Mad or Bad?
What Are They Thinking?
By Keith Teare • Issue #323
$350m for the man who lost most of $20 billion. The world has not gone mad. Read why Marc Andreessen (@pmarca) did it. Plus @ReidHoffman on AI, Josh Nicholson on Science and AI, @BrianSolis on Web3 marketing@Alexoppenheimer on valuing companies, and much more
A16z is betting big on Adam Neumann’s new real estate startup - Protocol @RyanDDeff
The Rise of The Cash Man - @KWHarrison13
Investing in Flow - @Pmarca
The Revenue Multiple - @Alexoppenheimer
When Low Valuations are Good - @Squire
Why Web 3.0 will rewrite the concept of marketing - @Briansolis
How to Build a GPT-3 for Science - @joshmnicholson
Uniquity: DALL-E, NFTs, and the emergence of limited-edition abundance - @reidhoffman
China’s Growing Trade Dominance in Latin America @visualcapitalist
How I Built and Sold a Newsletter for 5 Figures - Jason Kelley
Now piloting: Substack Threads - Substack
Threads questions answered
U.S. Streaming Tops Cable TV Viewing for First Time
Apple tells staff to come into the office for at least three days a week - Variety
Global private equity, venture capital deal value falls 63% in July
Public Stock Held by Sequoia Capital, Andreessen and Bessemer Fell 44% in Second Quarter - The Information
Tesla’s Shanghai Gigafactory made its millionth car
Optic - NFT Validation
Ethereum (ENS) names
There was much surprise this week when Marc Andreessen announced his firm’s $350m investment into Flow, Adam Neumann’s newest venture. The details of the business model have not been fully revealed but it seems to be another real-estate-based idea, except this time it focuses not on offices but on residential property.
Neuman’s infamy, after taking WeWork from startup to multi-billion dollars in value, only to see it shrink again, is of course huge. Most reactions are questioning the sanity of any venture fund, never mind one with as good a reputation as A16Z, to back him again.
In explaining the decision Andreessen says:
“We understand how difficult it is to build something like this and we love seeing repeat-founders build on past successes by growing from lessons learned,”
So this week I want to take a step back and ask whether the investment is mad or bad (in the Michael Jackson meaning of the word).
The answer depends a lot on understanding how venture capital works. Many of the readers here understand that so I won’t belabor the point. Suffice it to say that venture investors need to make large multiples on large investments in order to deliver the returns that their investors are looking for. Unless an investment could theoretically return 100x or more a venture fund really has no business thinking about putting money to work in it. 100x on $350m is $35 billion. And A16Zs share is probably between 15% and 30%. So for the plan to work the company must become worth between $120 billion and $230 billion.
Is this possible?
Well to answer that you have to look at the market being addressed, the cost of execution, and the likely upside. You also have to think about timing.
Residential real estate is a very large market. It is dominated by mortgage-backed lending and rental income. The market is clearly large enough to imagine revenues in the billions of dollars, and possibly a lot larger.
The rate of growth of Flow and its ultimate size over time will be part of the equation. But, on the back of an envelope, if it can get to $10 billion in revenue in 10 years then it is not impossible that it can achieve growth-driven multiples of 10-20x. That would certainly achieve the goals of A16z.
So let’s start by saying this investment could make sense.
But there is more. In this sector, the numbers are astoundingly high. If Flow can disrupt rents and mortgages then trillions of dollars are available. And if it can move debt-based financing to a new model of ownership, then it can be hundreds of trillions.
These are scary numbers to most startup founders. But not to Neumann. He thinks big and has shown a prior ability to deliver. In this world, A16Z gets to 1000x or maybe more.
So what is the lesson here? There is no shortage of ideas. But there is a shortage of big ideas delivered by big thinkers who can be trusted to really try to execute them. Whatever you may think about Neumann’s past. He qualifies. And as in baseball, hitting and missing is all part of the sport. You only have to hit once to deliver a home run.
There are fabulous articles below covering valuation, Flow, and A16Zs motivation.
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Mad or Bad? What Are They Thinking?
