amazon is the flywheel king of losing money on certain things in order to build larger network effects, but it was mid-2010s blasphemy to simply have made money by…selling their speakers.

Alexa, what happened?

Now we enter a period where Amazon is laying off thousands and reportedly lost $3 billion in just the last quarter in its devices division. And those unprompted Alexa questions—I can’t describe just how dystopian they feel. As we try to normalize artificial interactions with human-like computers, having zero control over a device you’ve let into your home just so some product manager can juice their engagement KPIs is annoying and also kind of terrifying. Tech companies have to recognize just how powerless these interactions make the consumer feel.

Mobile and cloud, the two last great platform transformations, felt like they had organic evolutions. I waited 3 hours in line for the first iPhone and remember being excited to just pinch zoom and drink a fake beer. Cloud was the most boring thing that lived in the realm of HBR digital transformation articles and engineering forums. But these both realized the platform promise and changed the technological landscape in the ways every IoT or AR/VR is supposed to. Was it the constant 10% incremental improvement rather than the 10x rapid shift that allowed for this?

When I think about the degradation of voice computing, I really wonder how many other transformative technologies may have been beaten out of existence. It’s a powerful reminder that technological innovations, on their own, are not enough. The economic incentives underlying them, along with the user behaviors and prevailing attitudes projected on these technologies, all are vital to making a cool tech advancement become something much greater.

But I’ll end with a bit of optimism. As big tech companies pivot to efficiency, interest rates exist, and consumers demand better experiences, maybe, just maybe, things will make sense again and we can all enjoy the fruits of genuine technological innovation.

Until then, please, oh please, don’t ruin generative AI for me—that’ll be my next post, because I really, truly am bullish on the technology (Note 2).

Note 1: My co-host Can and I were talking and complaining about our respective smart-home setups. I’m trying to become a full HomeKit convert, and it’s astounding that little things like simply inviting your partner are broken (c’mon Apple!). But the Matter standard adds to my innovation optimism for the coming years. If anyone has any good pieces on how all these cutthroat companies finally got together to create a universal standard I’d love to read them. Maybe, just maybe, we’re at a point where the industry focus will move towards solving consumer pain points and creating widespread adoption.

Note 2: I am very excited about how generative AI could help advance voice computing. Processing a ton of information and generating one, kind of authoritative, conversational output is what this stuff is good at and should translate well for voice. I’ve been doing a lot of work in the space over the past 1.5 years and think there is tremendous potential—however, the other day I was visiting my parents and they were watching Kevin Roose on CNN and turned to me and asked “can you explain AI to me?” Please, oh please, don’t ruin generative AI people!

I don’t really cook often, but I do love making pasta aglio e olio. It’s a simple recipe that I discovered many years ago on YouTube. Yet, being the extremely irregular cook I am, I have to look up that simple recipe every once in a while. And every time I have to search for it, which is every six months or go, I feel like I have a worse experience on the internet than the last time. And by internet, I mean the Google monopoly.

I'm old enough to remember when Google came out, which makes me old enough to remember at least 20 different companies that touted as called Google-killers. I applaud every single one of them! A single American company operating as a bottleneck behind the world's information is a dangerous, and inefficient proposition and a big theme of the Margins is that monopolies are bad so it’s also on brand.

But for one reason and another, none of the Google competitors have seemed to capture the world's imagination.

Until now, that is. Yes, sorry, I’m talking about that AI bot.

So, is ChatGPT a real threat to Google search business?

Yes, but not for the reasons you might think.

First, a primer. ChatGPT is the latest gizmo from OpenAI, a formerly non-profit AI research company founded by many Sam Altman and a few others including Elon Musk. It's a bot built on GPT-3, a language model — or more specifically a Large Language Model (LLM). As the name suggests, these models are trained on huge troves of data, to the tune of terabytes in GPT-3’s case. Their main party trick has been, however, being able to generate (the G in GPT stands for Generative after all) eerily human-sounding responses to whatever question you answer.

And when I say whatever, I truly mean "whatever" — including things that have probably never been asked. Obviously, just like you can ask it to write a Haiku in Australian bogan slang, or you can also ask it to answer any questions you might have previously asked Google, such as the recipe for pasta aglio e olio. And lo-and-behold, while Google would probably send you to a page where you'd have to scroll down a short life-summary of the author, ChatGPT will happily give you an answer, straight to the point.

I mean, this has to be a threat to Google's business, no?

Probably not, or at least not on the demand side.

The Demand Side

There are a couple problems. While tools like ChatGPT are already very expensive to build (training these LLMs them requires beefy computers running for extended periods), they are even more expensive to run, at least compared to something like Google. According to Sam Altman, ChatGPT costs around a few cents per query. It's hard to find a direct comparison but Google search team measures their costs in cents per thousands (if not millions) of queries. The math will have to change by 100x, if not a few more zeroes, before they can be widely deployed and used. The constant scaling issues ChatGPT seems to be having is an indication of the operational challenges too. The Microsoft money will surely come in handy but the unit economics will have to change by technological innovation first.

The other problem for ChatGPT's wide adoption is that while LLMs are an incredible tool for extracting data from its training set, the models simply don't know about what they do or don't know — they simply don't have any theory of knowledge, or understanding of time with its ever-changing set of realities.

This sounds all navel-gazy, but what it means is that ChatGPT will very confidently make up an answer, and you'll have no way of knowing any better. It will tell you Ankara is the capital of Turkey if you ask for the capital but will also confirm that happily if you ask if Istanbul is the capital. For an incredible capable bot, it’s lack of understanding knowledge like we seem to do makes it fall spectacularly flat on its face at times.

And it's not like Google has been sitting on their hands with their money printing machine in the basement the entire time. They've invented parts of the field (specifically the T in GPT) and have been working on their own LLMs for a long time. If you look at the demos from PaLM, they'll look quite reminiscent of what ChatGPT can do. So where’s Google’s answer to ChatGPT then?

I am assuming the costs and the risk I've mentioned above has been what's been making Google keep its cards closer to its chest. OpenAI folks have been very responsible in how they've approached the field, but given their size and relative obscurity, they can act with a lot more freedom than Google.

So why do I think Google's business will be at risk?

The Supply Side

The first is that while the unit economics of using ChatGPT to extract and find information is not there, the economics of using it to create content (aka spam) is. Long-time Margins readers know that I consider "content" a bad word, and things will get much worse before they get better. The easier it is to generate content that is indistinguishable from spam, the it will be to get to the result you want.

If you think the recipe internet is bad now, wait till the entire internet is inundated with spammy sites that generate content for all combinations of words you can ever use. This is the internet Google created and the same internet GPT-3 is going to make a whole lot worse.

Even today, my inbox is full of companies who are ready to create content for my company using GPT-3 or whatever. I hate it! But what choice do I have if that's the only way to get in front of my customers? The content game on the internet is forever going to be altered with the cost of content generation dropping to fundamentally zero.

The second reason is more subtle, but is related to the first. Turns out most people are fine being lied to, as long as they get an answer to their query and move on with their lives. Sure, the recipe I get from ChatGPT might not be the most authentic but turns out neither was the one I got from YouTube. And I’m not sure most Americans would have been able to guess the capital of Turkey correctly either!

And more importantly, while GPT-3 is bad every once in a while, it is always free or at least very, very cheap compared to a live human. If you are concerned about getting a wrong answer, or need someone to verify its results, it’s still a whole lot cheaper and easier to get started with the AI tools than to hire a consultant to Google things for you and create slides you’ll ignore a week later?

And lastly tools like ChatGPT are much better at providing answers to a specific type of questions: things that are well structured (like recipes with ingredients and instructions) and that don't change too much over time. An aglio e olio recipe from 10 years ago is still the same today, and will probably the same 10 years from now.

Actually, it’s the User Experience Stupid

But, putting all that aside, the real reason Google is at risk that thanks to their monopoly position, the folks over at Mountain View have left their once-incredible search experience degenerate into a spam-ridden, SEO-fueled hellscape.

Yes, Google is still the best search engine for most things, but the fact that many people are comparing OpenAI's tech demo to Google's flagship product should be causing alarm bells to go off. For a long time, Google's claim to fame was to getting the users the answers they want faster than the competition. That doesn't hold true for many types of queries anymore. More than half the time, I have to add `site:reddit.com` to get anything that is not SEO spam.

And as my co-host Ranjan put it, with generative AI tools reducing the cost of a website to just the hosting bit since the content is free to generate, we are going to see Google search results get a lot worse before they get better. And he works in content, so he should know!

I don’t want to sound all doom and gloom. If generative AI tools make the internet a worse place for a bit, that will only be because we are used to a certain type of internet that is taxed by big tech and subsidized by ads. If we are inundated with even more spam, and our search result become even more useless, it’ll only mean that we should move past those business models. I am glad OpenAI is held up as a real challenger to Google. The king is dead. I wholeheartedly welcome our new AI overlords.

Some of you might know that I actually started a mapping company almost two years ago now, first announced on this newsletter. It’s still going! And we are hiring, especially engineering managers. We are good people, I promise!

If you follow Can or me, you probably have a sense of where we stand on crypto (not exactly bullish). My longtime gripe has been a lack of normie utility for crypto, while Can questioned the technology underlying Web3 (Note 1). Overall, I keep my skepticism at an arm’s length as there are a lot of people I consider very smart working in the space and I have to give some credit that maybe something will come out of it.

But FTX. The more I read, the more my head spins and the more I keep asking myself: how did they manage to lose so much money?

They’ve lost all sorts of money. Billions of real-life fiat money. Money they made up. Money others made up. The very origin story of SBF is one of Kimchi Premiums and Japan arbitrage. You all know how much I love the idea of arbitrage, but arbitrage is supposed to be free money. The whole story gets even more confusing because the corrupt relationship between Alameda and FTX should’ve given them an additional unfair edge at making even more riskless money. They shouldn’t lose money.

One thing I am familiar with is market-making in illiquid instruments (if you’ve been a longtime Margins reader, you might remember me getting run over by the Dong). It’s important for people to understand the dynamics of creating liquidity in illiquid financial products to properly comprehend just how crazy it is for SBF to have lost all that money.

Market-Making 101

As an emerging market currency derivatives market-maker (that’s a mouthful) we’d regularly have to ‘make a price’ on currency products where almost no one was participating. To take my Dong debacle as an example:

• The Vietnamese Dong (VND) is not easily convertible across borders.

• To remedy this, there are financial derivative products where there is a contract that has a settlement price based on some agreed-upon indicator of the actual currency.

• The first layer of understanding is a basic futures contract. In plain English, the two counterparties could agree that one month from now one of us would buy $1 million USD worth of VND at 25,000 and the other would sell. If USDVND is at 20,000 on the settlement time, the owner of the contract is down about $200k and the seller is up $200k.

That’s what happens when you own a typical futures contract, but things get more complicated as the market-maker.

• That’s because as a market-maker you’re typically having to make a price, meaning you show a bid and an offer at the same time. The distance between the two prices is called the spread.

• Apologies if this sounds a bit 101-y, especially for financial types, but stay with me and I promise we’ll get back to SBF.

• As the market-maker, you don’t know if you’ll end up long or short the contract, and the spread is both your source of profit and your cushion for risk. The wider it is, the more comfort it’ll give you in trying to offload the risk without losing money, and hopefully making some along the way.

The game, and honestly it’s a beautiful one, is different banks will compete on how ‘tight’ the spreads they make are, meaning the smallest distance between the bid and the offer. If you show a spread the customer likes, they’ll deal and then, as the market-maker, you’re sitting on some risk. In the case of my Dong disaster, we were trying to get more business out of a huge hedge fund, so I had to show a tight spread on an amount much bigger than the typical trading volume of the product. I ended up long a bunch of Dong.

In a perfect world, the market-maker makes the price, gets dealt by the customer, and goes back into the market and offloads the risk. In a liquid market, I could sell someone else my Dong right away and make a little money from the spread. But this was not a liquid market and there weren’t other buyers and sellers. At that point you get stuck with the position and pray the Dong rises.

It gets even more complicated because, even if your derivatives contract settles in a few months, you’re marked-to-market every day. There was a whole risk department that tried to get an accurate understanding of what your daily change in profit & loss might be. In illiquid products, the whole daily revaluation thing really was more art than science (Note 2), but your entire survival as a market-maker is properly understanding the risk that’s sitting on your books.

Screwed

A few days after getting stuck with the position, the indicated price of the Dong started collapsing after not moving for a month. It gets even more complicated because of how that daily revaluation took place.

• Every day some number of banks would tell a central entity where they thought the market should be, and there was an official rate published.

• Typically these indications were fine as you’d have a lot of players giving their indication (though there’s plenty of controversy around this process). Because the USDVND market was so tiny, it was only two banks who were asked every day.

• In this case the grift could be pretty simple - the hedge fund I had to make the price for needed one or two friends at these banks to throw in a low indication. They all knew I’d get stuck and have to close out the position.

• Then the original hedge fund seller could work with one of those banks to quote me a much lower price and get to close out their short at a much lower price.

I know to the average human who lives in the normal-people world this might all sound absurd. It’s just so shady and corrupt, but I wasn’t angry a few years later when I found out that’s what likely happened. The emerging FX market was so wild west-y I’d even guess that’s not illegal. It was just a game where the more information and control over the market you had, the more you could screw others and make easy money.

Back to FTX

Okay, why did I just tell (and partially re-tell) you this long Dong deal in a piece about FTX? It’s because FTX was famous for making markets in anything and bragged about showing the tightest spreads in everything. FTX would quote tight markets in “Shitcoin Index Perpetual Futures.”

My hope is that the financial normies reading this get a bit more understanding of the dynamics involved with making markets in an illiquid product that are controlled by a few players who have an informational edge.

And that’s where I get more confused about how SBF lost so much money. The Alameda-FTX connection should’ve done the opposite. FTX could be the exchange promising Insane Financial Product™ and Alameda could make the market on FTX for Insane Financial Product™. Alameda could also be the hedge fund that went directionally long or short Insane Financial Product™. There were so many corrupt ways to make money.

One of the simplest things for Alameda, the directional hedge fund, to do was front-run. They did, in fact, do things like buy up tokens before they were listed on FTX, knowing the price would skyrocket right after. That’s such easy money.

But it’s not just token listings. FTX, the exchange, would have all the data on other market makers and what they were doing and what their orders were. When I had to quote the Vietnam trade, I had no idea whether I’d end up long or short Dong. I had no clear picture of what the other players were doing. I had no relationship with the central entity publishing the daily fix rate that everything was marked on.

To have that kind of information should’ve been literal gold for Alameda and FTX. Alameda, the market-maker could run over every other market-maker on FTX. Alameda, the hedge fund, could take directional bets knowing every buy and sell order on the platform. FTX, the exchange, would explode in trading volume.

And then you get into the retail gravy. You have Tom Brady and Gisele convincing the world to jump onto your platform and trade Insane Financial Product™. You’re Robinhood and Citadel at the same time. They could fleece retail.

Basic Blow-Ups

Getting screwed by the Dong in 2007 makes me feel old for just how analog the whole process was. If all the promise of machine learning whizbangery was true, the FTX-Alameda corruption was set up to be a magical money machine. The markets they were playing were being invented in near real-time without any regulation, they controlled all the levers for how those markets should move, and they were theoretically doing it at scale with unimaginable speed and precision. That’s what keeps making it more confusing how they ended up losing so much money.

But the first very clear thing that has come out has been, for all the quantitative-big-data-MIT-game-theory-talks-with-Tyler-Cowen, this was, at least partially, a tale as old as trading time.

The two best pieces I’ve read on what likely happened were Sadly, FTX and What Happened at Alameda Research. They lay out in (comprehensive) detail how Alameda basically sold as a highly complex, quantitative thing that could execute infinite trades in real-time to profit from minute market inefficiencies, but were really just going long Doge.

No, seriously, Alameda’s former CEO actually bragged about buying Doge after Elon tweeted about it as a trading strategy:

…..in a thread about their trading superpowers where he openly says they switched to just going long stuff:

This explanation feels almost depressingly basic, but I’m sure it certainly played a part in their downfall. They were just levered long crypto-everything and got caught. But I do think there’s a bit more to the story.

Master Plan Sam

Ben Hunt at Epsilon Theory has a more ‘master plan’-ish theory of what SBF was up to. As the Alameda-FTX empire became increasingly levered, the goal shifted into amassing as many crypto assets as possible. The whole SBF loves Regulators bit was an effort to get regulatory approval to clear his own trades. The piece does a great job mapping out how all the various entities could work together to bypass regulations, help hide losses, and become a classic Madoff-like ponzi scheme where new money came in to hide earlier losses. This seems like the clear second part of the story.

