Shomik Ghosh - A SaaSy Conversation
The Business Brew is joined by Shomik Ghosh. Mr. Ghosh is a Principal at Boldstart Ventures, a day one, pre-product partner for technical founders with portfolio companies such as Snyk, Kustomer, BigID, Superhuman, Front, and Security Scorecard.
His career has spanned everything from fixed income sales & trading to investment banking to venture capital. He specializes in enterprise software for his day job and long-term competitively advantaged businesses in his PA (a lot of which are also enterprise software companies 😀).
Shomik has been trying to make Bill less stupid for almost two years now. He succeeded in this conversation. We are grateful for his time and appearance. Follow him on Twitter!
Album art photo taken by Mike Ando.
Thank you to Mathew Passy for the podcast production. You can find Mathew at @MathewPassy on Twitter or at thepodcastconsultant.com
+ Transcript
Bill: Ladies and gentlemen, welcome to The Business Brew. This is your host, Bill Brewster. Super fortunate to be joined today by Shomik Ghosh, ex Minion Capital, doxxed himself. I can't say enough good things about him. We've communicated back and forth virtually. We were supposed to meet in New York or San Fran, one of the two, and then unfortunately 2020 happened. That's happened to a lot of people out there. We're doing this virtually. Hopefully, it's a great time on the pod. As a reminder, none of this is investment advice. We're not your fiduciaries, not your financial advisor. We're not soliciting or offering any securities, so do your own work, get your own advisor, do your own due diligence. Shomik, how's it going, man?
Shomik: It's going great, Bill. Thanks for having me on. I’ve got to say, I love what you're doing with the podcast. The first few episodes that you've put out have just been all remarkable. Somebody else mentioned this, but you have the perfect voice. It is so freakin’ good. It's actually [unintelligible [00:01:18].
Bill: [laughs] Well, maybe this is just one big radio resume for me. Who knows?
Shomik: [laughs]
Bill: If that's how it turns out, I'd be totally fine with that.
Shomik: [laughs] I would say that you’ve got to get your Sirius XM spot and start doing this on Sirius radio.
Bill: That's right. I'm just trying to be part of the big content grab. I'm real cheap relative to some of these guys. If somebody wants me exclusively-- I'm always fielding offers.
Shomik: Yeah, that to me is some of the most interesting stuff happening in the podcast space. I don't really know that much about it. I know what's driving it, the margins behind and things like that, but to me, it's so interesting to see like Joe Rogan, get bought by Spotify. I get why Spotify wants to do it. I guess I get why Joe Rogan gets it because he probably just got a large cash payment versus just having a crew that over time. As a listener, it seems like a worse experience because now-- I don't know if they've locked it only to Spotify platform. [crosstalk]
Bill: Yeah, they just did.
Shomik: Okay, so if they did, like, if you're Joe Rogan, maybe you don't care, because you already made your money you already had a large enough gathering anyway, but it seems the reason he started this podcast was get more people listening to him and grow from there and now you just capture at least the ability to spread. I don't know, it's an interesting phenomenon.
Bill: Well, Shomik, I think everybody is altruistic until $100 million hits the table.
[laughter]
Shomik: Exactly. [crosstalk]
Bill: Then maybe you say, “You know what? I don't need as many listeners.”
Shomik: [laughs] I would take the money in that case as well. It is just interesting, because I wonder like, Patrick O'Shaughnessy, do you think he would take an offer from Spotify? I don't know. I hope not, though, because it would really be crappy to have him and the knowledge he's spreading be blocked from everyone else to listen.
Bill: Yeah. I obviously can't speak for him. I can speak for me. When I was thinking about what I wanted to do with this-- First of all, somebody comes up with that kind of money, I'm whoring myself out. Not at all going to pretend that I wouldn’t, but it would need to be a reasonable amount of money because the thing that I am trying to do with this podcast is spread knowledge in a way that I think is enjoyable, and maybe unique to me being able to do. The benefit that I derive is I'm able to get a lot of phone calls that I couldn't have gotten in the past. I wouldn't trade my network for money that wouldn't change my life. But if you're going to give me life-changing money, then-- there's a price on everything.
Shomik: [chuckles] No, I completely agree with that. That's the funny part about even why we engage on Twitter and do all this stuff. I think the effort that you put in, the payout is so remarkable, after a sustained effort. I don't know if we'll talk about open-source software later or stuff like that, but it's like open-source software. It takes three to four years to actually build the adoption, build the following and stuff like that. Then, you start to harvest those that early work in the out years, that's why the payoff is-- year 10, year 12, you get these huge payoffs in some of these companies, because of all that work you did for that first three to four years. I think the same thing happens with these audiences. What you're doing with the podcast, what we do on Twitter, what I did with my anonymous account, and just sharing these ideas, investing time in it, you build this crazy network, you meet with people that would have never talked to you before, but they're actually now evaluating you on your ideas rather than your title, which I think is one of the most important things that Twitter has done, is gotten us to think less about, “Hey, this person's a CTO at this company,” to, “Here's a random engineer that's posting really thoughtful things. I want to go talk to that person because he or she is probably going to greatly increase my knowledge.” I think that's such a fundamental shift that's occurring now right now. That's really cool.
Bill: Yeah, for sure. Then the other thing that it does is you get these anon accounts, and you don't know who's behind them. There's no trying to get through a secretary anymore. There is, is my idea good enough to get to you? If so-- I've gotten some inbounds from a couple shops that I idolize. When these guys have wanted to talk to me, part of me is like, “Why the hell are you listening to me?” Part of me is really proud, I deserved it, I guess, in a way, but it's been really interesting to have those barriers completely eroded.
Shomik: Yeah, I love it. Well, I’ve got to say-- also, we’ve got to give a shoutout to our mutual friend, Oren Falkowitz.
Bill: That’s right.
Shomik: It was so random. I think he tweeted something, or maybe you tweeted something, I tweeted something back to you, and then he tweeted something. I was like, “How the hell do you guys know each other?”
Bill: [laughs] Yeah, we grew up together.
Shomik: But, great human being, just to give him a shout out. Hey, Oren, if you're listening, we love you.
Bill: I hope he does. I need to get him on the pod. He could talk about building a firm.
Shomik: Yeah, that's true. Yeah, it would actually be great. He has so many learnings, I think it'd be pretty interesting.
Bill: Yeah, he is a guy that has quite a background and has certainly accomplished a lot in what would appear to be-- he swam through different channels, ended up in the-- I think he picked a good niche. I think the results speak for themselves.
Shomik: Yeah, the solar winds hack is something that I would love to get his perspective on, frankly. That's like one of the craziest hacks. The fallout from that is going to be-- there's a long tail to whatever just occurred. I think we're still uncovering what happens. The supply chain attacks are really interesting because you go in, you acquire a set of toolsets that help you unlock another set of tools, that help you unlock another set of code access, and all of a sudden, you're in-- I don't know what they breach but like Homeland Security, or Treasury or whatever. Highly proprietary places, because you just went through all these different things, that are all these dependencies layered on top of each other. The interesting thing about software now is why I get so excited about studying and working on it every day is, it's just these layers of dependencies built on top of each other that if one-- it's like Jenga. If one brick gets removed, you can really have stuff where-- not the whole structure will tumble down, but the whole structure gets a little bit wobbly. What you have to do is, do all this resilience engineering, chaos engineering and all these little tests to try and figure out what will truly destabilizer it or what we'll just have it wobble a little and still keep it structured. It's so fascinating, because it's just all these things, as we continue to build more and more software are just dependent on Twilio’s API, on AWS on all these other dependencies. There's no way for you to control that complex adaptive system. It's just fascinating.
Bill: To a noob, like me, because I think that anyone that's listened to me, is I'm about to fully get exposed here, because I'm over my skis when it comes to software. When someone like me is reading about Twilio’s tech stack and how it has no technical debt in it today, and how it's developed for developers by developers. Should I be thinking about that? Is the base layer that everything is going to be built upon as far as a-- My best perception of that is a communication tool from businesses to consumers. Are they the base layer and then everything's built on top of that layer? Is there anything that can disrupt that layer? Like one step below it?
Shomik: Yeah, so I think those are all great questions. First of all, I would say, to say no technical debt is definitely not true. There's always technical debt. No matter what you're building, there's always technical debt, because what you're having to do-- just like in business, you're having to make tradeoffs. Those tradeoffs come with maybe you're prioritizing speed, but then that means you have to have less security or you're prioritizing security, but then that adds cost. There's so many different components that you're always going to have some sort of technical debt, because what you're trying to do is ship something to the customer that they need and want quickly, but you have to evaluate, like, out of all the other things that you're doing, you're also working on new product development, you're working on integrations with segments that you just acquired, you're working on all these different components. You have to manage that engineering time and that resource. That's always going to lead to certain technical debt.
What's interesting about some of these later-stage companies is, they've gotten further enough along that a lot of those decisions, they had to probably clean up earlier on, like, they probably had to re-platform or do things to reach the scale that they're at now. That's why maybe in some cases, the level of technical debt that will hurt the software and cause business damage is greatly reduced. But the actual scope of that technical debt may actually be bigger, if that makes sense. There may be more in this entire system, but the ability to take down the software is actually lower. What's interesting from the communication standpoint, with what are people going to build upon Twilio, the core part of like all these API-first companies is they are doing something, they're taking something that you used to have to do and do it themselves really, really well. What business need is that solve, that means that when you're Coca Cola, whatever e-commerce company, you're trying to communicate with your customers, you can either, one, build out that communication stack yourself, which means you're going to have to hire a bunch of people, it's going to cost a lot of money to do that. Or, you can have Twilio do it and rely on them.
Could somebody disrupt Twilio? Absolutely, because let's just say, I don't know, somebody comes in and says, we're going to do this one WhatsApp API better than Twilio can, and they focus on that fully 100% of the time, they do that, and they make it really well. Maybe that's what you decide to go with, because of the latency reduction that they're able to accomplish or whatever. There's some sort of key thing that they've been able to do. In most cases, most companies will just look at it, like, “Hey, they're offering a contact center API solution. They're offering video, they're offering messaging, they're offering voice.” That's pretty good. Let's just go with Twilio. I think it's all about solving this end-user pain, making the workflow really easy to adopt, and to map with existing integrations and existing workflows that the developers are using. If you can do that, you cement yourself in this new area of product-led growth.