Andreessen Horowitz is betting big on Adam Neumann’s return to the real estate startup game.
A16z co-founder Marc Andreessen wrote in a Monday blog post that the firm would partner with Neumann on a new startup called Flow, which is focused on the residential real estate market. Neumann was famously pushed out as leader of WeWork in 2019 after the firm pulled its IPO plans, and his personal and professional antics — padding around barefoot, investing in a wave-pool startup — have provided fodder for books and an Apple TV+ series.
“We think it is natural,” Andreessen wrote, “that for his first venture since WeWork, Adam returns to the theme of connecting people through transforming their physical spaces and building communities where people spend the most time: their homes. Residential real estate — the world’s largest asset class — is ready for exactly this change.”
While the blog post did not disclose the size of the investment, The New York Times reported it at $350 million at a $1 billion valuation. That deal is the largest individual check a16z has written to a startup, according to the Times. Andreessen will also join Flow’s board.
“We understand how difficult it is to build something like this and we love seeing repeat-founders build on past successes by growing from lessons learned,” Andreessen wrote.
A Case Study On The Venture Process
I want to throw out an important level setting: Do I believe that Adam Neumann can build a multi-modal real estate empire that revolutionizes the way we live? No. Would I have invested $350M with the guy who lit $20B on fire? No. Do I believe the investment case I’m about to lay out? No. So why write about this? I think the story and the numbers represent a fascinating opportunity to illustrate “the venture process.” There are people who write off venture as largely a “greater fool’s” game of passing the bag. There are other people who ask the honest question, “how does something like this happen?” I want to try and help answer that question.
I’m not going to address every aspect and controversy surrounding Adam Neumann, WeWork, and Flow. And I’m certainly not a bull on this investment. I’ve never found myself typing “Say what you will about…” so many times. I found myself using it over and over again.
“Say what you will about Adam Neumann, but he loves those amenities.”
“Say what you will about Adam Neumann, but the man knows how to drive splashy marketing.”
Instead I want this to be a case study to walk through how a lot of VCs think. Is the thinking right? Are they making the right decisions? Are they weighing the right variables? Unclear. Time will tell. But this is likely the structure for how some of this process is being justified.
Our nation has a housing crisis.
The demographic trends driving America’s housing market are impossible to ignore: our country is creating households faster than we’re building houses. Structural shortages in available homes for sale push housing prices higher, while young people are staying single for longer and increasingly concentrating in highly desirable urban centers. These factors put enormous pressure on rents in the nation’s most dynamic cities, starkly revealing the troubling realities of both sides of the housing market’s two historical models.
The first model is: you own a home you call your own, typically with a multi-decade mortgage, near your current employer. IF you can find a house, as these locations often aren’t building new housing. IF you can afford that house, as housing prices in many such places have skyrocketed. And even then, you’re now stuck — you can’t move, even if your economic opportunity or life path wants to take you somewhere else.
The second model: you rent an apartment, but: it’s a soulless experience; do you even meet your neighbors, much less have any friends in your complex? Does it feel like home, or just a place to sleep? Are you proud to bring friends and family to visit, or hesitant? And you can pay rent for decades and still own zero equity — nothing. There’s a reason the federal government started subsidizing home mortgages: someone who is bought in to where he lives cares more about where he lives. Without this, apartments don’t generate any bond between person and place and without community, no bond between person to person.
Now drop the impact of the post-COVID world into this. Many people will live in places far away from where they work and many more will shift to a hybrid environment. As a result, they will experience much less, if any, of the in-office social bonding and friendships that local workers enjoy. For many of these people, increased screentime and reduced in-person interaction will cause challenges that are not just limited to work, such as alienation and loneliness. This is not a good path for anyone and it needs to be addressed directly, right now.
At the same time, in the last two years, we have seen a shift in life priorities. For hundreds of years, ambitious young people have had to move to immediate geographic colocation with employers to have access to the best jobs for their skills and talents. That is suddenly no longer true. This newfound flexibility has triggered the “Great Resignation”, where people prioritized other factors over professional considerations. Many people are voting with their feet and moving away from traditional economic hub cities to different cities, towns, or rural areas, with no diminishment of economic opportunity. My partner Katherine Boyle has written about this, and I think she’s right: Can Zoom Save the American Family? and Can Starlink Save the American Mother?
