It's not debt, it's better: An interview with Harry Hurst of Pipe

Two Truths and a Take, Season 2 Episode 26

This week, I’m delighted to share an interview with Harry Hurst, founder and co-CEO of Pipe

Six months ago I wrote a post in the newsletter called Debt is Coming, about the all-equity model of funding startups finally coming to the end. It ran away to become the most widely-read thing I’ve ever written, ever. (Read it first, if you haven’t yet.) Since then, I’ve had a blast getting to meet all sorts of interesting founders, operators and investors who are thinking about the future of financing recurring revenue software businesses. 

Harry is one of those people. A short two weeks after Debt is Coming got published, Pipe launched with an investment from David Sacks’ firm Craft Ventures, and since then they’ve gone on to scale up their business with help from our good friends at Tribe Capital

It’s been awesome to see this story come together. Last year when I interviewed Jonathan Hsu from Tribe for this newsletter he shared a great preview of what’s since begun to materialize:

“When you acquire some customers and they start yielding revenue that behaviour sounds an awful lot like buying a fixed income instrument and there is a lot of sophistication around how to value those cash flows. In some sense, what we’ve seen over the last decade is that software enables a whole new business model – recurring revenue – which is both good for customers and is good for investors. It’s good for investors because it becomes more “predictable” in the sense that it starts to look more like a fixed income yielding asset and thus more amenable to traditional financial techniques and thus potentially “in scope” for a wider set of investors.”

Pipe is this thesis, made real. 

Up until now, founders have only two things to sell as they raise capital to fund their business: they can sell equity, and take expensive dilution, or they can sell debt, and take on covenants and other handcuffs. Pipe creates a new asset class to sell: the software subscription. Founders can now sell the recurring revenue from a cohort of software customers, as an easily tradable asset, and fund their growth without taking dilution. There’s enormous demand for those kinds of cash flows, but up until today, founders haven’t been able to hook up to that demand. Now they can, and the early results sound like they’ve been spectacular. 

So I’m really excited to share this interview with Harry. Enjoy.


AD: Narrative matters a lot. I’m curious to know how other founders, VCs, and other people in the community are thinking and describing revenue financing to each other. What are the recurring themes you hear, both helpful and not, when other people describe your business? 

HH: I think the recurring theme is equity vs. alternatives and the upsides/downsides of each. As you grow your company, equity can actually become harder to raise. I always tell founders that I mentor, that in most cases it’s a lot easier to sell what could be than what is, so enjoy that early stage while it lasts! At the later stages, the idea of funding your subscription-based software business leveraging alternative options becomes more attractive for a number of reasons which we can explore, so I think the conversation around revenue financing is becoming more and more relevant and prevalent.

There’s a broad spectrum of VCs and founders, the latter of whom possess differing levels of capability to maintain high growth and continually raise equity dollars at inflated valuations. For example, there are many companies who raise an angel/seed round, then a Series A, spend most of it on customer acquisition which flows right into FB and Google, which drives a ton of traffic to sustain high levels of growth. However, these channels aren’t always optimal or relevant for companies. Some are better suited to channels that are lower CAC but aren’t as scalable (more akin to how normal, non-venture backed businesses grow). For these companies where growth is slower but compounding, there should be more options for how they fund this growth that don’t include taking massive dilution at the hands of flat or down rounds. 

This is where Pipe comes in for software companies with highly predictable recurring revenues by creating a tradable asset class out of the underlying software subscription, the asset that actually drives the equity value in the first place

While Pipe isn’t a debt or revenue share financing product, generally speaking I think VCs at later stages may see alternative financing as a whole as a competitive model but in reality, the two can co-exist in harmony and actually benefit each other. I’m of the strong opinion that at the earliest stages of company building (pre-product market fit), the market-clearing price for a pre-seed or seed round is massively in the founder’s favor, especially if they are repeat founders. 

Though I’m in awe of founders who bootstrap to scale, to me personally, it makes a lot of sense to figure out GTM and product-market fit using some equity dollars. However, once you’ve got product-market fit with a rinse and repeatable growth strategy, spend is going to shift toward S&M away from R&D and raising equity to plug the CAC to payback gap in cash flow seems like an incredibly expensive way of achieving this when alternatives like Pipe exist. I think VCs that invested at the earlier stages are very aligned here, as they don’t want to take dilution alongside the founders as they scale, or have to deploy more capital into the company to maintain their stake via pro rata, when they could be investing those dollars into other opportunities.

AD: That last point you made is really interesting. To reiterate: once a startup reaches product market fit and starts to scale, early stage investors have to sweat about their pro rata commitments if they want to defend their ownership stake. And the more capital-hungry the business becomes, the more money the investor will have to fork in order to just defend where they are. Angel investors certainly can’t afford that. Series A investors probably can, and it’s an important component of their fund structure, but imagine if they didn’t have to! It’s like hitting green energy targets by just insulating your house better, rather than putting up money for new clean power.

Have you worked out something like, for every X dollars of Pipe financing a business raises at say, series C, that translates to Y dollars worth of additional deals that their Series A VCs can do? That would be really interesting.

HH: I haven’t actually done that equation because we’ve been squarely focused on building the value prop for the sell-side and buy-side of our platform, not for VC’s specifically. I guess it depends on a number of factors which makes it quite hard to quantify, such as ‘how early did the VC invest?’, which usually translates into ‘how much of the company do they own?’, which directly translates into ‘how expensive is it for them to maintain their ownership via pro rata?’. The qualitative answer is, assuming you’re a lead investor that wrote an early check: a lot of deals. 

With that being said, the majority of (smaller) investors on a cap table don’t tend to have the luxury of pro rata rights along the way and it’s from these investors that we see so many customer intros coming to us as they try to help their early bets navigate the fundraising game, or avoid playing it all together through the use of the Pipe platform. 

AD: If you could change the narrative around Pipe in any way, how would you? 

HH: I’d love for everyone I speak with to understand right off the bat that Pipe doesn’t offer equity or debt financing, rather it provides the platform to trade a new asset class - the software subscription. But that’s the gift and the curse of being the first to do something new I guess. 

