The Exchanges

Q what the A-plus case looks like for Brooke five years from now? And I'm sure you do lots of three-year, five-year planning, so you can think about this. And then I want to know, rather than just saying, what's the failure case? I, I think a more interesting question is, What is the riskiest part of your business right now, where if that thing goes wrong, everything else can crumble?

A Two questions. So the first one, the A case, we just created a, you know, a North Star 10 year vision for Brooks. It's global for sure. People are running all around the world. As the middle class grows, people invest in their fitness, and running is always making the cut there. So it's booming in Asia. You know, we're growing now really rapidly in, in, um, Europe. So we want to build a global, global brand, um, and that's work to do in the next 10 years. So we see an opportunity for sixty million customers, Sixty million uniques up from maybe fifteen million today, four bagger, and four billion in revenue. That's the big opportunity we see right now, and it's still a premium brand, positioned to the enthusiast, really uniquely positioned against all the big platforms. The A-plus case in five years is 20 to 30% growth every year annually, and that's what we've been doing the last two, three years, um, and a lot of that's gonna have to come internationally, but Um, but, but if we get a B and grow 15%, we're actually fine with that too, because we're not rushing for the exit. So we're excited. We think we see it. Um, we're gonna have to compete for it, but we have a, we have a complete playbook right now in our view. So what keeps us, um, what keeps us from being successful? I've experienced it. Single points of failure, right? We launched a DC, which we had to do to get in the m…

AI assessment note: “The A-plus case in five years is 20 to 30% growth every year annually”

Q Not a real URL. All right, so wait, let me, let me kick us off here with just like a very, let's dive right in. We wanted to ask you, what is YC continuity? But in a very mechanical way, like, like literally what is YC continuity? Is it a fund? Is it a set of funds?

A It's a, you know, it's literally the word continuity. So the way it was formed, a lot of our founders, the alumni came and said, hey, you took us through the 12 week program. This is really why we started a company. It would be so cool if YC can continue to support us in the form of investment and in the form of programs down the line too. Why do you stop at the accelerator? And so that's really how we came up with continuity. So it is a multistage fund. We pretty much do primarily the growth stage, series B and above. We have invested in primarily YC companies, actually. We double down on YC companies. Our goal is to be partner, a lifelong partner for all the enduring companies in YC to the extent possible. We also do a tremendous amount of post-patch programming. So people don't know this. If you go through YC today, You get 10 times more what you got in 2012 batch or 2014 batch. So we run three programs in continuity. We run the series A program. We help you how to teach and teach you how to raise the series A. So we work with you on pitch decks, how to negotiate term sheets, how to identify investors.

AI assessment note: “So it is a multistage fund. We pretty much do primarily the growth stage”

Q to publish what you sent me as a blog post, and we'll link to that in the show notes when this comes out. Uh, I just found the whole narrative about how, how an insurance company works under the scenes totally fascinating. So maybe just as a little teaser on stage, What are the three layers of an insurance company, and what do you do versus what do you outsource?

A Yeah, ah, so the, the three layers start with distribution, ah, then you have underwriting, and then you have capacity, right? So the capital to actually pay the claims, you know, when bad things happen. And so, most companies, the vast majority of the industry focuses on one of those layers, right? So distribution is your typical broker, they go to underwriters, and then in the event of a claim, underwriters go to their capacity providers. What's unique about Vouch is that we started off with getting licensed to sell insurance like anybody else, and if we were taking the, like, lean startup methodology, we would've just stopped there, and just sold you guys a Chubb policy, a whatever policy, like anybody else.

AI assessment note: “the three layers start with distribution, ah, then you have underwriting, and then you have capacity”

Q Chen Yi, could you tell us maybe two things? One, from your perspective for this work that you all have done and are still in the process of doing, how do you define platforms? And then also, why is this group particularly interesting to y'all?

A Yeah. I'll address the second question first, which is why platforms are so interesting. I guess it's pretty obvious to us all that platforms are creating tremendous value. There's stats out there that says majority of the most valuable companies today would operate on some form of platform in this model. So for us is, you know, both important and, you know, it's just intellectually so intriguing to go into them. And I guess the way we define platform, we think of it very broadly in high level. We think of it as an intermediary for transactions. And that's it. I know sometimes we see people sort of think of platforms as being bounded to digital technologies. People equate the term platform as digital platforms. For us, that's actually limiting the scope of the topic, because platforms really is more than that. It's a model with very ancient roots. You know, there's a book that Hamilton and I both really enjoyed reading and learned a lot from. It's called The Matchmakers from Evans and Schmollensy. So both are economists who've thought really deeply about platforms, and they took their title from Or in reference to the Chinese ancient village matchmakers who would keep a knowledge base of single men and women in the village and pair them up for dates. I love that example because these are people who existed 3000 years ago. They have no access to modern technology, but they opera…

AI assessment note: “We think of it as an intermediary for transactions. And that's it.”