The residential real estate world needs to address these changing dynamics. And yet virtually no aspect of the modern housing market is ready for these changes.
Essays of the Week
Understanding the Fundamentals of Valuation
For the last 10+ years I have been working in the startup world. It moves fast, breaks rules and changes the world – it’s awesome.
While some rules do get broken, there are more fundamental rules that do not. Just like with the laws of physics, we can break the sound barrier, but every action still has an equal and opposite reaction.
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I studied engineering in college, but I had the opportunity to take one class that informed my approach to business in a very meaningful way: Finance 335 – Corporate Valuation, Governance and Behavior. This class illustrated how the theory of valuation works in real business situations. We looked at case studies ranging from oil & gas to retail to technology in a variety of operating scenarios from growth to turnarounds to carve outs.
My key takeaway from the class was not the myriad ways to value a company, but the development of instincts around when and how to use them. Being able to creatively apply a set of tools while respecting the laws of physics is what any great scientist or artist does effectively. Company valuation is no different.
The increasing prevalence of the revenue multiple as a valuation metric for technology companies has me thinking about this constantly.
The single thing that makes a business valuable is its ability to generate cash flow – ideally a lot of it, with a high degree of certainty, and for a long time – it is an axiom of business.
Who can benefit from falling prices
Seems counterintuitive that some people might want lower valuations for their company. Are those people cynical or wise?
Today I’m going to show you why low valuations can be great.
Let’s dig in ⬇️
There are two main reasons lower valuations are good:
To attract talented employees
Set the stage for the next funding round
How can lower valuations attract talent?
While it is nice working for big tech companies that pay well, the allure of working at a startup is the equity that could be worth fortunes.
Let’s say person A begins working at a startup valued at $50m and person B begins working at that same startup a year later when it gets valued at $200m. A few years later that startup IPOs at a $1b valuation. Assuming person A and B were hired for similar roles, who benefited the most? Obviously, person A… they got 4x the outcome (with the added risk of working at an earlier stage).
Early-stage tech operates in very illiquid markets and a lot of the time when there is a new valuation set, the company is also raising money (rarely the case for public companies). So these low valuations might be beneficial for new employees, but if a company raises one year at a $1b valuation where they added 10% more shares to raise $100m, then in two years they need to raise again when valuations are lower they might have to raise at a “down round” AKA when companies have to sell more of their company at a lower valuation which dilutes existing investors and employees far more than a usual up round…..
Marketing practices have changed dramatically in recent years as new technologies, channels and processes have rewritten rules of engagement and delivery. But at its core, many key concepts that underpin marketing – aggregating audiences, designing and delivering campaigns and driving conversion – remain essentially the same as they were when they were first refined in the 1950s and 1960s.
However, the world is changing rapidly, and is evolving towards what may be the next great revolution in digital technologies: Web 3.0. This promises to bring together concepts relating to identity, trust, decentralisation and immersive virtual environments.
While the true impact of Web 3.0 is impossible to predict at this time, its proponents speak of a decentralised world where control and ownership of data and digital assets resides with the individual, not the corporation. Should these prognostications translate into reality, they will have a profound impact on the relationship between organisations and their customers, redefining customers as community members or stakeholders, and eschewing campaigns in favour of ongoing relationships. This signals a tumultuous time ahead for marketers.
While this kind of fundamental change is hard to consider amidst the day-to-day stresses of running a marketing function, it is very much on the mind of Brian Solis, awarding-winning author and renowned digital anthropologist and futurist. In his current role as global innovation evangelist at Salesforce, Solis is tasked with exploring and interpreting the ramifications of digital transformation, innovation and disruption. And there are few bigger emerging disruptions than that threatened by Web 3.0.