Pipe is the trading venue of a new asset class. Analogous to what the NASDAQ did for technology stocks in 1971, though unlike a stock exchange, it’s not equity in the company that’s being traded, it’s the underlying asset that drives the value of that equity - the software subscription. 

The narrative has resonated extremely well with the buy-side, we’re working with the largest banks, investment managers, hedge funds, family offices and pension plans in the world - all very excited to trade this new asset class with initial commitments to the tune of tens of billions of dollars of liquidity. For them, it provides the perfect hedge against the volatility in the equity markets, and for the sell-side (software companies), it provides the perfect way to grow without taking on debt or giving up equity. A true win-win.

AD: One of my hypotheses here, which I didn’t spell out explicitly in Debt is Coming but many readers independently concluded, is that founders’ adopting debt or other forms of financing will be heavily influenced by mimetic pressure from other founders. If you raise a Series B that’s 70% equity but, say, 30% something debt-like on attractive terms, that sends a really strong signal about confidence in your business, and your refusal to take dilution. If The Outsiders becomes fashionable reading, and founders start referring to themselves as “capital allocators”, then I could imagine a lot of social pressure among their peer set to show strength, and be more aggressive with new kinds of funding. What do you think?

HH: I have pretty unique insight here given we currently get anywhere from 30-50 software companies applying to trade on the Pipe platform every day. Based on the fact that most founders are builders, not CFOs, it’s a fair assumption that most founders aren’t naturally skilled capital allocators and so aren’t aware of all of the alternative methods large companies utilize to finance their businesses. What I see happening in B2B fintech is a sort of ‘consumerization’ of these previously unknown and unavailable methods of financing to the benefit of all founders, at all stages. 

While I can’t confirm whether the key driving factor is mimetic pressure, I can confirm that almost every company from startups all the way to pre-IPO unicorns with $500MM in ARR are absolutely thinking about alternative ways to finance their businesses now that the conversation has started, thanks in large part to your Debt Is Coming post which made waves across the industry. 

I think ultimately what it comes down to is that once founders have confidence around the predictability of their cash flows, they start to get turned off by the idea of bridging the cash flow gap by giving someone more equity in their company. We wouldn’t want to give our bank equity upside in our homes if we needed financing for home improvements, assuming we’ve been paying our mortgage on time for 5 years, would we?

AD: On a related note, what founder(s) do you think are the best capital allocators in software today, and why? And you can’t say the Collisons. 

HH: Ah man, I was absolutely going to say the Collisons. Those guys have built something incredibly special and done so in a seemingly capital-efficient way. In lieu of Stripe, I’d have to say Jeff Bezos leveraging the free cash flow thrown off their AWS business unit to fund the growth of their other business units is genius and although he is generally admired by the tech community, I don’t actually think he gets enough credit for the way he’s allocated capital along the way to grow Amazon into the behemoth it is.

AD: When you think about financing high-growth software companies, the large growth equity rounds seem like the peak for “this is the wrong bet for the founder to make.” If things go great, then you’ve sold equity that turned out to be really expensive. If things go badly, then you get wiped out by liquidation preferences. It’s like the founder is optimizing their regret minimization framework for a moderate success, rather than for the big outcome. (In contrast to the VC / growth equity investor, who’s made a great set of bets.) What gives? 

HH: I like to call it the alphabet game. Relationships are built across each letter of the alphabet typically from A through to F (I actually heard about a Series J recently), and when money is offered to you at these later stages it feels easy, and also feels market. There are of course moonshot bets that require you to play the alphabet game, however, we’re building Pipe on the premise that software companies with highly predictable recurring revenues should not need to raise large, dilutive rounds as soon as they’ve reached the point where they know that if they invest a dollar, they’re going to get more than a dollar back over a period of time. There had to be a more efficient way, so we created it.

AD: There’s an implicit thesis, baked into the Pipe narrative, that founders are getting better at building certain types of companies. Creating a tradable asset out of software subscriptions implies a pretty high degree of confidence that shared process knowledge among founders has exceeded some critical threshold. So on the one hand, Pipe is a bet on that process knowledge. But it also seeks to disrupt a little bit of that process knowledge. This is new stuff for founders to understand! Do you worry about this at all?

HH: This is a really good question. Our initial thesis was based on a more qualitative view and a bunch of assumptions, as most ideas in early stage startups are. What we’ve built, and the key to our success thus far, is an underwriting engine that dispels any of the potential human biases in assessing the quality of the assets of a business. In doing so, what we’ve created is effectively part exchange (think NASDAQ) and part ratings agency (think Moody’s) - relied upon by the buy-side in their decisioning to participate in the trading of the software subscription assets. 

By taking a truly quantitative approach and with the average tenor of a single traded asset being just one year at a time, we don’t have to worry as much about the process knowledge that goes into building great companies as it relates to the performance of the assets. However, we do think deeply about building tools to help founders acquire the process knowledge to build better, more sustainable businesses - which creates a win-win for both sides of the marketplace. More to come on this soon!

AD: Let’s talk for a minute about the “Silicon Valley honour system”. One of the great advantages that the Bay Area startup ecosystem has over anywhere else in the world is how quickly deals can get done, largely because of the rich social ties and the strong social contract in place between investors and founders. The best case I can make for “equity supremacy” in startup funding is almost like, for the social contract to work, it has to be equity. What do you think about this? 

HH: I’m an equity investor myself and think that equity most definitely has its place. I’m by no means anti-venture capital or anti-equity investing. Though, I do believe that the market-clearing price for equity is more firmly in the founder’s favor at pre-seed/seed stage and assuming the investor has a broad enough portfolio (and a bit of luck), the most outsized returns are made at this stage. 

The honour (loving the Canadian/British spelling here) system is, I think somewhat of a fallacy and a big part of the marketing that’s gone into making equity feel supreme at all stages. Though, it’s worth noting that assuming a clean SPA is in place with founder friendly terms, there is significantly more alignment between VCs and founders than banks and founders. The downside protections in place with traditional debt (liens, personal guarantees etc.) lead to a misalignment when things go wrong, whereas the equity investor with protections usually limited to liquidation preferences still need that liquidation event of some sort for that to matter, thus they are more incentivized to make sure that happens. 