I’ll take this one step further, and it’s why I told you the whole Dong diatribe. Maybe the original plan was to let Alameda get run over left and right as a market-maker. They’d make markets in every imaginable Insane Financial Product™ and give the tightest spreads. Remember, the very reason our bank wanted me to make a market in the Dong was because the hedge fund asking was a big client that dealt in all sorts of asset classes in size. You might lose a bit of money up front, but you’d grow volume and make it up in the end.

Maybe a chunk of the billions lost was to other crypto players who took advantage of this, but FTX, the exchange, could keep growing and keep raising money at outsized valuations. In the end, it’d be a source of real USD into SBF’s accounts.

Letting Alameda take the hit to juice FTX volume is not an unreasonable idea, especially given the ZIRPsanity of the time. Any edge Alameda had (how real was any of it?) was probably eroding, and maybe SBF was smart enough to realize long Doge positions weren’t the answer. Building up FTX into the world’s second biggest exchange meant he could convince real institutions to give him real-life dollars at absurd valuations. This would have the flywheel effect of giving him billions in paper net worth, which would bring in magazine covers and more real cash through more real fundraising.

And that is real cash you can basically steal. You can’t buy 19 properties worth $121 million with your parents in the Bahamas with Serum, but you can with cash from a teacher’s pension fund. You can’t use FTT to spend $100k a week on catering that you threw away. You can’t buy Robinhood or Twitter shares or become one of the biggest political donors in the country or invest $500 million back into the VCs who invested in you with shitcoins. I mean, SBF openly cashed out $300 million in their last fundraise (yes, the one where they raised $420.69 million…AYFKM 🤯!)

And that’s kind of where I am at the moment. I’m actually trying to give SBF some criminal mastermind, master plan credit. I cannot believe the whole FTX fiasco was simply mismanaged risk that got hit by a crypto winter and a CZ tweet. It was not just a bank run. SBF’s original sin was the FTX and Alameda relationship, and when you bring this insanely corrupt exchange-brokerage-market-maker-fund structure all together, the only crime should’ve been making too much money (Note 3). This feels less like a ponzi scheme and more like outright theft where their cash VC funding turned into a personal bank account, and it’s not more complicated than that. Even if your directional hedge fund is making a lot of really bad trades and even if your exchange is really bad at evaluating your customer risk and even if your brokerage is really bad at allowing for margin and even if your market-maker is really bad at making prices, when you have control over all of them in markets that you control…how do you lose all that money? It still doesn’t add up, at all.

Note 1: I’m not eternally anti-crypto and found a pre-margins 2018 piece of mine where I was feeling bullish crypto as a utility. It covered a ERC72 betting experience focused on the World Cup. Go USMNT!

Note 2: As more comes out about how absurdly lacking any risk controls were in the SBF empire, it reminded me just how important the risk controls at trading desks were. Our head of risk, every day, ordered the same Chicken and Broccoli lunch special from the same Chinese restaurant because “he knew what he was getting and it was good value.” I think that’s exactly who you want managing your risk.

Note 3: Can you think of any famous financiers who are successful examples of making crazy money thanks to an “insanely corrupt exchange-brokerage-market-maker-fund structure” 😀?

I’m sure most Margins readers have heard of the Chinese ecommerce juggernaut Shein (I’d be more curious how many have actually shopped on the site). For the uninitiated, Shein is a Chinese ecommerce site that receives accolades like being the “world’s largest online retailer” and the “3rd most valuable private company”. It clocked an estimated $16 billion in revenue in 2021 (for reference, H&M is ~$25bn and Zara is ~$28bn), and what’s more notable is its growth. Shein’s revenue was up 250% to $10 billion in 2020, and another 60% to $16 billion in 2021. Yes, they certainly benefited from the whole “10 years in 3 months” ecommerce acceleration during the height of the pandemic, but going from very solid online retailer to absolute global juggernaut is worth us exploring a bit more.

Shein Haul

In early 2020 I learned about the idea of a #ShenHaul and started following the rising TikTok trend of (mostly) younger consumers making a show of dumping out a big box of clothing and bragging about how much random stuff they got for the price.

@jodi.opudaI got 91 items total so stay tuned for all the parts:) #shein #sheinhaul

Tiktok failed to load.

Enable 3rd party cookies or use another browser

I enjoyed the absurd juxtaposition of always reading how consumers want to be more sustainable (Note 1), while watching these consumers celebrate clothing as essentially trash. However, I was much more intrigued by how Shein sold clothes that cheaply.

Learning More

There was barely any info out there in early 2020, and it kind of felt like the early 2010s when I was desperate to learn more about Bytedance and Toutiao (more on this later). Shein was and continues to be a mystery. The founder was apparently an SEO marketing specialist who started a wedding dress company in 2011 called SheInside 🤢🤢. The company was renamed Shein in 2015 (Note 2).

By mid-2020, as the pandemic grew, I heard more and more about people purchasing off the site, but the only press coverage remained mini-controversies like swastika necklaces or decorative Muslim prayer rugs. There was still zero business coverage (this Oct 2020 reuters piece is the earliest I have in my readwise), but a lot of people within ecommerce and tech started talking about the company more, and the pesky TikTok algorithm kept feeding me more #sheinhauls.

By early 2021, Lil Nas X and Katy Perry promoted the brand and Shein was dominating social media globally. Packy McCormick’s The TikTok of Ecommerce was one of the first comprehensive pieces I read on the company. He has a section titled Why You’ve Never Heard of Shein where he outlines how meticulous the company was about hiding its country of origin:

Shein describes itself as an “international B2C fast fashion e-commerce platform” with business in more than 220 countries and regions around the world. Nothing Matthew could find on their official website, app or social media accounts references the company’s Chinese origins. In fact, the company is so serious about hiding its Chinese roots that it voluntarily claimed to be from New Jersey. Previously, the About page of Shein’s official website said the company began as “a small group of passionate fashion loving individuals in North Brunswick, New Jersey.” This has since been removed.

Shein’s otherwise detailed shipping status updates use generic terms such as “source country” and “port of departure,” avoiding reference to Guangzhou or Hong Kong. The company’s logo, branding and products are indistinguishable in their professionalism and quality from global industry peers.

Thus far, it’s worked. American politicians and media have been asleep at the wheel. It’s missing from apparel brand rankings . Run a search for “Shein” on the New York Times site--nothing. Wall Street Journal--nothing. But Shein’s still running ads against those searches.

He also started to answer that question of how they make the clothes so cheaply - introducing the concept of “real-time fashion” as a modern successor to fast-fashion (Note 3). What Zara and H&M did in the 1990s, Shein was doing in the 2020s.

There’s a vivid picture painted of how Shein leverages an increasing amount of preference and purchase data to make small batches of items to test, and rapidly scale up winners. They supposedly digitized hundreds of factories with their proprietary supply-chain management software to build an integrated testing-and-scaling manufacturing and commerce powerhouse.

They also started raising a lot of money. In 2015, they raised a $50mm Series B, which jumped to a 500mm Series D in 2019 from Tiger and Sequoia China (I couldn’t find anything on the amount of their Series C).

That funding exploded, alongside their growth, through the pandemic, and the whole business world heard of Shein after their massive April 2022 $1.5bn round that valued the company at $100bn.

In some ways this all seems reasonable. You have a company that, over many years, innovated in a somewhat antiquated sector (Chinese manufacturing) to create a new way of doing things (inventory management and apparel production) to deliver a cheaper, faster product. They spent years perfecting this while growing steadily, and then when the pandemic hit and they were perfectly positioned. It also dovetails perfectly with my favorite topic of the explosion of late-stage private funding.

But there’s still so much of it that remains a mystery to me, and it’s not just me. It seems every piece on the company references it as an enigma, or mysterious, or secretive, or some variant of that famous Churchill riddle wrapped in an engima quote.

And when a mysterious, secretive, enigmatic company upends decades-old incumbents to become a global category leader in the span of a few years, there’s got to be more to the story, right?

Cross-Border Arbitrage

The real-time fashion, supply chain revolution explanation is a good start, but this June 2021 Bloomberg piece puts more of the pieces together. It references and reinforces the idea of real-time fashion as an enabler, but introduces a fascinating new element: Trump’s Trade War. Because Shein sells directly to the American consumer, and virtually all individual orders are less than $800, it was already exempt from paying any duties. The piece details how, in 2018, as Trump launched his tariffs, China waived its export taxes for domestic direct-to-consumer companies in retaliation, and Shein, along with other Chinese ecommerce companies that sold DTC, found themselves in the enviable competitive position of not paying import or export taxes. In the most Trumpian of ironies, his actions helped spark a 67% increase in Chinese online retail exports in 2018.

Between supply chain innovation and the tax loopholes, it makes a lot of sense how they could undercut everyone on price. But what about the growth? How did they convince millions of American consumers to overcome the age-old reticence of buying “cheap Chinese” stuff to celebrating boxes full of cheap Chinese stuff.

Enter TikTok

Another Chinese tech giant that exploded in the past few years is TikTok. As TikTok, fueled by billions in acquisition ad spending, skyrocketed its influence on the global population, Shein became a master of the platform to generate its own growth. Right now the hashtag #shein has 39.7 billion views and #sheinhaul has 6.7 billion views. You see headlines like **TikTok Fashion Favorite Shein Considers a Big Step or **Shein's success through TikTok's hauls.

I don’t think we should separate these two things.

To caveat, Shein was early and masterful in influencer marketing, and the company has built a vast presence on other channels like Instagram and Youtube. Packy’s piece points out:

Shein was one of the first apparel companies to use social media influencers as early as 2011. They were one of the first early adopters of Pinterest, which became their top source of traffic during 2013-2014. Even more recently, Shein was early to TikTok  marketing, becoming the most talked about brand on TikTok in 2020.

You have a brand that was well positioned to dominate in the influencer space, that perfectly captured the TikTok algorithm to mysteriously become as big as multi-decade retailers in a few years.

Two companies, perfectly poised for global domination. TikTok’s short-form video and contextual algorithm coupled with Shein’s revolutionary manufacturing prowess and influencer know-how. The two companies even share some major investors. As Margins contributor Adam Connor laid out in June 2020, TikTok had begun an advertising blitzkrieg in 2018:

We do know that armed with cash, ByteDance undertook an advertising campaign that was reported by the Wall Street Journal to be more than $1 billion dollars in 2018. That breaks down to nearly $3 million dollars in advertising daily. This included nearly $300 million on Google advertisements for TikTok in 2018. There were so many ads that you could find threads on Reddit and other places on how to get rid of the TikTok ads users were seeing (and a lot of offline ads too).

As TikTok was buying its way into American headspace, all it’d take was a tiny tweak in favoring the Shein hashtag to propel the company to global domination. TikTok is also built on a non-follower-based algorithm, meaning anyone who posted the Shein hashtag could be rewarded with virality, incentivizing them to post about Shein even more. TikTok users were being presented with this new, insanely cheap shopping experience. Everyone wins. It’d be such a simple, clean partnership.

The Tech Cold War

I don’t write this in an accusatory manner. This is Partnerships 101 and I’d almost be disappointed if this somehow was all magically organic. However, I do think this is important because of the conversation around the US and China “tech cold war.” In May 2019, I wrote about TikTok:

I still can't believe its not a bigger story that a Chinese-owned app is quietly taking over the American market. I'm very curious to see what level of American headspace will have to be occupied by TikTok before it ends up on CFIUS's radar. Maybe their members just haven't downloaded it yet.

TikTok is certainly top of mind now for U.S. policymakers, but we’re oddly only focused on whether the user data resides on Chinese servers (Shoshana Wodinsky has done great writing on the absurdity of focusing on where the data lives, though I disagree that it does matter who owns TikTok). I’m more interested in the idea that a black-box algorithm that has come to create and define American culture is built and controlled by a Chinese company (go read this Ryan Broderick piece on how TikTok is where culture begins now). I’m even more interested if that algorithm is silently able to bring along another national champion for the ride.

The policy conversation tends to focus on data, microchips, AI, biotech, quantum computing and other sensitive industries. I think we need a renewed focus on how a few very opaque Chinese companies have (we don’t know anything about the Shein CEO!), in the span of a few years, come to control a much greater percentage of our culture. Shein needs to be included in this conversation - it’s quietly and completely changing consumer expectations around commerce. Dumping out a box of clothing because it’s so damn cheap still blows my mind!

We need to explore how these companies built off each other—TikTok propelled Shein—and what that means for the Tech Cold War. I write this cautiously because I know one can easily attribute a xenophobic undertone, but I genuinely believe the ‘tech cold war’ will be one of the more geopolitical stories of this decade. This stuff is important and it’s not going to just be about who controls the highly sophisticated computing industries. Commerce is another front in the tech cold war that hasn’t really been in the conversation yet, and it should be.

#TemuInfluencer

One last fun part of this story: Pinduoduo quietly launched their own U.S. presence with the site Temu.

In exploring this piece, I bought a bunch of stuff on Temu just to see how it worked. Maybe I’ve just become one of the first American Temu influencers:

@asaramis#temuhaul #temu

Tiktok failed to load.

Enable 3rd party cookies or use another browser

Note 1: There are endless studies where you see “Gen Z wants to buy sustainable products.” My favorite research remains this McKinsey / Business of Fashion 2019 report that defines the “woke consumer” in this dry, analytical, consultant-y way:

Signs of this evolving agenda can be found beyond consumer sentiment too. Fashion companies are showing signs of getting “woke” (a phrase defined as “alert to injustice in society,” popularised on social media). For example, based on a “data scrape” of over 2,000 fashion retailers, the appearance of the word “feminist” on homepages and newsletters increased by a factor of more than five from 2016 to 2018.

Note 2: This press release where Shein announced it’s rebrand from the name SheInside is one of the oddest things I’ve ever read. It’s still wild to think this is how one of the biggest retailers in the world was communicating a major rebrand just a few years ago:

Before changing the brand name, Sheinside held a worldwide slogan competition and after half a month voting and selecting, the winning slogan emerged. "She In, Shine Out" is exactly the embodiment of SheIn. This wide-range of activity has sparked heated participation and it is also regarded as warm up of brand name changing. Compared to the prior brand name, SheIn is easily recognized and remembered. It also fits in with the company's corporate culture. "She wants in your heart rather than just to be by your side."

Note 3: I think we can credit Packy with the term real-time fashion? I looked around and couldn’t find it anywhere earlier.

It’s also (mostly) why I haven’t been on Margins lately. Ranjan has been on a tear the past few months, so maybe you haven’t even noticed. I don’t blame you. He’s carried the torch with gusto, even occasionally one-upping my risqué Twitter game. But finally, I’ve got something to share with y’all too! Been a while.

Long before “creator economy” entered my lexicon and ruined me forever, I loved creating things. Learning my first programming language (VBScript) predates my first foreign language (English) just so that I could create a website and share it with others. And some of those websites from 23 years ago are still implausibly up?!

Mind you, making a website in the 90s was not for the faint of heart. Even the simplest tasks required an alphabet soup of technologies one had to master. You had to line up your HTMLs with the right CSSes, organize them all in PHPs and FTP them all into the right CGI-BINs, all hooked up to the right SQLs.

Things have changed quite a bit since then — for everything. Almost all creative formats, all the way from text with Google Docs to videos with Frame.io, have gone through two important forms of transformation.

First, the tools themselves have become much more accessible, both in terms of cost and ease of use. There’s no longer downloading, let alone installing software. Developers complain about how making a website is an arduous task now with the maddening complexity in the JavaScript ecosystem but trust me; I’d take Squarespace over CuteFTP or Geocities’ neighborhoods UI anytime.

Secondly, the creations themselves have also moved to the cloud. Not only that there is no more software, there are no more files either. All the complexity of not just creating, but sharing have been eliminated behind a simple idea: everything is just a URL. All you need is a URL, a pointer that you can copy-paste, share, store, embed into a QR code, and the computer does the rest.

The combination of those two ideas is extremely powerful. A Figma document is not just a Photoshop file in the cloud, but also the Figma editor bundled with it. This is the true promise of the World Wide Web coming to fruition. The web was never meant to be a read-only medium; that’s why the first browsers came with the editor also built in. But we are getting there.

Yet, one format has resisted both of these transformations: maps. For all their richness, history, depth, potential to not just inspire but also help solve problems, creating and collaborating a map today is not much easier than it was in the 90s. In most ways, it’s probably much harder. And that’s a shame, especially when the world needs more people collaborating on global problems today than ever. That is the problem Felt is aiming to solve. Felt wants to make maps a native citizen of the internet. 

