Changing The World
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A reminder for new readers. That Was The Week collects the best writing on critical issues in tech, startups, and venture capital. I selected the articles because they are of interest. The selections often include things I entirely disagree with. But they express common opinions, or they provoke me to think. The articles are only snippets. Click on the headline to go to the original. I express my point of view in the editorial and the weekly video below.
This Week’s Video and Podcast:
Content this week from @kteare, @ajkeen, @packyM, @sgblank, @kwharrison13, @PaigeHagy, @icharliemunger, @jasonkilar, @alex, @eladgil, @satyanadella, @linakhanFTC, @ycombinator, @garrytan, @benthompson, @stratechery, @blakersdozen, @mparekh, @sarahpereztc, @geneteare, @KateClarkTweets, @julipuli, @om, @eringriffith, @trippmickle, @jason, @NathanLands
Contents
Editorial: Changing The World
It's Thursday evening, and I have had a busy day in a busy week, and I am not feeling the urge for grandiosity. But OpenAI and its CEO Sam Altman did announce some world-changing technologies this week. The article by Ben Thompson from Stratechery below lists them. Still, a list does not do justice to how much thinking decision-making, and execution OpenAI has accomplished in a short period.
The heart of the announcements is a newly scalable architecture that allows anybody to have their own “GPT”. Developers will be able to build both enterprise and consumer GPT applications, often with no code required.
Want the world's best chef and recipe source? Build it. Want an excellent tool for fixing a car? No problem. Want the world’s best physics teacher for 10th Grade… done. And so on.
Over the next 12 months, we expect to see an explosion of use cases for almost any human endeavor.
More interesting is that user interfaces will change dramatically. Form filling, browsing, searching, learning, creating, researching, building, and more will be done simply by interacting with an AI.
Productivity is about to explode. And investments, too.
Packy McCormick leads this week's Essays of the Week with ‘Tech is Going to Get Much Bigger’. And he means in value and scope. The idea that the world’s biggest company is worth a single-digit $ trillion will be history quickly.
When Kyle Harrison, in another essay of the week - Surviving the Death of Venture Capital - says:
So if you want to survive in the ever-changing world of funding innovation, there are a lot of things you can do. But one thing is for sure: the only thing that is certain? Change. Get used to it.
He could have been writing about OpenAIs developer day announcements.
There are many excellent pieces of writing in this week’s edition. The impressive interview with Charlie Munger explains why venture capitalists screw their customers. The videos with Satya Nadella and Lina Khan are great for Sunday listening or viewing. Warner Media CEO Jason Kilar on why Netflix has the upper hand in streaming and what it will take to compete is compelling also (hat tip to Steve Gillmor).
Enjoy.
Essays of the Week
Tech is Going to Get Much Bigger
Tech is going to get so much bigger in the next decade or two that it will make everything up until now look quaint by comparison. We’re standing on that part of the curve that looks steep in the present but will look prairie flat looking back from the future.
I’ve been writing around various parts of this thesis for a while. The simple version comes from Working Harder and Smarter, which I wrote last September:
Until the 1970s, tech was about hardware.
From the 1970s to today, tech has been about software.
From here on out, tech will be about the combination of software and hardware.
That was 14 months ago, and already so much has changed.
The Tesla AI Day at which they unveiled Optimus was still three weeks away. Now Optimus can do this:
Figure was still in stealth. Not its 01 humanoid robot can do this:
ChatGPT wasn’t around then. Yesterday, OpenAI announced all of this:
Millions of people and businesses are going to have armies of agents that just keep getting smarter and more capable with every model upgrade.
Long, long ago, when I wrote that piece, the National Ignition Facility hadn’t achieved fusion ignition, half of the nuclear fission startups we’ve spoken to for Age of Miracles didn’t exist, and solar hadn’t yet crossed the $100 billion in quarterly investment mark.
That’s head-spinning progress, all made in a supposedly bad economy with higher interest rates.
The pace of change is important, but more important is what’s changing.
At the end of all of the interviews we do for Age of Miracles, we ask each guest what the world will look like when we have abundant energy. Isaiah Taylor, the founder of Valar Atomics, gave an answer that frames the situation perfectly:
There are only really three pillars to anything around us, as far as consumable goods. We've got energy, intelligence, and dexterity.
Those are the three things that go into any physical good, any product. And we are like right on the cusp of getting all three for free, which is kind of unbelievable, right? Dexterity has been, you know, worked on for a while, but it was always bottlenecked by intelligence. What OpenAI is doing on the intelligence front is genuinely making intelligence free.
And then I plan to make energy free. So we've got free energy, free intelligence, and we've got dexterity with projects like Figure and Optimus.
Labor is becoming a scalable utility – plug in, power up, and produce.
This will certainly mean change for workers – I’m in the camp that believes we’ll do more fulfilling work and non-work with our time – and it will certainly mean surplus for consumers. If the cost of everything decreases, everyone can have more of what they need.
We’ve talked about abundance here a bunch. I’ve seen a lot of tweets and read a lot of essays about what AI might mean for humanity. And those are the most important things, for sure.
But my god, just putting on my tech investor hat for a minute, cheaper energy, intelligence, and dexterity are going to be an absolute boon for tech companies.
The biggest tech companies of the next decade will be much, much bigger than the biggest tech companies today.
Even the Smartest VCs Sometimes Get it Wrong – Bill Gurley and Regulated Markets
Posted on November 7, 2023 by steve blank
Bill Gurley was one of Silicon Valley’s smartest and most successful VCs. He recently gave a talk at the All-In Summit that was really two talks in one. The first part was railing against the consequences of regulatory capture on innovation and a second part, about the consequences of premature government regulation of AI and why the incumbents are all for it. He illustrated his talk with regulatory horror stories in the telecom market, electronic health records, and Covid antigen tests.
Bill’s closing line, “The reason why Silicon Valley is so successful is that it’s so fxxxng far away from Washington” received great applause. Unfortunately, for startups entering a regulated market following this advice this might not be the optimum path.
(You can watch Bill’s entire 24-minute talk here or his thesis summarized in this 7 second clip here.
)
Let’s be clear, rent seekers and regulatory capture strangle innovation in its crib. It’s the antithesis of how founders want to build a business. (And to be fair that was the was the point of the last part of Bill’s presentation.) But entrepreneurs entering regulated markets need to understand how the game is played, how they can play it, what their VC’s should be doing to help them, and how to win.