Bill: When you look at the valuations of a lot of these companies, it implies, I think, a pretty long duration of the asset life. One thing that I have stupidly argued against for no good reason other than stubbornness is like, “Oh, these may not be so durable.” But when I think about it, like, software really is sticky, and I use some cruddy software that it's just in my life. I was reading, I think it's Not Boring. I was reading him talk about Salesforce. I know it's one of your holdings. I'm sorry that I'm about to say this, but he was like, “Salesforce sucks, but it doesn't matter. I expect it to suck.” I'm not saying Twilio sucks at all, please, anyone that's long, don't get all mad at me. When we're thinking about these companies of today, and I complain sometimes about the SG&A. What I pivoted on, part of the benefit of the podcast, somebody reached out to me, like maybe is worth just this damn, the torpedoes land and expand because if we can get all these companies on our platform and integrated and it's a network effect, like, maybe this really is, this time is truly very different. I know that you can't speak blanketly. I'm just saying [crosstalk] concept.
Shomik: Yeah. Well, so I would say valuation is really interesting topic in software, especially now. If someone to say, hey, broadly, are the multiples in software elevated? I would say the answer is absolutely yes. Does that mean though, that certain companies won't continue to outperform? Absolutely not. There are certain companies that should get those premium multiples and probably will continue to command them because of the way they're able to either go more vertical into their offering and extract more value from those customers, or expand into adjacencies, and monetize the distribution that they already have and start going into product adjacencies which increases the TAM, increases the market share they can capture of the total customer spend. Those are the two ways that I look at it is, are they able to do that? What's their approach? How are they approaching that?
We've talked about this before, but when I look at valuation, with software companies, it's so funny, because I'll give you a great example. Everbridge is a company that's out there, and what they do is they basically create all the alerting software. If there's a hurricane or a shooting or something like that, you get that notification on your cell phone. Not all the time, but most of the time that's powered by Everbridge. That's something where it's mission critical, you need to alert your employees or the population of your city that something's happening, and there's no way they're ever going to rip that out. That's just something that just needs to work. What's interesting with a company like that is, is they've been growing 30% year over year for the past five years. If you think about how our minds work, we work in linear thinking. If you're growing 35, you should be going 30, 25, 20, 15, 10. At some point, you'll have some sort of steady state, we're just having pricing increases, but it should be this lockstep. That’s what's interesting is, that's the power of software and thinking about what can keep its growth rate at an above average level for a sustained period of time. If you can make those bets, that's pretty interesting for me.
I look at a couple things when I'm looking at valuation. I basically look at, okay, what's the company today? Let's say it's $200 million of revenue. It's got 80% gross margins. I then look at, okay, well, are gross margins going to go down or up over time? How do I think about that? Let's say they stay steady, then I would say, okay, 80% gross margins, this business, probably could spend 50% on SG&A and R&D and G&A and whatever else they have, and still probably clear, let's say, 25% to 30% of EBITDA margins. Now, if I use that as my metric, then I got to look at, well, what's top line going to be in 5, 10 years? Whatever timeframe I want to look at. If I do that, and then start to say, “Okay, well, now, what does it look like at 25% EBITDA margins and what multiple do I want to pay for that?” That's how I think about valuation. No DCFs. No stuff like that. This is just like napkin math that you can do. The interesting thing about this napkin math is that it requires you to understand how is that durability of growth going to happen? Why are gross margins not going to go away? Why with those high gross margins is another competitor not going to go eat their lunch by reducing it. All these different things I need to analyze to understand that steady state.
Bill: Yeah. I think that this is going to sound super late cycle, and some of the people that listen to me are going to be like, “What are you even saying?” I think that that's a lot more useful exercise. The longer that I've done this, the more I appreciate the power in just focusing on terminal economics, and saying-- take Shopify, for example. Let's say that you can build 1000 different iterations of the world, and you're paying too much today in 700 of those iterations. But in 10 years, in all 700 of those iterations, you outperform the market. Your real question is, am I willing to-- You're obviously not, but for purposes of this, like, the real question is, am I really willing to take the liquidity risk and lock up the capital to get to my end state and then will I be right on the end state? If you're conservative on your end stake assumptions, then if you overpay today, and it can still work overtime, who really cares if you got to take a drawdown as long as you don't put your life in a situation where you have to liquidate prematurely, that's how you really lose there.
Shomik: Yeah. Well, the interesting thing, though, is to start thinking about the optionality behind your implied bet, too. If you're investing in Shopify today, there are like $100 billion market cap or something. I don't know what the multiple is, but it's some crazy multiple of sales, not even EBITDA. There's a lot of optionality that's implied within that valuation, and also one could argue not implied as well, because what happens if they're actually able to integrate in logistics with the money that they have, and by the way, they've been able to raise so much capital, because as their stock price has gone up, they've smartly almost had a little bit of reflexivity kick in where like, because their stock prices going up, they're able to raise more funds, which then almost helps them achieve that outcome that everyone's betting on. That's really interesting to me is, now if you go into logistics, you own that whole supply chain, you can offer a better customer experience, you can serve a broader base of customers. Also, just like Amazon, you can start to earn margins in a different way. Maybe you lower your margins on certain one area, because you'll make it up on the logistics side or whatever, one of these other areas. That, to me is really interesting.
Plus, the payment side, there's a ton of stuff they could still do in payments, that they could innovate around, that probably gives them a larger take rate too. There's some really interesting components to-- not just Shopify, but I'm just saying in terms of optionality and looking at these sort of companies of, well, how could that change? If Shopify is able to do this, Amazon is a $1.5 trillion company, let's back out what AWS is, but let's see what they accomplished on the retail side. What do I think Shopify could do in terms to Amazon's retail side? I think that's an interesting exercise. It's just worth doing to understand what you'd be willing to pay for.
Bill: Yeah, I agree with that. I've historically had such an aversion to things, like, “Oh, you're underpricing in this segment, I've viewed some of, I guess the thinking that we're talking about, probably more speculatively than I probably should have viewed it. I think if I had opened my mind a little bit younger, I probably could have made a lot more money over the last five years, but whatever. That's could just be late cycle speaking, but I think it's closer to truth than not. I have a question from my man, Rishi Gosalia. I hope that I said that last name. I'm sorry, Rishi, if I didn't, but what are the common errors in SaaS investors’ frameworks that they're making today do you think?
Bill: I honestly think what's happening now is, people are over-indexing too much on growth. A lot of people that I'm talking to, are just like, “Well, we only invest in 50% plus growers,” because that means that, again-- it's that linear thinking to it, even though they don't realize it, which is like, oh, because it's 50% plus, that means that as it degrades it'll take them 12 years to degrade to 10% plus growth. That doesn't still take into account that the company like Tyler Technologies that's growing 10% year over year, could be making a ton of margin on that 10% growth, that they're able to reinvest in acquisitions, or [unintelligible [00:22:35] or whatever, other areas to actually increase the value in a larger amount than that larger grower. That may be just spending on customer acquisition and not really having that payoff. I think that's the most common mistake that I see people doing today. There's so many blog posts out there of people who'll be like, “What's my enterprise software framework?” Literally, the first thing is, like, it's got to be growing more than 50%. I'm like, “What? I literally don't understand what that means. You're not going to invest in Atlassian, which is growing 30% year over year, and is literally one of the best enterprise software companies of all time? What the-- I don't even understand how you get to that thinking. That's the biggest thing in my mind.
The other thing is, I think, not understanding the implicit business model bet that you're making. I'll give an example. If you're selling to SMBs, then you should be-- if they have a lot of churn, that's fine. At the same time, like their S&M, cost needs to be pretty, pretty low as well. They shouldn't be doing a bunch of sales and marketing, because of the fact that they should have some sort of efficient go-to market engine that's allowing these SMBs to come on board, and then also correspondingly leads to high churn, and that's okay. That still works with that model, but people aren't discerning that enough. They're looking at it and they're like, well, this company is moving upmarket, and so that's why they're spending more on sales and marketing. While that is true, then the question needs to be, okay, well, how are you seeing the adoption in the enterprise market? Have you been able to segment the enterprise versus the SMB? Have you looked at the unit economics of both those different areas? I don't think, at least from my opinion, like no analysis that I've read from these blog posts that people out there is doing that analysis, that worries me a bit.
Bill: Yeah, that makes sense to me. When I first looked at Shopify, which I never bought, including in December of 2018, thank you very much. I remember, I was looking at the churn and I was like, “Well, that makes a lot of sense because they're starting--" you want churn in that, because you get shots on goal, and then the way that they charge as you start moving more volume through-- it was very interesting I how aligned their entire businesses with onboarding new businesses and then how they tax. I think they tax volume going up in a very rational way. You can tell that it's like a platform that's there to help people, really-- it's clear that those aligned incentives.
Shomik: Yeah. They're a fascinating company, because I think they've taken all the learnings that Salesforce has given the industry over the years internalize those and then combined, like best of breed of a efficient product lead, go-to market engine and product model with also this like, sort of top-down engine as well. It's really a fascinating company, because not many have been able to pull that off in the way that Shopify has. That's why, I always joke-- people talk about, like, Charlie Munger says that lollapalooza of confluence of events and all that sort of thing. For me, that is Shopify. They are taking learnings from all these different things. You even think about the Act Two, that they realized to expand their enterprise value, which was, “Hey, right now we have software subscriptions, those are going really well. You know what? One thing we could do, though, is we could offer payments on a platform, and that will actually provide a better experience. In the meantime, hey, we also get some nice economics off of that as well.” That is such an interesting way of thinking, and that requires you to be thinking about, “Well, how am I going to add value to the customer?” Which is bundling in payments, so that they don't have to go to another provider, it's fully integrated, and all that sort of stuff. Then the payoff for that is you also make some money off that, even if like your implicit margin on that may be lower than what is being stated by the subscription revenue. That, to me is like, just very interesting thinking.
People always ask me, like, “What's the best way to learn about enterprise software?” I'm just like, “Go and read--” I'm forgetting the book now. Benioff has a book that he wrote about Salesforce, like, you go and read that book, and then you go and read Salesforce’s transcriptions,” you go and talk to SIs, like consulting firms, you talk to customers, just go and do that research. What you'll learn is like this fascinating thing about how distribution works in software, how they were able to get there, not great software out there and have everybody using it, and continue to use it. What Shopify is going to be is like that next version of Salesforce. What I'm so excited about is the investors are growing up now, and they're all excited about these SaaS stocks and stuff like that. They're going to be studying Shopify to learn from and their understanding of business is going to be so much greater than ours because we start off with Oracle. Or, we start off with something else. That's going to be really interesting.
Bill: Yeah. In your perception-- I mean, Shopify would be a much more product-led growth, though, rather than distribution. Is that an accurate statement?
Shomik: Not quite.
Bill: Really?