Putting Maps, well, on the Map

We want the same person who would be interested in learning SQL to make a website, to be able to make a map that’d help them plan out their trip without having to learn about SRIDs. Just like no one asks a non-programmer about tabs versus spaces, no one should be bothered to pick between LatLon or LonLat to make a map. Felt is not just a tool for people who make maps today; it is a tool for people who couldn’t make them until now.

It is a bit of a mystery to me why this field is so barren for consumer grade, amazingly easy to use products. I do not say with the intention of diminishing the work of tens of thousands of incredibly smart, talented, and curiously charming people. The GIS software is complex because the world is. But therein lies the Borgesian paradox: it should not have been. The software should have been simpler than the world it tries to model and operate in.

We wanted to strip away as much of the incidental complexity by making decisions where we can. We knew we’d be making some people unhappy along the way, but we think the trade-off is worth it. For example, that is why Felt works in a single projection system, Web Mercator, for now. This might be anathema to many people in the field, but also the way most people look at maps. 

Similarly, we removed many features and options from our tools along the way. The cognitive load of a user-interface increases exponentially, not linearly with the number of features you add. We might have made the wrong call on some of them, but a canvas is a much easier place to start draw on than a smorgasbord. 

And equally important, we wanted our maps to be nothing more than a URL; there are no files (or combination of files that you have to carefully zip) in Felt. There’s a URL, and with the URL comes everything you need from all the world-class data we have to all the other types of content attached to the map like pictures, videos, and links. You copy and paste a URL in your browser and it just works, like it should have all along.

Building a Building

Deciding to build map-making software has been the scariest thing I’ve done so far. I’ve spent countless nights reading documentation on arcane and mysterious subjects to understand the most minuscule detail, and often wondered if one day it’d all click. Much to my surprise and co-founder Sam’s delight, it did. 

And it’s been the most fun thing too: maps are just fun and seeing what was once a blank slate, literally nothing more than a barren UI with blue for water and yellow for land, turn into a world-class software has been breathtaking.

Yet, no amount of fun and fear of building Felt, The Product, can compare the sheer satisfaction of building Felt, The People. It’s easy to wax poetic about the kind of software my co-founder and I wanted to build all along, but none of this would have been possible without the people we’ve been able to recruit. What I can take credit for is giving people the motivation to surprise themselves with what they can do. Thank you, each and every one of you.

I do not come from a land of eternal optimists, as some at Felt like to point out. And today of all days, naturally, I am scared of what might happen as we launch Felt into the world. I worry about it getting abused, and of course it being ignored. But the real scary part is how much more there is to be built. 

How many more mapmakers can we enable if we do a couple more things right? How much more friction can we eliminate between what people want to do and what our tools can do for them? How many more maps would it take before someone solves the next crisis plaguing their town, or what parts of the world would benefit from us tightening the screws even more? What would it take to put maps, well, on the map?

I don’t remember the last time I was this excited, nor this scared. There we go.

Felt. The best way to make maps on the internet.

PS: The Felt <> Margins connection cuts deep. The way we’ve got connected to our investors at Footwork was through Nikhil responding to one of my Margins posts. In my infinite wisdom, however, I’ve managed to ignore miss him sliding into my DMs on Twitter. But things clearly worked out. The lessons I took away are 1) write more Margins posts (Hi Ranjan!) 2) keep acting coy on Twitter to VCs.

PPS: Felt is hiring!

It’s becoming more clear there will be many more tides washed out and emperors de-robed in the coming months. I’m convinced some of the most intriguing stories yet to be written will come out of the world of Tiger-style late-stage private startup funding (not that there’s any shortage of interesting in the markets right now). The style is often called hedge-fund crossover investing as it’s traditionally public market investors crossing over into private markets. For shorthand I’ll refer to it as HFC investing.

The Tiger

I’m sure most Margins readers are somewhat familiar with the Tiger Global HFC strategy. If you haven’t already, I’d recommend The Generalist’s Tiger Global: How to Win or Everett Randle’s Playing Different Games to get a better picture. Both pieces dive into how Tiger Global developed a Softbank-ian strategy of throwing more money, at a faster speed, while being insensitive to price. Randle used some great descriptors like “Better/Faster/Cheaper Capital” and “Maximum Deployment Velocity”.

Tiger could move faster by outsourcing deal diligence to Bain consultants. They would pay well above asking prices to quickly win deals. They wouldn’t ask for board seats or get overly involved in a startup’s strategic direction.

The scale of this became crazy as Tiger became the most active private-market investor around in 2021 (and remained the ‘spendiest’ in Q1 2022):

In 2021, the investment firm backed 335 deals — up 324% from 2020’s 79, and more than any other investor globally. That equates to 1.3 deals per business day.

Everyone talks about the speed and size, but just as interesting to me is the group dynamic often pursued with the HFC style. In a lot of these rounds, you’d see the same usual suspects teaming up to pour money into a late-stage startup. I’ll call this the a hotel party round, to clumsily combine the public market term hedge fund hotel (where hedge funds crowd into a trade together) with the classic venture term of party round (where everyone’s clamoring to get in). Maybe this’ll stick, maybe it won’t, but I have to try (Note 1).

This shining example of fast, cheap, and plentiful money finding its way into non-traditional places (sound familiar?) is something I’ve certainly been watching closely (Note 2).

Party Time

It wasn’t just Tiger. There was slew of hedge funds, sovereign wealth funds, and formerly-public market only institutional money diving into the strategy:

And the strategy worked. As someone who previously worked in emerging markets trading, the ability of a few well-resourced players to set and drive a price is something I’ve very much been on the very wrong end of (read about me getting smacked by the Dong).

For an example, let’s walk through the recent history of the cybersecurity company Laceworks.

It raised an $8mm A in 2015 from traditional VC. It raised (another?) A of $24m in 2018 from a bunch of normie venture. In Sept 2019 it raised $42mm, mostly as follow-ons. All seemed vanilla.

Fast forward to January 2021.

Out of nowhere there was a gigantic Series C of $525mm. Tiger, Dragoneer, D1, Coatue, and Altimeter were all involved. Yes, you could argue maybe this funding made sense. It was over a year since the last round, we were well into the pandemic, and cybersecurity was on fire, but the scale of the funding is certainly notable.

Just 10 months later, in November 2021, Laceworks raised $1.3 billion. It was, once again, the usual HFC suspects joined by some even more buttoned-up money like Franklin Templeton and Morgan Stanley. This really is a beautiful graph of Maximum Deployment Velocity:

I’m sure 2021 was a good year for the business. Cybersecurity would certainly produce some giants. Lacework reportedly tripled Q3 2021 revenue YoY. They hired the former a former Facebook engineering VP.

It’s the perfect embodiment of the HFC strategy. Take a company that was likely solid and in a hot sector. In Jan 2021, markets were already going crazy. You then team up with your friends and pour a bunch of money into it, and then just a few months later, you all pour even more money into it. Everyone happily pays an exorbitant price because it means everyone gets to mark up their books. Everyone could then go out and raise new funds by marketing those unrealized results. In a business where you get paid a percentage of assets under management, it’s a no-brainer. As of a few months ago, you might even be able to flip the company to the public markets at that high price.

Signaling

One additional detail to note is that Nov 2021 “record-setting” Laceworks round had a very public valuation of $8.3 billion.

Do you all remember the old days when companies and investors actively worked to avoid valuations leaking to the press? One element of the HFC strategy has been making very transparent valuation proclamations for late-stage rounds. Skims (D1 and Lone Pine) is worth $3.2 billion. Ramp (D1, Coatue, Lone Pine) is worth $3.9 billion. You see it over and over in any HFC press coverage.

This feels like one of the more under-appreciated parts of the HFC strategy. In the past, investors would have looked at the price they paid as proprietary info. The secrecy could help you negotiate the next investment. Now, it’s transformed into a signaling mechanism to the public markets and retail investors. In boom times, the leaked valuation effectively sets a baseline idea of a company’s worth. Laceworks is now worth $8.3 billion. When it’s time to IPO, that’s the starting point in the conversation. Over the past few years, with endless capital and investor appetite it worked beautifully.

Another notable element from the Laceworks example is that investors got to mark their initial January 2021 investments at that $8.3 billion level in November. Tiger and the HFC crew 4 or 5x’ed the January money with their own follow-on investment. They could then take those results to go out and raise. And they did. In March, Tiger announced a gigantic $12.7 billion growth fund, that was reportedly raised in “less than four months” (I’ll let you do the calendar math).

And the final amazing part of all this - these inflated private market valuations have helped prop up Team HFC through their public market carnage:

D1’s hedge fund was up 26% in 2021, powered by a 70% gain in its private holdings as its public portfolio fell 8%, while at Tiger Global, the hedge fund’s 7% decline last year compared with a 54% rise in its Private Investment Partners funds.

In Q4 2021, the public markets started shaking out but private market valuations were still marked based on these big HFC rounds where this small group of players effectively set the price.

Game Theory

Let’s now look at the game theory of all this. The most intriguing part of these HFC-backed companies is almost no one in the group has a vested interest in seeing the valuations come down. It’s this amazing tightrope where, as long as the startup can avoid an emergency funding round, the valuation can remain inflated. The HFCs and VCs want to avoid a markdown. The LPs (people who put money into the HFCs and VCs) aren’t clamoring for markdowns. Startups would rather not get marked down.

But the IPO market is dead meaning there is no clear exit anymore while public market comparable companies have been crushed. Just look at payments - it was a big story that Stripe was marked down by 9%. Meanwhile, Paypal is down 60%. Square is down 54%. Adyen is down 54%. It’s a perfect encapsulation of private market insulation. Everyone knows Stripe is worth less, but as long as we all don’t say Stripe is worth less, we can pretend it’s not worth less.

Everyone is praying the macro-economic outlook turns around, consumers feel great again, the IPO market opens up, and public market appetite comes back. I picture everyone sitting around a table, just looking at each other and sweating.

Prisoner’s Dilemma

In almost no scenario should those inflated private valuations hold. Even in the best-case scenario, a startup follows the suddenly-in-vogue pivot to generating cash, but that means they’ll have to slash growth. Those gigantic valuations were modeled on assumptions of strong growth and become dead in the water. But if startups don’t do this, they’ll need to go out and raise more, inevitably repricing to a down round. Given the state of the economy, public market comparables, waning consumer demand, and a million other negative factors, it’s clear companies should be revisiting those valuations.

The biggest question right now is what could trigger these revaluations?

Will it be the LPs who start the markdowns? I spoke with a friend in the industry who said there are certain provisions for institutional investors where audits and markdowns can and will quietly take place. Maybe that’s why you always hear the name Fidelity whenever some news of a markdown leaks to the press. Will Fidelity quietly be the HFC grim reaper?

Even as far back as 2015 this was a known potential:

So we’re back to that table where everyone’s sweating. Who will budge first? What incentives are there for any of the players involved to mark down the investment?

Hanging by a thread

The sweat and stress is compounded by the fact that most of these HFCs are in a precarious position. Their public market funds have been obliterated over the past few months. The Tiger numbers have been wild:

Given that there were 82 trading days in January-April, this works out to be a loss of roughly $183mn every day that markets were open this year. Or $28.1mn every hour that US markets were open. It’s almost impressive.

These elevated private valuations are Tiger’s lifeline right now. It is existential they’re not marked down.

It’s also worth thinking about how personal this all can be. At that table where everyone is sweating, a lot of these funds are known as Tiger Cubs [Note 4]. They made their way up in the world together. They often wear tuxedos. Even the ones who aren’t Tiger Cubs have dealt with each other for years.

When you’re all sitting at the table, do you want to be the first one to mark down a company and set off any number of unforeseen consequences for the people you made your way up in the world with and who all have shared financial interests?

Who gives first and why?

Human Drama

Every cycle has its own poster-child and this model of gigantic public capital moving into private markets is unprecedented for this current vintage. The dynamics are so unique because the markets are opaque, the players set the price, there’s no ability to short, and everyone involved has an interest to not mark assets down.

This story will be even more riveting as it will play out as a genuine human drama. This won’t be your buddy watching $LUNA collapse on a screen. For this kind of drama it will be phone calls and press leaks. It’ll be mutual fund risk managers in skyscrapers, furious text messages, and fleece vests. Maybe us mere mortals will never even see it happening. Or maybe there will be contagion. That’s the thing about illiquid, opaque markets filled with unprecedented wealth creation and the associated risk. Usually they make for good stories.

I recently watched Margin Call again. It nails the prisoner’s dilemma element of illiquid market dynamics. The movie has this ruthless, almost banal tone that perfectly captures how someone will start selling first and markets will be crushed (and everyone will still probably end up wealthy).

(had to record my TV with my phone so not the best quality)

Note 1: For fun, I pulled some Crunchbase data for D1, Lone Pine, Dragoneer, Tiger, and Coatue. There were 99 deals featuring 2 of them, 23 with 3 or more of those 5, and 2 deals with 4 of the investors. I’d be really curious if anyone has a more thorough analysis of these overlapping hotel party rounds (could throw in Altimeter and any other number of funds).

Note 2: ZIRP wasn’t the first time I was intrigued by money finding it’s way into unexpected places. As a former emerging markets trader, the idea of “Tourist Dollars” was a regular idea that I wrote about back in 2016.

Note 3: A big question I didn’t address here is what additional fallout there might be. There was a great piece called the Minsky Moment in venture capital, about how all the circular dynamics that drove capital into private markets could reverse:

Note 4: A friendly reminder that Bill Hwang was a Tiger Cub. Also, a nice reminder that Archegos had its own amazing prisoner’s dilemma where Goldman got out first.

As I go to publish, I see Twitter-Elon might be a done deal. This post is certainly a bit speculative and rambling, but here goes.

A running theory of mine is that, in January 2018, Tesla ceased to be an electric vehicle company and transformed itself into a financial vehicle of sorts. That was when Tesla’s board announced a new pay package that was called “audacious” and “breathtaking.” This NYTimes headline captured it.

Musk would bet his entire compensation on hitting very specific milestones. One layer of milestones was purely on increasing the market cap of Tesla. The other was around revenue and Adjusted EBITDA. This Fortune piece is the best breakdown I’ve read that outlines the exact potential scenarios (the image below is from the SEC filing):

There were 12 total tranches to be unlocked that required a combination of market cap increases and other operational results. Let’s remember, this was only four years ago and Tesla was worth around $60 billion, and Musk’s net worth was around $12 billion.

The idea that the company would 11x its market cap was called ‘laughable’:

If Mr. Musk were somehow to increase the value of Tesla to $650 billion — a figure many experts would contend is laughably impossible and would make Tesla one of the five largest companies in the United States, based on current valuations — his stock award could be worth as much as $55 billion (assuming the company does not issue any more shares over the next decade, which is unrealistic).

The package was so aggressive that in the summer of 2018 there was a shareholder class-action lawsuit over it that is going to trial soon, yet now it’s almost complete.

One can certainly draw a hero’s journey to draw from this. In early 2018, when that comp package was agreed to, there was plenty of doubt whether Tesla could scale its manufacturing capacity. Elon has repeatedly said Tesla was on the verge of bankruptcy, yet over the next months and years, Tesla stabilized and grew. It went from producing around ~90k cars a quarter in 2018, to nearly 300k last quarter. Revenue ~5x’ed from~ $12 billion to $54 billion. It produced nearly 1 million cars in 2021.

Something else happened at the same time. The stock price went to the moon and blew through market capitalization tranches that seemed impossible. There are two charts I look at when thinking about Tesla’s recent history. One that made Elon a ‘very rich guy’ and the next that made him ‘world’s richest human’.

The first was the stock move from mid-2019 to Feb 2020, right before the pandemic. This was the normal “Tesla is a company that will be an EV market leader” move. The company had shown it wasn’t going to collapse. It was becoming more clear the SEC wouldn’t really hammer down on Elon, even after the Sept 2018 settlement. Musk was making gigantic promises, like 1 million Tesla robotaxis operational by 2020.

Big promises coupled with near-term operational results made for a solid combination, and the stock more than doubled from when the pay package was set. In any normal market this would be…fine. This was the “normal company stock rise”.

Then March 2020 hit, and like so much else, things got crazy.

The stock jumped almost 1000% in a matter of months. Yes, the company was growing reasonably well, but the degree of the move will certainly be studied for years to come. This was also the time we started seeing TSLA stock splits and Cathie Wood touting touting wild price targets. You started to constantly hear “Tesla is actually a battery company” or “Tesla is also an insurance company.” It’s always easy to back a story into a stock price.

