Discover more from Margins by Ranjan Roy and Can Duruk
Everything is a tech company now.
Can here. Let’s talk tech.
Blockchain on Ice
I am not sure where we are with The Blockchain on the hype cycle, but it’s fair to say the worst is over. It was good while it lasted, and I don’t mean just financially. Whenever there is money, there’s fraud and whenever there is some irrational exuberance, there’s someone to take advantage of that.
Thus, I followed the Long Island Iced Tea Blockchain drama with deep, sustained interest. And boy did it deliver!
Matt Levine has been on it since day one. At some level, there’s not much to the story other than “people are attracted to shiny things”; turns out you can simply suckle on that sweet cryptocurrency nectar by simple adding “Blockchain” to your name. People (or computers, who knows anymore) will think it’s going to make them money, and buy the stock based on the name.
Really, that’s it. I feel dumb typing these words, so I am sorry if you didn’t know about this and feel dumber reading them. But I have a point.
Look, there are run off the mill ICO scams, but they actually require work. You need to create a swanky website, hire someone off of Upwork to create a white paper full of indecipherable jargon, create an illusion of activity on various subreddits and Telegram channels. It’s probably less work than actually doing productive work that benefits you and the society for a similar gain, but still, it’s tedious.
But you can, you know, just pretend. And it works, I guess, until it doesn’t. You have to appreciate the brazenness, if nothing else. None of this is legal advice, obviously.
Laziness as a Service
This entire thing works because, fundamentally, people are lazy. There are only so many hours in the day and understanding stuff takes energy. A better way is to something you already know a lot about and bank on (leverage?) that knowledge. Associations are powerful, because they are cheaper than learning. You don’t need to tell me that your store will be filled with identical looking but oddly soothing, well-proportioned furniture; you can just call “Scandinavian Design” and I’ll probably pay more than I’d have had it been called “Furniture”.
You might think finance folks would be less prone to this, but apparently not. Even in an industry known with its obsession with reducing every complex phenomenon to its measurable bits, and comparing them to other phenomenon with similar bits, you can rely on people being lazy to make some money. There’s a fine line between lying to people and preying on their laziness, but that’s a philosophical question.
I think what this means to be a “tech company” often. Benedict Evans recently wrote about Netflix, and how it not really a tech company. Evans says Netflix is a media company that uses technology “as a crowbar” to enter. He writes that the main drivers of the business Netflix is in content. While the technical aspects are impressive, they are quickly getting commoditized, lowering Netflix’s competitive advantage.
I wholeheartedly agree.
In fact, I am somewhat relieved that relatively influential (if not a bit controversial) figures like Evans can comfortable call a company like Netflix “a media company that uses” versus a “tech company”. This seems like a new development. Netflix is located right in Silicon Valley in Los Gatos. It has tons of engineers. It’s the N of the FAANG.
This does not mean that the technologists over at the company are not doing innovative, technically challenging work. But it means whatever work they do, the company will live and die mainly by its ability to create as much original content a possible. The rest, as they as, are on the margins.
Tech of Tech
If you spend all your time in code, it can get easy to ignore the forest for the trees. Yet, today, many of the new companies operate mainly through a network of emails and changing data on some spreadsheets. Sometimes, a company’s needs are so unique that they hire a bunch of people to help them send less emails, and make that spreadsheet more usable. This takes a certain amount of technical talent, surely. If you need to do a lot of work, you might need to take apart some of those systems and rebuild them to scale, but even that is becoming less of a problem.
So, what is a tech company then? Is there a way to group tech companies into a group, so that, say, we can compare them? There are many ways to do.
Take public companies for example. There are companies that use various methodologies to divvy up those companies into neat lists, called indexes. There’s a ton of financial literature why indexes are useful. We wrote about how they are both useful to invest in, but also scarily powerful.
Indexes, however, are not really useful many reasons. First of all, they generally exist only for public companies. This makes them pointless when looking at startups. There are some exceptions, as more companies spend their private time rubbing elbows with public company people, but still. They can be a good way to see if the markets think a company does business in the “technology” business, but they don’t add much to analysis.