Shomik: Yeah. They actually have a bunch of different models in there that have sort of different engines, because what happens with product-led growth is normally you have this mass adoption of things, and then you use that mass adoption, to then start what's called like an inside sales engine, which is basically just like, you have a bunch of usage, so you can see, like, “Hey, I have a lot of Coca Cola developers using this, let me go and talk to Coca Cola CTO, or VP of Engineering,” or whatever. Be like, “Hey, listen, you already got a bunch of people paying me, let's do an enterprise-wide contract. You'll get enterprise features as well, and security and all these things, you'll get integrations and it'll benefit you in a big way.” That's sort of the classic product lead growth, how do you harvest those leads, and then do it? What Shopify is doing those is notice how they just had-- I think Heinz ketchup or something like that. They've had some pretty large brands like Pepsi and stuff, going and selling through Shopify. That, I can tell you is not a bottoms-up product-led [crosstalk] That is a relationship person going in saying, “Hey, listen, I know you got a new brand you're trying to spin up. I know you're looking at Adobe's Magento. I know you're looking at big commerce, all this sort of things. Here's the reason why you should go with Shopify, because we integrate with this. We're building out logistics. We can help you in these ways.” That is a very relationship-driven sale. That's what's so fast about Shopify is the fact that that organization can do both and maintain that at such a high rate and high velocity is all about, like, organization of people.
One of the things that's most fascinating to me about business in general is, in the end, it all comes down to people. Whether the people that you invest in or these managers and how they organize these constructs, so I always go back to, is it centralized decision making or is it decentralized? For me, what I'm looking for is like Buffett centralizes certain decisions. If it's a big capital allocation decision, he is going to make that decision, it's going to be centralized between him and Munger. Everything else, decentralized. That allows them to move more quickly than others and making deals and things like that.
Mark Leonard, the opposite. He centralizes, obviously, certain core decisions as, “Are we going to spend this off?” What should we do from a high up return hurdle expectation?” Or, things like that. In the meantime, constellation software is highly, highly decentralized because the goal is, is that any one portfolio manager, or I forget what they call the-- I think business unit leaders or whatever, can go and do a $10 million, maybe $5 million acquisition as long as it hits the hurdle rate. That is so powerful, but that is org design, that has nothing to do with software, it's all org design. That's where I get really fascinated, like, you can go and study org design your whole life, still not understand it, but if you can evaluate these, you can start to understand competitive advantages a lot better, where it's like, “Okay, I now understand how decision making is done. I understand why it's done in that way. Then, I can understand how that will lead to better capital allocation decisions in the future.”
Bill: Yeah. That makes sense. I may not have been precise enough. I guess I was thinking more of like-- I have a buddy that works at Accenture. I think of that as distribution led rather than product-led, because I know how some of the companies come into, like, the Accenture, Salesforce, it's like, we are going to now do this implementation for our customers. I guess that's what I more meant, like, partnering. I was reading. I think it was a16z who wrote about Bill.com. Again, because of Not Boring, he wrote a pretty scathing review of that product. It was pretty funny. He's like, “Let's kill this product before it becomes part of my life, because I really don't want that to happen.”
[laughter]
Shomik: I love that about, like, we all use such terrible software. It's so hard to start a new habit. It's so hard to learn something new. I don't know, if you ever use this app, it's called Wunderlist.
Bill: I don’t, no.
Shomik: Basically, it was a to-do app. You would go in, you put your tasks and then you could click them off. It's like a stupid little thing. I don't know why it exists, really, but then when you start using it, you realize that this is the best thing ever. It’s all I use. The funny thing is, is like even now I have a bunch of different software where I could put my to-do’s and my task and laid out all neatly and stuff, but I still use Wunderlist, because it is the easiest thing. In my mind, whenever I think, “Hey, I have a task, there's zero friction in just going immediately, I know where to click on my phone, or where to click on my desktop, put it open, I know how the UI works, I can type it in really quick. Press Enter, boom, that task is now logged, and because I understand that hierarchy and how that works, I'm never going to switch. If you try and give me Notion which I use, I'm still not going to use it for my task, because the easiest way to do it is to use Wunderlist.
Bill: What do you like about Notion?
Shomik: Notion’s just so-- [crosstalk]
Bill: Because you recommended it when I asked about Roam versus Notion, or whatever, isn't that what you--? [crosstalk]
Shomik: Yeah. I recommended, actually, you try out something called lazy software.
Bill: Oh, I'm sorry.
Shomik: Which you should actually check out at some point. I think you're also looking at Roam and you're looking at Notion. I would say they all have different use cases. Roam, I use much more for-- the key that Roam brought to bear was like, “Hey, there's this graph of your knowledge base. If you could create that graph, there's pretty interesting thing that could happen.” You could start linking concepts like, for example, distribution. You could link Shopify to Kroger's because you're looking at distribution as a concept. That's really cool. What Notion did though, was like, “Hey, we can make a really flexible, easy-to-use database for any of us to use.” We use it for our investment pipeline, which has like qualification criteria, and things like that. We use it as a database for all of our board meetings, and updates and calls like that. We also use it just to take notes on a random company. The fact that it's that flexible and you can have all these different tables and you can nest videos in there and you can do all these different things. Makes it just a really powerful database for an everyday consumer to use.
Bill: Remember when we all had to save a Word document and then circulate it and then people had different tasks and had to say, “Yes, I did this.” It's crazy. Kids listen to this, are going to be like, “You guys are old.”
Shomik: [laughs] Word is going to be so interesting for the young kids coming up, too, because I think right now, I think most of them are getting used to Google Docs. Which is natively collaborative, so just imagine if we have grown up using something where it's, like, “Hey, Shomik’s typing this,” and all of a sudden Bill’s in the same document is editing stuff or highlighting something in there, whatever. If that's from day one how you're taught Word processing is supposed to go, that probably has a bunch of different changes in how you work in the future, and how you think about collaboration and stuff like that. That's so cool to me. I don't know what that will look like, obviously, but I'm just waiting for the one-year-olds or whatever, five-year-olds or whatever age they are, to get to when they're 20 and see how they're working.
Bill: I'll tell you what has blown my mind. It's not related, but it has blown my mind is this Oculus. Have you messed around with one of these?
Shomik: I have.
Bill: Dude, that is the future. I put that thing on, I was like, “This is crazy.”
Shomik: It's one of the most realistic things.
Bill: Yeah, there was a flyover of some Island, and I was looking down and the only thing that I could nitpick was there was a place where the waves were crashing under the trees, like I could see that. Once they fix that-- I was telling my father-in-law. I said, “I just think that it's inevitable that these are going to be in every classroom.” It doesn't have to be an Oculus, but something like this. When you're studying marine biology, you're just going to go down and swim with manta rays. Why would you not? You want to see what the fish look like, let's just go scuba diving. It's crazy.
Shomik: You know what's funny? I wish, and I do hope that this will change. I don't know if you remember this thing called Google Glass.
Bill: I do, and it flopped pretty badly.
Shomik: It flopped really badly. Then Snap came out with Spectacles.
Bill: Those I did not see.
Shomik: Okay, so Snap came out with Spectacles. Basically, what those were was, it could just record like 10-second videos from your glasses. If they roll it out now, for like TikTok use cases, it would probably take off because all the kids would be filming for TikTok. What's really interesting to me is like, I don't know why AR hasn't taken off in a bigger way than it currently has. VR, I can see the use cases. Like, obviously, for a fully immersive experience is amazing. You put on the Oculus, I played some Star Wars game, Darth Vader was in front of me, I was using the force to throw things around. I was like, “This is the coolest thing ever.” Meanwhile, all your friends are looking at you, like, I know what he's doing, but he also still looks ridiculous. [chuckles] AR has so many use cases, because for AR, I imagine, like what I want to have happen, this is actually what I truly want to get to is, I haven't attended a trade school, but it's actually something I would love to do is, one day, learn how to do plumbing, for example, or something like that. I still don't understand how no one's come up with consumer AR glasses that helps you with, here's how to actually fix the toilet, or here's how to fix the drain or whatever. That is a step-by-step thing. Obviously, there's going to be nuances to it, but I'm sure there's generalities that you could at least bring to bear, and that seems like an awesome way to teach me and you everyday jobs that I at least don't know anything about. That I want to get to, but like the Oculus is not going to do that.
What we need is more of the Google Glass or Spectacles, but they can't be these like, we're trying to change the world and do all these things. It's just like, find this use case, and go nail that use case. Why are you trying to help me see Batman on buildings? I don't care. I just want to be able to fix my plumbing.
Bill: [laughs] Yeah, basically have a YouTube that's in front of your eye, but that you can also like see-through, so that when you're doing the task, you can watch the video as you're doing the task, but to your point, like with Oculus, you're so-- I mean, you've entered a different world. I thought that I read that they had that for elevator training where they were sending-- again, I think it's an immersive headset that you watch the-- I guess the thing being fixed in front of you and then you go out and do it. Man, I think it's inevitable. I don't know how far we are. On the timeframe of how far we've come over the last 10 years to where we're going, I don't see how it doesn't end up there.
Shomik: Yeah. I mean, Microsoft HoloLens is probably the furthest along in that area where there's actually like people who are doing surgery, they'll actually put on a HoloLens and you can walk through like a mock surgery. That's again, an augmented reality, that's not necessarily VR where it's fully immersive. You could probably do it also in VR and have a good experience. There's something to be said for, like, walking through, like surgery on a cadaver, and still having to feel everything for real, but being able to, at least see that overlay of what you're supposed to do through AR, so that's what gets me excited there.
Bill: Are you naturally into tech?
Shomik: [chuckles] I grew up in Jersey. I went to school in Pittsburgh. For me, actually, the height of my career was, I got an investment banking job, and that's what I thought you were supposed to do, like, you were supposed to go and become an investment banker. Tech was like, the furthest thing from my mind. What started was actually more of getting into investing, I just started seeing these business models and be like, “Oh, those are interesting business models, I should learn about them.” That started to get me into the business model as a whole. From there, I got really interested in tech. Now, one of the most impressive firms to me is Lux Capital. We only focus on enterprise software, and hopefully, we continue to be good at that. Lux Capital is like investing in mind-brain connection devices, and then also investing in space rockets, and stuff like that. To have that range to be able to go across like biotech and hard tech, and whatever, is just so fascinating to me. I love reading their stuff, I love watching their videos. Unfortunately, I'm very much a enterprise software guy that will be where I will stay, but I think those sort of things are just so cool to read about.
Bill: Do you in your specialty, how long did it take you to ramp up understanding like the actual technical aspects of the product that you're-- like, you guys are seed. So, you're backing the founder. How much are you monitoring as this founder builds out their product, like, the actual technical aspects of it, versus just consumer adoption and talking to the consumers and figuring that out? Because one thing that I've tried to figure out is, like, I can look on the 10-Ks, I can watch the KPIs. I never feel like I really know what's going on with the software and where the threats are.