Sure, the early phase of the pandemic was the stupidest, most amazing time ever for markets. We had our Zooms and Shopifys and AMCs and Gamestops, and every other story we’ll never forget. But none of those stories had an audacious underlying pay package that would create the world’s richest man.

A Grand Theory of Early 2022 Elon

Can we all just take a moment to together process how wild this is - just two years after crafting the boldest pay plan ever, in a span of nine of the most wild, chaotic months for both society and financial markets, Elon became the world’s richest person (Note 1). This has to be the most rapid accumulation of wealth in human history (are there any historical equivalents, maybe a Sumerian king or something?)

And this sets the stage for my mini-grand theory on what is happening right now with the Twitter acquisition:

• Musk recognizes his Twitter account and unfettered access to it are vital to his current and future business interests.

• He also wants to neuter the SEC.

• The pay package is near completion and it’s time to think about the next one.

• He knew Q1 would be a banger for TSLA. It’s always nice to make a play from a position of strength.

• But this might also be the rosiest time ever for Tesla.

• And even if Tesla stays on a roll, it’s difficult to imagine significant upside for TSLA, the stock.

Musk going after Twitter is not about distraction; it’s diversification. The past few months have all been Elon putting together the pieces for what’s next, and he’s doing it from a position of strength. It’s like a super-charged Solarcity acquisition, where varying business interests will converge in unexpected ways. We just learned Musk was registering properties to make a “super-company” called X Holdings.

Twitter is all about what comes after Tesla. What it exactly looks like, I have no idea, but it’s important to at least ask why is this all happening right now.

Theory Element #1 - Tweeting is Existential

Okay, we all know he tweets a lot but this first piece starts with how much Musk tweets per month. I found this dataset on Kaggle for all Elon tweets by month from 2010 to March 2021:

The first thing that jumped out was that spike in the spring of 2013. A quick search led to headlines like “Tesla stock up 40% this week” from CNN in May 2013. Then, in the summer of 2018, you see a manic spike in tweeting behavior, from which we never look back (Note 3).

Elon has since paid fines over his tweeting. He had to get a Twitter baby-sitter. Through it all, he never stopped tweeting. Ever since the Spring of 2013, it was clear Tesla’s business results and Musk’s tweeting could have a self-reinforcing impact, and that virtuous cycle only became more clear in recent years. Shortly after Musk signed his giant package, the really high-volume tweeting began, and the rest is wealth accumulation history.

It’s conventional wisdom that Musk’s Twitter account transforms the unit economics of Tesla by allowing zero expenses on conventional brand marketing and PR. But the power of his tweeting also lowers his cost of capital, drives corporate partnerships, muscles regulatory pressure, is a recruiting tool, and touches every other element of Tesla, the business (not to mention every other business interest he owns).

Elon understands his access to tweeting is existential to every element of his business. It’s the difference between him being Phil Knight or Michael Dell-rich, to becoming the richest person in the world in nine short months.

Nothing works without his Twitter account.

Theory Plank #2 - Kill the SEC

In early March, I was ranting that it was very odd that Elon Musk was escalating his battle with the SEC. Tesla’s business was as solid as ever and the SEC had been completely hands-off. My hot take at the time was maybe there was a threat of Musk being deplatformed by the SEC, and this was all pre-emptive.

We’ve since learned the timing at least confirms something very strategic. Elon started buying shares in TWTR at the end of January. At same time, he began this legal escalation with the SEC. One involved SEC filings while the other involved lengthy legal motions, but they were both happening in exact parallel.

I believe a large part of this is Elon making a move to make sure his Twitter account cannot be limited, and certainly, never banned.

He’s already argued the SEC was limiting his free speech when it ‘restricted’ his tweeting. He’s concurrently framed the entire purchase of Twitter under some nebulous vision of free speech. From both a timing and strategic perspective, the two moves almost certainly had to be done in tandem.

There once was the possibility the SEC could become far more aggressive in controlling Musk’s account. Judgments were being passed and things were getting hairier for Elon. If someone used their Twitter account to repeatedly break securities laws, it still doesn’t strike me as a stretch regulators would revoke your access.

After the past few weeks, can you imagine the public outcry if regulators tried imposing any limits at all? Even if he doesn’t end up owning Twitter, could you imagine Ron DeSantis if Elon was forced to take down a tweet? Now just imagine he does end up owning Twitter and taking it private. Musk can break every securities law related to public communication ever invented, and at worst, he’ll be fined relative pennies. If the GOP wins back Congress, could you imagine any regulator going after Elon if he reinstates Trump?

If Twitter is existential to his overall business interests and his account feels threatened in any way, $46 billion for Twitter is a bargain for maintaining, and increasing, his $270 billion net worth.

Theory Element #3 - The Next Package

Tesla just had an amazing Q1 earnings report, and it unlocked compensation tranches 9 to 11 of the original 12. Longtime Tesla bulls like Dan Ives are already dreaming about how giant the next package might be and this is critical - everyone has to be thinking about the next compensation package.

For the next iteration, Musk’s path to trillionaire is likely not through Tesla or TSLA. Just think about how many things have worked out perfectly for TSLA over the past few years:

• The regulatory climate under Trump was non-existent (yet, even then, the SEC went after him). Now the NHTSA, the NTSB, the SEC, and even the FTC are all looking to become more aggressive. Even regarding public opinion, the entire regulatory climate has changed.

• The COVID bump and entire memestock climate driven by ZIRP and a million other factors is done with.

• There was virtually no true EV competition a few years ago. Now, Ford has already beaten Tesla in delivering a truck, and it’s clear every other car company is moving quickly.

• Tesla has shown an amazing ability to extract free cash flow from its customers. It received an estimated $2 billion in pure cash from people paying for a Full Self-Driving subscription, and even millions in cash infusions from Cybertruck and other unfulfilled vehicle deposits.

• It’s still receiving $1.5 billion in regulatory credits from other auto companies. All these channels of pure profit can’t last forever.

• Elon Musk has managed to walk the tightrope with the Chinese government but this certainly won’t last forever and they will start promoting domestic competitors (this WSJ piece and this Bloomberg piece are great on the topic).

Tesla is not a monopoly. The company could very likely hit a few million cars, stay a key EV player in the years to come, but the stock could still remain trading sideways. This Q1 feels like a high point where everything came together, perfectly. Musk knew this would be a blowout quarter, and started putting in motion some kind of plan in January.

Theory Element #4 - The Imagination Deficit

In 2019, when Musk was promising robotaxis in a year, it really captured people’s imaginations. Nowadays, it just doesn’t feel like anyone other than Cathie Wood & team are pretending to take those magical, futuristic business lines seriously (yes, ARK’s new model says robotaxis will be 62% of total Tesla revenue by 2026).

Even that whole dancing robot thing showed the difficulty of capturing our collective imagination. For those unfamiliar, last November Tesla announced a humanoid robot thing. The presentation ended with a guy in a robot suit dancing (yes, this is real):

On the recent earnings call, Musk gave a half-hearted statement about how this theoretical line of humanoid robots could be worth more than electric vehicles for Tesla. The whole thing has honestly felt a bit routine. I’ve watched this stuff for years, and maybe it’s overall Elon-promise fatigue, but a lot of these moonshot proclamations have started to feel a bit throwaway - from Elon, from the fanboys, from the press, from the entire infrastructure that once was manic over them.

However, the Twitter thing really lit a fire. Maybe Musk was really going to join the Board and be a cooperative part-owner, but the moment he saw the energy the potential purchase generated, he went all in. Musk buying Twitter has generated the conversational energy that rockets and robots once did.

Theory Element #5 - They’re already selling

All great entrepreneurs are always thinking about that next channel of growth. Elon has incredible entrepreneurial instincts, and he has to recognize it won’t come from Tesla. Whatever compensation scheme is concocted, there will never be another confluence of factors that can come together to prop up TSLA and reward Musk in the way that he was.

And here’s the thing - they’re already selling TSLA. Elon sold $16 billion of the stock last year (some of it would’ve been to pay taxes on options, but he did minimize that bill with a $5.7 billion donation to charities that remain unnamed). It’s not just Elon. His brother Kimbal sold a bunch at $1229 and is now under investigation for insider trading for the transaction.

Cathie Wood and ARK are selling too. While putting out a report with a price target of $4,600 for TSLA, they’ve been taking profits and trimming their TSLA position in their flagship ARKK fund from almost 4 million shares to less than 1 million. One of the biggest cheerleaders for Tesla is publicly saying the stock will quadruple, while cutting their holdings by 75%.

And you can’t blame anyone for selling. When a stock is up 1700% (from Jan 2018) and facing an onslaught of legal, competitive, and internal challenges, it’s certainly okay to take profit.

What next?

My mini-grand theory is that this entire sequence of events: The Twitter purchase, the SEC escalation, Tesla’s blowout quarter - it’s all about the next giant package. Musk saw an opportunity at the beginning of the year. Tesla’s business was on a roll, his pay package was almost complete, the SEC was threatening his Twitter account, and Tesla’s stock had stalled out for six months. Every great entrepreneur understands the importance of momentum and he decided to capitalize on this confluence of events.

At first, I was skeptical Musk was serious about buying Twitter, but I’m genuinely starting to believe it’s part of a larger strategy. We’re starting to see more pieces. The potential new “super-company”. He just raised a bunch of money for the Boring Company. Twitter is now both a potentially undervalued financial asset, a political asset, and a marketing tool. I think we’ll soon see something incredibly audacious, and breathtaking pay package that is far more creative and corporate boundary-crossing than what we saw in 2018.

Note 1: It’s always weird to me how casually news stories drop in the “world’s richest man” detail.

Given how journalists excitedly parse every Elvis lyric or even fire emoji tweets at length, it still blows my mind that no one touched the most rapid accumulation of wealth in human history. Just read this cut-and-paste piece from Jan 7, 2021 from the NY Times, and think about it relative to the endless typing taking place over the past few weeks.

Note 2: The dataset I used only had Musk tweets and didn’t include replies. Given how integral the stan elevation reply technique has become for Elon, I’d be really curious if anyone has this data.

Note 3: My writing and ranting has often led to me being labeled an Elon-hater, but for me, he’s the embodiment of “don’t hate the player, hate the game.” It’s the game, with it’s lack of regulation, the emerging market-ification of U.S. financial markets, the weakness of traditional journalism to hold the unconventional to account, and so much more that I hate. I really believe Elon is doing what most entrepreneurs would do, and he’s doing it well. Why stop if no one is stopping you?

Before I get into a theory on why I think he did it (because, c’mon, we all need a theory) it’s important to understand the context of Elon’s battle with the SEC over the past few years and, more importantly, how he’s spent the last six weeks escalating things.

The Background

Okay, this is a years-long thing I’ll try to walk you through quickly:

• August 2018: We start this journey with the famous funding secured tweet.

• September 2018: Musk settles with the SEC. Him and Tesla pay some money, he’s no longer Chairman of Tesla, and the most relevant stipulation for today’s story was that Tesla would have to “put in place a system for monitoring Musk’s statements to the public about the company, whether on Twitter, blog posts or any other medium.” This was the birth of what came to be known as Musk’s “Twitter Sitter” - the internal legal process in charge of overseeing any sensitive tweets.

• February 2019: The next chapter. A few weeks after Tesla provided official guidance that in 2019 they’d produce between 360-400k cars, Musk tweeted that they’d produce around 500k (he walked the statement back four hours later):

• April 4th, 2019: One of my favorite moments in the saga. Regarding the 500k tweet and the original Twitter Sitter settlement, U.S. District Judge Alison Nathan tells Musk and the SEC to put on their “reasonableness pants”:

• April 26th 2019: In a joint effort to put on those reasonableness pants, the SEC and Musk came to a stricter settlement where there was a (un-exhaustive) list of topics he needed approval to tweet about, and now he would need to “obtain the pre-approval of any experienced securities lawyer.” Incredibly it took this clarification to specify the Twitter Sitter needed to know something about securities law.

Over the next couple of years, Elon kept tweeting but things were publicly pretty quiet. We’ve since found out that the SEC had quietly corresponded with Tesla over two tweets:

• July 29th, 2019: One of the specific clarifications in the April 2019 settlement was that Elon could not tweet specific production numbers that had not previously been published. Elon tweeted specific production numbers that hadn’t been published.

Tesla’s response to that violation just captures everything about how absurd this entire arrangement was:

Tesla told the agency that Mr. Musk hadn’t submitted the tweet for review and that a committee had later determined it didn’t require authorization because it was “wholly aspirational,” according to the SEC’s account of its correspondence with the company.

• May 1st, 2020: The entire fight has been over Musk making material statements about Tesla’s stock. Elon makes about a very material statement about Tesla’s stock.

That last one is truly the piece de resistance. Just imagine the SEC sitting there. Elon has already gone on national TV and said he doesn’t respect you and that is AFTER the first settlement.

He tweets a joke to the entire world about you sucking his cock (I felt the need to spell it out), but, of course, can maintain plausible deniability:

Judge Alison Nathan had insisted both parties act in good faith and just to be mature about the whole thing, yet....

The Twitter Poll

We all know there has been endless Elon tweeting of material things since the settlement. All the Doge and Bitcoin stuff. Humanoid robots. Stuff about competition. My favorite one was where he said an entire Hertz corporate partnership announcement had no contract associated with it. I mean, that was just so wild, yet we all just forgot about it. I still wonder how Hertz corporate folks reacted.

But the latest chapter is centered around this doozy:

There were endless theories about ‘why’ Musk was doing this, but whatever it was, saying you’ll sell 10% of your stock when you’re the largest shareholder of a company again...seems material. Elon Nation voted “Yes, sell your shares!”, and Elon obliged and started selling on November 8th, selling $16 billion over the next six seeks.

So that seems pretty crazy in itself, and Musk was apparently subpoenaed by the SEC about the tweet just 10 days later. But it gets so much better. The day before Elon tweeted the poll, it turns out his brother Kimbal made his biggest ever share sale (15% of his total holdings) at $1,229 a share.

The SEC is reportedly investigating whether this sale could constitute insider trading, because, well, timing. Musk told the FT that “Kimbal had no idea I was going to do a Twitter poll” and this was “simply more evidence of Stevie grinding his very tiny axe yet again” referring to the SEC’s Steven Buchholz.

Why escalate?

It was in February that things started really escalating.

February 7th, 2022: Tesla disclosed they had received the subpoena about the November poll.

February 17th, 2022: Musk and his lawyer sent a letter to the ‘reasonableness pants’ judge saying the SEC was subjecting them to endless harassment and leaking of investigative information.

February 22nd, 2022: Elon tweets about the SEC being corrupt.

March 8th, 2022: Musk went even further, filing a motion asking to have the original 2018 settlement thrown out because he was ‘forced’ into it, it was chilling his freedom of expression and other bad things.

Okay, that was a lot of info above, and I’m sure most of you have followed Elon vs. the SEC in some capacity. But I think the timeline context is important to understand where we are today.

The most important question for me - Why did Musk start escalating in February?

The SEC had treated the 2018 settlement with kid gloves so why force their hand? Yes, there was a new insider trading investigation and some subpoenas, but why push this fight? Since the 2018 settlement, amidst that status quo detente, TSLA is up nearly 1750% and Tesla, the business, feels like it’s at its most stable operating performance ever. Why choose this moment to mess with the very circumstances that drove some of the greatest wealth creation in human history?

I had the chance to speak about this entire drama on March 10th on TechCheck - around the 3:05 mark in the video I laid three potential ways this could play out.

• The SEC could fight tooth and nail just to maintain the status quo where they were not really regulating him. This seemed unlikely.

• The SEC could agree the original settlement is void and then go after him over every single tweet since (even the original 420 tweet). This seemed most likely.

• The most extreme possibility I saw was the SEC could try to get Elon Musk kicked off of Twitter.

I know, it sounds ridiculous that the SEC could try to stop Musk from tweeting at all.

But if someone uses their personal Twitter account to repeatedly break securities laws, it doesn’t seem too crazy that the SEC could force that person to stop tweeting. If someone specifically created a legally binding arrangement with the SEC, and then repeatedly violated that arrangement in order to break securities laws, it doesn’t seem like a 1st amendment issue if they lose their privilege to tweet. If someone’s personal account is inextricably linked to the company they run and are the face of, and they use that personal account to market their own company to the point they do not spend on marketing or have a PR department, it seems like that personal account is a significant asset and extension of the company.

But this is Elon and it’s 2022.

Something has been up since mid-February, and Elon was very methodically escalating things.