When it comes to equity, the handshake deal may be convenient but in reality, unless you have a seriously hot deal that people are begging to get into, convenient usually equals expensive for the founders, especially when things go really well. Pipe is a new option, with new sets of dynamics, where the investors into the software subscriptions do not have any lien in the business, thus they have an alignment with the founders of the company for its enduring success so the assets they’ve purchased remain assets of par value at maturity. 

The Pipe platform offers a lot of the honorable benefits of an equity investment relationship, without any of the dilution, and without the misalignment created by the traditional debt products offered by banks and alternative lenders. With that said though, honour should be prevalent in every sector, no matter what the financial instrument, and I think legacy debt players could take a leaf out of the best equity players’ books to build trust around their more traditional offerings.

AD: I feel like everyone has their own thesis about what will happen to the Bay Area’s geographic network effect post-Covid. What’s yours?

HH: I moved to Los Angeles in 2014 from London. I haven’t been deeply impacted by the Bay Area network effect as a result, though I have benefited from working with some amazing investors based in SF. My thesis on this is more a viewpoint, from a ‘one ecosystem down the street’ spectators view. I think the impact of COVID on people’s desire to live in the Bay Area is a real thing. I see house prices in certain LA markets rising due to an influx of Bay Area folks jumping ship down here. I’m sure this is happening in other states (particularly those with more founder-friendly taxes), and to your beautiful country, Canada - who I think really get it right with respect to immigration and long-term investment into building a fantastic ecosystem. With that said, I think SF has such a strong brand, it will remain a hub for innovation, even if it’s derived from a more distributed workforce. There’s just too much infrastructure and capexed investment that’s been made there for it to become void. 

Further, I think SF has held two uniquely special qualities vs. other ecosystems. There’s a bunch of amazing blue chip tech companies that have been built over the last couple of decades all with their operations centralized in the Bay Area. From within these blue chips have emerged thousands of incredible operators who have learned how to execute masterfully and now have the experience and network to aid smaller companies in replicating their success by joining as co-founders or early employees. This network effect is huge and I suspect won’t disappear entirely, however, as blue chip companies disperse their work force geographically, the blue chip alumnus will naturally spread geographically - laying the foundations for a more geographically diverse set of amazing companies to be built across the country. I think this will happen more slowly than some may predict, but the effect is compounding nonetheless. 

The other thing in SF is the investor ecosystem that basically funds just about anything under the sun in the earliest stages. Since capital moves around easily and Zoom has made it more normal to not meet founders in person, we should expect that the SF funding ecosystem will continue to push money into other geos as it searches for founders doing great things.

The way I view the answer to your question isn’t so much around the dominance of the Bay Area’s geographic network effect, it’s more so how do we define geography in the context of centralization, or lack thereof, of an organization in a post-COVID world. I think a good example of this that we’re seeing play out in real-time is Harvard (as a business) still being able to charge $50,000 for tuition even though geography isn’t so relevant to attendance anymore, the brand and operations are still centralized around the Bostonian institution post-COVID. Will that remain true over the next decade? We shall see, but I think so for the most part. 

AD: Last question: since they’re topical right now, do you think that new ways of going public (direct listing, SPACs) will have any major upstream effects on how software businesses finance their growth? 

HH: I think SPACs, in most cases, probably lead to a suboptimal outcome for existing shareholders of the company. If the company is ready to go public ‘the traditional way’ then they should probably do that over the more convenient and seemingly cost-efficient SPAC. Conversely, at the other end of the spectrum, where a private company can afford to stay private but want to enjoy the benefits of going public (liquidity for shareholders, ability to close larger deals as trust is built in the market, getting the infamous ‘ringing of the bell’ picture to make Mom proud) the Direct Listing is a really interesting way to achieve this and save a bunch of costs and dilution.

With respect to the upstream impacts, I don’t think companies will build with getting acquired by a SPAC in mind, on the other hand, I think many founders, including myself, are building their companies to be real businesses from day one. Profitability is the new sexy and the public markets are rewarding high growth, cash flowing businesses (see $ZM), no longer are narratives around distant paths to profitability enough (in most cases). By focusing on growth and cash flow in synchrony, founders build leverage down the line at the IPO, making a direct listing with instant liquidity for shareholders, no dilution, and lower costs a totally feasible option. 

If I’m realistic though, the abundance of capital available in the alphabet game for high performing companies leads me to believe that the upstream effects may not be major for Bay Area companies in the short term, though perhaps they should be. Pipe is certainly increasing the opportunity for founders in all geos to make shifts in the way they build their businesses toward much more optimal outcomes.

Thank you so much to Harry for coming on the newsletter and for taking the time to share these thoughtful answers. Can’t wait for 18 months from now when recurring revenue financing has taken over tech, and we can do another one!

If you’re running a software business and you’re thinking about your next round (and you always are), go to Pipe.com right now. I’m serious! Go right now. Then have a conversation with your existing investors about it. You can also find Harry on Twitter @harryhurst

If you wanted to, you could get approved to sell your recurring revenue and get cash up front for it in your bank account in hours. (Don’t actually do this. Think about it for, you know, an appropriate length of time. But still, you think you can raise your Series A in a few hours? Forget it.)

Permalink to this post is here: It’s not debt, it’s better: an interview with Harry Hurst of Pipe | alexdanco.com

For this week’s reading, here’s a great post from Matt Ball on Nintendo, the “Nintendo is just like Disney was X years ago” thesis, and why Nintendo’s internal culture (which made it the great company that it is) prevents the Disney vision from coming true.

Nintendo, Disney and Cultural Determinism | Matthew Ball

I especially appreciated this bit about the Nintendo Wii remote, as a representative story around the blessing and curse of Nintendo’s craft of building unique game experiences. The Wii remote was a big hit, but it was ultimately a false trail, or a local maximum, however you want to think of it. It did not launch a fundamentally new way of interacting with games, beyond the deceptively popular Wii Sports.