Regulation
What’s regulatory capture? Why is it bad? And why was Bill’s advice of staying away from Washington flawed for startups?
All businesses have regulations to follow – paying taxes, incorporating the company, complying with financial reporting. And some have to ensure that there are no patents or blocking patents. But regulated markets are different. Regulated marketplaces have significant government regulation to promote and protect (ostensibly) the public interest for the benefit of all citizens. A good example is the regulations the FDA (Food and Drug Administration) have in place for approving new drugs and medical devices.
In a regulated market, the government controls how products and services are allowed to enter the market, what prices may be charged, what features the product/service must have, safety of the product, environmental regulations, labor laws, domestic/foreign content, etc. In the U.S. regulation happens on three levels:
federal laws that are applicable across the country developed by Federal government in Washington, D.C.
state laws that are applicable in one state imposed by state government
local city and county laws come from local government
Federal Regulation
In the U.S. the government has regulatory authority over commerce between the states, foreign trade, and other business activities of national scope. Congress decides what things need to be regulated and passes laws that determine those regulations. Congress often does not include all the details needed to explain how an individual, business, state or local government, or others might follow the law. To make the laws work day-to-day, Congress authorizes government agencies to write the regulations which set the specific requirements about what is legal and what isn’t. The regulatory agencies then oversee these requirements.
In the U.S. startups might run into an alphabet soup of federal regulatory agencies, for example: ATF, CFPB,DEA, DoD, EPA, FAA, FCC, FDA, FDIC, FERC, FTC, OCC, OSHA, SEC. These agencies exist because Congress passed laws.
State Regulation
In addition to federal laws, each State has its own regulatory environment that applies to businesses operating within the state in areas such as land-use, zoning, motor vehicles, state banking, building codes, public utilities, drug laws, etc.
Cities/County Regulation
Finally, local cities and counties may have local laws and regulatory agencies or departments like taxi commissions, zoning laws, public safety, permitting, building codes, sanitation, drug laws, etc.
Incumbents Advantage – Rent Seekers and Regulatory Capture
If you’re a startup entering a regulated market (Telecom, Pharma, Education, Energy, Department of Defense, Intelligence, Health, Fintech, Insurance, Transportation, Agriculture, Gaming, Cannabis, Petrochemicals, Automotive, Air Transportation, Fishing, et al.) you need to know that the game is rigged. And it’s not in your favor.
Incumbents in a regulated a market keep out new, innovative, and disruptive competitors by “gaming the system” in their favor. They do this by either being Rent Seekers and/or by Regulatory Capture. (Bill Gurley’s point.)
Rent seekers are individuals or organizations with successful existing business models who use government regulation and lawsuits to keep out new entrants that might threaten their business models. They use every argument – from public safety to lack of quality or loss of jobs – to lobby against the new entrants. Rent seekers spend money lobbying to increase their share of an existing market instead of creating new products or markets but create nothing of value.
These barriers to new innovative startups are called economic rent. Examples of economic rent include state automobile franchise laws, taxi medallion laws, limits on charter schools, cable company monopolies, patent trolls, bribery of government officials, corruption, and regulatory capture.
Rent-seeking lobbyists go directly to legislative bodies (Congress, State Legislatures, City Councils) to persuade government officials and their staff to enact laws and regulations in exchange for campaign contributions, appeasing influential voting blocks, or the “revolving door” – offering officials future jobs in the industry they regulated. They use the courts to tie up and exhaust a startup’s limited financial resources. Their lobbyists also work through regulatory bodies like the FCC, SEC, FTC, Public Utility, Taxi, or Insurance Commissions, School Boards, etc.
Regulatory capture is what happens when the very organizations set up to protect the public’s health and safety, or to provide an equal playing field, are taken over by the very people they’re supposed to regulate. These are the examples Bill Gurley were talking about.
Tech Companies Use Regulatory Capture
In my first two decades inside the Silicon Valley bubble we built products people wanted and needed. We competed with other technology companies, and, like Bill Gurley, largely ignored whatever was going on in Washington. We were content Washington didn’t know we existed. Unless you were in life sciences (therapeutics, medical devices, or diagnostics), very little government regulation applied. We ignored Washington and Washington mostly ignored us (defense contractors excepted.)
… Much More
Surviving The Death of Venture Capital
"Don't Euthanize Me"
NOV 4, 2023
I've said it before, and I'll say it again. In 2008 one of the most important experiences in my life was making sure I argued with all of my friends about which movie was better; The Dark Knight? Or Iron Man? Meanwhile the world was experiencing one of the five worst financial crises in history that led to a $2 trillion loss globally.
But when I think back, I still think The Dark Knight was a better movie. One scene in particular I was thinking about recently. There are two boats. One is filled with convicts, one is filled with regular people. The boats are stopped, and each are told they have a detonator to a bomb strapped to the other boat.
The perpetrator of the bomb switcharoo? The Joker. He tells each boat that if they blow up the other boat, then they'll live. If neither pulls the trigger? He'll blow both of them up. Pretty fascinating experiment in human nature. But the MVP of the experiment? This guy.
The guards on the prisoner boat don't want to pull the trigger, but they don't know what to do. The prisoners are starting to get ansy. Walking up to the guard holding the detonator, this guy offers a solution:
"You don't wanna die. But you don't know how to take a life. Give it to me. Or they'll kill you, and take it anyway. Give it to me. You can tell them I took it by force. Give it to me, and I'll do what you should'a did 10 minutes ago."
The guard hands it to him. And then this guy promptly throws the detonator out the window. So good.
You've got something that could kill a lot of people. Killing all those people would be awful. But if you don't kill them, you're going to die. You don't want to die. This guys response is ultimate. Remove the option. “I'm willing to die, if it means not letting something awful happen.”
Now, spoiler alert, thanks to Batman, nobody has to die. A boat full of people that "just showed you they're ready to believe in good." So how am I, yet again, going to turn an iconic moment of pop culture into a ramble about venture capital? Like this.
Venture capital is an existentially flawed, yet powerful, economic system that could kill the thing most VCs purport to love: startups. Just like the person who doesn't want to take a life on the boat — you're staring at a deadly thing. The deadly outcome isn't something you want. But the failure of that outcome threatens your own life. The dissolution or rapid revolution of the venture capital industry threatens to kill a generation of tried-and-true VCs. So what's to be done?