The title of the above segment was “If anyone could steamroll the SEC, it would be Elon Musk, the master of Twitter” as those words did come out of my mouth because I’d never discount Musk’s ability to play this game. That’s why I’ve been even more intrigued why he’s escalated things. He is the Master of Twitter.

D’s and G’s

...and voila! It’s now official! He’s the biggest shareholder. This is what he does, and he does it so well.

Okay, first a few things about the purchase itself. Every level of it feels like a S Elon’s C to the SEC. I’ll guarantee you in the coming weeks the average, non-financial market participant will be able to explain the distinction between a 13D and 13G filing.

Musk filed a 13G, which is used when the investor owns more than 5% of a company’s total stock but intends to remain fully passive. If they intend to take any active interest in the management of the company, they’re supposed to file a 13D. Rveryone imagining the different ways Musk is going to shake up Twitter should throw out those takes because the legal filing choice indicates he has no intention of engaging in shaping the future of the platform or company [that was sarcasm].

As I write this, Musk is tweeting about whether there should be an Edit Button

there are articles all just reciting that tweet

the CEO of Twitter is quote-tweeting this

Like 90% of my feed is now people talking about Edit buttons. It’s like Trumpian jiu-jitsu. The more egregious and brazen the bad behavior is, the more confusing and difficult it is to parse.

…and as I’m editing this Elon has been named to the Board of Twitter. It’s utterly wild.

He filed the form (and he filed it late) of a passive investor, and now has been named to the board. Nothing, absolutely nothing, matters.

Why buy?

One more time, quickly, let’s review the timeline:

Sept 2018 - Feb 2022: Musk periodically and quietly spars with the SEC while Tesla becomes one of the most valuable companies in the world. Elon is named Greatest Person to Ever Live in the Universe by TIME, the FT, and every other publication.

Feb 7th - March 8th, 2022: Musk goes public. Letters, court filings, court filings that include Eminem lyrics, and a full-on assault. He’s forcing the SEC’s hand.

March 14th, 2022: Musk had accumulated at least half his position in TWTR by mid-March meaning, at the exact time he escalated his battle with the SEC over.....his ability to tweet…..he had already decided to become the largest shareholder in Twitter.

April 4th, 2022: We find out Musk, who has never held big equity position in a company he doesn’t own, has accumulated a 9.2% position in Twitter.

I get it - this entire thing could be as simple as Matt Levine put it:

“He bought 9.2% of Twitter because he has money, and wants to spend some of it on being more annoying on Twitter.”

Given how much Elon loves and is the master of tweeting, this is not implausible. But maybe it’s both about the lulz and legal jiujitsu. Imagine in mid-February, as Musk decides he wants to bring the fight head-on about his right to tweet, someone tosses out the idea “why don’t you just buy Twitter?” Everyone laughs and then he does it. It is the shitpost to end all shitposts. No one will ever outdo this.

And for a thought experiment, imagine there is a video of Elon telling Kimbal on Nov 5th “you should sell your shares because we are going to commit securities fraud and I am going to push the value down of this company over the next month” and the SEC finally gets real about going after him. Now picture you’re in the room with Twitter’s Safety and Security team. They’ve just received instructions from the SEC about restricting the account of the guy who is the biggest shareholder in their company and is on their board (and has no qualms about going after those who financially cross him).

It kind of feels like Elon Musk might’ve just solved his entire SEC problem for $2.9 billion. How does the SEC go after his ability to tweet when he....owns Twitter?

Why this matters?

Nothing matters anymore, but this kind of does. It’s like a real-time view into the shit-postification of our financial markets.

For the first time forever I was interested in TWTR the stock. It finally felt like they got their shit together. They nailed it with Spaces, they’re pushing hard on newsletters, communities, even their shopping product might be something. How quickly they reversed the reverse chrono debacle showed they’re finally responsive. It’s almost like they’re a real company!

Now the CEO of Twitter is shitposting alongside Elon. Did Parag know about the 13D vs 13G thing when appointing Musk to the board and is also yelling “S Elon’s C”? Will there really be an edit button or is this a joke? This was a good company with a straightforward business that looked like it might execute on a turnaround. Now the stock is up 30% since Musk’s filing was disclosed and it lives beyond the realm of any kind of rational analysis. Now we just speculate on what Elon and Parag might do next and laugh.

It’s wild to think about. The U.S. government regulator has been in a fight with the world’s richest man over his ability to use a communications platform that’s vital to his business interests - and he just went and effectively bought the platform. Both Can and I have repeatedly written about the emerging market-ification of the U.S., and this really feels like another one of those moments where we look back on and remember how we all posted memes as it happened.

Now that my co-host Can is back, I once again feel pressured to write on time. This makes me happy. Writing about Robinhood also makes me happy.

In March 2021, Robinhood announced they (Note 1) would be building a platform to give everyday investors access to IPOs. It really was the perfect ‘democratizing finance’ story. Until they pushed this, the IPO allocation process was the poster-child of clubby, insider-y, and banker-y. The stereotype was of investment bankers pulling out their Rolodexes (for the younger ones, this is a Rolodex) and calling up their golf buddy money managers to decide who got the juicy access to buy into an IPO that always pop on the open. It was so easy to conjure up images of backrooms with oak furniture and cigars.

When Robinhood announced the news, we were back in a world with endless headlines about IPOs shooting up after ringing the bell. It was the easiest of money. Why should the everyday investor be left out? So Robinhood came up with a system where companies would allocate some portion of the equity to be raised to Robinhood users. Those users would be able to reserve their own shares to be purchased at the IPO price. They wouldn’t be left out of the inevitable gains.

In May 2021, the product officially launched. The hip medical scrubs company, FIGS, was the first to be offered. The company had genuinely good numbers (it was profitable - good piece from Sid Jha at the time) and everyone could now share in the wealth creation.

I started receiving emails in June announcing upcoming IPOs. The first one I received was for Outbrain (yes, that Outbrain). The second email was the really buzzy one - it was for the Robinhood IPO itself (how meta. Not Meta). The emails slowly trickled in over the following months.

….and the emails looked innocent enough:

...but one thing kept irking me. I’d guess plenty of Margins readers know the difference between transactional emails and marketing emails, but for the uninitiated, think of transactional emails as the “confirm your account” or “reset your password” or “update on your package”. They are emails triggered by some action within an app or service, are sent to an individual (rather than a group), and are usually for informational purposes (Note 2). Marketing emails, in contrast, are the ones built for commercial purposes (to sell something), and are usually sent to groups or entire lists of people. They generally live in different parts of your email service provider and often are built within different parts of an organization.

The SEC has strict guidelines around advertising an IPO to investors. This feels like the perfect example of a marketing email disguised as a transactional email. Every time one of these emails were sent out, it’d spark inevitable conversations “are you buying into the XX IPO?” “I might pick up a few shares.” Because of course it did. Robinhood is explicitly avoiding any recommendation, but implicitly has curated this offering. And in some ways, it felt like Cathie Wood’s genius in just publishing ARK’s daily transactions. The act of informational communication is the recommendation and has the downstream effect of catalyzing conversation and purchase interest. It’s even more acute in this situation because this is a one-sided conversation. You can only buy the IPO, and you’ve just introduced a vast new population of buyers.

And it worked….

And it worked and it was non-stop. Sweetgreen opened at nearly double it’s IPO price. Allbirds surged 90% after the open. Nubank ‘only’ traded up 15% after it’s ‘blockbuster IPO’. I will note, Robinhood, itself, was a bit different. The shares traded slightly down on IPO day, and then shot up 100% on the 4th day of trading.

Overall, things appeared to be going according to plan. Finance, democratized.

But, of course, that’s not how things have ended up. Here are just a few charts:

But I promise you, I’m not cherry-picking. I went through my inbox and every single stock chart that was being marketed through the IPO Access program looked like that. (Note: These are all the emails I got - I’m not sure if they had other IPOs where I didn’t receive an email):

I’m the first to recognize that there are endless momentum-y, meme-y stocks have collapsed (this is me in mid-December on CNBC saying the ‘era of the story stock is over’), but this is brutal. So many of these stocks are 60-80% off their high, but much more glaring is how uniform the Robinhood IPO Access stock charts look:

Please excuse my ugly image as we don’t have a graphics department (Note 3), but just look. It doesn’t matter whether you’re a Brazilian fintech, a fancy salad chain, a cloud backup company, a German solar company, a fantastic expense management SaaS (I love Expensify), something-something-blockchain, coconut water, a biotech claiming to cure chronic disease, a fraud detection company, an Australian energy company, a COVID-19 testing maker, a wallet for nerds, or whatever else. It didn’t matter whether you IPO’ed in May or July or November. Other than the jewelry company $BRLT Brilliant Earth (on the top right) every single company comes out incredibly strong or has a spike early on, and then it slowly dies. Sometimes, like $SEV or $SG or $HLTH, it’s brutal. Other times, like $ARBK or $NRDS, you see glimmers of hope and then goodbye. Seriously, take a look again.

Correlation or Causation

My co-host Can said maybe it’s just that Robinhood is the appified version of the Scott Galloway school of stock picking (hey-o). Maybe it’s just self-selecting where the type of company going through this process is the kind that cannot reliably raise from institutional investors. But that distinction between marketing and transactional emails I think is incredibly important here.

For an IPO, there is only a finite amount of people selling something. There is new equity issued. There is some set amount of existing shares to be sold. That’s it. By introducing an army of new buyers, there’s an inevitable mismatch pushing prices up. If it doesn’t happen on day one, you’ve now seeded the idea among an army and they slowly come in. That transactional email was a marketing one.

When I was in trading, there was a running meme. Whenever someone inquired about a market move up, and no one had a clue what happened, someone would yell “more buyers than sellers!” I know a lot of stocks have lost a lot of value over the past few months, but the mechanics specific to Robinhood’s IPO Access offering feel like it had to contribute to this exact scenario. It literally created....more buyers than sellers.

And then maybe people lost interest, or the company really wasn’t great, or the valuation was stupid, it would collapse. Especially if it were predominantly retail investors, you could imagine the initial moves down would be amplified by investors who never cared too much for the company and moved on to the next thing. It’s happened over and over, almost universally (Note 4). Just look again at those charts, and please, once again, excuse the ugly graphic.

Finance, democratized?

A lot of people have now lost a lot of money. I have no way of knowing what percentage of them were retail investors, but back in July 2020, when I wrote about Robinhood users being ‘the gravy’, this is the kind of stuff I worried about. Even more, this feels exactly like the woo-woo Silicon Valley doublespeak of democratizing finance that has always grated on me. In that original Robinhood post, I had written:

I hadn't processed just how perfectly Robinhood has silicon valley-ified financial markets until I started writing this post. Robinhood is Facebook is Google is everything else. Just look at the story:

• Stanford (or insert other top-level school here) grads head out to disrupt a market that genuinely needs to be disrupted.

• The great disruption is things will become free. Everything is couched in the language of democratization. The Robinhood founders even push the origin story that the idea was born amidst the Occupy Wall Street protests 👀.

• As with most "free" products, the real business model is based on engagement. The more time you transact and interact on the platform, the more money the platform makes.

• The product is built to trigger every possible dopamine receptor in a user's brain. In the early years, terms like gamified UX are considered a positive.

• The company grows to an incredible size and the founders and investors and lots of people working there get incredibly rich.

• We slowly start to see a litany of unintended consequences, but for the most part, it's too late and the cultural impact has already taken place.

....and we’re at that stage about unintended consequences. It’s yet another example of the language of democratization being deployed without any thought of how to build up the newly democratized world. It feels like Dick Cheney and Paul Wolfowitz’s idea of the democracy they would bring to Iraq and Afghanistan. Access without a plan can be a bad thing.

I’m not quite Bill Gurley radicalized, but I recognize there is plenty about the traditional IPO process that could be improved. But this effort gave people a ticket to a process with specific mechanics that made it much more likely to result in a quick rush followed by intense pain. Sending an email to millions of users with no additional analysis or context is probably correct from a regulatory perspective (it’s not a recommendation), but it is a nudge to buy. This is another situation where the SEC should’ve looked a bit deeper at how things were done.

Where next?

In many ways the crash is already here. On the way up we’ve been inundated with gain porn but no one likes sharing the drips and drops on the way down. I started this post meaning to write about ZIRP and risk (for next week! we’re writing again! [Yes!!! —Can]) but also have been thinking about story stocks and the quiet mechanisms that have exacerbated this cycle. I’m the first to acknowledge, things could still get weirder. But as the era of ZIRP appears to be over, the coming weeks are going to get a lot more interesting.

Note 1: Random grammatical question - I had previously always been edited to use the pronoun ‘it’ for a company rather than ‘they’. First, as you’ve clearly seen [especially on my pieces — Can], we don’t edit ourselves too closely (hey, it’s free!), but also, I really think of companies as collections of people rather than inhuman entities. I’m curious about others thoughts on this.

Note 2: One standard example of a marketing email masked as a transactional email is a cart abandonment email (“You’ve left these items in your shopping cart. Do you want to go back?” or something like that)

Note 3: We don’t have a graphics department, but I would like to plug TradingView as a fantastic tool for tracking stocks. Also, if anyone could do a cool visualization overlaying the lines over each other or something, please do!

Note 4: I forgot two stocks when putting together the graphic, and didn’t feel like going back…but here they are. Look familiar?

Note 5: Shameless Plug: I guest co-hosted on the Slate Money podcast last week. We talked ZIRP, Wordle, and globalization in banking. It was fun.

For a long time, I resisted opining on crypto, even though I had a lot of early exposure to it. My roommate circa 2011~2012 was really into Bitcoin. He was so convinced that it was the next big that he set up ASICs, devices that were designed specifically to mine Bitcoin, in some San Jose schools’ storage cabinets thanks to a network of ethically flexible janitors. The whole thing felt off.

On one side was an admittedly enterprising guy who used to make six figures from his side jobs alone and on the other was a public school system (I think?) getting fleeced and a bunch of people with a lot to lose risking their jobs at a chance to make a quick buck.

But I think it worked? Maybe I was wrong.

And you know, maybe I’m just bitter that I never get in on this action! But I’m pretty sure that’s not the whole reason.

“It’s Just Math” they said

My curiosity started out pretty normal. Bitcoin I grokked pretty easily, and the math, so to say, checked out. I knew about practical cryptography and things like Merkle trees both from school and work. However, as the crypto conversation turned from running a wildly-expensive yet cleverly-designed distributed ledger to building a world computer that does everything On The Chain, something went off the rails.

There were genuine moments where I felt like I was in the middle of an elaborate performance act, or that I was the only person not in on the joke. Everyone talked about things being decentralized, except everyone interacted with the “chain” more or less using the same couple of services. The storage and processing capabilities were all laughably impractical, even accounting for the possibility that it could eventually get faster. And most importantly, the user experience of doing even the simplest things was as fun as getting a root canal. Even though the money and content kept flowing, as far as I could see nothing really came out on the other end. I shook my head, and largely moved on.

Years later, as crypto became even more more mainstream, I started following it closely again. I even tried to invest a bit of my own money in the doomed-to-fail ConstitutionDAO since I couldn’t resist (being) a good troll. But the fees alone surpassed my trolling budget so I went back to making jokes on Twitter. Luckily for everyone, Ken Griffin turned out to be a bigger (and richer) troll than I could ever imagine being and just bought the damn thing outright. I felt vindicated.

Yet, for the longest time, I’ve tampered my own skepticism of the crypto industry with a heavy dose of skepticism of my own understanding. While I considered myself technical enough to start a tech company, I thought maybe some of this stuff went over my head. I should have trusted myself more.

A Wild Post Appears

I’ve been meaning to write this post for a while. I even started a draft but just couldn’t finish it for…reasons. Again, I was able to wrap my head around easily on the even the gnarliest of the “crypto” part of the cryptocurrencies (surprise: there’s not that much!), but I still thought something, ANYTHING, must have been evading me. And admittedly having a sizeable internet following, I also didn’t want to put a target on my back.

And come on, betting against billions of dollars seemed like a bad idea in itself. People who are raising billions in dollars to invest solely in crypto apps must have seen something I haven’t seen, I thought. I’ve been wrong before (see my roomate’s story above), and this must have been one of those times. I closed my draft tab, and went back to reading about the Theranos lawsuit instead.

And then, yesterday, much to my co-author Ranjan’s chagrin, who’s been begging me to finish this piece, Moxie Marlinspike, the founder of Signal and the architect of the end-to-end technology used in WhatsApp, finally came up with the post I wish I could have written. Once again, I felt a tiny bit vindicated.