Speaking of Nintendo and entertainment experiences, Niantic - who you probably know from their global smash hit success Pokemon Go - has its own work cut out for it over the next decade. To me, we’ve only had one real glimpse of AR in our future to date, and that’s been Pokemon Go. (By the way, if you thought Pokemon Go was a flash in the pan that died out, think again. It’s had remarkable staying power.)

Pokemon Go, or a similar game format like it (although I have a hard time imagining what else could replicate that same magic), is to me the most likely launch pad we have to actual adoption of smart glasses, or perhaps some other hardware format, that brings AR into the world. The simple reason why is that when you wear them, you look like a total dork, unless you’re clearly having fun, in which case they become fascinating and beg further inquiry.

Anyway, I highly recommend this short but great interview with Megan Quinn, who many of you in tech know from her time running product at Square or in VC at Spark Capital. Many of you may not know that she’s actually one of the founding team members of the internal mapping experiment at Google that became Niantic. She’s one of the most remarkable people in tech, period, and when she announced she was headed back to Niantic to become COO, it made me genuinely happier than just about any other hiring move in tech I can remember. Here’s the interview:

Niantic COO Megan Quinn thinks consumer AR glasses are just around the corner | Janko Roettgers, Protocol

Here’s another great post from Li Jin on the internet and the rise of micro-entrepreneurship, and the many, many opportunities to build “Shopify for X” out there. (Hopefully some of them will be us, but many more will be from other great companies!)

Unbundling Work from Employment | Li Jin

And finally, this week’s Tweet of the Week that made me laugh the hardest (click through to watch the video, it’s incredible)

Have a great week,

Alex

SPAC Man Begins

Two Truths and a Take, Season 2 Episode 25

Three years ago, Chamath sat us all down at a Social Capital all hands meeting and told us about this great new thing we were gonna do. It was called a SPAC. 

A SPAC (“Special Purpose Acquisition Company”, or “blank check company”), he told us, was a new way we were going to help take big tech companies public. Going public is an important moment in a company’s life. It’s a transition from one state to another, it’s a stressful but monumental transition, and the current way we do it - the Initial Public Offering - stinks. Our SPAC, the thinking went, would create a new path for tech companies to go public that could compete with the IPO, and win.

It took a few years, but Chamath got this one really right. At the time, hardly anyone in Silicon Valley had ever heard of SPACs before. But now they’re having their moment, from Wall Street (Bill Ackman’s $4 billion SPAC for finding a “mature unicorn”, lol; David Ubben and Nikola stock making even Elon blush) to Sand Hill Road (Ribbit Capital just raised $600m for a fintech SPAC, and Chamath is doing two more, with more to follow I’m sure.)

SPACs aren’t new; they’ve just traditionally been a grimy, off-Broadway kind of financing. I have some fond memories of heading home to Canada and then talking to these 21 year old university students who were like, "SPACs? Oh yeah, we know what those are. I worked on one during my co-op semester, trying to take a fake mining company public.” (As an aside: did you know that Canada has a stock exchange specially for scams?)

So what are these things? What do they do, why are people all worked up about them, and why might they be here to stay?

When you IPO, the bank doesn’t work for you - it works for the ecosystem

When you IPO, you go through a transition: your company’s shares go from one day being not publicly traded, to the next day having a publicly traded price. There’s some uncertainty as to what your price will be! So there’s a risk involved, and that risk is specifically assumed by the initial public buyer of your stock - the first group of people to say, yes, I will buy this public stock at a certain number, and hope that number doesn’t turn out to be way too high. The IPO process mitigates this risk, but not for free.

The way an IPO works is you hire an investment bank, and say “we think we’d like to go public, we need to raise around X many dollars, do you think you could help us with that” and the bank says “why yes, that’s what we do, we will find buyers for your stock.” And so you go on a road show and pitch your stock to buyers all around the country, and then a few months later, depending on how the show went, you and the bank settle on a number for your initial offering price, and the bank makes a commitment to sell a certain number of shares of you to investors, at that price. The bank’s job is to make sure that this process will go smoothly. The bank will also insist on a number of fine points, like lockup periods to prevent employees from dumping too many shares on day one, to help the process remain orderly and clean.

On the day of the IPO, you show up at the New York Stock Exchange, you ring the bell, and your stock starts trading. And, most of the time, the stock will open quite a bit higher than the price you sold it for via the bank. This is called the “pop”, and it’s really the core part of why businesses grumble about IPOs: they feel like they’ve left money on the table. 

Of course, there’s a sensible reason why you should actually expect a pop to happen. The initial investors are taking on risk, by buying a brand new, not-yet-priced stock! So, on average, they should get paid for taking that risk. Banks recognize this, and that’s why they price their IPOs accordingly: they want the pop to happen, because it keeps their clients happy, and coming back for more IPOs. 

Sometimes stocks don’t pop, though. From time to time (with Uber last year, for instance) the stock will slide right from the opening bell, if for whatever reason the bank misjudged the public buying appetite. The bank’s job is to help stabilize this. And they do it via something called a greenshoe. The way a greenshoe works is that the bank actually commits to sell more shares than the company issues; in other words, it oversells the offering, and is therefore effectively short the stock on day one. In order to cover that short, the bank also gets (for free!) an offsetting number of call options to buy more stock from the company at the IPO price. 

This is a “heads I win, tails you lose” kind of deal. If the stock pops on day one, as it normally does, then the bank covers its short position by simply exercising its free option to buy more stock at the IPO price. So the bank makes money on the difference, and the company grumbles because it has to cough up even more shares at below-market value. If the stock slides, on the other hand, then the bank can buy up shares on the open market. Either way, the greenshoe is nearly risk-free for the bank, the company foots the bill either way, without actually seeing any direct benefit. 

