Podcast Summary
Investing: Lean into Positive Selection: Effective primary research is vital for investors, and Tigas helps streamline the process. Positive selection, a key concept in investing, involves avoiding adverse selection and being in the right part of the consensus/right or wrong matrix for favorable outcomes.
Effective and efficient primary research is crucial for investors, and Tigas, a primary information platform, addresses the challenges of lengthy and costly research processes. Rule number 1 in investing, according to Alex Rampell, is to lean into positive selection and avoid adverse selection. This concept is particularly relevant for venture capital, where being in the wrong part of the 2x2 matrix of consensus and right/wrong can lead to unfavorable outcomes. In venture capital, being consensus right might even be better than being non-consensus right due to the need for subsequent funding rounds and the importance of having a lead investor. Overall, the conversation with Alex Rampell covered his framework for positive selection and investing, the value of operating systems or systems of record investments, and his views on the future of FinTech.
Private markets vs public markets: The exclusivity factor: In private markets, companies choose a limited number of investors, making it harder to gauge fair value but potentially leading to higher returns. Public markets are more accessible, but lack exclusivity and face short selling risks.
The public and private markets operate differently due to the concept of winning a deal. In public markets, orders are filled based on market prices, while in private markets, companies only engage with a select few investors, making it a harder-won deal. This exclusivity is not necessarily unfair, as private companies may choose to limit their fundraising circle to avoid leaking sensitive information. The goal is to be one of the chosen few, and paying a higher price can be a good sign of a founder's fundraising acumen. The private market's potential to outvalue public markets lies in the lack of short selling and the limited number of bidders, making it harder for investors to gauge fair value. However, companies like Carta are bridging the gap between public and private markets, allowing for more nuanced distinctions and potentially more equitable capital formation.
Bridging the gap between private and public markets: Private markets investing in call options can limit access and result in illiquidity premiums, but solutions like Carta enable trading of private securities for more frequent investment opportunities and a smoother transition to public markets. Viewing private investments as call options can provide a new perspective for growth-stage companies.
The traditional distinction between public and private markets may become increasingly blurred, benefiting both companies and investors. According to the discussion, private markets often invest in out-of-the-money call options, betting on a company's potential future success. However, this can result in an illiquidity premium and limit access to a larger pool of investors. Solutions like Carta aim to bridge this gap by enabling trading of private securities, allowing for more frequent investment opportunities and a smoother transition to public markets. Furthermore, viewing private investments as call options rather than equity can provide a new perspective, particularly for companies in growth stages that may not yet be profitable. This shift towards more frequent trading and broader investor access could lead to a more efficient and fair allocation of value in the marketplace.
Investing in private markets involves taking risks on companies with massive potential upsides: To be successful in private markets, investors must take calculated risks on companies with the potential for exponential growth, apply a 'margin of safety', and focus on investing in 'operating systems' companies that have the potential to disrupt entire industries.
Successful investing in private markets involves taking calculated risks on companies with massive potential upsides, despite the uncertainty and high risk of loss. This is because the potential for exponential growth in these companies is significant, and investors must try to quantify this upside using imperfect methods. Investors often look beyond current market size and instead consider the potential growth of a company if their assumptions about the future direction of the world prove correct. This approach requires a long-term perspective and a willingness to accept that many investments will not succeed. Investors can apply a "margin of safety" to their investments by only investing in companies that have the potential to fundamentally change the world and could become massive in the future. This strategy involves making a large number of bets on such companies to increase the chances of success. The concept of "operating systems" refers to companies that provide foundational technology that enables other businesses to operate more efficiently or effectively. Investing in these types of companies can lead to significant returns as they often have the potential to disrupt entire industries and create new markets.
Investing in companies with operating systems: Investing in companies with operating systems, such as dental practice management software or restaurant management systems, can provide consistent margins and competitive advantages due to their daily active use and control over distribution.
Investing in companies with an operating system, or a system of truth, can be highly beneficial due to their high retention rates and the ability to offer additional products and services to customers. These operating systems, such as dental practice management software or restaurant management systems, have a significant impact on how businesses operate and keep track of essential information. They are daily active use products, meaning that they are used frequently, which creates a strong moat and allows for the extraction of consistent margins. Furthermore, controlling the distribution of these operating systems is crucial for their success, as seen with the example of TiVo. Companies that offer operating systems have a competitive advantage over those that do not, as they can easily integrate and offer new products and services to their customers.
Control infrastructure or operating system for long-term value: Controlling the operating system or infrastructure offers cross-sell opportunities, high retention, and significant business growth
Controlling the underlying infrastructure or operating system of a business can provide significant long-term value and leverage. This was illustrated through the discussion of TiVo, which faced the challenge of not controlling its distribution and being at the mercy of competitors or partners. The lesson learned was that it's better to be the company that owns the infrastructure or operating system, like Comcast, as it provides the ability to roll out innovative products and charge premium prices. Operating systems can be defined as permanent systems of record that store all customer business interactions and are used almost every day. Examples of operating systems include QuickBooks, Square, Toast, and even Facebook. By controlling the operating system, companies can offer cross-sell opportunities and have high retention, leading to significant business growth. Infrastructure providers like Amazon Web Services, Twilio, and Stripe also play a crucial role in this ecosystem by providing the underlying support for various businesses, but they may not always be the ones controlling the distribution or pricing.