The entire post is full of information and insights a lesser writer (ehem!) would have taken paragraphs to deliver. Moxie approaches the entire field with the fresh-faced optimism of a kid who just got his first set of Legos but at the same time is extremely thorough and systematic. He doesn’t just stop at building but instead follows the trail of evidence to see where things really lead.

The Inner Workings of Crypto

Moxie’s overarching diagnosis is that the technological fundamentals of cryptocurrencies are at very much at odds with the applications people are trying to build on them. And since the skew between the reality (the constraints embedded in the technology choices) and the hype (Web3 applications such as NFTs and DeFi apps) is so large that people were forced to bridge that gap with giant hacks, all of which are decidedly centralizing in nature.

At their best, these hacks are ugly. They are aesthetically unpleasant and operationally cumbersome, and maybe marginally wasteful. Here’s an example: since you can’t really store any meaningful amount of data on the blockchain, most NFTs are actually nothing but pointers, such as URLs to data stored on servers that a potentially untrustworthy third-party controls*.

This is objectively bad design:

When you think about it, OpenSea would actually be much “better” in the immediate sense if all the web3 parts were gone. It would be faster, cheaper for everyone, and easier to use. For example, to accept a bid on my NFT, I would have had to pay over $80-$150+ just in ethereum transaction fees. That puts an artificial floor on all bids, since otherwise you’d lose money by accepting a bid for less than the gas fees. Payment fees by credit card, which typically feel extortionary, look cheap compared to that. OpenSea could even publish a simple transparency log if people wanted a public record of transactions, offers, bids, etc to verify their accounting.

But it gets worse. Overzealous adoption of a hot trending technology is nothing in new tech, if not a rite of passage for any young engineer. But the thirst by which people seemed to have built applications to ride the hype wave have blinded people to the extremely obvious shortcomings of the infrastructure.

This is just wrong:

This was surprising to me. So much work, energy, and time has gone into creating a trustless distributed consensus mechanism, but virtually all clients that wish to access it do so by simply trusting the outputs from these two companies without any further verification. It also doesn’t seem like the best privacy situation. Imagine if every time you interacted with a website in Chrome, your request first went to Google before being routed to the destination and back. That’s the situation with ethereum today. All write traffic is obviously already public on the blockchain, but these companies also have visibility into almost all read requests from almost all users in almost all dApps.

And it goes on and on. If you you want to take anything from my piece, it should be that you should read Moxie’s piece instead.

Given Moxie’s credibility and the calm and collected tone of the piece (which is rare in the anti-crypto side too), the piece made waves. Unsurprisingly, Vitalik Buterin, the creator of Ethereum blockchain penned an equally calm response on a Reddit thread.

Buterin more or less acknowledged all of the criticism and argues that the “missing-middle” that bridges the gap between the current limitations of the technology and the apps is coming soon. While Vitalik is also a gifted writer and an exceptional technologist with sharp insights, I’ve personally found his post much heavier on the jargon and somewhat dismissive of the larger points of Moxie’s post.

Are we the baddies?

As much as I resent the primary political ideology that animates, and increasingly is funded by, the crypto space, a little part of me rooted for them. Despite my misgivings on the tech, I did wonder what things could look like if we funded the internet with something other than chumboxes and various other adtech scum. I agree with Moxie that people will never run their servers and most people don’t fundamentally care about owning there data but I also agree the current situation of the internet feels dark.

And as someone who competes for talent against world’s largest firms who enjoy monopoly margins and can practically pay people hundreds of thousands of dollars to sit around all day (🔥🔥🔥), the idea of taking away even a part of their power had both an emotional and strategic appeal.

But, like many others, I thought that the large sums venture money going into various crypto companies were barely veiled (or or not) Ponzi schemes. However, I’ve since changed my mind.

It’s still in the eye of the beholder if many of the “Layer 2” style crypto companies that build their own “chains” are speculative vehicles where the goal is not to build a product, but instead to sell it to the next person for higher.

It’s Time to Invest

Yet, I am now convinced that most of the money going into Web3 is going for the “right” reasons: people are in it to make huge sums of money by not just speculating, but actually investing.

Here’s Moxie again:

People have made money through cryptocurrency speculation, those people are interested in spending that cryptocurrency in ways that support their investment while offering additional returns, and so that defines the setting for the market of transfer of wealth

All of a sudden, everything made sense!

Once you see what is going on for real in the crypto space, you realize it’s not that the extremely normal Twitter user and part-time venture capitalist Chris Dixon was being delirious in his seminal “Why Web3 Matters” thread. It was just that he was being extremely evasive (or maybe ignorant) about why firms like his are now so interested in this space.

It’s just business. The short of it is that these firms that have brought you Web 2.0** style centralization with all its benefits and downsides, are now looking for their next big hit. And while Big Tech has already grown to a democracy-defying size while making all their early investors and employees wealthier than gods already, crypto promises a whole lot more; an ability to own and fully control entire economies. Who could (or should, as an investor) miss out on investing in new monopolies that are vertically integrated across the entire economies? Imagine El Salvador, but way…worse? Maybe even dumber, as if that’s possible?

It’s probably not lost on people who have been investing in Coinbase that if you could own the on-ramp into the crypto ecosystem for the masses, that you can exploit all the advantages of being a, or even the, bottleneck. And surely, you could exploit all the benefits of economies of scale over time.

But a gold rush is going to attract a lot of people.

So while Coinbase can charge exorbitant transaction fees today on the retail side, they must know that music will stop with competitors coming in. It’s an existential necessity for them to expand into other parts of the crypto industry. They already announced its own NFT marketplace, and have a MetaMask competitor in the works as well.

On the flip side, OpenSea and their investors must understand a marketplace like their own is the textbook example of a winner-takes-all phenomenon and benefits greatly from network effects. It would in fact be very much in OpenSea’s interest to rip out the crypto parts of their business, both technically and strategically, both so that they can run their business more efficiently and actually make it harder for people to their works take out of OpenSea. And how long do you think it’ll be before they go after some of Coinbase’s business?

For many companies in this space, such centralization efforts will seem benevolent as the crypto pie keeps growing. But keep your eyes fixated on the future, not the past. They must all be seeing more competition in their future than their past. When that happens, expect even more centralization than there is today. When that happens and companies erect barriers around themselves under the guise of user experience or security, the crypto-folk might be left wondering why they let those who built today’s internet with all its problems, own the next one as well.

Final thoughts

Close friends know that I’ve long admired the positivity of the crypto field, with all their “gm”s and WAGMIs. And as a technologist who still writes code, I enjoy the tinkerer’s mindset of the whole scene, with their relentless experimentation. Hell, the mere aesthetic of the scene that feels like a breath of fresh air compared to the mind-numbingly boring, tame af VR crap from Zuck & Co. There’s also something nice about the center of a new technology not being the Bay Area, let alone the United States for once. I am emotionally sold.

I’m, however, still rationally unsold on the promises, and am skeptical of the motivations of most people. I believe the “hitman for hire” problem people bring up with crypto is relatively straightforward to fix, but the mere human capital, both in terms of talent and conversation, that goes into the field annoys me personally. I also don’t know how to square the environmental impact with what little we have achieved with it so far, especially if you discount the self-trading.

I also worry the ironically opaque nature of the technology coupled with the lax regulatory approach will make the current speculative profits by the lucky insiders will make it an attractive choice for those who have been left behind by the more traditional markets.

I was wrong about my roommate and his grift before. Let’s hope I am wrong this time around too.

Felt

My new company is called Felt, and we want to be the best place on the internet to make maps. After raising a seed round, my co-founder Sam, who previously founded Remix, and I spent the last year building the kindest and most talented team I’ve ever worked with. Our goal is to make Felt the best place to be if you are passionate about maps on the web. We are actively hiring for many roles, and especially looking for talented folks to join our front-end team to build something quite magical.

Check out our blog about how we think about technology, about prototyping and maps on the web. We are good people, I promise.

*: There are some even further workarounds to this workaround. The primary approach is using IPFS, which is reasonably decentralized. It’s worth noting that IPFS doesn’t use a blockchain, but is based on a content-addressable system similar to BitTorrent. Between 2012-2015, I worked at a company that was building something very similar.

And yes, the organization behind IPFS did create a cryptocurrency called Filecoin to incentivize IPFS adoption. The success of Filecoin remains dubious and like many other coins, its price is generally correlated to BTC.

**: I am not sure how we ended up re-defining Web 2.0 to mean “Facebook and Google style centralization” versus what it was initially supposed to be: an API based internet where you could freely exchange data between services programmatically. This retconning grates on me, but that’s an entire different rant.

You may have seen the Sex and the City character Mr. Big died after riding a Peloton in the premiere episode of the show's reboot. It led to the inevitable headlines:

Could the death of a fictional character directly affect the financial prospects of a multi-billion dollar consumer goods company? Before we start mixing our correlations and causations, let's take a quick look at few other story stocks over the past week (note - screenshots are from Wednesday):

The past few weeks have been a wild ride down for all of the meme-y, growth-y pandemic story stocks. Something really feels like it's given way in story-stock land. Anyone who has been watching Peloton's stock knew this post-HBO loss of was just a blip in its larger collapse of nearly 70%:

Peloton was the perfect pandemic story. We were all going to exercise from home and they were the innovative leader. They were a tech company. They were really, really cool. Longtime readers know I’m a huge fan of the product, but wasn’t exactly a believer in the stock. In November 2019, shortly before Peloton’s IPO, I wrote:

It’s still a great product and continues to blow my mind just how motivating it is once you’re clipped in. But keeping people clipped in remains a great product challenge, and my even bigger concern is probably consistent with my general skepticism around 2019 tech: realizing a $4 billion valuation is a huge problem. Like every other tech IPO, Peloton has boxed itself in where it can't simply sell a really good, stupidly expensive exercise bike, then go IPO and slowly launch additional business lines. They will have to deliver on so much more.

Instead, they launched that treadmill. I can only imagine the amount they’ve paid to target me, an already existing customer, with online ads, because they are nonstop. They lost $196mm on $915mm of sales on what should be two super high-margin products (the bike and streaming content).

Okay, I was wrong. Like, really wrong. I was skeptical about a $4 billion valuation when Peloton were on track for around $900 million in revenue. In my meager defense, shortly after the IPO, the stock jumped to $35 and then collapsed to $19 right before the pandemic. There was a moment it seemed like Peloton might not successfully sell the 'tech company' narrative and be treated more like a retailer, and the financial markets would feel a bit conventional.

Then the pandemic hit. And just like that…..

Valuations and Innovation

The golden rule of investing is to never regret the money you didn't make. I'll admit, it was pretty tough to watch the stock of a company whose product you’ve very publicly proselytized shoot up. As the valuation skyrocketed to $48 billion, my skepticism of a $4 billion valuation felt pretty dumb.

As Peloton stock has come back down to earth, I wonder how that stratospheric valuation and entire hype cycle impacted the company itself? What did those impossible expectations do to the company's strategy and culture? We all talk about big valuations as an unadulterated good. Headlines celebrate the numbers. Employees mentally calculate personal wealth. Everyone assumes the cementing of category leadership. Somewhere, a little Masa Son gets their wings.

Valuations are theoretically extrinsic numbers that should only live within the capital and financial side of a business. A company's strategic and operational prowess should drive the stock price, not the other way around.

But when very specific circumstances around a once-in-a-century event lift your share price from $19 to near $170, your company has to change. You need to start producing and selling a helluva lot more things. All of your organizational focus will likely move towards customer acquisition and production. Product development and user retention would naturally take a backseat. Sure, someone at the company would keep trying to do innovative stuff, but all the north stars would turn into getting new butts onto bikes.

Peloton’s CEO John Foley essentially confirmed my suspicion:

Foley told employees that in his view, Peloton's current position is rooted in its rush to hire and grow its manufacturing and logistical footprint to meet the pandemic surge in demand and speed up delivery times, which he says made the company "a little undisciplined."

"Every decision we were in for probably 18 months, every meeting we were in, we said, it doesn't matter. Just get the capacity we had to go from here to here, you know, a six-, seven-, eight-, ten-X increase in capacity across a lot of our manufacturing and supply-chain channels. And it was incredible. And it was an incredible job," Foley said.

In chasing those new butts on bikes, the company would have to divert focus away from keeping the old butts on their bikes. Also, getting too many new butts too quickly can result in bad butts. In its early days, Peloton could focus on acquiring the types of users that were likely to become sticky butts and keep using the product. But to make sense of that $48 billion valuation, the company would have to go after anyone who could sign up for Affirm. Did the valuation completely change the internal workings and strategic direction of the company?

I write this as a somewhat disappointed user. I still uses the bike (admittedly, in spurts), but the core offering has not really improved in the years I've owned it. Back in 2018, I wrote how the competitive and group aspects of it were the most exciting part for me. Last summer, I started doing rides with a group from work. It was a fun quarantine bonding experience, but to ride together, we'd have to try to sign on at the exact same time, Slacking or calling each other to coordinate this. This was just one example of an area they could’ve introduced features to promote retention. But they didn’t.

I even envisioned Peloton maybe revolutionizing personalized workouts:

The road to highly personalized workouts cannot be too far off. The system should easily be able to tell you when you’re slacking off, and when you’ve done a great job. Simple additions like recommended riders to follow/race must be in the pipeline. Every exercise app (along with every business) is promising a future full of data-driven, personalized experiences. Given what they have already built, I have faith if any company can deliver this, it’s Peloton.

(For those readers who think my co-host Can and I are a bit cynical, I’d like to submit this as a reminder that we can be huge tech optimists.)

But nothing really improved. There's more types of workouts in the app and some tweaks to the biking UI, but overall the core biking experience has been stagnant.

Did Peloton lose two years of product development by getting locked into impossible sales expectations? Did it provide an opening to not only biking competitors but also the Tonals and Mirrors and connected rowing machines of the world? Did they kill brand equity by acquiring the wrong new customers? Did they miss a huge chance to invent new ways to keep users motivated, the hardest challenge for anything related to exercise?

I’m really intrigued if Peloton might’ve lost a longer-term opportunity around market leadership by trying to achieve something unattainable.

(note 2 on this video)

Crashes and Company Culture

The impact of the stock price on the strategy was clear, but it's also important to remember the impact on the company culture. A 75% drop in a stock price seems pretty bad, but the stock is still trading at 3.5x revenue as of writing. That’s what makes this kind of stock price journey so intriguing. Nothing really changed. If you removed the roller-coaster the company has done…..fine. It’s quadrupled its pre-pandemic revenue. The stock is trading at a reasonable level. It has a bunch of assets in place that have potential.

But from a company culture standpoint, I’m sure there are plenty of employees with options that are underwater. I have to imagine the jarring impact of hiring bursts and freezes will take a toll. The confidence of the average employee in the company might not be great, but this is also a brand I imagine employees love to work for. Can they culturally come back from this?

But then, my goodness, regarding culture, this story about how Peloton canceled its holiday party because of the stock price, and then John Foley had a 'personal' party where he invited all the instructors but no employees, COME ON WHAT ARE YOU THINKING!

In any other situation, this might come off as slightly out of touch, but for a company that feels like it’s facing an existential threat, it seems almost like a nail in its coffin (and honestly, just kinda creepy). That’s the thing about outsized expectations - mistakes like this feel much bigger.

And just like that…

It feels like the story-stock stories of the past two years are done. The days of ZIRP are behind us and a collapse of all the meme-growth-story stocks has already quietly begun. Seriously, look at the chart of any of the fun and crazy stocks you’ve paid attention to and so many of them are already down 30% or 50% off their highs. It’s happening. Right now, the most interesting question should be which of these companies will (or won’t) make it out alive.

There's the famous story of Amazon stock dropping 90% before it went on to be the gazillion dollar company of today. Clearly, Bezos is one of the greatest business people of all time but the company also had very strategic practices in place (this is a good piece on how its cash conversion cycle helped it survive the downturn). Some companies will be well positioned to weather these storms.

Peloton is an interesting one. It really did bring together media+tech+hardware in a way that blew my mind in 2017. But I'm not quite sure what the company is now. It’s still always a great workout. It is still a life-saver for a working parent. It’s still, I think, cool. Peloton, the product, is still fine. But will Peloton, the company, come back from this somewhat artificial stock market roller-coaster and still be Peloton five years from now?

Note 1: I managed to write this entire piece without addressing the stupid Peloton "fastvertising" ad response to the Sex and the City death. That ad was an ad made by ad people to get ad people to talk about the ad. It screwed up the fourth wall for the show in a way that where I’m not even sure if Chris Noth died in the show. It was Ryan Reynolds' ad agency milking Peloton for cash after he did masterful work back with the Aviator Gin Peloton Wife ad. That was great. This was not. Sorry, maybe that is worth another post of just ranting about how bad that response ad was.