Why am I telling you this? Because it’s a window into an important lesson about IPOs: the company might hire the bank, but the bank doesn’t really work for the company. The bank works for the ecosystem. The bank’s job is sort of to make the company happy, but really it’s to make sure that this IPO goes predictably and boringly, and let everyone take their profits. Banks don’t just care about this IPO; they care about getting IPO business generally

This is largely a good thing, in my opinion: it helps avoid the tragedy of the commons problem. If IPOs were a complete free for all and had no standard rules, and banks worked explicitly for the business to try to maximize their gains (at the potential expense of the buying public), then the IPO would quickly develop a market for lemons-type situation: bad behaviour would potentially drive out the good, and going public would become riskier in more unknown, scary ways. 

So rather than solve this problem with cumbersome regulation, we instead solve it by essentially assigning the investment banks as gatekeepers of the integrity of the system. They take their hefty take rates, they impose their unfriendly provisions, and they won’t quote you a price until you’re worn out from your road show. But in exchange they effectively guarantee a certain base level of integrity to the process. And that generally-expected level of integrity makes the IPO market run as smoothly as it does, and allows businesses to access the public markets and their cheap capital in the first place.

There is an obvious tension here. If you could somehow go public without the banks, you can theoretically avoid all of this, and that’s good for you. It is the selfish move, perhaps, but that’s fine! Your responsibility is not to preserve the integrity of the IPO process for generations hence.It’s in your shareholders’ interest, and your employees’ interest, and everyone in your world’s interest, to be as selfish as possible here. 

SPACs may rip you off too, but they really work for you

So now we can talk about how a SPAC works. 

While the normal IPO process starts with a private business who wants to go public, a SPAC is the opposite: it starts with a public business, that is nothing. A SPAC begins its life when a well-known promoter, like Chamath or Bill Ackman, raises money in an IPO with the following prospectus:

“I am raising money to take a company public. I don’t know which one yet; the money is going to go in a bag until I find one. When I do, my publicly traded bag of money will merge with the private business, and in doing so, take them public. You, the investors, will have your SPAC shares convert to shares in the new business, at an attractively negotiated price, plus warrants to buy more so you can profit on the upside.

Because I’m so smart, I’m going to pick a business that’s amazing and that you’ll want to own. If you disagree, you'll have a chance to get your money back. But if I’m right, you’ll make a ton on the upside.” (I wrote this in the first person, rather than in a more business-conventional third person, because SPACs are highly centred around the cult of personality of the sponsor.)

So Chamath or Bill Ackman or whoever goes on a roadshow, raising money for the blank check company. Once it’s fully subscribed, they take a 20% equity interest in the SPAC as payment for doing the work. And then they set out to go find a company to merge with. The bag of money sits there, earning money market interest, and the investors can at least earn that in the meantime (minus 20%, but ah well.)

At this point, the SPAC has some interesting advantages as a route to go public. The first advantage is certainty: in contrast to the IPO road show, where you engage with the process and then only figure out later how much you’re going to raise and at what price, with the SPAC you negotiate one time, you have a price, and it is done. (As Matt Levine pointed out, WeWork is the perfect example of a business who should’ve used a SPAC. Imagine!) 

The second advantage is speed: the IPO process takes well over a year, while a SPAC has already done a lot of the work up front (they’re already public!) and can take you public a lot faster than that. (Byrne Hobart calls it “the Vegas Wedding Chapel of liquidity events”, which is perfect.) At Social Capital, we had some serious fun thinking about how to use the SPAC to take a crypto company public before the 2017 bubble inevitably burst. Now that would have been value-add.  

The third advantage is brand halo: if a SPAC has an especially charismatic sponsor, they can imbue your business with a certain special kind of charm and intrigue, and maybe vault you into a higher valuation multiple. It won’t last forever, but in the short term, that may be what you need. As Byrne eloquently put it, (paraphrased): “I was long Social Capital’s SPAC before the Virgin Galactic deal was announced, on the simple theory that Chamath Palihapitiya is a) smart, and b) more importantly, very willing to say crazy things on TV.”

The catch to all of these things, of course, is that the SPAC will massively rip you off. First of all, if you look at the terms that the SPAC is offering and what their ownership targets are, they’re seeking a pretty substantial discount as they take you public relative to what you probably feel you’re worth. Second of all, the SPAC sponsor is taking that enormous 20% vig as a promotion fee. In theory, that fee is charged to the investors of the SPAC, not the target business. In practice, that fee gets passed back to the negotiated price with the target. The net result is that instead of going public and feeling ripped off by your investment bank for having sold them shares too cheaply, instead you just directly give the sponsor something like 1% of your business as a tribute offering and go straight to being public. 

But then something cool happens. The business and the sponsor, who used to be on opposite sides of the table negotiating against each other, are now on the same team. The sponsor might even become the chairperson of the newly merged public business, like Chamath did with Virgin Galactic. This is very different than the dynamic with banks: it’s M&A, rather than consulting. Your negotiation is more brutal, but then once it’s done, you merge. 

Unlike the bank, who never really worked for you anyway; the SPAC sponsor doesn’t just work for you; they ARE you. So there’s no reason for them to keep all of those ecosystem rules, which the businesses hate but the ecosystem collectively wants. No lockups! No greenshoe! None of those stupid things! Most importantly, total price transparency, up front. No bank will ever give you that. But a SPAC can. 

Direct listing, which also had its trendy moment recently, is another way you might get around all of those IPO taxes. But there’s a small problem, which is you can’t raise any money in a direct listing; you just start trading. And often the money, and the momentum and energy around that moment of going public (so you can get more money) is really the point. SPACs are like paying up for the best of both. You get the money, and you get to feel freed from the vague promises and oppressive taxation from the investment banks. You just have to get screwed really badly, one time. But on your terms!

So the real SPAC question actually reveals itself here: how much would you pay to be taken public by someone who actually works for you? Currently, the answer is "it's probably not worth it for most people." It's a bit like "How much would you pay Facebook to get rid of ads", the answer is probably "not an option at any price". But now there is a price!