I'm staring down the barrel of cognitive dissonance where, on the one hand, I am a venture capitalist. And I want to keep doing what I'm doing. And I believe the model I'm leveraging can be valuable. On the other hand, I recognize the multitude of issues in the industry that create potentially more problems than they offer support.
First? We have to fight within the nuance. Just because something is broken, doesn't mean it needs to be taken back behind the barn and shot in the face. But once we defend our right to live? Then we have to come to terms with the need to change.
Don't Euthanize Me
"But Kyle, isn't all the murder and death talk pretty gloomy for a VC blog? Euthanasia is a bit much." The hyperbole is not mine to claim. That honor belongs to Edward Ongweso Jr. In March 2023, after the SVB blow up, he wrote a piece entitled "The Incredible Tantrum Venture Capitalists Threw Over Silicon Valley Bank." As part of that piece he took this pretty aggressive stance:
The increasing vitriol thrown at venture capitalists is as broad as it is creative: parasites, con artists, Venture Catastrophists, and (the most creative), ill-dressed rent-seeking oligarchic vampires.
So much of this specific drama was tied up in the back-and-forth frustration of what happened around SVB. I'm not gonna touch that too intimately. At the time, Mike Solana addressed this call for wiping out the "VC class" directly:
"Shortly after Ed achieved his goal of attracting attention from the people he dehumanized as “parasites” before suggesting they be euthanized, he clapped back, repeatedly and breathlessly, with a hopeless rolling of his eyes, and a kind of ‘do you see the idiocy I have to deal with.’ You’re all a bunch of poorly read losers, he argued. “Euthanized” is just a reference to famed economist Alfred Maynard Keynes! First and most obviously, there is a difference between “euthanasia” of a concept, and dehumanizing a group of human beings before suggesting they be euthanized."
In the same way that I'm not looking to unpack the SVB drama, I'm also not looking to unpack the complex web of politics driving someone like Edward Ongweso. The common thread from this aggressive stance towards VCs all the way to the actually important, and much more serious issues like the rise of anti-semitism globally, all runs through the idea of "identity value systems." I don't want to call it identity politics, because once you're calling for the death of a group of people you've stepped out of politics and started to demonstrate your value system (or lack thereof.)
People's overall frustration with venture capitalists as a group of people stems from a number of different big drivers. Here are just a few of them:
VCs are annoying: This is the easiest one and we can get it out of the way quick. True! Solana makes the same point in his response to the call for euthanasia; "for firms or venture capitalists with less of a track record, you’ve pretty much just got Twitter... This is a recipe for incredibly dramatic status games, all played loudly out online, which is just to say I get it. Venture capitalists really are, for the most part, incredibly annoying." There you have it. Moving on.
VCs have an undeserved celebrity in the startup community: Another easy one. True! People are often annoyed by how much attention VCs get. Also true. I've written before about how the ideal VC should be "the person that the person in the chair can count on." Too many VCs are intent, instead, on being the center of attention.
VCs don't do due diligence: People refer to VCs as "con artists," because they "no longer care if the companies they fund succeed. They have created a new math to declare themselves winners even when they are not." I've written before about the diligence deficit that exists in venture, and there's plenty of room for improvement.
VCs don't provide any real utility: Captain Euthanasia argues that one studypointed to limitations in VCs ability to actually fund things that provide utility: (1) VC and founder networks are very small and exclusive, (2) VCs exhibit herd mentality, and (3) the VC business model favors investments that "promise large returns in a medium time frame with minimal risk." I've written about most of these. "The Institutionalized Belief In The Greater Fool," and "The Blackstone of Innovation." The incentives of the venture business model do, in fact, reward structurally unsound thinking.
VCs are to blame for funding a myriad of detrimental innovations: Whether its defense, immigration, labor, transit, rental, or restaurant markets, people argue that startups have had more negative impacts than positive. I'll come back to that one.
VCs are obsessed with "new" over "good": Remember the sick "ill-dressed rent-seeking oligarchic vampires" burn? That comes from Nassim Taleb who accuses VCs of "injecting neomania," a "madness for perpetual novelty where ‘the new ’has become defined strictly as a ‘purchased value, ’something to buy.'” I'll come back to this one too.
Billionaire Charlie Munger, Warren Buffett’s right-hand man, says a lot of venture capitalists screw their investors
“You don’t want to make money by screwing your investors, and that’s what a lot of venture capitalists do,” Munger said on the podcast Acquired.
BY PAIGE HAGY
October 30, 2023 5:55 PM EDT
Munger, vice chairman of the famed holding company Berkshire Hathaway and one of the world’s most successful investors, discussed his disdain of venture capitalists, as well as his obsession with Costco, the state of the global stock market, and the concept of investing versus gambling, on the podcast Acquired on Sunday.
“You don’t want to make money by screwing your investors, and that’s what a lot of venture capitalists do,” Munger said on Acquired.
“You really shouldn’t be in the business of charging extra unless you really are going to achieve very unusual results,” Munger added, referring to the higher fees venture capitalists charge compared to other kinds of investments and the promise of venture capital providing bigger returns. “Of course, it’s more easy to pretend that you can get good results than actually get them, and so it attracts the wrong people.”
The average annual return for venture capital investments over the past 20 years was 11.8%, versus 12% for the Nasdaq Composite, according to Cambridge Associates.
Venture capitalists’ business is based on a concept known as the power law. Most startups in a venture firm’s portfolio will fail or only see modest growth, so to offset those losses, any big returns must come from the rare, explosive startup successes like Facebook, Airbnb, and Zoom. For this reason, venture capitalists are often described as the epitomes of greed.
Venture capitalists also have a reputation for being like sheep—following the herd and putting their money in whatever everyone else is investing in. Just look at Sam Bankman-Fried’s cryptocurrency exchange FTX, which collapsed spectacularly in November 2022. FTX’s demise called into question the venture capital industry’s due diligence, with the Securities and Exchange Commission (SEC) probing FTX’s investors about it at the beginning of the year.