Note 2: Writing this made me wonder the history of the NordicTrack company. It’s Wikipedia page is a good quick read. Mom-and-pop shop gets bought by a conglomerate that expands too quickly and declares bankruptcy, and is then bought out of bankruptcy and run well for nearly 25 years by a good conglomerate. Tale as old as time.

Okay, on to the post:

I bought my first pair of Allbirds in Feb 2020. There are certain things I’ll forever associate with providing me much-needed comfort during the early part of the pandemic. My Allbirds are one of them. I love those shoes.

Allbirds recently filed to go public and we’ve now seen its financials. The overall economics are not horrible, but they're not great. The one thing that’s clear is they are unprofitable and have never been profitable. That was weird to find out, because their CEO talked about how they were profitable (from 2018):

Mr. Zwillinger said an initial public offering was “not desirable for a variety of reasons” but that the company had been “profitable since basically day one.”

This Forbes piece did a great job covering this phenomenon of the overly "enthusiastic entrepreneurs" that claimed profitability for years until their verified numbers became public:

Along the way, much of the hype went beyond the trendy shoes, centering on Allbirds’ financial success. By CEO Joey Zwillinger’s account, the company had been “profitable since basically day one” — a remark he made to the Wall Street Journal in 2018. Two years later, he reinforced the message, telling TechCrunch, “We’ve been profitable for most of our existence.”

But when the company filed to go public last month, Zwillinger’s assertions were at odds with disclosures made by the company to the Securities and Exchange Commission. In fact, the company stated in a filing ahead of its planned IPO that it had “incurred significant net losses since inception and anticipate that we will continue to incur losses for the foreseeable future.” AllBirds declined to comment on the record because it is in a quiet period.

The piece cites how the CEOs of Warby Parker, Peloton, and plenty of other companies would all casually drop “we’re profitable!” into interviews. They weren't alone:

More than one in four of the 50 largest venture-backed companies to go public since 2019 made assertions about their profitability that don’t appear to line up with their later IPO-related disclosures to the SEC, a new __Forbes __analysis has found.

Saying you're profitable when you're not feels dishonest. But if you were a buzzy, private company over the past decade, you had every incentive to stretch the truth. Your investors were likely fine with it because it would garner additional interest. An individual journalist would never shelve a trendy story over an inability to verify that detail. And as Warby Parker has shown the public markets will not only forgive you, they'll reward you with a valuation worthy of a pure software company

After the fact, you can always say “non-GAAP!” and “adjusted!” and no one could ever really question you. That's how Peloton justified it:

We were obviously a private company in 2018 and internal company definitions of profitability often differ from [Generally Accepted Accounting Principles].

It's that perfect goalpost-shifting stretch of the truth. As a private company, the only parents in the room were your investors and your board. Maybe constrained access to capital or aggressive journalism might have also acted as parental forces that would provide guidance and discipline, but those limitations haven’t been there either.

TETHER

I'd imagine most Margins' readers have been exposed to the Tether story. I'll try to avoid too much explanation, but basically Tether is a stablecoin that underlies a lot of Bitcoin (and other crypto) trading. A stablecoin is supposed to enable seamless crypto transactions by replacing fiat US dollars, and to do this properly, it should have $1 of real USD backing every $1 of Tether they issue. Tether does not.

The story has been dripping out for a few years now but Bloomberg just put out a canonical piece on the mystery of where is the money backing Tether. More than anything, the sheer size of the operation jumped out at me:

Then, this year, Tether Holdings started putting out a huge amount of digital coins. There are now 69 billion Tethers in circulation, 48 billion of them issued this year. That means the company supposedly holds a corresponding $69 billion in real money to back the coins—an amount that would make it one of the 50 largest banks in the U.S., if it were a U.S. bank and not an unregulated offshore company.

and

Elsewhere on the website, there’s a letter from an accounting firm stating that Tether has the reserves to back its coins, along with a pie chart showing that about $30 billion of its dollar holdings are invested in commercial paper—short-term loans to corporations. That would make Tether the seventh-largest holder of such debt, right up there with Charles Schwab and Vanguard Group.

The story only gets wilder and involves one of the stars from The Mighty Ducks and the guy who co-created the cartoon Inspector Gadget (really!). But the thing that Tether-is-a-fraud-red-pilled me a few months ago was this Deirdre Bosa interview with the Tether GC and CTO:

It's just...so...weird. You have, technically, one of the largest financial institutions in the world, and the General Counsel has a big printed receipt thing (that is I guess a reference to the Bitcoin Genesis Block), the CTO's internet connection drops, and overall, they're unable to answer the most basic of questions. This hits harder for me having worked at a giant bank for years and seeing how disciplined and careful everyone is about everything. And…that’s really not saying much given the behavior of banks in the 2000s.

But...why not keep doing this? The NY Attorney General had opened a probe but let them settle. Tether's circulation keeps growing, and while they're certainly in the purview of Gary Gensler, there has been zero oversight. Seriously, read the entire Bloomberg piece. It's an amazing narrative, but also a powerful reminder of how the combination of endless risk appetite coupled with a complete lack of oversight means major influential companies can act like moody, rebellious teenagers.

PARENTING

Having 4 and a 2-year-old makes you think a lot about limits and rules. It's amazing to see just how effective these little humans, whose brains are still forming, are at calling upon some weird quirk of evolution that instructs them to push boundaries just a little bit further every day. Setting rules and disciplining your kids isn't exactly fun. It often feels thankless and it’s stressful, but it just needs to be done.

When I was reading about private company profitability proclamations and Tether absurdity, the consistent theme seemed to be a lack of parents in the room. Once upon a time, a board member or an investor might have been the one to caution a founder about exaggerated claims. The public markets might have scolded them for their dishonesty. As Matt Stoller might say in his BIG newsletter, the government has forgotten how to govern. All the institutions and economics that once would’ve forced a company to behave a bit more maturely have been missing.

These companies are certainly not toddlers. In any other era, given their age and revenue levels, they would've been well into their lives as grown-up public companies with audited financials. They're fairly mature and they're certainly smart. But for so long, no one has imposed any discipline or heavy-handed guidance and we directly see the resultant bad behaviors. We're dealing with teenagers. The DTC companies mentioned above are certainly not too bad. No one reprimanded them for those little lies and they got away with it. Tether...man...that company feels like the parents left the teenager at home alone for a month and gave them a key to the wine cellar and a credit card with no spending limit (is that part ZIRP?)

It's not just private companies. As regulators are years behind in trying to figure out what to do with longtime public companies like Facebook, the company's entire PR strategy has become that rare combination of petulance and arrogance unique to a teenager. It’s that “I just read the Fountainhead” and know better than you attitude that I personally know so well - I was a high school policy debater!!!

The more I think about all this wackiness and assholery across the economy, it becomes clearer that there have simply been no parents around. The institutions or financial constraints that are supposed to teach a well-formed, but still developing mind, the difference between right and wrong haven’t been around. The entire economy feels like it’s acting like a teenager. Every CEO tweet, every odd price action, Adam Aron not wearing pants, just all of it. The more I remember my own mindset during those awkward, formative years, the more everything starts to make sense.

Note 1: There’s one mystery about Allbirds that really fascinates me. For years, they have referred to TIME magazine saying they are the “World’s Most Comfortable Shoe”. It’s in their S1 six times. It’s their Google Title Tag. They say it nonstop.

After skimming through their filing, I went back and found the original article. The weirdest thing is, the headline clearly says what Allbirds keeps citing….but the article never even comes close to saying this.

I re-read it five times thinking “maybe it’s kind of in there somewhere” but nope, the author never even alludes to thinking this. Maybe he does, but he didn’t write it. The only mention of ‘comfortable’ is: Allbirds, a new San Francisco-based startup aimed at designing environmentally friendly and comfortable footwear, launched Mar. 1.

Knowing very well that at a company like TIME the author likely isn’t writing the headline, and they might even A/B test different headlines, who wrote this headline?? Was the headline writer just a personal fan of Allbirds? Are they now a well-compensated marketer at the shoe company? Was it one of maybe ten different combinations that performed the best? I’m so intrigued… (the original article author did have a hilarious response to a tweet of mine on this):

Note 2: To my Mom and Dad, if you’re reading this, thank you for putting up with me during those teenage years, because….yikes.

Reddit is probably the social platform that has brought me the most uncomplicated joy over the past decade (Note 1). I gauge the quality of a movie or TV show if the first thing I do after watching it is spend hours dissecting it on Reddit. I get a bit emotional thinking about how important r/predaddit was in keeping me confident and sane up until the birth of my first kid. I still type "x item reddit" into Google to research any new products. I once gave a wedding speech where it was all wedding advice gleaned from Reddit (fun fact: it was my pizza arbitrage friend!).

I started spending time on the platform in 2011, and couldn't get over just how much insight there was to be found, and my defunct startup, Informerly, was originally launched under the MBA-tastic tagline "Reddit meets Bloomberg". The first idea my cofounder and I tried was building a social news community focused for professionals. It felt like there was a massive gap between the depth of conversation taking place on Reddit and how fragmented discussions were across the professional information tools I had experienced on a trading floor and while at the Financial Times.

We pivoted fairly quickly to a personalized newsfeed product versus social news, but finally in 2021, Reddit for the enterprise has turned out to be....Reddit. I should be ecstatic. Hedge funds are monitoring Reddit conversations. Every esteemed financial publication has had endless headlines about merry bands of Redditors. I have even been on CNBC talking about Reddit memes. This was kind of the dream!!

But there's one thing about Reddit’s ascendance I want to highlight, and it goes back to the very unique funding structure through which the platform has been allowed to develop.

Media Shangri-La

A lot of Margins readers might be somewhat familiar with the Reddit founding legend. The startup was part of the first YC batch, pretty quickly was sold to Advance Publications (the parent company of Condé Nast) for $10 million. As a full disclaimer, what comes next is pure media gossip: Apparently, the purchase was a strong reaction by senior execs at Advance Publications who were worried about "not getting the internet" so they jumped on Reddit. Once it made its way into the corporate behemoth, no one really knew what to do with it, but they didn't want to mess with it and hurt their potential internet cred, especially as the print media business was beginning its decline (again…pure, unadulterated media biz dev gossip, if anyone has more insight please reply!)

For years, Reddit lived this kind of utopian commercial-pressure-free existence. The post-ranking and voting mechanisms that generated amazing discussions never really evolved from the early days, but they didn’t really need to. It worked. The site grew to hundreds of millions of monthly pageviews, with barely any advertising revenue goals or a concerted push for engagement or growth. It didn’t work as a business but as a digital gathering place (Note 2). My favorite thing was there wasn't even a proper mobile app (remember Alien Blue?) even as Facebook and others loudly went mobile-first.

It was only in October 2014 that the utopia ended. Reddit became a standalone commercial entity, raising a $50 million round. This isn’t really relevant, but I just had to share this part of the announcement:

More interesting than the amount raised, however, was that investors promised 10 percent of their new equity in the company will be shared with community members, a highly unusual move. While the exact mechanics of how these shares will be distributed to users is not yet clear, lead investor Sam Altman told The Verge that it will most likely use a block chain method similar to the systems used to create and distribute Bitcoin.

The next few years weren't the smoothest, with multiple CEO resignations and no shortage of controversy. The interface and app didn't change that much, but there was a slight push on the advertising side. In 2014, the site only made $8mm in ad revenue (and their commercial ‘team’ worked out of the same WeWork as yours truly!), and they grew to about $20 million in ad revenue in 2016 - remember that was when there was endless speculation about could "Reddit become a real business".

It was in 2017 that things really started picking up on. Reddit raised a $200 million round (including money from very professional money like Coatue) at a $1.8 billion valuation. Armed with institutional money and credibility, Reddit started making serious moves. It started with a major redesign:

Huffman’s plan for the new funding includes a redesign of reddit.com — the company is literally re-writing all of its code, some of which is more than a decade old. An early version of the new design, which we saw during our interview, looks similar to Facebook’s News Feed or Twitter’s Timeline: A never-ending feed of content broken up into “cards” with more visuals to lure people into the conversations hidden underneath.

“We want Reddit to be more visually appealing,” he explained, “so when new users come to Reddit they have a better sense of what’s there, what it’s for.”

For anyone who has used Reddit, its simplicity was always a key UX selling point. That was the first sign that it might start to look a bit different.

Growth Legends

For me, the biggest sign that this was turning into a growth machine was the April 2018 hiring of Jen Wong, the former Chief Operating Officer at Time Inc. (who guided them to a very successful exit to Meredith). I knew a bunch of people at Time who worked in her organization and the consensus was she was a Chamathian-level growth legend. She had cut her teeth at Huffington Post and then PopSugar and knew how to rapidly scale digital media properties. At Time Inc she rapidly jumped up moved up to Chief Operating Officer as they leveraged every ounce of a century of brand credibility to surpass traffic and revenue goals. (My favorite was in 2016 when they launched Extra Crispy, a breakfast-focused editorial vertical. Fond memories of 2016 digital media).

At the time of her hiring, Reddit had around 330 million MAUs. She boldly told the WSJ that they would grow to one billion monthly users. I still remember reading that line because it was clear that the entire strategic vision had shifted to hypergrowth...which is...fine. Of course, I wondered if the Reddit I had come to love would get morphed into some Facebook-like, quick-hit passive feed, but I accepted its utopian Advance Publication days were never a sustainable business.

Engagement

After years of static product development, Reddit's web and mobile presence started rapidly evolving. I remember receiving the first email Daily Digest a couple of years ago. Right now I'm scrolling through my app feed and I'm seeing a Top Broadcast live video thing, about 50% of the posts have some kind of imagery or video, I see a few "Popular on Reddit right now" suggested posts that are all videos. There are plenty of promoted posts (mostly video, some imagery)..again...which here are a number of "similar to" suggested Subreddits (because I follow r/Patriots, maybe I'll like r/buccaneers, I follow the r/BATProject so maybe I’d like Binance).

There are "Because you visited this community before" suggestions (r/ouraring - does anyone have thoughts on this product?).

At some point, I had to turn off my iOS notifications because everything was "you might like this post or community". That suggested content is annoying but logical. Any content feed that’s looking to hit a billion users will probably be video-heavy and need to keep surfacing more communities and content. I’ve definitely been getting Reddit links shared from a lot more normie friends who had never mentioned the platform before.

SAVA

Again...this is all....fine. Reddit is reportedly raising up to $700 million, is valued around $10 billion, and is supposedly looking to IPO around $15 billion. And of course, as we all know, Reddit has now achieved a cultural resonance thanks to r/wallstreetbets I never could've dreamed of when I was awkwardly pitching a startup that would "bring Reddit to the professional world" 🤮.

But on this last part, for a long time, I never connected Reddit's engagement-driven transformation and the explosion of memestocks. I had always been impressed by how insightful a lot of the r/WallStreetBets analysis was. For the early part of the memestock craze, I just assumed it had rightfully spilled over into the mainstream.

But in mid-August, a friend was going on about Cassava Sciences ($SAVA). It had nearly doubled from a recent low (from around 65 to 130) and he was saying it would revolutionize medicine or something. I had heard of the stock in passing but never paid too much attention. I briefly ended up in r/SAVA, and a few days later, this was my Reddit daily digest email.

It became a regularly suggested subreddit and followed me around my Reddit app and emails like a pair of shoes you clicked on once in the digital ad world. Reddit was insisting that I pay attention to $SAVA. At some point, I ended up on this post questioning if SAVA is a fraud and read about the CEO's Elon Muskian compensation scheme that ties cash payouts to sustained valuations:

"The Plan is triggered only if the Company achieves $200 million to $5 billion in market capitalization. The Plan specifies 14 distinct valuation thresholds between $200 million and $5 billion. Each valuation threshold must be achieved and maintained for no less than 20 consecutive business days for participants to be eligible for a cash bonus award. Each valuation threshold triggers a separate cash bonus award in a pre-set amount defined in the Plan."

This really went from a casual search to Reddit insisting repeatedly that I pay attention to SAVA and me feeling that I was now 'doing the research' and uncovering some grand conspiracy. It was such a clear reminder of how quickly this kind of stock-market analytical radicalization can take place. I went from trying to ignore a stock to a single search convincing me I had uncovered some deep state-esque management conspiracy.

Topical Radicalization

It's hard to say whether this form of topical radicalization is intrinsically bad. I bought a sous-vide a few years ago, and can genuinely say that r/sousvide has sous-vide radicalized me. I think about sous-vide a lot. I challenge my levels of sous-vide'ing with new types of food (I just did octopus the other day). I critique the steak-searing abilities of others. And I love it! I'm genuinely convinced sous-vide innovation is a revolution in home cooking. This is Reddit perfection.