So now you can see the real appeal of SPACs: they’re a way to go public selfishly. In the SPAC mindset, the IPO ecosystem - managed by a cozy group of investment bank gatekeepers - knew how to keep a good thing going. They knew how to write the rules, how to get everybody paid, and how to keep the peace. They paid for it by taxing the companies as they went public, taking zero risk of their own, and continually passing the bill back to the company for all effort incurred. And those companies didn’t have any other option, so they went along with it. 

SPACs give you a way to opt out of this system. If you’re willing to pay a massive, up-front, one-time fee to the SPAC sponsor, then they will take you public as your biggest shareholder, with maximal alignment between one another, and zero obligations to do right by anybody else in the ecosystem. I think that’s a real part of the appeal, not only for the business, but for short term speculators too. SPACs are fun. It’s fun to see something that’s just such a deliberate flipping off of the rest of the ecosystem. 

I think the right way to think about SPACs is to say, the transition from private to public will always entail reputational risk; the question is which is more important: reputation among the banks and insiders, or reputation directly between the retail buying public and the company itself. In the past, the second one wasn’t really an issue, because 1) the IPO process was always so intermediated you could never test this theory, and 2) companies typically don’t go public twice. Now we have a way to see! 

If Chamath can earn a reputation for pulling these things off, does he become as valuable as the investment banks’ IPO businesses? If we can repeatedly go directly to the retail public and sell these things, what happens if he lowers his 20% fee, to say, 10? Once you really have this process down, could a SPAC start to compete on cost? The conventional answer would say no: you’re still paying the blank check fee to go public, M&A fees for the deal itself, not to mention the promoter fee. But you’d be surprised where cost savings can get found in a new, hungry industry that hasn’t ossified into its Generally Accepted Margins.

SPACs today might just look like a rearrangement of banker fees into a different structure, with costs being disguised rather than saved. That's fair. But there's no way you can convince me that you can't find some real economies of scale in taking the same blank check company public 20 times in a row. Get out of here. At some point, a bank will break ranks and get into the wholesale SPAC listing business. Then we'll see what the margins actually look like.

Anyway, I can’t wait to see where this all goes, and I especially can’t wait for synthetic biology SPACs to hit the mainstream so we can have some companies that absolutely no one understands get taken public on the pure brand strength of a sponsor. We’re about to learn a whole lot about some questions no one ever thought to ask about only a few years ago! And also keep an eye out for those Canadian junior I-bankers. If you’re looking for targets, they are here to help. 

Permalink to this post is here: SPAC Man Begins | alexdanco.com


Here’s a neat thing that I just learned: where the term greenshoe comes from. It’s named after the Green Shoe Corporation, predictably enough - the first company to let their IPO bankers do this as they went public. And you know what Green Shoe Corp went on to rebrand as? Stride Rite: the kid’s shoes company. As a parent of a one year old, this amused me a lot.

Also: I never really found a way to work this into the essay, but this little gem from @inagfatt is too good not to share:

Some news from the team at Shopify Money: First, Shopify Payments is now integrated with Google Shopping:

Hey Google, install Shopify Payments

Also, we’re happy to officially announce our partnership with Affirm to power installment purchases in Shop Pay:

Affirm, Shopify partner for new interest-free, zero-fee installment purchases | CNBC

Here is a nice little post from Adam Keesling about the Costco business model, and how they pull off the sleight of hand of getting premium brands to produce white label products for Kirkland Signature, at even higher quality standards, and at a substantial discount - and why brands do this enthusiastically.

How Costco convinces brands to cannibalize themselves | Adam Keesling, Napkin Math

I’ve shared this before but I’ll share it again: a really good introduction & series of thought exercises around information theory from Simon De Deo at the Santa Fe institute:

Information Theory for Intelligent People | Simon De Deo

And finally, today’s tweet of the week. No exaggerating, this made me audibly gasp (and if you’ve read this newsletter for a little while, you’ll know why):

Image

Have a great week,

Alex

The Freud Moment

Two Truths and a Take, Season 2, Episode 24

Three months ago to the day, I wrote:

I’m getting concerned that we’re not psychologically ready for what’s coming next. The future may not be predictable, but people are. I have no idea what’s going to happen with reopening and recovery; but I can say two things pretty confidently about the next six months:

First: our individual psychology is predictable. If we’re forced to choose between abandoning our ego and self-image, versus turning on each other in order to protect our egos, most of us will turn on each other. In the next six months, we’re going to face that choice an awful lot. That’s problem number one.

Second: our collective narrative is predictable. The recovery and reopening, when it opens, will proceed a lot more slowly than we can generate narratives about the recovery. And that means the recovery is going to become sports. That’s problem number two.

It’s going to get worse | Alex Danco

Three months later, I’m afraid I got this one pretty right. 

Over the next few months, across America, a lot of people are going to die. And they’re going die because other Americans are - not just cluelessly, but gleefully - refusing to wear masks, and celebrating it, the way you’d celebrate winning a football game. Meanwhile, the urgent topic occupying all of the air time in elite circles isn’t the pandemic, or its generational economic devastation; it's “how bad should other people be allowed to make you feel online?”

So yeah, it did, indeed, get worse. 

You know who would really have recognized and understood this moment? Sigmund Freud. 


Reading Freud is tricky. You have to do a lot of active work to separate out the archaic and offensive parts from the genuine insights. Many of Freud’s explanations for why we are they way we are are ridiculous and disrespectful. But his observations, on the other hand, are deeply perceptive. 

To get started with Freud, the place to begin is with his three-layer model of the human psyche, which you’ve probably heard of before: theId, the Ego and the Superego. The Id is the deep, primitive part of our psyche that just instinctively wants pleasure. It’s strictly unconscious, present from birth, and knows no concept of right or wrong - it’s just a psychic mass of impulses. 

A newborn baby quickly learns that the id does not, by default, get what it wants. The outside world is a harsh, unforgiving place. So around the Id evolves the Ego, whose purpose is to get the Id what it wants. Unlike the Id, which knows nothing, the Ego has to navigate reality. Our perception, planning, reason, common sense, drive and executive function are all part of the ego. Our egos evolve, and become our personality, as we grow up and learn how to navigate the world. 