Venture funds experienced a boom in capital during the COVID-19 pandemic, leading them to pump record-breaking volumes of “cheap money” into startups in 2021 and thereby inflating those new company’s valuations. Now, after nearly two years of high inflation and the Federal Reserve’s interest rate hikes in an effort to dodge a recession, startup valuations have fallen, tech startups are stuck in an IPO winter, and investors are being stingier with the money they hand out. In the first half of 2022, venture capital investments reflected average losses of 13%.
To be sure, Munger’s scathing criticism doesn’t apply to all venture capitalists. He says it can be a “very legitimate business, if you do it right,” and if you put the “right people” in positions of power. But that’s currently not the case, he says.
“The people who make the most money at venture capital are a lot like investment bankers. They say which hot, new area they’re going to get in,” Munger said. However, “they’re not great investors—they’re not great at anything.”
..More
Hollywood Needs to Create Its Biggest Hit Ever. Here’s How the Industry Can Make That Happen
By Warner Media CEO Jason Kilar
Hollywood is hurting. The financial backbone of the industry — linear television — is rapidly shrinking as consumers continue to cut the cord at alarming rates. At the same time, YouTube, TikTok and other innovative digital services continue to earn more consumer attention each day with their seductive offerings. Most acutely, production remains halted due to the now 105-day impasse between SAG-AFTRA and the studios. There is a way forward, but it starts by looking back to when all corners of the industry contributed to Hollywood’s greatest hit.
First, some additional context: it is no longer controversial to state that the future of entertainment will largely be streamed. As linear television declines at a rate of close to 10% per year in the U.S., consumers are already choosing streaming more than either broadcast or cable television. In the most recent network linear television season, the median age for most entertainment shows was over 60.
Despite the rise in digital consumption, only one company from across the industry — Netflix — is generating material cash flow from streaming. This should not be an indictment of streaming’s ability to deliver strong cash flow. Contrary to what many have stated, streaming is neither a bad business nor is it a broken business model. While streaming is not broken, a number of entertainment and sports companies’ streaming strategies may be.
The distinction is important. Netflix is in command of a sound streaming strategy, which has been to invest and execute consistently such that it can substantively replace the linear pay TV bundle. Netflix has attracted just about 250 million paying households as of this writing and is going to generate over $6 billion in cash flow as a result of the company’s streaming strategy. These results are remarkable for such a relatively young company that has only one business. By the end of this decade, Netflix has a credible chance, given the high growth rate in its cash flow, to generate more cash flow annually than any entertainment company in the industry’s 100-year history. Just from streaming.
The big question confronting and confounding the industry is how can companies not named Netflix generate attractive cash flow from streaming? I believe it comes down to one of two paths.
The first path entails earning Netflix-esque high daily usage from a large customer base of at least 200 million households. Such that those customers happily pay a sufficient price every month for your service and do not churn. This path requires offering enough compelling series, movies and other programming such that members of the household consume hours each day, every day of the year. There are no shortcuts. This path is not in the cards for the vast majority of companies, as it requires creative scale and an unusually large amount of disciplined investment over a long period of time. It also requires a balance sheet that makes it possible to do so. In success, the cash flows from this first path are extremely attractive (see: Netflix).
The second path entails a company playing a contributing role in someone else’s scaled, heavily used streaming service. But contributing in this context does not mean licensing or selling individual series or movies to a streaming service. This path entails a company contributing a branded, continuously updated programming lineup and in return receiving a share of the ongoing revenues from a scaled streaming service. It means being a new kind of channel that’s part of one big streaming service (ironically, this is the way that Hulu and its Hollywood partners operated for many years). In success, this second path is financially attractive.
Either of the above options can generate attractive cash flow. What will not generate attractive cash flow? A streaming strategy or service that is not on a credible path to earning high daily usage from over 200 million customers that each pay a sufficient price each month. Unfortunately, most companies in the industry currently fall into this latter camp.
WeWork’s bankruptcy is proof that its core business never actually worked
Alex Wilhelm@alex / 9:00 AM PST•November 7, 2023
Image Credits: KAZUHIRO NOGI (opens in a new window)/ Getty Images
WeWork’s bankruptcy filing has arrived. The well-known flexible office-space company has filed for Chapter 11 bankruptcy protection in the United States and Canada, seeking to convert certain debts to equity investments, and “further rationalize its commercial office lease portfolio.”
In fewer words: WeWork wants out of some of its leases while keeping its lights on so it can shed liabilities and get its business to a point where it can self-sustain. For more on the nuances of the filing, see TechCrunch’s coverage of the news.
This morning, let’s talk about WeWork’s economics. Did the company’s business ever make sense? To answer that question, we’ll go over its S-1 filings, its SPAC deal and its early earnings reports.
A history of unworkable economics
To start, we have to rewind the clock to 2019.
There was a time when WeWork was a hot, venture-backed company. Heading into its IPO filing, the market knew that the company was quite unprofitable, but as with all private companies, WeWork’s lack of clearly delineated results made it seem more appealing. It was not until the company filed to go public that we really learned how it had financed its impressive growth rates.
And grow WeWork did. It went from revenue of $436.1 million in 2016 to $886 million in 2017, $1.82 billion in 2018, and $1.54 billion in the first half of 2019.
That growth came at a massive cost. The company’s operating losses swelled from $931.8 million in 2017 to $1.69 billion in 2018, and then to $1.37 billion in the first half of 2019. In short, WeWork grew quickly but had to burn piles of cash to do it.
Which begs the question: How was the company losing so much money on something as well-understood as office space leasing? WeWork did spend too much time and money on efforts that had little bearing on its core operations, but what mattered more is the fact that its business was fundamentally garbage when it tried to go public.
Let me explain:
H1 2019 revenue: $1.54 billion.
H1 2019 membership and service revenue: $1.35 billion.
H1 2019 location operating expenses: $1.23 billion.
H1 2019 depreciation and amortization: $255.9 million.
H1 2019 location operating expenses + depreciation and amortization: $1.49 billion.
In short, WeWork’s core business was operating at a gross margin loss after the depreciation and amortization costs were added to its location operating costs. When you compare that lackluster profitability picture with the company’s staggering costs of $2.09 billion in the first half of 2019, you begin to see how it came to lose all that money.