Shomik: Yeah. None of us are expert programmers, or developers, or anything like that. We've all programmed something at one time or another. I did Tetris in college, and I forget-- [chuckles]
Bill: Tetris is awesome.
Shomik: Yeah. It was great, but I forget how to do it. I have to go back and reread my notes and figure it out. One of the things though is, I think when you're focused on an area, and this is why we like being specialist actually, is because Boldstart only does seed-stage enterprise software, we don't even do series As. We'd like to be the first check-in our companies, which is partnering them from when they're at the pre-product stage with just an idea, they're now going to go build out that product, and they got to build out the business and that's where we want to help them. When you think about that stage, what's really interesting is mostly, one, it's people bet. You’ve got to understand, like, what does this person know. What's their secret? Or, what's their hidden knowledge that nobody else knows, which makes them the person to tackle this area? Then the other thing goes into, okay, well, now do they understand the competition? How the competition is making-- What moves that they would be naturally making? Again, if we're talking about moving into product adjacencies.
The interesting thing about the competitive landscape is, right now you could say, like, okay, here's how I am differentiated from all these other companies. They are also dynamic beasts, they're also trying to figure out where they're going to move next. You almost need to have an idea of, “Hey, I've, I've actually used that software before I've also used their software before, and I know where their weaknesses are, and also where their product leanings are going based on using it, so because of that, I think here's an area that they're not focused on and won't focus for a while that's why I'm going to go build in that area.” That's what we're trying to understand is like, how far down the idea maze has this person thought about this, live the pain, and figured it out.
When it actually goes to building out the software, I would say we've now read enough engineering blogs and worked with enough companies and things like that, that we can get a general sense of like the tradeoff decisions that they're making. Again, we don't actually need to read the code to understand what's happening. What we can do is understand is if they say, here's a programming language choice we made, well, we can say, “Okay, well, based on that you're going to have these issues potentially in the future from a technical debt perspective. Are you prepared for those?” Or, they're like, “Hey, we're, we're favoring this.” We're going to be like, “Okay, that's going to ramp up speed, but that's going to make it harder for you to do this other component.” If that's the case, then we need to be mindful and watch that. That's the level that we're watching is just trying to understand those tradeoffs, try to evaluate them and then help the founders, either one, teach us why that's the right way, or talk with them about, “Hey, here's another way to think about it, and why we think that you should approach it from this way.” We don't necessarily need to be able to see the code. We just need to be able to understand those tradeoffs.
Bill: That's got to be super rewarding when it works out because it's a true partnership from the jump.
Shomik: Yeah. I mean, it is. There's a bunch of highs and lows, I would say--
Bill: I'm sure. It's like a marriage.
Shomik: [laughs]
Bill: Obviously, my marriage has no lows but just saying.
Shomik: [laughs] Exactly.
Bill: The theoretical marriage.
Shomik: Exactly. It's got its highs and lows. I would say that the highs are really high and the lows are really low. The crazy thing about being a venture investor is, you have a portfolio of companies. If something doesn't work out, you still have other companies that are probably doing well. For that one founder though, or for the cofounders, or for that team, that is what they've dedicated their lives to, that's the tradeoffs that they've been making, in some cases, not spending as much time with their kids, all sorts of things, and to have that be a failure is a lot. It's a huge emotional burden. It's just devastating. Those are sort of things that I think make the job, I think, just very interesting because it's not just a pure business model, or technical evaluation or anything like that. These are people, you need to be talking with them every day, you need to be understanding how they're feeling. You need to be helping them out when they're feeling bad and down and trying to actually uplift their spirits. Or sympathizing with them when something's going wrong because they're humans just like us. We sometimes glorify these founders, but I'm sure Toby at Shopify still has really terrible days. It's funny, because we always just think about, like, how are they going to compound stuff? If he has a mental breakdown, like maybe that actually has significant damages the enterprise value or something, because of his knowledge and the way he leads organization. Those are all things that I think about as we're talking to companies.
Bill: Yeah. I started a flooring franchise in 2009, which was a really dumb decision, and I wasn't the person to do it. The confluence of those factors created a fair amount of-- I mean, I wasn't like depressed depressed in a clinical way, but I had a long time that I did not believe in myself. I would say, it probably took like three or four years to get over that failure. That was by far the worst thing that I've ever gone through on a professional level because I was too disorganized, I didn't know what the hell I was doing, I don't know why I thought I was the right person for that at that time. The other part of it was, it was really hard to separate how much was the economic backdrop. How much was my franchisor dropping the ball, which I do think they did, how much of it was me, which I know I did. When putting that much effort into something, sleeping at the office and trying to get it off the ground, and just not getting there, that sucked. If you believe in somebody, and you're there, and you're coaching them up, and that just doesn't take off, that's got to be hard to watch.
Shomik: Can I ask you a question on that? If you went back to your 2009 self and you were starting this business all over again, did you have a co-founder at that time?
Bill: I had a partner.
Shomik: You had a partner. Okay.
Bill: Probably not the best partner.
Shomik: Got it, okay. Would you have chose the people that you worked with, though differently, or augmented yourself in some way? I find sometimes a lot of those is because you're taking too much of the burden on yourself. When you realize that, “Hey, if I hired somebody else, like that actually could have augmented the whole business,” it's interesting to do a postmortem on that.
Bill: Yeah. When I said not the best partner, I mean, I love this guy. Thankfully, it's the one thing that it didn't cost me, it was my relationship with him because he's the closest thing to a brother I have, there's like three of us. The problem with that that setup that we had was none of us had the technical chops, or the industry expertise to really know-- In 2009, it was about really knowing where you could get the best stuff to source, it was about really knowing what your install costs were going to be, it was not about like this fluffy sales process that you think you can get through, which I don't think business is ever not about, like-- you always have to know the nuts and bolts, but I think that we relied on the franchisor more than we should have to provide that expertise. I think I'm outside of the period where I can say anything about them. I would argue that they oversold their capability to deliver that. They also undersold how expensive it would be to get the help. I should have diligence-d better.
One thing that I really screwed up was-- they have the model, and this is the capital that you're going to need and whatever. Well, that model may work in Kansas City or whatever, you need a lot more capital in Chicago, or Chicago land than you do in Kansas City. Maybe a zip code that you're blanketing with mailers in Kansas City can work and you can hit that same zip code for this amount of dollars. In Chicagoland, there's so many more houses, that your spend is really spread out. I feel if I could go back and do it again, I would say don't go do it again. If I had to, I would really, really drill down on one specific area, and I would hire somebody that had a lot of technical expertise in flooring.
Shomik: All right. Bill, you have a VC career ahead of you, that is the advice that pretty much universally is the hardest thing to figure out. Also, the simplest concept to understand, but the hardest thing to truly grok, because of even just what you mentioned of like, “Hey, if I only focused on Kansas, one, I could understand the competitive landscape of the Kansas other floors very well and how I could differentiate.” Then, two, also, I could solve a specific pain point. Maybe I would I know all Kansas houses have rugs on the first floor and they all want hardwood, so I'll only do hardwood, and I'll only do it in these two colors so then I know my-- the supply that I'm getting, I can source more easily, I can push more volumes through them to decrease my costs. There's all these sort of compounding decisions that happen from that narrowing of your initial scope. That happens in software, that happens in-- I mean, you name it any business. When you're starting out, you need to have that one solution and understand that pain point very well, understand the market landscape, understand everything about this area. If you can do that you can have a really successful business over time. We always have the tendency to want go bigger, because the dollars with that niche, probably, frankly, very small as well. That's the hard part to always think about.
Bill: Yeah, that's right. We mentioned Oren. One thing that I had spoken to him about, and I don't think you'd mind me saying this, so I'm going to say it is, he's like, “I built this successful company, and here on the West Coast there's this feeling of like, ‘Well, why isn't it much bigger?’” Well, the answer is because we're really good at what we do, and maybe there aren't as many tangential markets to enter as quickly, but I know that when I'm selling my product to somebody, like, this is what is going to work. I will never poopoo anybody that wants to dominate one niche in one area. If they say, you know what? I'm just going to kill it in this line of business and maybe it doesn't get so big that I'm the founder that everybody heralds, but I built a business that can provide for my family. That's awesome. I think that we tried to-- and it was the agreement with the franchisor to, like, we were young and naive, and we thought, like, let's go big, quick, or strike out. In retrospect, life worked out. If I were to do it over again, I do it a lot slower.
Shomik: It's one of the things we all say is, like, “Go slow to go fast.” Then, you got to go niche to go broad. Those are all these things of just trying to slow down this complex adaptive system to something that you can understand and control before it starts to get out of hand, because once it gets out of hand, the horse is out of the stable, it's going. Now you're just like catch it and go for the ride. Those are all sorts of things that you have to consider. I think the other interesting aspect to it too, is what I get really excited about even talking with you, having gone through that experiences, I imagine that from 2009 to-- you said five years or so, let's say 2013.
Bill: Well, it was 2011 when we folded, but it took me five years to get over that failure.
Shomik: Yeah, got it. Which makes complete sense. Even in that two years, the things that you learn, and especially as the business grows, the complexity that you have to handle, also, is this crazy thing to look back on yourself and be like, “Oh, my God, I went from managing one person, or maybe No people to managing 5 people, 10 people, whatever that answer is, that requires just like a whole different skill set. That's why the crazy thing about some of these founders is, one, their ability to scale-up with the organization. Then, two, I think sometimes, the CEO title gets so much cache around it. You're the CEO, this is your, your baby and stuff like that. In reality, it's all just dependent on skill set, so a certain CEO, maybe the person, just because they've managed a complex organization before and there's certain best practices to do that. If a founder then moves to a COO role or some other role, that's completely fine, because they're still doing what they enjoy, they're still adding the most value that they can at that time, and they don't want to be CEO.
In the venture industry, that sometimes is seen as a loss, or as, “Hey, this founder didn't live up to their potential.” Instead, I'm like, that's an unselfish act of somebody who's like, “I want to benefit the company as a whole. This is the best decision for the company perspective, so for that reason, I'm willing to do this,” or maybe I just enjoy doing this, I don't want to be the CEO. I think that needs to be normalized more. All this stigma around like talking through these tradeoffs, and talking through mental issues, and all this sort of stuff, it's crazy that we just don't have that in normal discourse, because it should be something that's more appreciated, and that we're able to be better equipped to handle.
Bill: Yeah, I think this sort of aligns with, you can get all the credit if you don't mind who gets the credit, or, you can accomplish everything, if you don't mind who gets the credit. I'm working on trying to put together a pretty cool episode on this. I think a different host would be better. There's a certain amount of me that doesn't want to say, “You know what? This guy would be better for this interview.” That's who I want to do the interview. I want the best interview on this show that I can get. Why would I not pull that person in? The only answer is ego, but screw that. I'd rather produce something dope. It's different, but I think that the capability of saying-- When I was younger, I wanted to be the guy that I run this, and whatever. I wasn't in the right place to, I wasn't mature enough and I shouldn't have been. I had skills, but I tried to take on way too much.