Q Yeah. Well, actually maybe first, can we finish Uber and talk about that third question for Uber? Cause that sort of feels like for Uber at least and Lyft, that's where the rubber hits the road on how valuable are they?

A Yeah, I think a very challenging characteristic of platforms overall is you don't own your customers. Your customers choose to patronize your platform, and they can choose to do the same with another platform. So this is a scenario that we call multi-homing, and essentially what we're saying is a lot of the differential value a platform can generate is a result of differential scale they have with their participants, and multi-homing is what arbitrage out all of that. Differential value if this platform don't make profits out of their operations. The result of that is you're creating so much value, but all of those gets arbitraged and the customers get it, but not the owner of the platform itself. So in the case of, you know, right sharing business, particularly the things you really want to ask yourself is what is preventing my customers from also accessing the other platform that's competing with me and your customers referring to both your riders and your drivers. So It doesn't matter if my platform is right now larger if technically both groups of my customers can frictionlessly multi-home on the other platform. So if you always open two apps and look for whichever one that happens to have that ride that's closest to you, and you always have open two apps to see whichever one gives me the closest rider that I can get matched with, then relative scale does not matter because…

AI assessment note: “multi-homing is what arbitrage out all of that. Differential value”

Q moments in our culture that we're sort of are like Rorschach tests. Like, you know, there's Michael Lewis's Liars Poker. There's the social network, which we've talked about, where maybe written or created intending one thing and then get received. Joe, you know, the responding to confidence in your thought that like people will like Travis more than you might think. How much was that in your minds making this?

A Brian, you can Speak to this, but it was one of the, one of the first things I think I brought up with you guys is like, how can we make sure that we don't inspire a new generation of young entrepreneurs to be assholes? And I do think it is a concern. And, you know, does Scarface inspire people to be criminals? Does the Wolf of Wall Street inspire people in the financial sector to be crooks? You know, maybe some, like when you're talking about large audiences, all sorts of people are going to take any given movie or show all different ways. But I think because this show is so Unflinching in shining light on the protagonist's shortcomings and dark moments. I would hope at least that the majority of the audience will come away understanding this as a cautionary tale, as opposed to a glorification of bad behavior.

AI assessment note: “it was one of the, one of the first things I think I brought up”

Q Well, we're gonna go back and tell some of the story of what led to Brave, but I wanted to get it in your words first. What is the Brave browser?

A So Brave is a faster browser because it blocks all the trackers, many of which Google or its publishers or ad buyers depend on, and it's based on Chrome, the Chromium open source code. So if you were using Google Chrome, which kind of swept the market up to 70%, let's say, or more of market share, uh, 2.65 billion users, they say, You should get off Chrome and you should use Brave. We tried to make something that's easy to switch to, but that's much more protective of your privacy. And this is an ongoing commitment on our part because it requires a lot of research and development. It requires fighting new kinds of tracking and fingerprinting that emerge. It also involves something we talked about from the beginning and we prototyped in Bitcoin, and that's the basic attention token system for users who choose to participating in Private ads that are anonymous, but that pay them 70% of the revenue and that let them support their creators directly through the basic attention token. And that was something we wanted to do because we saw the privacy protection, which is I think every user's right and good and necessary as nevertheless harmful to the current system of ad tech that publishers do depend on. So we wanted to get Our users an option that wasn't privacy invading, let them participate in funding creators. And if you don't want the private ads, you can still fund creators out…

AI assessment note: “Brave is a faster browser because it blocks all the trackers”

Q And there's only one thing that I actually knew about MicroUnity coming into this. Wasn't the chief architect at MicroUnity the same person as, uh, both MIPS and Next with Steve Jobs?

A Craig Hanson might have been at Next, Yeah, now you remind me. Craig definitely was at MIPS. He did the floating point unit, the MIPS floating point unit. So he was the full architect at MicroUnity. So MicroUnity was like practical grad school for me because it didn't go anywhere. It was way too ambitious, right? It was doing a new chip, new semiconductor process, new chip, do analog and digital on the same chip, I should say. It was doing basically everything except the radio front end that mixes down the bass band, it was doing in software. So all this stuff has come true over time, but trying to do all at once, you just run into the multiplication principle and your odds of success go to one in a billion or ten billion. And they could have used the fab to make SRAMs, but I think it was too boring. I think Moose was really ambitious. He wanted to change the world. He wanted to be the new Howard Hughes in some ways. And he did make a lot of money off the patents.