The ego is kept in check by its counterpart and rival, the superego. The superego (or as Freud called it, the “ego-ideal”) is our conscience: the set of rules, expectations, guilt, and ideals that we learn from our parents and peers. The superego really exists to counteract the selfish and thoughtless needs of the id, but in practice that means fighting and negotiating with the ego, who must reconcile and navigate between the id’s unconscious pursuit of pleasure and the superego’s oppressive conscience. 

The ego and the superego, from the outside, look like opposites. The ego pushes desire and aggression outward, as the Id’s agent; the superego suppresses and shames, pushing back inward. Freud’s first big insight here is that they aren’t opposites at all: they’re more like siblings. To Freud, the ego and the superego are made out of the same psychic material. The latter is reflected back inwards, towards the former.  Freud understood guilt, shame, anxiety, and other expressions of the active superego as, essentially, aggression - just directed inward, rather than outward. A lot of Freud’s most famous (and appropriately outdated) ideas, like this work around the Oedipus complex, try to zero in on the origins of this aggression and guilt. Here’s where it’s important to separate out the how versus the what - however offensive his explanations might be, there’s something undeniably there in his initial observations on the presence, structure, and suppression of all that aggression inside people. 

Civilization runs on Guilt

In his later years, Freud came to characterize the human condition as an evolving struggle between those forces: outward aggression of the ego, and inward aggression of the superego. This dynamic plays out at multiple levels: within individuals, and throughout society. His last and most approachable book, Civilization and its Discontents, tackles a subject that’s pretty familiar in today’s discourse: “As the world advances and living conditions improve, why are we still so angry and miserable?” 

To Freud (and many others), what we think of as “civilization” is essentially an arrangement for directing our psyches into productive, rather than destructive, avenues. This applies equally well to the ego and the superego. You can imagine an ego-driven business owner who, in an earlier world, would’ve taken his aggression out in a more harmful way, but now has a more productive avenue to do so. Freud’s insight here is that most aggression in modern society actually takes the form of guilt, stress and anxiety. Modern society functions not because we feel continually threatened from outside aggression to stay in line, but because we feel continual pressure from internal aggression - our conscience - to be an ideal neighbour and citizen. To Freud, civilization is, essentially, structured guilt. No wonder it’s so stressful! 

The United States, and the general phenomenon of “American Exceptionalism”, is really an ongoing experiment of what happens to a country when you give the ego a bit more room to run. America has always been a highly egotistical nation. We celebrate the individual, the home mortgage, and the V8 engine. In some ways, the experiment has succeeded spectacularly; in others, America seems to continually suffer from a brain hemorrhage, where people regularly lose their minds over issues (both real and imagined) that no other country seems to experience at the same level. 

America’s egotistical bent doesn’t mean we lack a conscience: we carry around a ton of guilt, as part of the cost of letting egos run wild the way we do. The narrative of “the coastal elites want to tell you what to feel guilty about; we won’t let them” is effective for a reason: because we are collectively guilty of so many things, from climate change to police brutality and everything else. The Trump candidacy figured out how to exploit this better than anyone else: in a complex and interdependent world, everyone is basically guilty of everything. And when that’s true, no one can say “you should feel guilt” without sounding hypocritical. It’s a perfect judo move, because not only does it neutralize the superego’s ability to effectively level any criticism, it opens the door for the ego to go be as offensive as possible. 

The internet has accelerated a lot of this. It essentially kicked off an arms race between the ego and the superego, which started out as a Cold War but then turned increasingly hot since Trump’s candidacy as the ultimate Ego Candidate. On the one hand, the internet empowers the ego to project its ambition and aggression out into the world, like never before possible. This is great for self empowerment, but unfortunately not so great for issues like online harassment, and its real-world variants that are now just called “politics.” There’s a case to be made that the most perceptive and predictive piece of writing about contemporary culture was a Deadspin post from 2014, The future of the culture wars is here, and it’s Gamergate by Kyle Wagner. Online harassment in 2014 became the model for how regular discourse and the news cycle works in 2020, before anyone knew what a coronavirus was.

On the other hand, the internet also arms the superego an equally formidable amount. Everything you say online is permanently inscribed in the collective psyche, and everyone’s thoughts and actions become linked to everyone else’s, either by active involvement or passive association. As everyone becomes connected, guilt becomes total. Any kind of association with anything problematic can follow you around everywhere. Oh, you own the S&P 500 in your retirement account? Bad news, you’re a shareholder of companies who drill for oil, sell guns, and fight gay marriage, so you’re cancelled now. I am not entirely unsympathetic to the idea that everyone should be cancelled a little bit. A lot of bad things have happened, and are happening, for which we kinda do bear responsibility. Unfortunately, online crowds are too much fun. And so we got to modern-day cancel culture, and its equally frustrating cousin: the “I am actually the victim here” essay. 

And then a pandemic happened. 

“The elites want you to feel guilty about not wearing a mask"

In retrospect, the critical mistake of the pandemic was telling Americans that masks protect other people.

There are a lot of what-ifs we could look back and theorize about: what if we’d closed borders earlier; what if we’d had more humility in the early days. The biggest what-if of them all is “what if the CDC hadn’t initially urged Americans not to stockpile masks, felt they had to rationalize it by saying “they won’t help you”, then later had to walk that back by clarifying, “oh, but now you should wear them, because they help other people."

The minute that wearing masks became about protecting other people, it was game over for America. Masks became a symbol of the superego; and as far as symbolism goes, it’s laid on pretty thick. (It’s literally something that you put on your face into order to stop yourself from spraying germs onto other people, and therefore suppress your own guilt of being part of a pandemic!) The minute masks became about suppressing yourself to protect others, the narrative became: The Elites want you to feel guilty about not wearing a mask, just like they want you to feel guilty about driving a car, or eating a burger, or anything else you love. Don’t let them! 

Our reaction to this narrative misses what's really being said. If you've ever thought, "how stupid do you have to be to think the government wants to control with a mask", pause for a minute and think about what's really being communicated. The real message is "they want to control you with guilt." Doesn't sound so stupid anymore, does it? Freud would certainly argue that this message gets it exactly right.