Shomik: Yeah. It's a blend though. You want that ambition, but you also want-- it's always the joke of you wish you had your learnings when you're 80 for right now.
Bill: Yeah, that's right.
Shomik: You’d probably be a lot more successful, but it is what it is.
Bill: Yeah, indeed. How do you identify the founder, that's not only got these qualities, but also hungry enough? That's got to be tough because I would think you want somebody that's had some success, but also still has a lot of fire in them?
Shomik: Success is not necessarily a prerequisite, because, in fact, in some cases, actually failure might be actually more important because it drags out that individual or those individuals, to want to accomplish more and also a bunch of hard-fought learnings. Again, I think from the founder standpoint, there's no one archetype that fits because for each product, for each industry, different things may succeed. I would say what they all though have in common is this ability to really understand deeply the customer's workflow. Either one is because they've been in their shoes and they've actually done the job that whatever their building is doing. Or, the flip side of it is, is just they have this innate ability to be able to understand things by just talking with others and synthesizing that and getting a framework for it. That's the key things. If you can find someone who understood stands that, what happens is their learning velocity so quick that even as a competitor makes a certain market move, or rolls out a new product or whatever, that person is already thought about, “Well, what would happen there?” Or, because it's happened before, maybe they've read about how that's worked in the past with other products or something like that. They can be like, “You know what? Actually, let me go back and reread something I read for a while. Let me go back and talk to this person.” They'll start to synthesize those learnings and be like, “I think we can do this. I think we can flank in this way. I think we can pivot to this.” All of a sudden, the business keeps on going without a stutter.
A lot of what we're looking for is, do they have an innate passion for what they building? Do they have that ability to understand the workflow and how that end-user is going to be using their product? I would say, this goes not just for software, but even paint or flooring or things like that. You still need to understand, like, what's the thickness somebody want? What's the color they want? What's the consistency? All these different things. Those things are what we're looking for. One of my favorite things to do is go back and reread The Idea Maze. This guy, Balaji Srinivasan, who was a general partner at Andreessen Horowitz, I think he was the CTO of Coinbase for a while. He's also been a founder of multiple different other companies, but he taught this class and there's a whole lecture on it called The Idea Maze.
What he talks about is this journey of walking through all the different components of an idea. When you find people who have done that, that makes amazing founders, because they've been thinking about for, whatever. The duration doesn't matter, but they've been thinking about so deeply such that they understand all these different components and inputs to the journey. When you've already done that, then you're able to start to take little feedback or kinks in the plan and adjust them quickly because you've already been thinking through all these different dynamics over time.
Bill: Hmm, that's interesting. I just have one thought, and I have been listening to you, but the one thought that I just going back, like, what I did wrong, I wish that I hadn't underpriced myself. Every deal that I didn't land, I would default to price and then I'd be like, “Oh, well, now I have to cut a corner here. Cut a corner there to get my margin.” Sometimes just saying, “This is what I'm delivering and this is what it costs me to do it.” You either want it or you don't, but if you hire me, you're going to get the product, that would have been healthier. Selling from a position of strength would have helped. I was a mouse on the idea maze, in that particular entity. I was running through the maze, I had not thought it through.
[laughter]
Shomik: We're all mice at some point or the idea maze. What you brought up is interesting concept. I was talking with the founder the other day, and what we were talking about was, hey, I've got this contract with a large-- great logo, enterprise, Fortune 100 company. It's going to be a logo that everybody would want to have on their list. What's interesting is, it was going to take a bunch of professional services, it was going to take a lot of time to stand up and frankly, they would have to devote a ton of resources to it as well. The hidden costs with something like that, is you go from saying, “Okay, well, notionally. This is a great logo, they're paying me a bunch of money, this is great. I should be excited.” The hidden cost though is the resources because we're spending so many resources on this one customer, you may be stopped yourself from innovating on the product, to then serve five other customers, which then are going to be more referrals to other customers, and so on and so forth. Those sort of tradeoffs are so hard to identify in real-time.
In some cases, what you're saying is like, if the price isn't right, and prices is not just dollar amounts, but also the resource and the time that you'd have to put behind it. If it isn't right, sometimes the best decision is, unfortunately, to walk away. You say, “Hey, right now, this is not the best time for my business. I would love to get back in touch with you in a year or something when I have a bit more resources to tackle this. Unless we're able to pay this month or something,” it just doesn't make sense.
Bill: Yeah, that's right. I had a friend that I knew that signed a deal. He was developing a game type company, and he signed a deal with Disney and Mattel. The day that the deal gets signed is the greatest deal ever. Then, it's got to go into production, and all of a sudden, he needs more people. Then the deal isn't going quite as well as he thought and the working capital, they're squeezing him on the terms. Now you got all these employees, and then it's like, “Well, how do I get this produced.” It ended up costing him a lot more stress. If I asked him now, “Would you redo the deal?” He'd say, “No way.” At the time, it made a lot of sense. I probably would have said yes, too, I'm not trying to take a shot at him. It's interesting how sometimes the things that appear the best are not exactly the best when you look back at it.
Shomik: Have you invested in any flooring company since?
Bill: No, man. I did get a pitch on the franchise, or they're Toronto listed. I was just like, “I can't do it.”
Shomik: [laughs] You're like, “I know too much.”
Bill: [laughs] That’s great. I was like, “I know this thing inside and out. I don't even think it's a bad investment, but I'm going to pass on that one. Thank you very much.” I'm not trying to live on other people's tears. No, thank you.
Shomik: That’s amazing. [laughs]
Bill: I'll tell you what I have done is the concept of outsourcing. From listening to you and other interviews, I think we see things somewhat similarly. With IAC, I almost view that as like my allocation to VentureTECH. It's like, I know that these guys do offline to online, they specialize in marketplaces, I'm probably never even going to look at this thing, but that's my allocation, and we'll see how it turns out. I sort of a judge that based on what they've done in the past, so we'll see. Do you do that? I think you've done that, or at least talked about it. I don't want to misframe what you're saying, but with CSU and IAC, is that how you think of those?
Shomik: Yeah. I see exactly what you said. I would say I've studied a lot about marketplaces. I think I understand some components of network effects to be able to evaluate them on my own. That being said, like, I don't live in them every day. For me, what's funny is a lot of people, I think, on FinTwit and hedge funds in general, they go by IAC, and then they go look through the components and they're like, “Oh, Angie's List is such a large part of the valuation.” Then they go down a rabbit hole about Angie's List and blah, blah, this and that, and like, service providers, and whatever. It makes my mind spin. I don't even understand it. Fixed price--[crosstalk]
Bill: [chuckles] How is this different from Yelp? I don't know. [laughs]
Shomik: Yeah. For me, all I can say is like, Joey Levin and Barry Diller, and all the stuff that they've done in marketplaces over the years. From everything from Expedia and Ticketmaster to match and all these different marketplaces. If they see something in it, I can guarantee you, it's not something that I'll be able to figure out. There's just no way. Again, this goes back to why-- I believe in specialization, and why Boldstart would believe it, too, but personally, I've decided to specialize enterprise software. The reason I do that is because I think the compounding knowledge that you get in that one vertical, or that one area that you focus on, gives you a competitive advantage compared to others. There's different ways to attack it. It's not to say like there's tons of generalist investors that are have invested in Shopify, and then have also invested in American Tower and Facebook. They're able to do that, and they're able to go across and do all these things. For me, I'd rather put my money with a specialist who understands that area so well, that I don't even need to worry about. If Angie doesn't work out, they have many other marketplaces that are going to work out. They're going to invest in the new ones and at least that will be the way to go about it.
What's interesting is think through what's centralized and decentralized in all these different companies that we mentioned. With IAC, again, it's one of these things where it's centralized in terms of like, large capital allocation, but then they're still buying these companies that have their own owners, that they are also looking at, are they owner operators? Are they going to do what's best for the long term of the business? If they don't, IAC will step in, replace the CEO, and put those incentives aligned such that that is the proper way to do things. A lot of this is tied more to culture and to people into decision making, than it is to economics, which is hearsay, when we're talking about. IAC can compound for a very long time because of the knowledge that they've grown so that the next marketplace that they found, they're going to be able to shorten the timeframe for that to go from 0 to 100, a lot more than what they were able to do 10 years ago. How much could the value compound in the future? I don't know, but I think a lot.
Bill: Yeah. How do you think through-- like some people have said to me, “Well, the Vimeo thing is sort of Wall Street.” I said, “Yeah, but the other side of that is, they have a really unique asset now and I do understand saying that we should spin this off and let our people get compensated based on how this business performs. By the way, stock comp, if you're not playing the game that everyone else is playing, it seems to me that you're at an unnecessary disadvantage. Are you as a shareholder? Do you get excited at the prospect of like--? How do you analyze, I guess, the Vimeo transaction?
Shomik: Yeah, for sure. Vimeo is something that I think is pretty exciting. What's happening now is, you see this whole creative economy that's happening. I think you are a great part of it. With this podcast and what you're doing around this is, you're honestly creating this sphere of influence, by doing what you're doing really well. I don't know how that will accrue to you, but it's going to accrue to you in some--
Bill: Nor do I.
[laughter]
Bill: It's all just a donation.
Shomik: The cool thing is, like we said, it's bringing interesting people to your network, and at the edge of their network is going to be some way that's super interesting, that's going to help you with something. I guarantee you, at some point, that's going to happen. The interesting thing with Vimeo is, it's empowering all these creators to be able to easily get their video content out there. As latencies have reduced, and with WebRTC, and all these different things that are happening in the technological landscape, it empowers videos to be more prevalent in all the things that we look at on a daily basis, so because of that, if you can now bring in awesome editing software that also has distribution, by the way, baked into that as well. The tail of that is pretty long, because I can think of all different ways, like Vimeo probably could have a separate business unit inside of it only focused on one of those stories, Facebook stories and Instagram stories and-- [crosstalk]
Bill: Yeah.
Shomik: Different way of making this video, it's a different format, it's a different audience that you're going. If they just specialize in that could probably go pretty far. That's what excites me about their ability to compounds way out in the future. They're moving up enterprise, but they still have this product lead growth area where individual creators can go pay Vimeo for, I think, 30 bucks a month or something like that, and then have this toolset at their disposal to be able to create wonderful experiences. I think that's what broadly gets me really excited about it. One thing I'll say is, so you mentioned stock comp, and I'm going to go on a little bit of a rant here.