What concerns Solis now is that many organisations – and especially those born before the digital revolution of the mid-1990s – are still coming to grips with what it means to be a digital enterprise. And even those born of the digital era are themselves still adapting to the social nature of the web’s second iteration from the mid-2000s.
Want to create an image of velociraptors working on a skyscraper, in the style of “Lunch Atop A Skyscraper” of 1932? Use DALL-E. Want to create an imaginary standup comedy show by Peter Thiel, Elon Musk, and Larry Page? Use GPT-3. Want to deeply understand COVID-19 research and answer your questions based on evidence? Learn how to do a Boolean search, read scientific papers, and maybe get a PhD, because there are no generative AI models trained on the vast body of scientific research publications. If there were, getting evidence-backed, plain-language answers to scientific questions would be among the simplest benefits. Generative AI for science could help reverse the deceleration of innovation in science by making it easier and cheaper to find new ideas. Such models could also provide data-backed warnings of therapeutic hypotheses that are certain to fail, counterbalancing human bias and avoiding billion-dollar, decades-long blind alleys. Finally, such models could combat the reproducibility crisis by mapping, weighing, and contextualizing research results, providing a score on trustability.
So why don’t we have a DALL-E or GPT-3 for science? The reason is that although scientific research is the world’s most valuable content, it is also the world’s least accessible and understandable content. I’ll explain what it would take to unlock scientific data at scale to make generative AI for science possible, and how it would transform the way we engage with research.
What makes scientific research data challenging
Research publications are some of the world’s most important repositories for content and information ever created. They tie ideas and findings together across time and disciplines, and are forever preserved by a network of libraries. They are supported by evidence, analysis, expert insight, and statistical relationships. They are extremely valuable, yet they are largely hidden from the web and used very inefficiently. The web is rife with cute, cuddly cat videos but largely devoid of cutting-edge cancer research. As an example, the Web of Science is one of the most comprehensive indexes of scientific knowledge. It has been around for decades, but it’s probably something most readers have never even heard of, let alone interacted with. Most of us don’t have access to research papers, and even when we do, they’re dense, hard to understand, and packaged as a PDF — a format designed for printing, not for the web.
Because scientific papers are not easily accessible, we can’t easily use the data to train generative models like GPT-3 or DALL-E. Can you imagine if a researcher could propose an experiment and an AI model could instantly tell them if it had been done before (and better yet, give them the result)? Then, once they have data from a novel experiment, the AI could suggest a follow-up experiment based on the result. Finally, imagine the time that could be saved if the researcher could upload their results and the AI model could write the resulting manuscript for them. The closest we’ve ever come to a DALL-E of science is Google Scholar, but it’s not a sustainable or scalable solution. IBM Watson also set out to achieve much of what I describe here, but most of the work came ahead of recent advances in large language models and didn’t utilize appropriate or sufficient data to match the marketing hype.
When you use DALL-E, a new AI system that generates images from natural language descriptions, words become your pencils, paints, brushes, cameras, lenses, chisels, and more. In the DALL-E universe, though, there’s never just one way to translate written language into graphic language. Inverting the old proverb on its head, a single word – or […]
Over the past 20 years, China’s economic presence around the world has grown significantly, including in Latin America.
Now, China is one of Latin America’s largest trade partners, which is threatening U.S. dominance in the region. This graphic by Latinometrics uses IMF data to show trade flows between China and Latin America since the 1980s.
Two Decades of Trade Growth
Four decades ago, the United States had a much stronger trade relationship with Latin America than China did. In 1981, Cuba was the only Latin American country trading more with China than the United States.
Here’s a look at total trade flows between Latin America and the two countries since 1980. Latinometrics calculated trade flows as total exports plus imports….
This week, cash from selling the business I started during the pandemic finally hit my bank account.
So, I figured it would be a good time to reflect on what I learned while starting and operating the business. It would also give me an opportunity to help others learn from (or avoid) these lessons in their own entrepreneurial endeavors.
In September 2020 I posted on Reddit’s /r/opensource subreddit looking for a weekly newsletter I could subscribe to in order to keep up-to-date on open-source software.