Controlling customer interaction through presentation layer: Companies controlling the presentation layer have deeper customer insights, enabling them to offer additional services and products, leading to long-term growth and retention.
Controlling the customer interaction through the presentation layer can provide significant expansion opportunities for businesses. Companies that control this layer, like Affirm and Stripe, have the ability to offer additional services and products to both their business and consumer clients, as they have a deeper understanding of the business's operations and customer behavior. This can lead to long-term growth and retention, as seen with Uber and Pinterest's relationships with Twilio and AWS, respectively. Conversely, companies that focus solely on back-end infrastructure, like Visa and PayPal, may have limitations in terms of product expansion, as they do not have direct interaction with the end consumer. Therefore, owning the customer interaction on the presentation layer can be a valuable asset in achieving business success.
Building an operating system as an entrepreneur: A significant undertaking: To build a successful operating system as an entrepreneur, offer a unique, differentiating feature, execute quickly, expand rapidly, and retain customers while avoiding competition
Building an operating system as an entrepreneur is a significant undertaking, requiring careful sequencing and a fundamental shift in the market. Effective entrepreneurs lead with an exciting, differentiating feature that customers want, while leveraging a tailwind from a larger platform shift. Starting with a narrow, unique feature is crucial to avoid becoming a commodity service, but expanding quickly and retaining customers is essential to avoid being undercut by competitors. The key is to offer an appealing value proposition to customers and execute on it quickly enough to retain them, while also building additional products to expand your offering over time. Ultimately, the success of an operating system depends on the customer's adoption and the entrepreneur's ability to execute and expand while avoiding competitive pressures.
Finding a unique entry point and building trust with a small group of customers: Focusing on a niche market and providing customized solutions can lead to remarkable business success
Building a successful business, especially in the early stages, requires finding a "wedge" or a unique entry point to gain the trust of a small group of customers. This trust is crucial in shaping the product around the needs of the overall market, rather than over-engineering it for a single customer. The Simpsons episode about Homer designing a car serves as a cautionary tale of creating a product with no applicability beyond the original customer. Furthermore, the rise of the creator class and the increasing number of online, digital-only businesses present an opportunity for the development of vertical software businesses that cater to these sole proprietors. These businesses can provide an "operating system" for these entrepreneurs, offering a suite of tools to manage their back-office tasks. However, the challenge lies in customizing these solutions for various industries and their unique needs, as opposed to offering a one-size-fits-all solution, which could lead to the TiVo problem. To sum up, focusing on building trust with a small group of customers and providing a tightly targeted operating system for the creator class can lead to phenomenal success in the business world.
Focusing on a well-defined niche can lead to business success: Toast's success in the restaurant industry highlights the importance of a clear niche and understanding customer needs. The creator economy and passion economy offer opportunities, but businesses must adapt to unique needs. Embedded financial services provide multiple revenue streams.
Having a minimum viable and well-defined niche in business can significantly improve the chances of solving customer problems and acquiring customers, as exemplified by Toast's focus on the restaurant industry. Additionally, the rise of the creator economy and passion economy presents opportunities for businesses, but it's essential to understand the unique needs of each vertical. Furthermore, the evolution of business models has led to the emergence of embedded financial services, providing companies with multiple revenue streams, including transaction fees, subscription revenue, and advertising or financial products and services. The joke about the pigs illustrates this shift, with the barn owner offering a free checking account and debit card to the pigs, effectively turning them into customers. This strategy can benefit supply-side constrained businesses like Uber and Lyft by increasing driver engagement and retention.
Software companies offering financial services to enhance customer relationships and create new revenue streams: Software firms providing financial services like payroll, loans, and point-of-sale financing can keep larger transaction values and add value to customers, strengthening relationships and setting them apart from traditional financial institutions.
Software companies are increasingly embedding financial services into their offerings to enhance customer retention and create new revenue streams. Companies like Toast in the restaurant industry and Synchrony in healthcare are prime examples of this trend. By offering services such as payroll, loans, and point-of-sale financing, these software companies can keep a larger portion of the transaction value and provide added value to their customers. This not only strengthens the relationship between the customer and the software company but also sets them apart from traditional financial institutions. The financial services functions that are most attractive from a business model standpoint are those that can be linked to the software's primary function and offer value at the point of transaction. Additionally, the ability to underwrite more efficiently with access to more data is an exciting development in the financial services industry, particularly in areas like lending.
Exploring Opportunities in Bundled Financial Services: Financial institutions and tech companies can offer bundled financial services, potentially leading to fairer pricing and improved customer experiences. Using data and control over funds, they could underwrite customers effectively and charge lower interest rates, offering more intelligent pricing for other financial products.