The other day a friend (again, the Pizza Arbitrage restaurant owner friend!) told me that making mozzarella could be a fun activity to do with my kids and I read through some r/cheesemaking threads. Just like SAVA, cheesemaking posts instantly started making their way into my Reddit feeds.

I still haven't joined r/cheesemaking or made cheese, almost out of algorithmic defiance. But cheesemaking is still on my mind because Reddit has deemed it a topic that could get me more engaged with the platform...and it's probably right!

Memestocks

When the history of the memestock craze is written, there are a lot of known factors (or at least, they’re clear to me). ZIRP. Robinhood and the gamification of trading. Stimulus checks and people sitting at home. But especially, in light of this week’s amazing Wall Street Journal series the Facebook Files (which I’d recommend everyone read every single piece and we’ll certainly cover it soon), unanticipated consequences of engagement-driven algorithms are top of mind.

When Reddit raised a ton of money and hired a media growth legend, I’m sure sending AMC to the moon was never on anyone’s mind. But as we slowly try to make sense of what’s happened in the financial markets over the past year, it’s worth remembering how a redirection in a business model and UX tweaks can create massive outsized behavioral changes that make the world a lot weirder and harder to understand.

Also - while we happily keep Margins free to excuse our unpredictable delivery schedule, if you feel so inclined: I’ll be taking part in the Making Strides against Breast Cancer walk in Central Park in October for the American Cancer Society. Would love it if anyone could make a donation!

Note 1: One thing I purposefully left out of this entire post is the ‘bad side’ of Reddit. There are endless issues that arose over the years (TheDonald, The Fappening, and the list goes on). I concede those issues are a good reminder that engagement-driven algorithms aren’t the only issue we collectively need to get our heads around (plenty of them existed long before the big changes at Reddit). This would probably require an entirely different post, but whenever people try to say “people are bad” or “Fox News is also bad! It’s not just Facebook” my answer usually is...yes.  

Note 1: While writing this post and thinking about pre-2014 Reddit, it really did make me wonder whether some kind of taxpayer-funded social network with no aggressive commercial goals could create that digital town square that actually could be a reasonable town square.

Note 3: If the question of old-school Reddit credibility ever comes up, I will readily bow down to my co-host Can. He worked at Digg when it was dominating the world of social news (and whose demise opened the door for Reddit’s success).

Everyone seems to be talking about inflation, but I’m still having a lot of trouble imagining what non-transitory inflation looks and feels like in real life. As an econ undergrad, sure, I get the technical definitions and feedback loops. As someone who worked in emerging market finance, I’ve certainly watched other countries experience inflation through a terminal screen. As someone who reads plenty of economic history, I have clear hyperinflationary mental images of wheelbarrows of money. As a parent living in an expensive urban area, I'm well acquainted with the cost pressures of education, health care, and housing which create endless stress but don't really count.

You all know one of my theories of everything is that ZIRP (zero interest rate policy) drives so much of the odd and bubbly behaviors in the financial markets. But I'm surprisingly not a believer that the Fed is going to spur Weimar-style hyperinflation (Note 1). Yes, ZIRP creates very weird and problematic risk behaviors, but I recognize it’s not a guaranteed recipe for buying milk in the morning out of fear the price will be higher in the afternoon. 

(American privilege alert) The most difficult part of trying to engage with the "is inflation transitory" debate is I've never experienced problematic inflation. I have a hard time conceptualizing the stagflationary or hyperinflationary dynamics which destroy lives. So many of the conversations I have felt like this as well. You talk in circles like “if you’re going to buy that bed now instead of later because you think the price will go up, that’s good for the economy this quarter!” What does it feel like to buy things, today, out of fear of runaway prices, tomorrow? What does inflation feel like when it’s not “the good kind”?

I think I've finally found one part of the economy where I'm already seeing a kind of stagflationary dynamic play out—Facebook ads.

Good Inflation, Bad Inflation

As a quick primer/reminder - when inflation is driven by more demand chasing a fixed number of goods, it can be the “good” kind. If inflation is driven by businesses raising prices to accommodate for higher worker wages it can also be the good kind. There are a lot of “good” types of inflation (and ones that mysteriously disappeared from the economy over the past decade). But then you get into the dreaded ‘stagflation’ - a portmanteau of stagnation and inflation - where prices rise while economic output contracts.  

What's been happening in Facebook ads over the past six months has been fascinating (note: I’ll use the term “Facebook” throughout to really mean “Facebook-owned platforms which would include Instagram and to a lesser extent, WhatsApp). There are a few concurrent dynamics at play that are creating a perfect stagflationary storm. 

First, if you caught a glimpse of Facebook's Q2 earnings...well, holy shit. Let's just take a moment to remember that Facebook made $10.4 billion in PROFIT in just one quarter. They made $10.4 billion in PROFIT from 'only' $29.08 billion in revenue (Note 2).

Advertising revenue made up $28.58 of the $29.08 billion in revenue. Facebook is a digital ad company. But the metric most important to this newsletter is the average price of advertising across Facebook went up 47%. In Q1 the average price of an ad went up 30%. The cost per ad is skyrocketing.

These numbers will feel a bit exaggerated as they’re compared to the quarters from the height of the pandemic. But rising Facebook acquisition costs are front and center for every digital marketer. It's brought up in every virtual panel and it makes sense - Facebook only delivered a total of 6% more ads in Q2 while prices went up 47%. When the majority of people in the world already use your products, there are only so many more ads you can cram into user feeds without completely destroying the experience (the technical term for that challenge is ‘ad load’).

But we also have a situation where digital ad spending is rapidly growing and there's no end in sight. Even in 2020, with a severe economic contraction, digital ad spend grew 12%. In the last two quarters, brands that had cut budgets are back with a vengeance. Travel, leisure, and every service benefiting from the economy’s re-opening is back spending. The rise in online commerce has also meant brands who traditionally spent big on analog media are shifting more towards digital platforms.

There's more and more money chasing a relatively stable supply of goods. Prices are increasing but no one is going to leave Facebook. 

It's not just Facebook. There's plenty of increased spending on other digital channels as well. Snap, Pinterest, and Twitter are all finally seeing some ARPU growth. TikTok is certainly building a solid ad business. But Facebook remains the perfect self-contained representation of how more money chasing finite goods leads to rapidly rising prices of effectively inelastic goods. Is this what kind of bad inflation looks like?

Et tu, Weimar

But now for the troubling part.

You've likely read about the huge changes to tracking brought about by iOS 14.5. where iPhone owners "Ask App Not to Track" prompts. I've seen numbers ranging from 96% of users are not opting in (which sounds a bit high) to 67% of users are opting out (which feels more right?) Whatever it is, this will have a major impact on Facebook's ability to target and the overall quality of its ad product. They've been openly talking about it in their earnings calls and launching a full-scale attack on Apple.

The impact is already being felt. In addition to the rising prices of ads, another conversation dominating digital marketing chatter is how Facebook conversion rates are declining. Fewer people who click on your ads are buying things on your website, likely because they're not as perfectly targeted as before. We can save the conversation about whether this is good or bad for society, users, and small businesses, but it's a real thing (Note 3).

So the price of an ad is increasing while its quality is decreasing. Advertisers are paying more for less. Prices are rising while the overall economic activity declines as fewer clickers of ads end up buying things. 

Advertisers will still have to go where the people are and Facebook still dominates the attention of users. It's like buying milk. You will not approach the product in a 'rational economic actor' way where increased prices lead to decreased demand. Sure, every marketer is coming up with channel diversification strategies, but for the coming quarters, this trend will continue. Again, this piece isn't about assigning blame to Facebook (or the businesses built on and around it). It's a genuine effort to try to reflect on what a bad inflationary dynamic could look and feel like.

More marketing money is shifting to digital. The total amount of marketing spend is increasing as the economy re-opens. These are the demand-side and monetary inflation pressures. Facebook can only minimally increase the number of ads it serves. The iOS 14.5 measures will decrease targeting efficiency. These are the supply-side constraints and shocks. With Facebook ads, I’m finally seeing an example of what higher prices combined with lower economic output can look like.

I guess this is what bad inflation looks like?

Note 1 - Given the past decade of low interest rates and low inflation, I fully acknowledge that inflationary dynamics are much more complex than “Fed money printer goes brrrr => hyperinflation => buy BTC”. However, I just can’t give the Fed credibility around predicting how inflation will behave. We spent a decade trying to unsuccessfully increase inflation to 2%. The idea that we’ll perfectly time it the other way, and orchestrate the exactly correct monetary policy to safely land us back to 2% inflation feels egregiously overconfident.

Note 2 - Every time I see a $FB earnings report and am reminded just how obscenely profitable the business is, I can’t take anything they say about disinformation seriously. If they ever wanted to devote real resources towards solving the externalities their platform creates, they could. They don’t.

Note 3 - I still feel the debate around do users ‘really’ want personalized ads has been misguided.

The issue is not “do users want personalized services or not”. It’s simply can you PLEASE be transparent about how you collect my data and manage my data in a safe, responsible way. Do that first, build up trust, and yes, then I imagine there would be a lot more people being okay handing over their data and we could all build beautiful, personalized ad ecosystems.

There have been so many times over the past decade I’ve thought, “things can’t get weirder and stupider.” And then they do.

At that time I wondered about how Gamestop management would handle the January stock price rise:

Gamestop's CFO is a guy named Jim Bell. I feel he might go by Jimmy B. He was formerly the CFO of the PF Chang's holding company (awesomely named Wok Holdings). He was a Naval Officer. Jimmy B. seems like the type of guy you'd want to handle such a high-pressure situation.

Well Gamestop CFO James Bell clearly handled the pressure in his own way. He announced he'd be leaving the company at the end of February, which allowed for the accelerated vesting of his equity, netting him tens of millions of dollars for less than two years of work. The Gamestop CEO, who started at the company in April 2019, and is walking away with potentially a couple hundred million. The WSJ has a good writeup of all the numbers.

I certainly can't blame any of these guys - reporting indicates they were pushed out by the new Ryan Cohen regime. Whatever the opposite of collateral damage is, that was them. Must be nice.

AMC, Adam Aron, and Apes

While the old guard of Gamestop golden parachuted their way out of the gaming game, things are very, very different over at AMC. Last Tuesday I was on CNBC’s TechCheck discussing AMC (Shameless plug alert that my co-host Can will give me shit for): 

At around 0:50 I say that Adam Aron, the CEO of AMC, is the most interesting character in this entire AMC story. When the show aired, I thought that statement was maybe some kind of under-the-radar, Margins-y insight. He’s certainly a known quantity now.

Before this Week

Let’s look at Adam Aron in the news before this week. If you searched for Adam Aron before this week, his name was only in headlines about AMC’s mask policy back-and-forth last summer.

But, in early May, on their most recent earnings call, he quietly pledged allegiance to the lords of the meme. First, he divulged that AMC had 3.2 million individual shareholders (as of March 11) who own about 80% of the 450 million shares outstanding and that he was here for it:

These individual investors likely own a majority of our shares,” Aron said during Thursday’s call. “They own AMC. We work for them. I work for them.”

There's almost something beautiful in it. The average person now owns this company and the CEO is saying he works for them.

And then that earnings call got a lot more 2021.

You see, Apes Together Strong has been a running meme in r/WSB world:

Traders call themselves the Ape Army. This led to a donation push back in March by the r/WSB folks to adopt a number of gorillas. In six days they raised over $350k for the Dian Fossey Gorilla Fund (Note 1).

On that May earnings call, Aron announced AMC’s Charity Cares and Aron personally would be donating 100k total to that same exact fund.

He went full meme. Not only did he acknowledge the new majority ownership of retail investors, he paid full homage to the memes, and he did it in the language of the meme. He told the Ape Army that he respects them and understands them. It wasn’t done in some cheesy corporate how do you do fellow kids way either. It was the perfect insider-y reference that seems absurd or irrelevant to an outsider. It was perfect memespeak.   

This week

Okay, before this week, gorilla donations and proclamations of democratization on an earnings call were how Adam Aron was going full memestock. But this week, holy hell. 

On Wednesday morning, AMC announced a new program that would give perks like a free tub of popcorn to its retail investors. This was now official policy. That consumer marketing-meets-corporate governance effort was officially being put into place.

But, again, it’s 2021, and things couldn’t stop there. 

On Thursday evening, my YouTube homepage prominently told me that Adam Aron was being interviewed by someone called Trey Trades, whose Twitter bio succinctly says, “fighting for the market of the apes.” 

Okay, a 66-year old CEO of a public company with a $24 billion market cap going on a memestock YouTuber’s show might be quite a radical departure from the norm. But this CEO’s company is worth $24 billion because of these very apes so I guess it’s not that weird.

Then came a moment that makes 2021 smile with pride. 

Yes, as his camera fell, AMC CEO Adam Aron was wearing no pants during the interview.

I will refrain from any references to emperors and clothes, but let’s note that Adam Aron was born in 1954, is a co-owner of the Philly 76ers, and is the former CEO of fancy things like Vail Resorts and Norwegian Cruise Lines. He's a Harvard undergrad and Harvard MBA. This guy is as establishment as it gets, and I imagine, as polished as it gets.

Sure, a Boomer getting caught no-pants-Zoom is not an unfathomable thing, but Adam Aron has been at the top of a very buttoned-up game for a long time. Is he really a no-pants-Zoom kind of guy? I mean, he was even wearing a shirt and tie!

I can’t stop thinking if the lack of pants was a bit of engineered virality by his already-proven-to-be-genius social team. I also can’t help but wonder if he had on those gold toe dress socks that my own Dad always wore. I know, it’s weird, but this is a weird time. 

This is such a fascinating combination of consumer marketing and investor communications. For a consumer business that was in both a financial and secular crisis, could these crazy moves actually work? Customer acquisition in any business is expensive and tough but now you have an army of 3 million retail investors who are both financially and emotionally tied to you. Maybe they’ll buy a movie ticket. Even if they don’t, you are continuing to issue equity and paying down your debt. AMC wanted to be authorized to double their share count in early May but it was voted down. As of this week, AMC is still trying to issue more equity and people have kept buying the entire time.

No pants Zooms and gorilla memes might just push through a transformational recapitalization of a 100-year-old company. That would be the most 2021 thing possible.

Regulation

I’ll end this by saying, while I empathize with financial regulators right now, the markets feel like a referee losing control of a game—where it starts with a few small things no one sees are mishandled, but soon it turns into this:

I get that things are confusing. Is a donation to a gorilla conservation fund an investor pitch? When Elon tweets emojis, whether they are 💎🙌 or a 💔, and the price of crypto fluctuates that clearly affect the profitability of the very public company Tesla, there are no ramifications.

In terms of regulators, this week we found out right after getting a sternly worded letter from the SEC about previous tweets, Elon tweeted:

For the less crass amongst us, he told the SEC to Suck Elon’s Cock, but just imagine in a courtroom, an SEC lawyer trying to explain this and Elon saying he really meant “Save Elon’s Company” or something ridiculous (Note 2). He’d probably be dressed up as Wario.

When emojis and gorilla donations are a new form of investor communications, it’s understandable that traditional regulatory frameworks won’t be sufficient. But we need to catch up. This stuff isn’t going away.

And as AMC has shown us, it can be a very real, strategic, and potentially reasonable thing in the world of capital allocation. In a world where Blackrock, State Street, and Vanguard basically own the entire stock market, there’s still something Bernie Sanders-beautiful about the idea of millions of regular people coming together, powered by social media, to own a company. It’s even more inspiring to think that these investors could then become a consumer force, lowering marketing costs and increasing profitability. The stock rises because they’re buying the stock and their products, and maybe the CFO meets more with the CMO and come up with customer acquisition-meets-capital raising strategies (Note 3). It sounds kinda nice, no?

Of course, this could also just all end up as one big pump-and-dump, but hey, it’s 2021, who knows how this ends?

Note 1: Dian Fossey, the lady the conservation fund was named after, has a crazy story.

Note 2: My co-host Can wrote the other day about how the key to our current-day grifting is utter shamelessness. Just reading that Elon SEC tweet reminded me how true that is.

Note 3: I’m really curious how many consumer companies are trying this AMC style of capital raising. Right after FIGS IPO’ed I’ve been getting promoted tweets nonstop (and have never been on their website and am certainly not a doctor). I’ve noticed the same thing happening with other companies. Are they already allocating marketing channels to drum up retail investor interest?