I wanted to find projects I could contribute to as an engineer. I got 9 upvotes and no responses. At the time, I was writing a weekly round-up of tech news, so I decided to pivot that newsletter to open-source; thus, Console was born.
I’d already sent out 17 tech-roundup emails before pivoting. There was a very noticeable inflection point in the subscriber graph when I pivoted; at that point, I knew I was on to something.
If you were an early subscriber to Console, you’d notice I’ve refined the email format since sending that first one. There are a few important changes. The first is that there are 10 projects in the email. Now, there are only 3. Another is that there are no images. A third is how small the interview is.
Today we’re introducing Substack Threads: a feature we’re testing that gives writers a dedicated space to host richer conversations with subscribers.
As we said recently, we’ve seen many successful Substacks evolve into far more than just an email newsletter. Writers are hosting book clubs, live events with subscribers, and sourcing ideas and inspiration directly from their reader communities. There is great beauty and power in writers having their own “private social network,” where they set the rules of engagement, and where they own the relationships with all the members.
With Threads, we hope to make it simpler than ever to connect with the people who care the most about your work—all in an intimate, controlled, and private space. You can interact casually with subscribers and cultivate a vibrant paid community without having to compete in a news feed algorithmically optimized for engagement.
Answers to common reader and writer questions about Substack Threads
How can I add Threads to my publication?
Who can see a publication’s Thread?
Only your subscribers can see your thread. For each post, you can choose whether you want all subscribers or only paid subscribers to be able to view and reply.
Can I access Threads from the web or Android?
For the initial pilot, Threads can only be viewed and composed in the iOS app. We aim to make it available for web and Android as soon as possible.
How does this differ from the existing discussion thread feature?
We see this as an evolution of discussion threads that will enable more lightweight, casual interaction (especially for multimedia posts and writing on-the-go) in a dedicated community space.
For now, discussion threads created from the web will still be sent as emails, and posts you publish to your Thread in the app will only be viewable there.
News of the Week
Streaming platforms, led by Netflix, topped cable TV in July 2022 in total U.S. TV viewing for the first time, Nielsen said.
Americans now watch more stuff on TV from streaming services than either broadcast or cable TV.
Streaming platforms, led by Netflix, in July 2022 for the first time surpassed cable networks to claim the largest share of U.S. TV viewing for the month, according to new data from Nielsen. It was only a matter of time before the milestone was reached, as streaming usage has continued to climb while traditional TV declines amid the steady drip-drip-drip of cord-cutting losses.
For the month of July, streaming among American TV households represented a record 34.8% share of total consumption, while cable and broadcast came in at 34.4% and 21.6%, respectively. Streaming usage has surpassed that of broadcast before, but this is the first time it has also exceeded cable viewing.
Memo from boss Tim Cook backs down from earlier attempt to get all employees in on same three fixed days
Apple has told its employees they must come in to the office for at least three days a week from next month, in an effort to restore “in-person collaboration”.
In a memo to all employees, Tim Cook, Apple’s chief executive, said the policy would require all staff to return to the office on Tuesdays and Thursdays, as well as a third day that would vary team by team.
Global private equity and venture capital entries in July slipped to the lowest monthly totals of the year, slowed by soaring inflation and rising interest rates.
Deal value worldwide was down 63% in July to $43.05 billion from $116.47 billion during the same month a year ago, according to S&P Global Market Intelligence data.
The month saw a total of 1,579 transactions, a 29.2% decline from the 2,231 deals booked in July 2021.
Public stocks held by Sequoia Capital, Andreessen Horowitz and Bessemer Venture Partners lost 44% of their value, or $18.3 billion, between March 31 and June 30 as the venture capital firms held on to sizable stakes in tech companies they had backed as startups, though they have recovered somewhat in recent weeks, according to recent securities filings tracked by S&P Global Market Intelligence.