AI assessment note: “Craig Hanson might have been at Next... Craig definitely was at MIPS.”

Q Who do you consider your competitors? So is it, would it be like Square or Block or MetaMask or...

A No. So, you know, we're trying to get people off of Chrome and that's a matter of getting people to see that it's easy to migrate. You can even co-browse for a while. You don't lose anything. And then you can cut the cord with Chrome. People switch from Firefox. That happens over time because it's going down and people can see it and sort of, there are problems there. We can get people off Safari, but Safari is still privileged in Apple's OS's and kind of tied. So that's hard. Edge is somewhat privileged in Windows, which is a little hard on us. We're competing, I think, for thought leadership with other privacy firms. So there's Jumbo Privacy, which isn't really doing a browser, but it's, it's coming up with stuff. It's another, you know, venture funded thing. Duck That Go has been out there a long time and they've built up quite a reputation and brand name. You see their signs in airports. So they've done sort of a marketing first approach and gotten to a reasonable annual turnover from what I understand. And that's gotta be considered a competitor because they're doing desktop browsers on top of mobile now. But we look at the pie. That we're dividing up as very large. If you're taking users from Chrome, we could both take and not really interfere with Joe. The worst case to me would be, you know, duck and brave start blooding each other in some mixed martial arts match to cl…

AI assessment note: “we're trying to get people off of Chrome... Duck That Go... gotta be considered a competitor”

Q Well, to kick us off here in episode one, Vanta today provides the best solution in the market to get SOC II certified and, and stay that way. I know there's actually a fascinating history to SOC II and why it exists. Can you share that with listeners?

A For sure. So, uh, it started in, or there's a handful of, you know, different versions of SOC II before we know what it is now, different acronyms, but started probably 1015 years ago, um, with something called SOC I, actually, with the accountants, and that was just a financial auditing standard, uh, just trying to look at, do companies have the correct financial controls in place, so rules around how they, how they handle financial matters in their company? And then what gets audited annually? Um, accountants were doing that. I think it was a good business. Uh, around that same time, right, businesses just started to digitize, come online, um, more in our parlance. Software started eating more and more of the world. Uh, and so I think the accountants saw this, uh, you know, tremendous opportunity for, for sort of market expansion. Um, and so they, they started something called SockTo, uh, which sort of like Java, JavaScript, like, These things aren't really that related, but what it is at a high level is just assurance that the business takes care of customer data well, and we just have seen this be, you know, kind of more and more important as software has eaten the world, as we've seen more data breaches of big companies, and sort of everyone is more aware of how much data there is about all of us on the internet. And so over the last Five years, really the last two years, …

AI assessment note: “started probably 1015 years ago, um, with something called SOC I, actually”

Q too, is it also fair to say that your background, because most if not all of you came from television, was that kind of a secret weapon? Because packaging was more common in television, A, and B, television was still relatively new. I'm imagining most of the old people at, at WMA and, and then also in, you know, the studio business just weren't tuned into this new world, right?

A No, actually, if it's a good question, but let me correct something. William Morris was the top television packaging agency, and we all knew how to package television, but it's very different than packaging movies, because in television, the producer is a key element, and in movies, it's the director. And the director actor and actors are cast in television prior to the eighties when fading movie stars were brought into television. But the thing about William Morris is they bifurcated TV and movies at a time when they were starting to come together. And that was a thesis that we didn't agree with. So that helped us leave, but it was a different business at the time. And William Morris wanted to keep them separate, and we were asking the head of William Morris Picture Department and Television Department to run joint meetings, because people could work in both areas, and they refused to do it. That was another nail in their coffin. So when we started, we made a conscious decision to be TV only, because by SAG rules, they had to pay every Thursday. And we started our business on a 100,000 dollars, and we never went into debt beyond that, paid that debt off in six months, and never carried 10 cents a debt, ever. And the reason we didn't is our TV clients got paid every Thursday, so we took our commission. But, In 1978, we made a decision that we needed to be in the movie business,…

AI assessment note: “No, actually, if it's a good question, but let me correct something.”

Q What could have made CAA an enduring franchise that became a gigantic force rather than sort of apexing as you exited?