Bill: Okay, please do, because I'm adult. Like not adult, like a dolt.
Shomik: [laughs] Well, here's the thing, everyone it with all of these companies, I understand how-- if you're at Coca Cola, and you're worried about stock comp, I can understand that because unless you have meaningful levers to expand the margin and the free cash flow that that business is generating, you're diluting that stream with stock comp, so I can understand focusing on that there. People look at like, at Salesforce, or Workday, or these companies are just, like, “Stock comps out the wazoo and everyone's getting paid in stock, what the heck? We got to bake this into our valuations,” and stuff. The only way this business works is through human capital. That is the most important thing. Guess what? If your stock comp, is you get to get-- Salesforce got Bret Taylor, who used to be the CTO of Facebook, created Google, or not him alone created Google Maps, but obviously led the Google Maps effort and is now I think he's either CTO or CEO at Salesforce. How much is he worth? I don’t know.
Bill: A lot.
Shomik: Can you put a value on the stock comp that Bret Taylor should be getting? Benioff did. He bought Quip for $750 million that basically got Brett Taylor over. These are the kinds of things where I just hate this focus that FinTwit has on what they can understand. What's easily understandable is, “Okay, stop comp is X amount, so if we back this out or whatever, here's what it looks like.” “Oh my God, this is egregious.”
Bill: I'm guilty of this, by the way, you're speaking directly to me.
Shomik: [laughs] Well, but I think instead, it's trying to understand, well, what is the incentive for that stock-based comp, for the high stock-based comp, okay, and why is that incentive needed? Now, I would argue in something like Workday. I actually do think their stock-based comp is too high because of the fact I think like in payroll software and where they're playing, like, I don't fully grok why they need to be paying people that much in stock. Salesforce is the opposite. In fact, if you look at where Salesforce is right now, most of stock comp is happening through these acquisitions, which is natural, but they're expanding into large market adjacencies and creating their own bundle, which is pretty exciting for what they could do in the future. If you actually talk to a Salesforce employee, they'll tell you like, “We're cash-heavy, we're stock poor.” There's a reason that they do that because Benioff and the team understands that at this point, in certain areas of the business, stock comp is not really the main thing. You could get a brilliant engineer who's coming from India, pay them life-changing money in cash, they don't really care that much about stock comp, and you're still able to get the things done that you need to. That's just my rant is basically, I think there's too much of a focus on this, instead we need to study the incentives behind it.
Bill: I guess that the thing that makes me nervous, and again, like this could just be me being stupid. I'm fully aware of that. Right now, with what I perceive to be the incentives to chase growth, at almost all costs, because of just how things are being rewarded, generally in the market. I just worry that, as a minority shareholder, that doesn't have any say, in these businesses, that the answer today is to give stock comp. Then, what happens when the growth slows, or the business hits a hiccup and the stock drops is everybody's options are going to be rebased, because you can't have everybody leaves. Now I'm further diluted in a downside scenario.
Then, if I then am in a company that's got some problems, they're competing against the other companies that are able to issue stock comp that is an attractive currency. Am I then having the even shower more stock comp on people because it is a people business, and people can leave? Really good salespeople, you can't hire. They're worth their weight in gold. They'll just leave. Other businesses really good engineers, it depends on your go-to-market strategy. I guess that's what I fear. What I guess what I'm really saying when I'm bitching about stock comp is that I need to work harder to figure out what I'm saying. It's probably just me being an idiot saying, “I don't like stock comp and I should just do the work.”
Shomik: Well, I think there's value to both sides of it. Like any argument or anything like that, there's value to both sides. I think you're absolutely completely right. If the multiple goes down, or if the business has a growth rate slow in a period of time that the market wasn't expecting, and the stock gets nailed. Well, first of all, one, if you didn't rebase, like you said, people are going to leave, which is going to damage the enterprise value, or you diluted shareholders by rebasing those. That's definitely a risk. I don't know, how often that's happened historically, I actually don't know. I don't know, if you have a bunch of--
Bill: No, I don't have data for these opinions. Come on.
Shomik: [laughs] It's interesting, I don't know what happened at, let's say, like, Microsoft or something. After the dotcom bubble, it would be really interesting actually to study from that perspective. I think putting too much effort into looking at stock comp and trying to figure out how to back that out and all sorts of stuff like that is missing the forest for the trees. You're missing the big opportunity and focusing too much on minute details, because those are things that we can understand and we can control in a way, because we can say like, “Oh, this is how much they're diluting themselves. If I keep that going, this is what free cash flow per share looks like in 10 years because of this dilution.” The hard thing to consider those is, what's that stock comp driving? Some of that could be in tech, a lot of ways to uncover that is, like, you actually have to look at job board postings. When you look at job board postings, you'll see, like, I don't know, Cloudflare is hiring a bunch of AWS serverless folks because they're working on their workers’ platform. That is something that could be paradigm-shifting, could be next-gen, like, AWS type margins at steady state. If they're putting stock comp into that,-
Bill: Yeah, that's okay.
Shomik: -you should put more stock comp, you should be hiring the best people and going after that, because that opportunity is so big, that's worth chasing. Now, that takes a lot of diligence, that takes a lot of effort to go through these things. That's where I get more excited, rather than-- I don't own Workday by the way, and I do think their stock comp is egregious, like I said, because I'm not quite sure, but I haven't done the work. Maybe they have something that they're doing on the payroll side or on the financial planning side or whatever, that requires that much stock-based comp.
Bill: Yeah. Well, look, man, I am the first to admit that I have some mental things that I need to get over it myself. I have said over and over again, some of the advice that I think is the best advice is, look in places that make no sense and things that are blindingly obvious, Adam Robinson said that. I could easily say, “This makes no sense, why the stock comp is where it is, and the valuations are where they are, why don't I dig into this?” Instead, there's something about me that inherently worries about a market that is so looked at, at least my perception of what's going on today, is it just feels like people are saying, like, “Oh, people are at home, buy Teladoc. Then it's like, “Oh, I'm a genius, I should start a fund.” No. In five years, if you still write, then we can talk about you starting a fund. I don't know what the hell is going on right now. It's probably some self-defense mechanism. I don't know, some psychologists can call me after this. Long story short, I just think that there's not enough diligence going on, and I probably irrationally attribute some of my fear to stock comp. It's probably stupid.
Shomik: Well, I think to your point, though, on the current behavior, I couldn't disagree with that. Like I said, I see so many people, like putting these, it's got to be 50% plus growth, it's got to be high margins, and blah, blah, this and that. There's nothing mentioning about-- or maybe they do start going to competitive positioning and how the product actually fits in with end-user workflows, or anything. Most of those write-ups that I read, there's no secret sauce to-- or innate understanding of, “Well, here's how Datadog’s monitoring product provides them a better entry point into application performance monitoring, which then provides them a better entry point in the security market.” That's the type of analysis that you need to be doing to understand companies at this valuation. You understand, like, “Hey, well, why--” It's not just, Hey, New Relic is growing slow.” New Relic has an old product, so they suck, so because of that, we own Datadog, because New Relic sucks. That's the type of analysis that I'm hearing now, versus people saying, like, hey, maybe if you start in logs, and you're ingesting these logs, and you're taking information from them, that can then lead to a much better entry point into security because when you're ingesting those logs, you're also seeing all these different events that are happening, and all the breaches and all the little anomalies. For that reason, this is a better entry point. That analysis isn't happening, and that's scary to me, where that you have too many of these folks who are-- not to bring up Robinhood and talk about them, but it is one of those things.
They are creating this industry where a lot of folks are just they're going by these simplistic methods, and it's worked in this environment, and maybe it will continue to work for the next 50 years, maybe. I think it could also not and it could also not worth-- [crosstalk]
Bill: Maybe two years, I don't know about 50. We're going to get to some crazy places, if it's 50, man, I'll sell everything.
Shomik: I mean, that does scare me honestly, it's not-- Luckily, most of the founders are so paranoid about their business and so focus on what they're doing that they're not really as focused on like, “Oh, this company got this valuation, we need to beat them,” and blah, blah, this and that. They're just like, “Hey, what's the market now? We want to get a fair price compared to the market now. If we can get that, let's go to work.” They're focused on actually building their business. I think the investor mentality now is frankly, a little bit over-exuberant. Like these EV, SPACs that are going every single day. The craziest thing to me was Microsoft announced a partnership with Datadog that had already actually been announced at a previous conference, but they put out a formal press release. Datadog stock that day went up something 15% or 20%. That was $10 billion worth of market cap added because of a freakin’ press release, that was already known. That is really scary.
Bill: It's like when Peloton bought that company and solved the manufacturing kink. Guys, it's already $49 billion on a diluted basis. You telling me that solving your manufacturing kink hasn't been embedded in this price? I've pivoted a lot on that name, and I can see much better how-- I used to think it was nonsense, now I think it's got a shot and I could see that the gym that I am a member at here actually uses the brand that they bought, so maybe that is the entrance into gyms. I can get my galaxy brain going on it. I just feel there's a lot of galaxy brain going around and not a lot of-- Let's be measured about how all this is going to work and timing it out, but whatever, and just try to stick to stuff I know.
Shomik: With Peloton what's really interesting to me is, so if you think about more like a Costco type model, where you're like, what's the main driver? The main driver’s the subscription revenue. What drives subscription revenue over time? One of the interesting things to me is, like, well, you're doing the bike, that's great. But now they just put a bunch of money and went into the treadmill area. Well, one, what does attach rates look like for that? I imagine not that much, because they're both expensive devices, but maybe they're pretty high, which would be a bullish indicator, or two, what's the net new subscribers that they're picking up from the treadmill entry points, rather than the bike entry point? The problem is, is you have to scoop that data up from a random conference call and then somebody's mom talking about on the phone. That's how you're going to figure that out, but that's the bet, that's honestly, the thing that I would be trying to understand with Peloton to get the valuation now is, is what's that sub growth going to be looking like? The only drivers I can think of that are, like, well, is the entry point of them now bundling in yoga going to provide new subs or things like that. How do you prove that out? How do you get proof points on that? Again, for now, people aren't worried about so, what do we know?
Bill: Well, I'll tell you, this is totally anecdotal, it could be just totally cherry-picked in my head. This could be nonsense what I'm about to say. Since they started to talk about how many workouts per person they do, or since I've seen that discussed in the investment community, I have felt as though there have been a lot of, like, “You should do my warmup class. Make sure to take my cooldown class,” in the beginning and the end, it's become a very prominent thing that I should go back and do some of the earlier rides because if you do a warm-up, you bike, and you cool down, that's three classes. That's not three sessions. That's one session. It's kind of Wells Fargo-ey. I hate saying it, but it is.