Sequoia Capital’s public stock holdings sank 42% to $17.7 billion over the period, including the company’s U.S., Europe, and Asia businesses, according to S&P. The venture firm’s holdings were dragged down by positions in four companies that went public in the past two years—delivery app DoorDash, cloud software firm Snowflake, banking firm Nu Holdings and game software developer Unity Technologies. Those stakes were valued at $7.7 billion on June 30, down by half from three months earlier, securities filings show.
• Andreessen Horowitz held on to Coinbase, exited DigitalOcean
• Sequoia Capital trimmed Airbnb position
• Bessemer shrank Rocket Lab, Toast stake before stocks recovered
Since the end of June, however, tech shares have regained some of their losses, boosting the combined value of the three venture firms’ public portfolios by $6.6 billion, roughly more than one-third of the value they lost in the second quarter, according to S&P Global Market Intelligence. For Sequoia specifically, its public stocks have recovered 22% to $21.6 billion so far in the third quarter, according to S&P data. That means the Sequoia portfolio is now down by 30% since the end of the first quarter compared to a 6% and 8% drop in the S&P 500 and Nasdaq Composite indices in the same period.
Plant closures and other challenges didn’t keep Tesla’s Chinese factory from crossing a key milestone. As Electreknotes, company chief Elon Musk has revealed that Gigafactory Shanghai recently produced its millionth car. As mentioned earlier in August, Musk noted that Tesla has made a total of 3 million electric vehicles to date.
The facility has quickly become a cornerstone of Tesla’s manufacturing strategy. It started production in late 2019, but ramped up to the point where it became the largest EV factory on the planet. Its annual production rate topped 800,000 by the end of 2021, making it crucial to Tesla’s record-setting year. Gigafactory Shanghai is now the company’s main export hub, delivering cars to Europe and other key markets in addition to China.
Congrats Giga Shanghai on making millionth car! Total Teslas made now over 3M. pic.twitter.com/2Aee6slCuv
— Elon Musk (@elonmusk) August 14, 2022
The Shanghai factory is gradually becoming just one piece in a larger puzzle. The newly opened Gigafactories in Berlin and Texas will drive at least some near-term growth, and Tesla is exploring the potential for factories in places like Canada. For now, though, the Chinese plant will be vital to meeting ever-higher production goals and competing with international EV makers.
Startup of the Week (there are 3)
VeradiVeradict - Issue #210
Optic is building an AI-enabled NFT verification protocol to provide fraud-related NFT analytics and community NFT discovery. Pantera is thrilled to have recently led Optic’s $11M seed round alongside Kleiner Perkins, Lattice, OpenSea, Circle, Polygon, and others as they help encourage authenticity and transparency across NFT marketplaces and communities.
Often, purchasing an NFT is the first step crypto-curious individuals take before entering the broader web3 ecosystem. It’s a fun and simple way to purchase digital assets while simultaneously supporting artists and becoming a part of a larger community. Unfortunately, many eager individuals new to crypto – as well as existing buyers – are increasingly becoming susceptible to fraud and scams, particularly in NFT markets. Because digital art can be easily (slightly) altered, replicated, and then minted on-chain, it’s sometimes difficult to decipher which pieces are legitimate – especially when the art is listed on a marketplace the buyer trusts. Despite this, excitement is high: during the first quarter of 2021, there were over $2B in NFT sales. Additionally, around half of all NFT sales are under $200, showing that many buyers are willing to deploy a smaller amount of capital to become a part of a community and hopefully turn a profit. However, according to Optic, ~90% of NFTs are traded on OpenSea, but the space is rife with fraud – for example, 80% of lazy mints on OpenSea were scams. This fact deters many buyers from purchasing NFTs (even ones they’re excited about) because of the high probability of fraud on the platform. Optic aims to solve this issue by using an AI engine to monitor newly minted NFTs and compare them to existing legitimate collections on marketplace websites.
As the crypto world gears up for the Ethereum Merge next month, the number of Ethereum Name Service (ENS) addresses created has surged, surpassing 2 million yesterday, after crossing the 1.8 million mark two weeks ago.
“2m ENS names created!” tweeted the ENS Domains account. “It took 5 years to get to 1m names, then 3.5 months to get to 2m names, and we’re just getting started.”