So, what did WeWork do? It came up with new and better math to make itself appear more profitable. Here’s the company describing a much kinder metric that it preferred to more traditional figures:
We define “contribution margin including non-cash GAAP straight-line lease cost” as membership and service revenue less location operating expenses (both as determined and reported in accordance with GAAP), adjusted to exclude non-cash stock-based compensation expense included in location operating expenses. We define “contribution margin excluding non-cash GAAP straight-line lease cost” as contribution margin including non-cash GAAP straight-line lease cost further adjusted to exclude non-cash GAAP straight-line lease cost.
If you can parse that, congratulations. It isn’t a simple concept, but in essence WeWork found a way to make it look like its core business — running and leasing office space — did generate some margins. Its “contribution margin including non-cash GAAP straight-line lease cost” came to $339.9 million in H1 2019, from the aforementioned $1.35 billion in membership and service revenue. That’s not terrible gross margin for a non-tech product, but given the financial jiggering it took to get there, few investors were impressed at the time.
What’s worse, the company was igniting entire bales of cash to generate that super-adjusted margin from its core business. In just the first half of 2019, WeWork burned $198.7 million in cash to fund its operations, and another $2.36 billion to fund its investing work. That was counterbalanced by massive investing inflows, but the company itself was cash-hungry, increasingly unprofitable and had ambiguous unit economics at best.
Then, as we all recall, WeWork eventually pulled its IPO after a few S-1/A filings and everyone forgot about it for a while.
Enter the SPAC.
The 2021 pitch
Cognizant of the weaknesses that everyone noticed when it first tried to go public, WeWork stressed “recent cost optimization efforts” that would help it achieve “profitable growth in 2021 and beyond” in its SPAC presentation.
Here’s how the company described its COVID-era performance at the time:
Image Credits: WeWork
That was the past. How did WeWork see its future bearing out? It anticipated rapid revenue growth and rising adjusted EBITDA:
Image Credits: WeWork
Another chart pointed to the fourth quarter of 2021 as the point where the company would break even on an adjusted EBITDA basis, and the company said it had a “clear path” to that result.
So, what happened?
Video of the Week
FTC Chair Lina Khan on AI regulation, startup acquisitions, and more
by Y Combinator 11/7/2023
As we've said before: you may not be interested in government, but the government is absolutely interested in you. For anyone working in startups and tech, this only gets more true by the day.
FTC Chair Lina Khan went on a whirlwind tour of Silicon Valley last week as she looks to better understand and strengthen the relationship between Silicon Valley and DC.
One of her stops was at our office in San Francisco, where she sat down for an on-stage chat with YC president Garry Tan. We invited a number of founders and press to attend, and the topics discussed were important enough that we figured we’d share the audio recording with everyone. In the interview, Chair Khan dives into how the FTC thinks about startup acquisitions, AI regulation, maintaining a "level playing field" for future startups, and more; in the latter half, we opened up the Q&A to the audience.
Enjoy!
AI of the Week
The OpenAI Keynote
Posted on Tuesday, November 7, 2023
In 2013, when I started Stratechery, there was no bigger event than the launch of the new iPhone; its only rival was Google I/O, which is when the newest version of Android was unveiled (hardware always breaks the tie, including with Apple’s iOS introductions at WWDC). It wasn’t just that smartphones were relatively new and still adding critical features, but that the strategic decisions and ultimate fates of the platforms were still an open question. More than that, the entire future of the tech industry was clearly tied up in said platforms and their corresponding operating systems and devices; how could keynotes not be a big deal?
Fast forward a decade and the tech keynote has diminished in importance and, in the case of Apple, disappeared completely, replaced by a pre-recorded marketing video. I want to be mad about it, but it makes sense: an iPhone introduction has been diminished not by Apple’s presentation, but rather Apple’s presentations reflect the reality that the most important questions around an iPhone are about marketing tactics. How do you segment the iPhone line? How do you price? What sort of brand affinity are you seeking to build? There, I just summarized the iPhone 15 introduction, and the reality that the smartphone era — The End of the Beginning — is over as far as strategic considerations are concerned. iOS and Android are a given, but what is next and yet unknown?
The answer is, clearly, AI, but even there, the energy seems muted: Apple hasn’t talked about generative AI other than to assure investors on earnings calls that they are working on it; Google I/O was of course about AI, but mostly in the context of Google’s own products — few of which have actually shipped — and my Article at the time was quickly side-tracked into philosophical discussions about both the nature of AI innovation (sustaining versus disruptive), the question of tech revolution versus alignment, and a preview of the coming battles of regulation that arrived with last week’s Executive Order on AI.
Meta’s Connect keynote was much more interesting: not only were AI characters being added to Meta’s social networks, but next year you will be able to take AI with you via Smart Glasses (I told you hardware was interesting!). Nothing, though, seemed to match the energy around yesterday’s OpenAI developer conference, their first ever: there is nothing more interesting in tech than a consumer product with product-market fit. And that, for me, is enough to bring back an old Stratechery standby: the keynote day-after.
Keynote Metaphysics and GPT-4 Turbo
This was, first and foremost, a really good keynote, in the keynote-as-artifact sense. CEO Sam Altman, in a humorous exchange with Microsoft CEO Satya Nadella, promised, “I won’t take too much of your time”; never mind that Nadella was presumably in San Francisco just for this event: in this case he stood in for the audience who witnessed a presentation that was tight, with content that was interesting, leaving them with a desire to learn more.
Altman himself had a good stage presence, with the sort of nervous energy that is only present in a live keynote; the fact he never seemed to know which side of the stage a fellow presenter was coming from was humanizing. Meanwhile, the live demos not only went off without a hitch, but leveraged the fact that they were live: in one instance a presenter instructed a GPT she created to text Altman; he held up his phone to show he got the message. In another a GPT randomly selected five members of the audience to receive $500 in OpenAI API credits, only to then extend it to everyone.
New products and features, meanwhile, were available “today”, not weeks or months in the future, as is increasingly the case for events like I/O or WWDC; everything combined to give a palpable sense of progress and excitement, which, when it comes to AI, is mostly true.
GPT-4 Turbo is an excellent example of what I mean by “mostly”. The API consists of six new features:
Increased context length
More control, specifically in terms of model inputs and outputs
Better knowledge, which both means updating the cut-off date for knowledge about the world to April 2023 and providing the ability for developers to easily add their own knowledge base
New modalities, as DALL-E 3, Vision, and TTS (text-to-speech) will all be included in the API, with a new version of Whisper speech recognition coming.