A So You know, it's funny, I had dinner with Ari a couple weeks ago, and we were, you know, he was a trainee at the agency, and one of the best we ever had, and I think he's done a fantastic job at building his business and diversifying it. I spent a lot of time, which very few people know, looking into how I could diversify CAA. Could I run it public? Could I sell it to private equity? Could I buy an ad agency? And I looked at buying J. Walter Thompson. I looked at bringing in private equity, and at the end of the day, I didn't know how to divide it up amongst the players. I couldn't figure out how to get it transitioned to a bigger entity. And Ari said, well, yeah, Michael, you could have bought an ad agency and blown the company up. But I said, I said, Ari, this was. 30 years ago. Economics were different. Public entities were different. Private equity was different. It just wasn't like it is today, and I couldn't figure out how to keep my core group and compensate them all, and I decided it was better to make a clean break and try to do it on my own in a different field. So how could it have been? Yeah, I could have bought Jay Walter Thompson. I would have gone into debt. I wouldn't have known how to give options in what To so many people at the agency, because how do you tell a group that's all for one, one for all, and we're splitting all the proceeds and then go through wh…

AI assessment note: “I looked at buying J. Walter Thompson... couldn't figure out how to get it transitioned”

Q like you were always looking around and identifying what's the new way that we've become more valuable and how do we leverage that into the next thing? Can you talk about some of the Like, that and some of the other ways that you just, by sheer force of will, or by counter-positioning against other agencies, how you were able to be different than everyone else around you and win?

A Well, we were different for one solid basic reason, which is that we basically worked as a team. So if the two of you were clients of ours, You didn't have one agent. What we resented at William Morris is that one agent coveted one client, and you couldn't go anywhere with that, because human nature is such that eventually there's a relationship problem. It just is. The longer you're around someone, the more there's a relationship problem. So we went ahead And put teams on people. We had some clients that burned through three, four, five agents, but they never left us. As a matter of fact, in a 25 year period, I think we lost under six, five or six clients. We never lost clients, because we had teams of people on them that they could relate to. So we would have a, for an actor, no actor ever had a literary agent. We'd have a literary agent on an actor. Well, why would we do that? Well, it would be stupid not to. Why wouldn't we? What does an actor do? All they do is read scripts to see what they want to do. What does a literary agent do? All they do is read scripts to see what actors' roles are available. So we were in a state of shock. That actors didn't have literary agents. When we looked into it, we were saying, wow, are we, are we stupid or is everyone else stupid?

AI assessment note: “we were different for one solid basic reason, which is that we basically worked as a team.”

Q That's wild. I mean, so, uh, we're talking about this point in history where you had already become this big successful agency, you were already representing these people, and you're, you know, branching out into things like trying to take on Koch's advertising. Can we hear the entrepreneurial story from you of how CAA came to be in the first place? Because you really started with nothing, like zero.

A Yeah, I mean, it, it, it's actually pretty simple. Um, I'll, I'll try to give you the highlights. We were, A group of us, there were probably 15 young agents at William Morris, maybe 20. All in our twenties. And I was the assistant to the president at the time. Bill Haber ran the TV talent department. Ron Meyer was a first-class talent agent. Roland was a, and Mike Rosenfeld were TV packaging agents. And basically, we noticed that A disagreement philosophically with where they were taking the business. And crazy as it sounds, CAA was born out of a bad staff meeting at William Morris. Where the guy I worked for, who was head of the television department, his name was Sam Weisbord, announced with great pride and passion that he had signed Ann Miller, which will mean nothing to you two young guys, but she was a fifties song and dance queen and a Broadway star. And we said in a staff meeting, we all sat in the back. We weren't allowed to sit at the table because we weren't senior enough. And one of us got up and said, look, Ann Miller is a talented lady, but we should be signing Bob Redford and Paul Newman and Dustin Hoffman and Sean Connery and Sidney Poitier, and we should be signing those people, not Ann Miller. This is William Morris. We've been around since The older guys went ballistic, and you then saw a division at William Morris that never healed, and then they made a card…

AI assessment note: “CAA was born out of a bad staff meeting at William Morris.”

Q They made money. You made money. Coke did great, right?

A Everybody was happy, but more importantly, you know, it's funny, our competitors put out all this press. CA is gonna use their clients to make commercials. How stupid, blah, blah, blah. I'll never forget one of our clients, Dick Donner, who did Superman. Call me up laughing. He said, I just read this article in Variety that we're all stupid for doing these. He said, I just cashed my check. He said, and I'm, he says, I'm between movies. I couldn't be happier. I just want you to know that. So it's just that kind of, you know, we thought out of the box. Nobody else did. And when we Did the commercials. I said to Roberto, I want you to premiere them like a movie. Invite the press and run them all, because 35, 32nd commercials is less than 20 minutes. And he ran them for the press, and the press we got was insane. We got the cover of Time Magazine, which was important at the time. We got a love letter in the New York Times. We got unbelievable press, except for the advertising journals.