I don't think it's a Wells Fargo product, I think it's a great product. Where I think the bulls could have a lot of merit and what they're talking about is, if you use the app a lot, and you use it to meditate, and use it to do yoga, it is a pretty good value proposition. You're really only paying like a buck a day. Maybe a little bit more, but then you got to amortize the cost of the bike, but still, long story short, it's a lot cheaper than personal training.
Shomik: Yeah. What we're, again, looking at with all these sort of businesses, I think the main point I would make is at these high valuations, the analysis chains from do we understand what the product is doing, and how that's working? To, how are they expanding into adjacencies? That’s the core of that, in order to make these things work, you need to understand how they're moving into adjacencies. That's why the Twilio acquisition of Segment to me was mind-blowing. I'm really excited about what they could do there. I've been really excited about Cloudflare’s moves in certain areas. With Peloton, what I would be excited to learn more about is again, how many subs is yoga as an entry point and treadmill as an entry point bringing on? Then, also, thinking about, well, okay, knowing that what if they came out with a, or acquired a weightlifting product or whatever, swimming. I don't know whatever the other thing is.
Bill: Swimming Peloton would be impressive. You need the AR glasses that we were talking about.
Shomik: [laughs] Yeah. Something like that. Then being able to understand how that would look to drive that sub growth. Those to me are, the interesting point now is, we're at a point in the market where understanding how a company can leverage their existing market position and their existing distribution to move into product adjacencies, is one of the most important things I think we can look at. as investors right now. By the way, founders are also looking at the same thing, because what they're looking at is, “Hey, how do we exceed the valuation that we're getting that are fairly high at this point in the market?” They're all starting to think about, “Well, maybe if I'm top-down, I should start to think about what's a more bottoms-up entry point for a potential product?” Or, “Is there a more efficient go-to market I can engender somehow?” Or, “Hey, I'm already talking with Coca Cola on this one thing. They told me that they need to solve this other thing. You know what, I'm going to go buy a company in that space, that's just getting started out,” maybe they're at the seed stage. Go and buy that tech, have those people come in, build out this product within our implicit distribution, and then all of a sudden, we start to expand our adjacency and start to expand to a larger TAM, a larger market potential.
Bill: Yeah. Then you get into these scenarios where somebody like me, when Zuckerberg buys Instagram, I say, “Oh, that's so stupid.” Look at how dumb I look.
Shomik: We all have those moments. I've had, Microsoft buying LinkedIn. Oh, my God, that was the dumbest call on my part. I was like, I don't get--
Bill: It's a horrible product, but people do love it. I can't stand LinkedIn. Maybe I'm just like biased towards Twitter.
Shomik: I just didn't see what Microsoft was doing acquiring it basically. I didn't understand how it fit in, but I mean, man, they have done just such an excellent job stewarding that company along since it's been under their ownership. We're always wrong on these things.
Bill: What got you so excited about the Twilio acquisition?
Shomik: What's interesting with Segment is, it is-- what Twilio has proven with their multiple acquisitions, first they did SendGrid, when they did SendGrid, it was pretty exciting because it was an email API product that you could see, one, how it can fit in really nicely to. Two, it was also developer-led, and product lead growth. You're like, okay, but I worried about like, “Okay, well, what's Twilio going to do next?” One, how are they going to integrate that. Two, how are they going to move forward and what are they going to acquire. What they've clearly shown with their Segment acquisition is they're sticking to developer first. The next thing that they're going to buy is also going to be developer-first. Again, that's leveraging their inherent inside sales model that they already have and it's leveraging the share knowledge that they already have with these business models, and so because they're doing that, now I can start to see them expanding int-- there's certain things around security that they could be doing, there's certain things around identity maybe, there's other areas that they can move into.
Right now, they're almost building like a bottoms-up CRM, like a Salesforce, to be honest. Where they have these communication API's, they have Segment itself, which allows you to take this customer data from all these different solutions, have it be in one place, and then be able to port those into whatever tools that you need. What Segment provides is a really easy, interoperable layer, where if you're using Marketo, and you want to move to-- what would their exact target or I don't know if that's the exact. If you're trying to move to another MarTech solution, Segment allows that to be very easily done, so that you can just pour it on over. There's all these sort of things on the sales stack, the analytics stack, the marketing stack, where you can easily port this data over, but still have this central hub where everything is unified, and you understand these personas, so that you can better easily understand your customer data.
Bill: I would think that being led by such a developer-focused CEO in that world, I would think developers think that guy is the man. If I was going to go work for somebody-- a young Buffett-- shoot it, old Buffett called me, I'd be like, yeah, I'm there. I would think that you have this natural reflexivity in the company, like in the character of the CEO that can attract talent, and then when that CEO can prove that they are able to move into adjacencies-- There's in people businesses like I do think there's serious reflexivity in that, and I do think that momentum really, really matters. I don't know if that applies here, but I would think it does.
Shomik: I think it does. Part of their culture too is getting people to think about that developer-first mindset. The CEO of SendGrid came in, I don't he was a developer, on day one, or whatever, the early days of when you join Twilio, you have to actually build something using Twilio’s API. Imagine how cool that is to see your CEO who has been a go-to market person who's great salesperson, or whatever that's who you've looked up to, and now they're presenting something that they've coded. That is wild.
Bill: Yeah, that’s cool.
Shomik: That would get me so jazzed up to see that, like, I'd be fired up. I'd be like, “Yeah, let's go. You're building this, let's go.”
Bill: Yeah, that's right. Culturally, you all start at this, you all got to code. It's like, “Alright, let's do this.”
Shomik: Yeah. It's just also just like a fun thing because then you get to razz on the product and he'll make fun of himself, and so and so forth. I think that's the fun part of having Jeff Lawson. More so him being like this person that everyone aspires to be or anything in the developer world, it's more about that culture that he's put up of, like, “Hey, this is what we're going to do. If you're a salesperson, you still got to create a Twilio API product with the Twilio API.” That is really cool, and that gets everyone brought into the same culture.
Bill: Yeah, that is cool. I could see how that would create something enduring.
Shomik: Yeah. We'll see if others do that. Hackathons used to be something that Atlassian would do. Other companies would do it, too. I would say, Atlassian did a really good job with these hackathons, coming up with new products and having that be a major cultural thing. Over time, though, that's become so effective that now-- it's table stakes, like every company has-- [crosstalk] You lose some of those cultural competitive advantages over time, just like the coffee table and the coffee and ping pong table and all that sort of stuff. Eventually those get commoditized, so you have to think about these other ways that you're going to engender culture. I think Jeff Lawson has done a great job with that Twilio.
Bill: As a Facebook investor, do you get concerned because I heard you talk about in the past that everything at Facebook came back to the Blue App? Do you worry a little bit about Zuckerberg being so tied to the Blue App that culturally that creates a problem, or not really?
Shomik: Well, I would say, yes, that does worry me. I would also say that the Instagram co-founders, Kevin Systrom and Mike Krieger, they stayed at Instagram for five or six years. That is a pretty long freakin time for someone who just made a billion dollars or whatever, a couple 100 million each to stay at a company, when you don't need to work anymore. That's long past the golden handcuffs.
Bill: Yeah, no doubt.
Shomik: I read this book called No Filter, which is a story about Instagram acquisition. It was great, and really interesting to learn about how Zuckerberg was prioritizing the Blue App, and how that led to certain tradeoffs and decisions. At the same time, the fact that the Instagram founders stayed for five to six years and continue to do their best and wanted to, also means that Zuck’s probably pretty good at motivating folks. I think there's this balance that there's no one narrative that can control that.
Bill: I have heard of a couple people that I know that got hired, and then now they won't even talk to me about. If I mentioned the word Facebook, it's as if I like don't exist. I don't know if they're worried that everything is tapped in their house or whatever. They're very impressive people. I think the hiring that I've seen, at least on the engineering side, is quite impressive.
Shomik: Yeah, the moves that they're making to in terms of Instagram and the partnership with Shopify, and some of their recent acquisitions that they've announced, is pretty exciting. I think if people delve more into those the acquisitions and the things that they're talking about publicly and stuff, I think there's a really, really cool vision for how this could expand in the future, and what I get excited about. I think that's something where-- if you do a little detective work, they're not hiding what they're trying to do. I can't really talk about it because one of the companies acquired was in our portfolio, but it is a very exciting potential outcome and strategy that they look to be formulating.
Bill: I hate that stock because I wrote it up when #BoycottFacebook was going on. I think I bought it at like 150. I think I sold it at like 155 because I was like, “No, there's too much terminal value risk for me.” Then, I think I did it again, in March, I think I held it, and then I was like, “I can't hold it.” Now I hold it again, and I think I've got myself over the hump, but watch me lose money on this thing. I promise I'll be the guy that ends up losing money on Facebook. I deserve it. I believe in it, but there's something about me that worries about terminal value in that entity. Instagram is the best ad machine ever created. That thing is incredible.
Shomik: Yeah. There's absolutely terminal value. You could always make a bear case for Facebook pretty easily, because the bear case is just, “Hey, what happens if all the young people go to TikTok and no one goes to Facebook? There's always an easy bear case to make, which is just like, “Hey, everyone's consumer attention could just shift elsewhere.” I think that does a disservice though to Facebook, which has shown just how frickin’ good they are at continuing to figure out ways to grab our attention. Again, that's where it comes down to management teams to their ability to use the data that they have, the amount that they're investing in machine learning to figure out different ways to engage their users. I think all those are working. I don't know about you, but I logged on to Facebook the other day, I haven't been on there for a while, I just got a bunch of ESPN highlight reels. I was like, “Well, this is great. I didn't watch this NBA game. Oh, my God.” All of a sudden, I was like on Facebook for, probably not that long, but let's say like 15 minutes, just watching these ESPN clips, that I had and looked at. There's a reason that Facebook did that. They're not stupid that's the way that even someone like me who doesn't log on that often can get drawn in.
I wrote about this, I posted a tweet recently. I came out from that Facebook session, having bought a pair of sneakers, these Nohble sneakers, I don't even know, but they looked really cool. Also, I got this meal delivery plan called F-Factor. Literally, my fiancée’s like, “What just happened? You never do this.”
Bill: I don't know, I went into Facebook.
Shomik: [laughs] Yeah. I'm like, “I don’t know, I was watching ESPN, then LeBron had some cool shoes, then these cool shoes showed up, and I don't know, I got that.” Then I was like, “Oh, I want to eat better, and this F-Factor thing came up,” and so that's the magic I think what they're doing over there.
Bill: It's very smart. They show you LeBron, and then they make you think that the shoes might change you in some way. Then, by the way, the diet could give you that body. I take it all.