Customization, including fine-tuning, and custom models (which, Altman warned, won’t be cheap)
Higher rate limits
OpenAI offers to pay for ChatGPT customers’ copyright lawsuits
At its first showcase, the ChatGPT creator unveiled an app store, a new AI model, and a legal strategy for copyright infringement suits
Rather than remove copyrighted material from ChatGPT’s training dataset, the chatbot’s creator is offering to cover its clients’ legal costs for copyright infringement suits.
OpenAI CEO Sam Altman said on Monday: “We can defend our customers and pay the costs incurred if you face legal claims around copyright infringement and this applies both to ChatGPT Enterprise and the API.” The compensation offer, which OpenAI is calling Copyright Shield, applies to users of the business tier, ChatGPT Enterprise, and to developers using ChatGPT’s application programming interface. Users of the free version of ChatGPT or ChatGPT+ were not included.
OpenAI is not the first to offer such legal protection, though as the creator of the wildly popular ChatGPT, which Altman said has 100 million weekly users, it is a heavyweight player in the industry. Google, Microsoft and Amazon have made similar offers to users of their generative AI software. Getty Images, Shutterstock and Adobe have extended similar financial liability protection for their image-making software.
Altman made the announcement at OpenAI’s first ever developer conference, meant to attract programmers working with ChatGPT. Roughly 900 developers from around the world attended. Satya Nadella, CEO of Microsoft, made an appearance during Altman’s address. Altman also debuted a ChatGPT app store, launching later this month, where developers can advertise and monetize their custom bots built with ChatGPT as well as a new model, GPT-4 Turbo.
Household-name authors have filed at least three suits against OpenAI for the alleged use of their copyrighted work in training the chatbot, which generates text in response to users’ prompts. The plaintiffs include Jonathan Franzen, John Grisham, Michael Chabon, George RR Martin, Jodi Picoult and the Authors Guild, a professional association. To create such software, AI companies feed billions of lines of text sourced from the internet, including databases comprised of tens of thousands of copyrighted books. OpenAI previously said in a statement: “We’re optimistic we will continue to find mutually beneficial ways to work together to help people utilize new technology in a rich content ecosystem.”
AI: He calls it 'Grok'
...an apt name for Elon Musk's AI Chatbot
MICHAEL PAREKH, NOV 5, 2023
WSJ headline “Elon Musk unveils ‘Grok’, an AI Bot that combines Snark and Lofty Ambitions’ certainly catches one’s attention.
It got my attention with the word ‘Grok’. It’s a word that has been a part of my vocabulary since my teenage years. Particularly since the word is from the world of Sci Fi royalty Robert Heinlein.
But first some more from Elon on ‘Grok’, and his his nascent AI ambitions:
“Billionaire says first product from his artificial-intelligence startup will eventually be available to subscribers on X”,
the corporate entity formerly known as Twitter. The piece goes on with more context:
“Elon Musk’s artificial-intelligence startup showed off its first product: a bot named Grok whose sense of humor the billionaire demonstrated with jokes about Sam Bankman-Fried and how to make cocaine.”
“Musk, in a series of social-media posts over the weekend, included those sample responses from Grok as he boasted that it has both a love of sarcasm and the advantage of access to real-time information via X, the platform formerly known as Twitter that he bought just over a year ago.”
“An announcement Saturday night by his startup, xAI, also mixed the serious and the silly. It said Grok will be designed for tasks including information retrieval and coding assistance, part of an effort to create AI tools “that assist humanity in its quest for understanding and knowledge.”
“It also said that Grok “has a rebellious streak” and was modeled after the Hitchhiker’s Guide to the Galaxy, an all-knowing guidebook in Douglas Adams’s classic science-fiction comedy novel of the same name.”
“Musk said Grok would be made available to X’s Premium+ subscribers after beta testing with a limited group of users.”
“Musk unveiled xAI in July with the mission, as stated on its website, to “understand the true nature of the universe.”
Grok thus far is an early LLM AI effort by xAI, rushed into public testing after only two months of training. Most models are trained for much longer, sometimes over a year (link below mine):
“The engine powering Grok is Grok-1, our frontier LLM, which we developed over the last four months. Grok-1 has gone through many iterations over this span of time.”
“After announcing xAI, we trained a prototype LLM (Grok-0) with 33 billion parameters. This early model approaches [Meta’s] LLaMA 2 (70B) capabilities on standard LM benchmarks but uses only half of its training resources. In the last two months, we have made significant improvements in reasoning and coding capabilities leading up to Grok-1, a state-of-the-art language model that is significantly more powerful, achieving 63.2% on the HumanEval coding task and 73% on MMLU.”
“To understand the capability improvements we made with Grok-1, we have conducted a series of evaluations using a few standard machine learning benchmarks designed to measure math and reasoning abilities.”
It does not have multimodal capabilities like OpenAI and others, and does not have capabilities equivalent to OpenAI’s GPT-4 LLM AI. The latter is much larger, with over trillion parameters. Larger scale is likely planned on the xAI horizon. Grok is currently available ‘to a limited number of users in the US’, to test before a wider release. It’s as much a recruiting clarion call for AI talent, as to let the world know that Elon is on the LLM AI track as well with Google, Amazon and others.
That Elon planned xAI to be his AI gift to the world, has been highly anticipated and discussed in these pages. It goes along of course with Elon’s ambitions for an ‘Everything App’, and his unique penchant to be a true ‘wild card’ in everything he does. Even though all his ventures from Tesla to SpaceX to Twitter/X and others are relatively separate pursuits, a common thread is his ambition to tie it all together with AI. And a desire for it all to do ‘everything’. (Something also being pursued by Apple, Meta, Uber, and so many others). Not to mention leveraging technology, human, and capital resources as needed across these endeavors towards his goals.
Sutro introduces AI-powered app creation with no coding required
Sarah Perez @sarahpereztc / 9:00 AM PST•November 8, 2023
Image Credits: Sutro
AI is already transforming the way we search, gather information, create, code, decipher data and more, and now it may democratize the process of building an app, too. A new AI-powered startup called Sutro promises the ability to build entire production-ready apps — including those for web, iOS and Android — in a matter of minutes, with no coding experience required.
The idea is to allow founders to focus on their unique ideas by leaning on Sutro to automate other aspects of app building, including the necessary AI expertise, product management and design, hosting, use of domain-specific languages, compiling and scaling.