AI assessment note: “Everybody was happy, but more importantly, you know, it's funny”

Q Yeah, totally. Uh, Billy Joel, Allentown, growing up in Allentown. Um, so what were you like as a kid? Like, you know, is there anything, like, any, any little glimmers of the future not boring empire that were popping up when you were growing up?

A Yeah. So I, I think probably they're, they're a bunch of glimpses. I used to make these little books or newspapers on post-it notes. So one of my dad's, my dad was a consultant, uh, at Arthur Anderson, uh, and luckily got out before Enron, thank God. Um, but one of his early clients was the Miami Herald. And so when I was like, you know, six years old, I would make these little post-it note versions of the Miami Herald. I also have this one Which is creepy, and maybe we cut this part, but it was called Golden Memories of a Young Boy's Life. And so I had all these au pairs, and they would take me in like, you know, the women's locker room at the pool or something like that. And I was like a five-year-old kid, and I would come home and draw stick figures of boobs in this little book called Golden Memories of a Young Boy's Life. So that was probably the earliest version of Not Boring.

AI assessment note: “I used to make these little books or newspapers on post-it notes.”

Q sent out a tweet in February that you wanted not boring to make one million dollars this year, which as David has in the notes, uh, sounds effing crazy. And I, I'm curious, like, how, how did you, what happened in your brain as you formulated that tweet? Was it that the sponsored posts had been going well? Were you already contemplating Not Boring Capital? What was that moment like?

A Yeah. So I probably, I mean, like I'd been thinking a little bit about Not Boring Capital, uh, and so that was there, but really was talking about just purely making a million dollars off of the newsletter. A couple of things that happened around that time, like me and Ben from Composer wrote this piece on Excel that got picked up, I think, by two separate New York Times articles and got to the top of Hacker News and all of that kind of stuff. So I was like, whoa, that was my first taste of like this thing really going kind of, kind of mainstream. Uh, had written a sponsored post. I think probably, you know, either that week or was in the middle of writing the post. Um, and the company was really happy with it. It's like, and I was in Miami and the weather was nice and I could have been in, in, uh, New York in the middle of February and I probably wouldn't have tweeted the same thing, but I woke up and the sun was shining and I was like, you know what? Life is pretty good. Like I'm probably making at this point, call it 10 or 15,000 dollars a month or something like that. So like not close, maybe 20, I, I don't know. Um, But I just woke up feeling, like, really good, and I was like, you know, I'm just gonna, I'm just gonna say this, and, like, I'll probably, people will probably think I'm an asshole, but, you know, I, I've, I've, like, struggled on zero dollars for the past X n…

AI assessment note: “I just woke up feeling, like, really good, and I was like”

Q Did your parents like expect you to get A's or was that, was that you?

A My parents definitely expected me to, to get A's because they saw that I could get A's, right? Like I, I don't think it was any, any like undue pressure. It was just that they saw that if I applied myself, I could get A's. And if I didn't, which was also often the case, and then I didn't. So in fifth grade, I had told my parents everything was going really, really well. I was probably going to get straight A's, maybe like a B plus, maybe, but probably not. And then I got my report card and I remember my dad was coming home from a business trip and you know, he was a fancy consultant. So he had a cell phone way back in the day in his car. We got a report card, and my mom made me call my dad and tell him the grades that I got, and so I was like, science, A, English, A, French, C plus, blah, blah, blah, A. And he was like, alright, Paki, I'm gonna be home in an hour. By the time that I get home, I want all of your certificates, all of your trophies, anything that would suggest that you might be a winner, I want them in a box in the attic. We're calling that box the loser box because you're a loser. What? And my mom said that my dad went to like the, the Mo Mark Addafi school of parenting for this. I actually think it was awesome because what he was mad about wasn't that I got a C plus, like that wasn't the big deal. It was that I lied all semester and said that I was doing really …

AI assessment note: “My parents definitely expected me to, to get A's because they saw that I could”

Q So you apply to business school, right? And astute readers of not boring will know, and, and trollers of your LinkedIn profile will note that you do not have an MBA. Uh, Walk us through that and what happens.