Shomik: [laughs] I got to imagine that's what they're doing. Unfortunately, it won't work out for me that way, but at least I could try.
Bill: I've been researching Naked Wines, that's like everywhere. I don't know what they're going to do. Maybe they'll show me a bunch of pictures of [unintelligible [01:42:51] [crosstalk] that make me want to drink my sorrows away.
Shomik: Have you bought anything on Naked Wines yet?
Bill: I have. I think that the problem that that company may have is that I didn't like the first bottles that I bought. If I was not interested in the investment case, I don't know that I would have given them a second chance. I will say that when I returned the bottles or said that I didn't like them, they gave me all my money back immediately. Now that I have trained it into what I like, I can get like, really good cheap wine there. There's no friction, I don't have to go to the grocery store, they ping me 40 bucks a month, which I don't use every month, but then if I ever wanted it back, I'd get it. I think it's a pretty good mousetrap. I've said that I think it's the Carvana of wine. If you like Carvana, you'll love this.
Shomik: Oh God.
Bill: It's not perfect, though because each state-- like, where I am I need to be there to sign when I get the delivery.
Shomik: Oh, okay.
Bill: That's a pain because then I got a plan on, like, what my day is going to look like to get wine, and I could just go to the grocery store to solve that problem. I ended up just driving to the UPS store to pick it up, which I don't mind. Again, if I wasn't interested in the company, that might be the thing that I just say, “Yeah, whatever.” On the other hand, I ordered from this competitor, Wine Access, and that's taken like a month. Naked, they can ship it and they can ship it efficiently and they can get it to you quick, so there's something there.
Shomik: What gets me excited about Naked, so I actually had the opposite experience. I'm a little bit of a wine snob, just because I only like certain wines. I haven't really found Pinots I like. When I found one Pinot, it happened to be quite expensive, but that was literally the only Pinot that I would buy because I was, like, “That's the only one that I like.”
Bill: That's right, that's what goes in my mouth is only this.
Shomik: [chuckles] I would just be like, “I'm buying this one. If it's got to be a Pinot, I'll buy this.” Otherwise, I can drink as many Shirazs or Cabs or whatever, I love those, but Pinots for some reason, I only like this one time.
Bill: I get that.
Shomik: Anyway, I bought the starter pack, the six wines that they offer from Naked Wines. They sent me this one Pinot. My whole family loved it. Just right there, they have me hooked. From that moment, the fact that they gave me that, I'm now hooked. What interests me about the business, though, is there's some really low hanging fruit, that now that they're completely focused on just this e-commerce marketplace business, essentially, they can do a lot of. What gets me excited is, first of all, there's a ton of like UI/UX tweaks that they can make that, frankly, I think improves the buyer experience. I think as they do those, that will bring a lot more repeat purchases, and also new consumers in because even when you look at the website right now, it's like this blue and white, like, hodgepodge, it just looks cheap. It doesn't look good.
Bill: Yeah, it does look a little-- [crosstalk]
Shomik: Yeah. Imagine if they just put a little bit of effort into that, which I think they're doing now, the conversion should go up a decent amount. Once you have those UI/UX tweaks, then you start moving into growth tactics, which this is what Facebook's really good at, but it's notifications, email marketing, its ads in different places, so there's all these different components, which I think could be nice drivers in the future.
Bill: Dude, their email marketing is really good. I don't know if it's one of these-- Tony Robbins has an exercise where he says, like, “Look around your room, look at blue, blue, blue, blue, blue, blue. Now close your eyes and tell me what's red?” You can't name one thing that's red. Again, it's very possible that I'm interested in the investment, so I'm seeing the emails, but those emails show to me different than most spam emails. I actually think they're quite good at email marketing.
Shomik: It could be. Now I'm going to actually start paying attention to the emails. To be fair, I'm interested in investment, I haven't actually looked at the emails.
Bill: There you go.
Shomik: I don't know if that's the bear case for it.
Bill: It might be, I don't know.
Shomik: What's interesting about that is, again, if you think about a differentiated approach to a market that's existed for a while, wine has been there for a while, there's tons of different models out there. There's been some successful localized e-commerce efforts as well to do that. What's interesting to me, though, is they're taking this approach of going vertical, working with these independent wineries, buying some of them, or, I guess they used to own them. Now, striking partnerships with them. Being able to just focus on customer experience and what that looks like to you. I think, to me, that's a huge differentiator versus what's out there right now, which is currently everyone's trying to brand themselves as, we're from the French valley that only does these grapes, or like, We're from Napa, or whatever, and then they mark up that premium. Versus, these folks are just like, “Hey, listen, we're going to get you fast, cost-efficient wine, at a level that you're okay paying with, but it's going to taste just as good as the other stuff that you're used to and you'll learn some new brands out there.” That to me, it gets pretty excited where that you can see a lot of consumer surplus being generated from that.
Bill: Yeah, I think the other thing that is nice-- again, it's just whether or not people will engage enough with the product to train it. I think that with like the Stitch Fix-- Stitch Fix training some people in certain ways. There's evidence that consumers are willing to interact with apps. Once you train that app to what you like, like, I logged on the other day, and they said, like, “We don't think you'll like this, too sweet. We think you might like this. We think you might like this.” I bought a case of wine that I have a high degree of confidence that I'm going to like. I paid like 12 bucks a bottle.
Shomik: Yeah, that’s insane.
Bill: That's so much better than going to the grocery store, picking some $19 bottle, that's probably got $7 juice in it that I'm going to end up hating. By the way, if I don't like the Naked Wines, they're going to refund all my money. Not for all the bottles, but if I really don't like a bottle, I'll say that. I left two reviews, the actual winemaker got back to me.
Shomik: Wow.
Bill: I like the idea of the angel, it's sort of engenders, like this feeling of I'm supporting you. There's a lot of smart psychology in that product.
Shomik: Yeah, I agree. The low hanging fruit to me, again, goes back to all those little things that you mentioned. Stitch Fix has put so much money into their data science, rightfully so because they understood the payoff. I think up until this point, Naked Wines hasn't had the ability to, because they've had this legacy wine business and vineyards and all this sort of stuff and it's been all confused. Now that they're only focused on this area, there's a ton of stuff that they can do that has measurable quick impact, just from even-- I don't know what their data infrastructure looks like, but I imagine they probably don't have the cleanest data or the best systems to ingest that data. Even those improvements have compounding effects very quickly. At the stage that they're at, where they're not to say that they're like starting from a standing start, but they are very early on how to optimize e-commerce and how to optimize e-commerce websites, all these little things that they can do, will lead to like 1%, 2% uplifts in conversion. Those uplifts and conversion have a massive payout, especially as you start to invest in content marketing.
Bill: Well, to your point on nonlinear thinking, if you can improve, call it 2% for five-- well, that's not a high enough improvement, but what I mean. You can really get some margin improvement and some throughput through-- my understanding is that their distribution system can handle more volume, so you get enough little sort of tweaks, and you can get a pretty interesting outcome. We'll continue to watch it, it'll be interesting to see. I think, to your point, like adding cheese and stuff like that, if they can figure out how to ship it, but then you get a lot of complexity in supply chain, so it's really not worth it. There might be something that they can add, I don't know,
Shomik: I think this is one of those ones where they don't necessarily need to add another category. I think they just need to improve at what they're doing. It's better UI/UX, it's better growth marketing, it's better data ingestion and machine learning. All of those will lead to increase conversion rates. I will say this, a 1% to 2% conversion rate, if you-- I don't know what their unique visitors to the website are right now. A 1% to 2% lift on a million users is a lot of money. Especially if they're early on in that and they haven't gotten a huge top of funnel yet, if they can make those tweaks now and then start to turn on the top of funnel engines, you could really quickly see this rerate to a multiple that where other e-commerce rightfully so, trades out, where the Stitch Fix is, where the Farfetch is the world trade in apparel. Something with wine, where there's not as many competitors on a national basis, I think it's a pretty attractive investment.
Bill: Yeah, I would agree, although this isn't investment advice.
Shomik: Well, yeah.
[laughter]
[crosstalk]
Bill: I agree with you. I think it's got some very interesting upside. I think that the interesting thing about drinker data is the everyday drinker drinks a lot more than the not everyday drinker, and they're serving that person. They're serving a need fo-- I mean, my grandfather, he drank every single night, and that dude could have drank a lot of nicer wines. He drank Yellow Tail. I guarantee you that had Naked Wines existed, he had a case a week delivered to the-- Well, I might overstate how much he drank. He didn't need to be existing on Yellow Tail to feel he wasn't wasting money.
Shomik: You know what? I'm still a Bud Light fan and, and no matter how many premium beers come my way, the only other one that I really like is Yuengling from [crosstalk] those are my two go-to’s. Honestly, I'll go into a bar and there'll be like, “Oh, we've got this triple IPA from Sierra Nevada or something like that. I'm just like, “Do you have Bud Light?” [laughs]
Bill: I can't take those IPAs anymore. I used to when I was younger. They go straight to the gut now. I'm Coors Light, that's it. Do you do like Bud Light Lime?
Shomik: No, I'm not a big fan. I know you're a fan, I know.
Bill: One of them fast is excellent. More than that, it's not so great. I have promoted that in the past. All right, my man. Well, I know that you got a meeting coming up, so I'm going to let you go. I really enjoyed this. I hope if you're willing to come back, you got an open invitation, it's evergreen.
Shomik: I appreciate that. I love what you're doing with the podcast. Honestly, the guests have all been great. I love that-- I think you had Jack on-- I'm forgetting his last name.
Bill: Yeah, Rohrbach.
Shomik: Yeah, you had him on recently, that was one of the most fascinating conversations with someone that I frankly would not have been introduced to you-- to without you bring him up. Someone who's in the candle business, he was in all these other businesses, just so fascinating to hear how he talked about it. Then, also take those learnings and be like, “Okay, there's interesting parallels to enterprise software that I could think about.” I really want to say thanks for bringing some of these folks to all of our attention.
Bill: Well, man, I brought him on specifically so that people like you would like it. I did not know how many people would get to the end. There have been a couple people that I really respect that reached out and said, “This is actually one of my favorite episodes so far,” that was super fun. If you want him to talk to anybody, he's not very good at retirement. That guy likes to work, so he's happy to coach people up. He's itching to get back to work. I'm like, “Jack, calm down.”
Shomik: I love that. I maybe reaching out to you for a connection to him at some point, so I appreciate, man.
Bill: Well, I mean it.
Shomik: I love it. Keep it up with the podcast. This is amazing stuff. Thanks for doing what you're doing.
Bill: I will, man. I'll do it until it starts to suck, and then I'll take a break.
Shomik: [chuckles] All right.
Bill: All right. Take care of yourself.
Shomik: All right, I'll see you.