The company was founded in late 2021 by Tomas Halgas, who sold his previous startup, the group chat app Sphere, to Twitter, alongside former Google and Facebook Product Manager Owen Campbell-Moore. The two have taken turns running the company, with Campbell-Moore at the head while Halgas worked at Twitter in its chaotic days leading up to Elon Musk’s takeover. Now, with Halgas having departed Twitter, he’s acting as CEO as Campbell-Moore has shifted to a day job at OpenAI.
Halgas, whose background is in machine learning and compilers, imagines Sutro as something that functions as your entire product team — something that would allow app building to become as simple as creating a website.
“Since university, we’ve always talked about how antiquated the craft of software engineering is,” Halgas tells TechCrunch. “We spent so much time thinking and working on technical minutiae, rather than thinking about what would make a technical product unique.”
For example, when starting a new project, Halgas says developers have to spend days figuring out things like infrastructure, authentication, security and other “data plumbing” before they can actually begin working on their idea.
“It’s completely insane — there has to be a way to basically automate all the stuff that’s common,” he had thought to himself.
News Of the Week
Global Venture Funding In October Dips Below 2023 Average
November 6, 2023
Global venture funding reached $21 billion in October 2023, a few billion dollars below the average 2023 monthly funding amount to date, Crunchbase data shows.
Funding continued to slow year over year with October amounts down around 24% from the $28 billion invested in October 2022.
To put this in a wider context, funding last month was less than one-third the monthly totals during the peak months of 2021.
Seed and early-stage funding also declined by about a third year over year as investors continued to scale back. Late-stage funding declined by 18% from a year ago, Crunchbase data shows.
Venture funding to U.S. companies totaled $11 billion — slightly more than 50% of total global funding.
Closures and M&A
Two high-profile unicorn companies shuttered in October: trucking company Convoy and health care claims management company Olive AI. Each company was valued at close to $4 billion and had raised almost $1 billion in funding.
Well-funded late-stage companies will not be the only casualties in this slower funding environment as more companies that raised at record rates in 2021 and in the first half of 2022 face a funding cliff.
Meanwhile, M&A activity picked up in October.
Notable acquisitions included video chat company Loom, acquired by Atlassian for $975 million, and data pipeline company Arcion, acquired by cloud data company Databricks for $100 million. In edtech, Instructure acquired academic credentialing platform Parchment for $795 million.
AI, health care lead
Crunchbase data also shows artificial intelligence companies are garnering a greater share of dollars invested.
AI and health care companies raised the largest amounts last month, with close to $5 billion invested in each of those sectors. Google doubled down on investing in Anthropic, an OpenAIcompetitor with an initial $500 million investment and a commitment of up to $2 billion from the search giant.
Coatue Cuts Value of OpenSea Stake by 90% as Fund’s Returns Sag
By Kate Clark, Nov. 7, 2023 12:41 PM PST ·
Comments by Pauli Ojala and Kenneth Goldman
One of OpenSea’s biggest investors has marked down by 90% its stake in the struggling non-fungible-token marketplace, implying that the former crypto darling is now valued at $1.4 billion or less on paper. Coatue Management, a New York–based hedge and venture fund, slashed the value of its $120 million stake in the company to $13 million as of the second quarter of this year, according to a document viewed by The Information.
The previously unreported markdown shows how venture investors are reassessing the value of their investments made at the height of the crypto boom, following a severe deterioration in the market. At the start of last year, OpenSea sported a $13.3 billion valuation from a funding round co-led by Coatue and Paradigm.
THE TAKEAWAY
• Coatue co-led investment with Paradigm during height of crypto bubble
• Firm also slashed valuation of MoonPay stake
• Coatue’s 2021 growth fund has lost money on paper
Coatue also slashed the valuation of its stake in crypto payment startup MoonPay 90%. It isn’t clear how the firm determines such valuations, and venture investors have differing methods of doing so.
Collapsing startup valuations are contributing to lackluster returns for venture investors. As of September, the multiple on invested capital for Coatue’s $7.7 billion growth fund, raised in 2021, which backed OpenSea and Moonpay, equaled 0.8 times, meaning the total paper value of the fund's investments is worth less than the initial money put in, according to a person with direct knowledge of the matter.
For venture funds raised in 2021, the median internal rate of return is negative, meaning most of these funds have lost money so far, according to Cambridge Associates data as of March. Paradigm, a specialist in crypto, had generated a negative 5% net internal rate of return as of May. A spokesperson for Paradigm declined to comment on the value of its OpenSea stake.
Most crypto startups have faltered in the past 18 months, as the end of near-zero-percent interest rates quashed demand for digital assets. OpenSea last week laid off 50% of its staff after volume on its marketplace plunged 99% since the start of 2022.
Coatue and crypto VC firm Paradigm co-led a $300 million Series C investment in OpenSea in January 2022, amid high demand for trendy blockchain-based digital collectibles like the Bored Ape Yacht Club collection. The transaction valued the New York startup at $13.3 billion or nearly 9 times higher than its prior round, led by Andreessen Horowitz, less than a year earlier.
But OpenSea’s business, which had generated revenue by taking a 2.5% cut of each transaction, began to founder once crypto prices declined and NFTs fell from favor. In July 2022, OpenSea made the first of at least three rounds of layoffs over the last year.
By December 2022, Tiger Global Management, another OpenSea backer, had slashed the value of a $126.8 million investment it made in the startup by 76%, The Information previously reported. Early this year, OpenSea temporarily eliminated its fees on most trades following the launch of a no-fee competitor, Blur, crushing trading revenue. A spokesperson for OpenSea didn’t comment.
Cruise recalls all self-driving cars after grisly accident and California ban
All 950 of the General Motors subsidiary’s autonomous cars will be taken off roads for a software update
Associated Press
Wed 8 Nov 2023 13.17 EST
General Motors’ Cruise autonomous vehicle unit is recalling all 950 of its cars to update software after one of them dragged a pedestrian to the side of a San Francisco street in early October and a subsequent ban by California regulators.
The company said in documents posted by US safety regulators on Wednesday that with the updated software, Cruise vehicles will remain stationary should a similar incident occur in the future.
The 2 October crash prompted Cruise to suspend driverless operations nationwide after California regulators found that its cars posed a danger to public safety. The state’s department of motor vehicles revoked the license for Cruise, which was transporting passengers without human drivers throughout San Francisco.