There are significant opportunities for financial institutions and tech companies to offer more bundled financial services to consumers, potentially resulting in fairer pricing and improved customer experiences. The speaker discusses the issue of unsecured credit card debt in the US, which totals over $1 trillion and comes with high interest rates due to the risk of non-payment. He suggests that if financial institutions could tap into the flow of funds from employers to offer loans, they could underwrite customers more effectively and charge lower interest rates. This could also lead to more intelligent pricing of other financial products, such as insurance, based on individual customer data. The speaker raises the question of whether consumers prefer bundled or unbundled financial services, and suggests that the ability to offer lower prices through bundling could be a compelling reason for customers to choose a particular provider. He also mentions the example of Tesla, which is using data from its cars to offer customized insurance rates, and speculates that if Tesla could also control the flow of funds, it could underprice its competitors and offer even more compelling deals to customers. Overall, the speaker sees significant potential for financial innovation through the bundling of financial services and the use of data and control over funds to underwrite customers more effectively.
Revolutionizing finance with data-driven technology: Fintech companies use data to accurately measure risk and offer customized financial solutions, leading to more efficient cash flow management and unlocking new possibilities
The future of finance lies in the efficient management of cash flows through technology. Traditional finance functions, such as lending, are inefficient due to the timing of cash flows and the need for intermediaries. Fintech companies, like Upstart, are revolutionizing this by using data to accurately measure risk and offer customized financial solutions. This shift towards data-driven financial technology has the potential to unlock new possibilities, such as customizable paydays for employees or automated loan approvals based on ability to repay. The use of smart contracts in crypto is an example of how automating money movement can lead to lower costs and more efficient financial transactions. Ultimately, the future of finance is about making cash flow management seamless, efficient, and customizable for individuals and businesses alike.
Finance industry at a crossroads: Expand access and lower costs or disrupt established systems?: Opportunity to expand financial markets significantly by democratizing and securitizing financial instruments, but challenges in disrupting entrenched payment systems like Visa. Buy now, pay later companies pose a threat to traditional payment systems.
The world of finance today is experiencing a significant disconnect between the high demand for yield and the high fees charged in various areas, particularly in lending and credit. This disconnect is due to the lack of democratization and securitization of certain financial instruments. However, there's an opportunity to expand the financial pie dramatically by lowering costs and making markets more accessible to those currently locked out. This could lead to a shift in profits for financial services, but it's uncertain how much bigger markets could grow without transaction costs. Another interesting point discussed was the challenge of disrupting entrenched payment systems like Visa. Despite numerous attempts, no organic solution has managed to appeal to both merchants and consumers. Buy now, pay later companies, however, have managed to gain organic traction with both parties, making them a potential threat to traditional payment systems. In essence, the finance industry is at a crossroads, with opportunities to expand access and lower costs, but also facing challenges in disrupting established systems. These changes could lead to significant shifts in profits and market sizes.
A new payment rail providing affordable financing and targeted promotions: Buy Now Pay Later (BNPL) offers item-specific financing and promotions, setting it apart from traditional payment systems and benefiting consumers and merchants alike.
Buy Now Pay Later (BNPL) emerged as a successful new payment rail due to its ability to provide affordable financing options to consumers and help merchants customize financing for specific items. This parallel payment network, which doesn't interfere with traditional Visa or Mastercard transactions, is significant because it allows for item-specific information, enabling merchants to offer targeted promotions and discounts. Traditional payment systems, like credit cards, have limitations, as they involve multiple parties and can only offer basket-level discounts. BNPL's success lies in its ability to cater to the unique needs of consumers and merchants by providing item-specific financing and promotional opportunities. This new payment method has gained traction organically due to its clear benefits for both parties, and its potential goes beyond just financing.
The struggle between distribution and innovation in business: Startups can find success by providing better payment terms and leveraging ubiquitous coverage to disrupt traditional industries
The struggle between distribution and innovation is a perennial one in business, particularly in the financial services industry. Distribution is often more important than innovation due to the high barriers to entry and the importance of customer acquisition. However, when a startup manages to find a distinctive distribution wedge and build a good product, it can lead to rapid adoption and long-term success. Companies like Afterpay and Affirm, which offer alternative payment solutions, have found success by providing better payment terms for expensive items, leveraging ubiquitous coverage and name recognition, and creating a synthetic credit card from a debit card. This approach has disrupted the traditional credit card oligopoly and offers merchants an alternative to high-fee transactions. The kindest thing anyone has ever done for me was introducing me to new ideas and perspectives, enabling me to learn and grow both personally and professionally.
The power of reaching out and building relationships: Initiating connections and being open to kindness can lead to unexpected opportunities and learning experiences.
Kindness and reaching out to others can lead to unexpected opportunities and connections, especially in professional settings. The speaker shares his personal experience of moving to Silicon Valley knowing no one and building relationships through cold emails and meetings. He emphasizes that this isn't about arbitrage or stealing ideas, but about building genuine relationships and learning from others. The speaker's story underscores the importance of taking the initiative and being open to the kindness of strangers. Without the willingness of others to respond to his emails and spend time with him, the speaker would not have been able to advance his thinking and build a successful firm. This lesson can be applied to various aspects of life, from entrepreneurship to personal growth, and highlights the power of connection and the importance of being open to new opportunities.