A One other thing to add was while I was in finance, I started a company called Throgo, which was a terrible name. I had bought the site for something else and then I applied it to, uh, building this company that essentially took people from New York down to the Jersey shore and to the Hamptons every weekend. Uh, so the party bus ride, it was so much fun, paid for my summers. I took it You know, way too seriously and thought that this was going to be my ticket to a great business school, applied to Stanford, got summarily rejected, uh, from, from GSB. Um, ended up getting into Chicago, had my deposit down, was going to go. And then one, I kind of visited and it was snowing and it was like May or something, you know, April or May. And I also found a company called Breather on AngelList and had just started a conversation with the founder of Breather. Uh, where there was no guarantee of even an interview or anything, but I asked Chicago if I could defer. They told me, no, I couldn't defer. Your deposit's already in. If it were Harvard or Stanford, they would have let me defer. But Chicago wants to, you know, they know that people might try to say they want to defer so they can go to Harvard or Stanford. So they wouldn't let me defer. And so I just said, all right, cool. Not going to business school, uh, had already quit my job. And so really spent, uh, kind of the next four months,…

AI assessment note: “asked Chicago if I could defer. They told me, no... Not going to business school”

Q of the two posts that I do is going to be pure unadulterated. I'm getting paid by the subject to write this. I am doing the thing that is going to make classically trained journalists like freak out. And I'm just going to own that. How did you come to this and, and how did you, what were your fears around it? How did it come to be all that?

A Totally. So I'm going to get the origin story somewhat wrong. I'd started talking to Nick Abazita at That main street. And if you use Twitter, you've probably gotten a sponsored tweet from him about using main street also happens to be a phenomenal guy. Love Nick. Thank you. And he was like, by the way, like these posts that you write on companies, like you could write those on startups and I bet people would be willing to pay. And he had just come over from shrug capital to run marketing at main street. And he's like, you know, we'll be the first ones who, who do this. And I was like, all right, cool. Let's try it. Like I'm going to caveat the hell out of it and tell everybody right up front that it's sponsored. But like, I think Main Street is really cool, so I would actually love to write about Main Street and explain, and like, my audience is a bunch, a bunch of entrepreneurs and founders, and I bet my entrepreneur and founder audience would love to make money back from the government that otherwise they might not have, and Main Street will get you, kind of, your tax credits back in, in an easy way.

AI assessment note: “I'd started talking to Nick Abazita at That main street”

Q Well, that's so cool. And am I right that, that y'all actually went, uh, to the Santa Fe Institute and, and took courses there? Like, like, how deep did you go in this?

A We did, um, you know, like, Like a lot of rabbit holes, we go down very deep. Uh, we, we quickly became members of the Santa Fe Institute. They call it the action group. It's, uh, this group of non-scientists that are allowed to sit in on a lot of the, the science. And so then we took this complexity course over a weekend, Brad and I did at Stanford. Um, and, and that was just a ton of fun. Actually, John and Joe, uh, the two other investors on our teams, they took a longer course. They actually had to do real work. Brad and I didn't have to do homework. Um, But, but we just learned so much. And, and I remember sitting outside of this cafe at Palo Alto with Brad, and, and we just sort of been at this course with Deborah Moore, this lady that teaches at Stanford who studies ants. And I thought, man, this concept of resilience is really fascinating. You know, it's really more about resilience than it is about predicting the future. And it's about adaptability. Like biology doesn't really care that much about the future. They care about, they care about adapting to this wide range of futures, right? Like my bees don't really care if it's going to snow tomorrow. They can adapt to snow. They've learned how to do that over millions of years. And what if we looked at companies like that? And so then, you know, of course we kept reading, we kept writing. This was probably. 20 11, 20 12…

AI assessment note: “We did... we go down very deep. Uh, we, we quickly became members”

Q Well, Brent and John, where can folks find you on the internet?

A You can go to nzscapital.com. We do try to write a lot. Um, we put it all on the internet immediately. Um, it is everything that we use internally. Nothing's held back because we know when we put it back, when we put it out there, we're going to get more value back. So this is our way of trying to create more value than we take. Um, our partner, uh, Brad also writes a newsletter every week. And so if you want to speak, see how he spends his time, um, you can sign up for the newsletter on nzscapital.com. It's called sit all week. It's just Brad's process. Um, Of sitting all week, and what he thinks about, and Brad is, um, well, he's like a microprocessor. He's, he's literally a small, smartest person I've ever met, and the way his brain works is incredible, and so if you'd like to sign up for that, you can do that there as well.

AI assessment note: “You can go to nzscapital.com.”

Q Is that the idea that if there's consumer surplus, you know, if there's money left on the table for, for consumers where they're not getting every dollar extracted that they could by the company, that that company is more resilient over time, even if they're not making every profit dollar and growing as quickly as they could today?