In the crash, another vehicle with a person behind the wheel struck a pedestrian, sending the person into the path of a Cruise autonomous vehicle. The Cruise initially stopped but still hit the person. But it then pulled to the right to get out of traffic, pulling the person about 20ft (six meters) forward. The pedestrian was pinned under one of the Cruise vehicle’s tires and was critically injured.
Cruise says in documents posted by the US National Highway Traffic Safety Administration that it already has updated software in test vehicles that are being supervised by human safety drivers. The driverless fleet will get the new software before resuming operations, the company says.
In a statement on Wednesday, the GM unit said that it did the recall even though it determined that a similar crash with a risk of serious injury could happen again every 10m to 100m miles without the update.
“We strive to continually improve and to make these events even rarer,” the statement said. “As our software continues to improve, it is likely we will file additional recalls to inform both NHTSA and the public of updates to enhance safety across our fleet.”
Cruise said that after examining its system, it has decided to add a chief safety officer, hire a law firm to review its response to the October crash, appoint a third-party engineering firm to find the technical cause, and adopt companywide “pillars” to focus on safety and transparency.
iOS 17.2 Beta 2 Includes Feature for Recording Spatial Video on iPhone 15 Pro
Thursday November 9, 2023 10:42 am PST by Juli Clover
The second beta of iOS 17.2 adds a new feature that allows an iPhone 15 Pro or iPhone 15 Pro Max to record Spatial Video that can be viewed in the Photos app on Apple's forthcoming Apple Vision Pro headset.
Spatial Video recording can be enabled by going to the Settings app, tapping into the Camera section, selecting Formats, and toggling on "Spatial Video for Apple Vision Pro."
Apple says that for best results when recording Spatial Video, the iPhone should be held stable in landscape orientation while capturing video. Video is recorded at 30 frames per second at 1080p, and one minute of video takes up 130MB of storage space.
Spatial Videos taken with an iPhone 15 Pro can be viewed on the iPhone as well, but the video appears to be a normal video and not a Spatial Video. Spatial Videos feature a "Spatial" label to denote that they can be viewed in 3D on the Vision Pro.
On the Vision Pro headset, Spatial Videos are not shown full screen by default. If you expand the video, Apple warns that the video "has excess motion" and "could cause discomfort if expanded."
Startup of the Week
NOVEMBER 9, 2023 | On Technology
The Real Personal (AI) Computer
Om Malik
A decade ago, I hosted a conference exploring invisible interfaces and interactions in the connected world. The AI Pin is a hardware manifestation of some of the ideas we explored at that event. At the time, I wrote:
I don’t care as much about the hardware as I do about the software and the experience of these wearables. Why? Because I want to see if Apple can retain the Jobsian philosophy of omission as the ultimate enabler of wonder. I want to see if Cupertino’s software can move beyond icons, apps, flat design, or something equally fashionable—something where perfection can emerge from the invisible.
Since then, I have been waiting for someone to build an experience like that. Humane, a San Francisco startup cofounded with former Apple designers and engineers, has announced a new device, the AI Pin, that comes pretty darn close. Imran Chaudhri, a former human interaction designer at Apple, is president of the company and co-founded the company with CEO Bethany Bongiorno, another former Apple executive. (What is AI Pin?)
If you think of Humane’s AI Pin as just another device, it is easy to shrug your shoulders. However, when you place it in the context of the development of computing, you can see we are at the start of thinking about computing differently.
Computing as we know it has been ever-evolving—every decade and a half or so, computers get smaller, more powerful, and more personal. We have gone from mainframes to workstations, to desktops, to laptops, to smartphones. It has been a decade and a half since the iPhone launched a revolution.
Smartphones changed personal computing by making it “everywhere.” Personal computing, as we know it, is once again evolving, this time being reshaped by AI, which is making us rethink how we interact with information. There are many convergent trends — faster networks, more capable chips, and the proliferation of sensors, including cameras.
Smaller, lower energy, more powerful, and more capable chips mean we can now build smaller, more capable devices. The faster networks of today can deliver the power of the cloud instantly. More importantly, what is different is the emergence and progress made by what is colloquially called AI. Large Language Models (LLMs) and Natural Language Processing (NLP) progress means we no longer need old methods to acquire and interact with information.
If you have been a regular reader, then you are familiar with my argument that artificial intelligence is really augmented intelligence for us mortals, allowing us to cope with the complexity of an ever-digital world. AI is here to make personal computing even more personal.
It is a fertile ground for reinvention of what is a personal computer. We have already seen Apple and Meta’s ideas for the next evolution of personal computing. Humane is proposing another very different idea of personal computing for the post-smartphone era.
Silicon Valley’s Big, Bold Sci-Fi Bet on the Device That Comes After the Smartphone
By Erin Griffith, Tripp Mickle and Photographs and Videos by Kelsey McClellan
Reporting from San Francisco, Nov. 9, 2023
Humane, a company started by two former Apple employees, says its new artificial intelligence pin can stop all the scrolling. Can it live up to the hype?
Inside a former horse stable in the San Francisco neighborhood of SoMa, a wave of gentle chirps emerged from small, blinking devices pinned to the chests of employees at a start-up called Humane.
It was just weeks before the start-up’s gadget, the Ai Pin, would be revealed to the world — a culmination of five years, $240 million in funding, 25 patents, a steady drumbeat of hype and partnerships with a list of top tech companies, including OpenAI, Microsoft and Salesforce.
Their mission? No less than liberating the world from its smartphone addiction. The solution? More technology.
Imran Chaudhri and Bethany Bongiorno, Humane’s husband-and-wife founders, envision a future with less dependency on the screens that their former employer, Apple, made ubiquitous.
Artificial intelligence “can create an experience that allows the computer to essentially take a back seat,” Mr. Chaudhri said.
They’re billing the pin as the first artificially intelligent device. It can be controlled by speaking aloud, tapping a touch pad or projecting a laser display onto the palm of a hand. In an instant, the device’s virtual assistant can send a text message, play a song, snap a photo, make a call or translate a real-time conversation into another language. The system relies on A.I. to help answer questions (“What’s the best way to load the dishwasher?”) and can summarize incoming messages with the simple command: “Catch me up.”
X of the Week