Let’s Check the Books
If you want to go deeper, you can follow the same playbook analysts use. How a company spends its dollars can give you some idea. For example, you could look at the R&D spend as a percentage of its sales, and the more a company spends on it, the more tech-y it’d be. But even that would a bit misleading. Capital expenditures which are typical of really large tech companies are hard to tease out from financial statements. Similarly, acquisitions muddy the water, as they can come in various forms, like buying technology or simply marketshare. And maybe more fundamentally, your dollar gets a lot more R&D mileage in some companies then others.
Or you could go the other way and see how a company earns its dollars as opposed to spending it. Companies that sell software online, for example, would be more similar to other companies selling software online than those that sell toothbrushes online. They would have similar cost structures, similar earnings per share, and such. Maybe, and I can’t stress this enough, comparable margins.
You could call the software folks “tech”, and the rest “online retail”. This sounds more accurate to me them lumping the toothbrush people with the tech people.
Show me your Enemy
I generally view the world of business through lens of competition, so I am partial to this approach. Your identity as a company is defined by who you compete against. Of course, this is a bit of a circular approach. Who gets to be the initial tech company to be compared to? I don’t have a good answer here.
And, selling goods and services is not the only place where companies compete. Talent, for example, is an increasingly scarce resource in Silicon Valley and you see companies compete for it often. The recent resurgence of distributed work evangelism has more to do with dearth of people to hire in a tiny earthquake prone region, then, say, an enlightened view of what work should look like.
There’s probably a simpler answer here that “whoever has the last word runs the company”. This rings true to my experience. You could, for example, be the highest paid person in the room but that doesn’t mean that you have the last say. If you are, say, in the business of providing transportation as reliable as running water for everyone, and you are running out of drivers, it’s more likely that you are an “operations” company than a tech one.
Working in technology is fun. There are few purer joys than being able to type something on a computer, and see its effects in real life. Sometimes, that comes in the form of moving people around, and sometimes helping a business run more efficiently. However, it is misleading to conflate the how a business runs to how it makes money. People, with both malicious and benign intent, will always go extra lengths to present themselves in the best light. Where that care for style and flourish crosses the line into maliciousness is in the eye of the beholder. Thoughtfulness is the best I can hope for. Maybe we’ll get there one day.
Congrats on the IPO, WeWork.
What I’m Reading
This Land Is the Only Land There Is: Climate change is real, and it coming in fast. There are no two ways about it and we are nowhere near ready. Robinson Meyer at The Atlantic goes over UN’s latest report on climate change and wonders if we literally have the resources to fight it. The idea that we need to not just change our habits, but actually transform the earth to undo the damage we inflicted is fascinating intellectually, and dreadful realistically.
But that’s not my point. To address climate change, we will need to reduce our use of fossil fuels, and replace energy generated in the past (by long-dead plants) with energy generated today (by wind turbines, solar panels, and uranium atoms). But, this report adds: We must do all that in a house of only 52 million rooms, the majority of which already serve as someone’s bedroom, bathroom, or kitchen. And those 52 million rooms must stage not only the unending drama of the human family, but also—as far as we know—every other living thing in the universe.
The Lonely Work of Moderating Hacker News: I’ve long stopped reading the comments but checking Hacker News daily has been part of my routine since its inception. One of my favorite writers in tech, Anna Wiener (whose book I’m really excited about), talks to the two moderators of that orange website that sets the zeitgeist in tech. She uncovers the human side of moderation while not mincing her words. This paragraph is stuck in my head forever:
The site’s now characteristic tone of performative erudition—hyperrational, dispassionate, contrarian, authoritative—often masks a deeper recklessness. Ill-advised citations proliferate; thought experiments abound; humane arguments are dismissed as emotional or irrational. Logic, applied narrowly, is used to justify broad moral positions. The most admired arguments are made with data, but the origins, veracity, and malleability of those data tend to be ancillary concerns. The message-board intellectualism that might once have impressed V.C. observers like Graham has developed into an intellectual style all its own. Hacker News readers who visit the site to learn how engineers and entrepreneurs talk, and what they talk about, can find themselves immersed in conversations that resemble the output of duelling Markov bots trained on libertarian economics blogs, “The Tim Ferriss Show,” and the work of Yuval Noah Harari.