A I agree with that, especially if you're, I mean, if you really have a management team that's thinking really long-term, I don't know why you wouldn't give up a little bit of extra economics for your key partners, whether that's suppliers or developers on your platform or your customers, um, to really solidify your trajectory over the next, you know, 10 to 20 years versus, I don't want to pick on Apple too much, but like, what's the gross profit impact if they cut their app store, um, you know, take rate from 30% to 15%, you know, across The board. What is that like? Five percent of gross profits. It's like meaningless to them and it would create so much value for, um, all the, and there's, there's obviously knock on effects of that. But, um, anyway, I think that's what we're, we're looking for as companies that are paying it forward. Like again, back to the TSMC example, cause you guys covered it so well, like TSMC has lower margins than most of their gross margins than most of their customers. And so at any point they could, they could probably take the margins from 50% to 60% and say, Hey, I'm obviously have a monopoly in this market, but the way, you know, Morris Chang architected the culture there. Um, is, is on, you know, long-term value creation and really creating a platform for, for their customers to, you know, create massive, you know, amazing businesses. And so I thi…

AI assessment note: “I agree with that, especially if you're... thinking really long-term”

Q think we kind of glazed over in our TSMC episode is the current state of Moore's law from a, from a, like, literal perspective, but then probably more interesting, the current state of the spirit of Moore's law. And I was wondering, maybe John, let's, uh, let's go to you. Could you give us a little bit of a download on, like, does Moore's law still work, at least spiritually?

A Yeah. I'm, I'm glad the way you, you framed it that way. Cause it is kind of like a religious debate and people much smarter than me in the semi-industry are on like both sides of like, is like the true Gordon Moore, um, Moore's law still, um, holding up. I think, I think just like for the spirit of Moore's law, we still have, we have visibility probably for the next. 10 to 15 years. And to be honest, that's like the industry never has more than 10 to 15 years of visibility. I think obviously the death of Moore's law has been pronounced for a very long time, but I think that's one thing to keep in mind is like There, there are a lot of things out there that's going to keep us driving down Moore's law. And so, I mean, one, one thing that you guys covered well, um, in the TSMC episode is, is the, um, implementation of EUV systems, um, from, from ASML. And they actually are allowing us to shrink the transistor, um, kind of the fundamental building block, um, you know, two dimensionally. So it actually put more, you know, transistors into a chip. And so ASML is kind of on record saying they think that, That EUV will last about 15 years.

AI assessment note: “for the spirit of Moore's law, we still have, we have visibility probably for the next. 10 to 15 years.”

Q On the note of ants, uh, this is like probably the first and, uh, best example of an extreme version of resilience in an organization. Can you share the insight you had there?

A Yeah, so we attended this class by Deborah Gordon, and she has been studying this group of ants for 30 years in New Mexico. So like, they obsess over this group of ants, right? And they know what every ant is doing at all times. And what they found was really fascinating. They found that about half the ants in the colony weren't doing anything. They were just sort of sitting around, and then they had half the ants doing these defined jobs. And that's very counterintuitive. We think of ants as sort of the ultimate productivity machines. Um, But it turns out ants aren't optimized around productivity. They're optimized around longevity. They're optimized around resilience, around living as long as possible. Let's say it that way. Um, so, so that was really insightful for us. We thought, man, all these companies are optimized around productivity and Wall Street only makes it worse because we're obsessed over quarterly earnings. And so what if companies were really optimized around this long-term thinking? Of course, we see that with lots of companies. Most of them tend to be run by founders. Because founders have a lot of skin in the game, and they think long term. Um, but there are CEOs that think that way also. We know that the average tenure of a CEO in S&P 500 is less than five years. So this is not, they're not optimized like ants are. They're, they're trying to get a lot of r…

AI assessment note: “ants aren't optimized around productivity. They're optimized around longevity.”

Q So what's an example? And those are the companies that like you bump up to seven, eight percent of the portfolio, right? What are some examples of those?

A Well, I mean, sort of, there's a couple, right? The classic example would be Amazon and, In, in 97, when they went public, you know, I think around a billion dollar valuation, nobody could have foreseen AWS, right? That wasn't anybody's DCF. Oh yeah. They're going to also create infrastructure that everybody in the world is going to use, create businesses. They sound so silly, right? But, uh, another one that we had in the portfolio years back was, was eBay. Um, I don't know if you guys remember the marketplace business was struggling. Uh, they brought in a new CEO, John Dono. Um, they had PayPal, uh, and really you weren't paying for any of PayPal. If, If the marketplace business would recover, that was, that would more than cover the cost of, of entry. So, um, of course, you know, marketplaces did recover. PayPal ended up being great. John Donahoe is an amazing leader. Um, and, and that was a classic Rootmo stock.

AI assessment note: “The classic example would be Amazon and, In, in 97”

Q Well, we want to ask you for a spoiler in case people haven't read the book from the first time around, in case it sort of slipped through the cracks in anything else they were doing in 2001, um, and they haven't picked it up yet. What's kind of the, the big seminal idea?

A I don't want to discourage anybody from buying it, but here it is in 30 seconds. Here it is in 30 seconds. So the idea is to say a stock price, or it could really be any asset price, a price of an asset, but let's say a stock price reflects a set of expectations about future financial performance. So the first step is to say, what do I have to believe for this to make sense? And you can apply that broadly. The second thing is, the second step is to say, let's introduce strategic and financial analysis to judge whether that set of expectations is too optimistic, too pessimistic, or about right. And by the way, more times than not, you're not going to have a view that that's different. But if it's, if your views are more optimistic, then you should buy the stock. If your view is more pessimistic, you should sell the stock. And then the third and final thing is as, as a result of those things, take action, right? So buy, sell, or hold, or do nothing. But the core idea is just basically saying, what do I have to believe? Is the company going to do what the market believes it's going to do? And then let me make decisions as a consequence.

AI assessment note: “the idea is to say a stock price reflects a set of expectations”

Q to perform in X way. Cashflow is going to be Y. Um, And now, um, you know, uh, even if we're just talking about companies that are traded on public stock markets, like the, the expectations built in seem to me like they're a lot more complex than just like, uh, uh, Facebook or Amazon's cashflow next year will be Z, you know, um, how should folks think about that?

A Yeah. And David, I'll just build on this and, and, you know, the sort of noun versus that is an interesting way to frame it. If you go back way to Ben Graham and so forth, you know, they focus a lot on things like book value, which was, you know, where the accounting was actually probably a reasonable representation because most of your assets were things that truly showed up on your balance sheet. But as you pointed out correctly, the world has changed a ton and now more of our investments are intangible versus tangible. So as a consequence, what's going on, the income statement and the balance sheet and so forth, cashflow statements is getting a little bit mixed up. So let me just give you one little stat I found interesting that we've just recently ran, um, back in 2001. So the year the first book came out capital expenditures and intangible investments. And this is for like called the Russell 3000. So basically us public companies Was about the same amount, 636 hundred and forty billion, something like that. So just think about their, think of a starting line for a race and they're both standing there at the same spot. Fast forward to 20, 21, obviously we don't have all the full numbers, but if the projections sort of hold out, it'll be the case that intangible investments now are two trillion dollars and CapEx is one trillion dollars. So going from the same starting point,…

AI assessment note: “now more of our investments are intangible versus tangible”

Q Can you for everybody just explain what you mean by intangibles?

A Yeah. So I mean, tangible, intangible, the basic distinction is exactly what you, what it sounds like. So tangible are things you can touch and feel and kick and so forth. And intangible are things that are not physical. Obviously canonical examples would be software code, but it could be anything. It could be marketing, branding, all that kind of stuff, training your employees and so forth. So what accountants try to do now is to look at the income statement and say, which Of those items that are spent on, on selling general administrative expenses, which are necessary to maintain the current business and which are discretionary investments, right? An investment defined as an outlay today with an expectation for a future return that are in this case that are intangible. So the big buckets classically are research and development, branding, but today you think a lot about customer acquisition costs, you know, all that kind of stuff. And so it's been a watershed change and this is You know, call it even maybe not even a generation of investors. And so a lot of those tools that were developed incredibly useful and thoughtful at the time, but, um, that just because the accounting changed means that they're much less relevant today than they used to be. And so this, you know, I was listening to, um, You know, Patrick O'Shaughnessy did a really interesting podcast a little over a ye…

AI assessment note: “intangible are things that are not physical. Obviously canonical examples would be software code”

Q And the paradox of skill was much lower then, right?

A Like it was, and I, just to be, again, I'll nerd out for just a second. One of the ways we can measure that is to look at the standard deviation of excess returns, right? So alpha, right? So excess returns. So, so you'd imagine, uh, and if you'd imagine If you're an active manager, what you want is a big fat bell shaped distribution, right? So lots of positive alpha that's on the right and lots of negative alpha. So you're going to be the winner and they're going to be a lot of people losing nets to zero, of course, but you're going to be right. So you want that to be fat because that means there's lots, lots to gather. Um, and then what has happened consistently is the bell shaped distribution has gotten skinnier and skinnier and skinnier, right? Which is exactly what you expect from the paradox of skill. And that's actually what That's how I picked up on the Gould thing. So Gould showed that the reason there have been no 400 hitters is precisely because the standard deviation of batting average has gone down over time, right? Which is all, these are all the things that are symptomatic of what this, this idea would predict, which is cool. So anyway, um, and, and again, it's not just, you just think about If you bought an automobile in 1970 or something, there was a huge variation in the quality of automobiles today. They're all really good, right? I mean, you know, some are be…

AI assessment note: “Like it was, and I, just to be, again, I'll nerd out”