Unfortunately, there is a right answer. Wear the stupid mask. This should be a conversation about public health, not yet another forum for symbolic battle between the ego and superego. And in most countries, that’s the case; people cooperate, wear masks, and their countries can cautiously reopen and get back to something like normal life. Not in America, though! In America, you see political talking heads saying things like“Mask-wearing has become a totem, a secular religious symbol. Christians wear crosses, Muslims wear a hijab, and members of the Church of Secular Science bow to the Gods of Data by wearing a mask as their symbol, demonstrating that they are the elite; smarter, more rational, and morally superior to everyone else.”

This quote is really spectacular: it’s simultaneously so offensively wrong, and yet perfectly captures the zeitgeist of the moment. This isn’t ignorance or passive abdication of public health responsibility. This is active, willful rebellion against the superego, fitting neatly into everything else in the culture wars: the elites want you to feel guilt. Don’t let them. It's not just individuals, either: local and state government officials understand the politics of the moment, and are putting in the work to ban local mask requirements. They want to make sure that their voters know:they're on your team; team ego.

And then, unsurprisingly, Covid cases began to rise again. 

Freud had a second insight here. The ego and the superego might be rivals; but they also immensely enjoy each other’s company. They give each other something to push against, and they legitimize each other. When you see people screaming at each other over wearing masks, particularly those who refuse to wear them, on the surface these emotions present as real anger. But you also come away with an unmistakable impression: this is the most fun these people have had in years

Just this morning, I witnessed a confrontation between three people in the park, when two people walking side by side did not make way for a third to pass through while preserving six feet of social distancing. Within 20 seconds, the quarrel became a full-throated screaming match, at 9 AM in the morning in Withrow park. The sheer exuberance and glee on display here was barely disguised: in that moment, there was absolutely nothing in the world these people would rather be doing than shouting at each other over sidewalk etiquette, and more broadly, over the general theme of how guilty everyone ought to feel. 

Critically, it’s not just the glee of yelling at people that’s so exhilarating. It’s the thrill of defying guilt, even, in fact, especially. if it means being guilty of something. If you watch videos of people having meltdowns in supermarkets for not wearing a mask and then throwing food everywhere for five minutes, you can see an extreme form of a remarkably pervasive mindset: I’m going to just ruin someone else’s day, make an absolute fool of myself in public, and maybe even get Covid while I’m at it, for the thrill: because of how incredibly good it feels to rage against the superego in such a pure form. The guiltier you are, the hotter the rage, and the bigger the thrill. By connecting everyone together into an inseparable web of guilt by association, the internet really brings out this behaviour, happily supplying weapons to both sides of the fight (who are both mightily enjoying themselves despite outward appearances).

It’s really no wonder that so much of the past few months has felt like sports. Sports are fun! And so is this, in a perverse way. The plot has become almost entirely about the ego-versus-superego struggle that, at least on my timeline anyway, most of the time people aren’t even talking about Covid anymore. It honestly makes complete sense that the urgent topic among the elites’ timelines today isn’t a society-threatening virus or generational economic devastation, but instead, the question of “how much guilt should other people be allowed to make you feel?” That honestly is the meta-topic right now. 

So yeah, I’m going to go ahead and call it, it got worse. Can’t wait to see what October 17th, 2020 will look like! In all seriousness, I think there’s a fair amount of insight into our current moment that you can acquire by reading old books. Human psychology hasn’t changed that much. Unfortunately, reading Freud and then writing a blog about it might get you cancelled, so that might be an issue, but hey. Read some C.S. Lewis or something, if you’d rather. Whatever works for you! 

Stay safe, and wear a mask. 

Permalink to this post: The Freud Moment | alexdanco.com

No links this week except one, the tweet that made me laugh the hardest: (you have to click through to watch the video):

This might be fake, but I don’t care, it’s awesome.

Have a great week,

Alex

Summer Vacation

Two Truths and a Break

Hi everyone, two quick things.

First of all, I’m going to take a couple weeks of summer break from the newsletter, and we’ll be back for the second half of the year in the back half of July. In the meantime, if you’re looking for some great summer reading material, Patrick O’Shaughnessy started a great thread of influential essays and you should check it out. There is some really great stuff in the replies too, and Will Haynes made a Notion page to keep track of essays mentioned in the replies.

Second of all, I’ve been absolutely (happily!) overwhelmed with how many of you responded to the Google Form I put out last week in the newsletter to see who’s interested in working for Shopify Money. I believe all of you who filled it out should have heard back from me by now, although for many in impersonal bcc form - sorry to make it mass-produced, but I wasn’t expecting hundreds of replies!

For everyone where there’s potential fit (you’re in the right time zones / you’re a good craft fit for positions that we’re hiring for right now, especially technical roles), hopefully you’ll hear from us soon. I’m sorry I can’t promise anything more directly, but I immensely appreciate all of the responses so far, and I hope I get to meet and work with some of you in the near future.

Have a great few weeks,

Alex

Craft is Culture

Two Truths and a Take, Season 2 Episode 23

I've now been at Shopify for two months. One month in, the leadership team announced that we're moving to "Digital by Default": permanently. The era of office centricity is over; it's time to figure out what comes next.

I've had mixed feelings about this announcement. On the one hand, I was disappointed. I like having somewhere to go for the day, and having done so much travelling over the last several years for work, I was even excited to have a "regular commute". I was especially looking forward to building up a new base of shared culture with a team. I'm sure I'm not alone in wondering how shared culture will translate to a virtual-by-default office. 

But on the other hand, it's the right thing to do. Working digital by default is going to change a lot of things about the way Shopify works, and how businesses work in general - some of these changes will be tough to absorb. But it's also going to free us up to rebuild some of the basic practices around how businesses ought to work. I think the biggest change will have to do with hiring.

If we want to understand what the next 10 years of transition into Digital by Default will look like, there are two important lessons from the 90s. The first lesson is California.

Up through the 80s, the centre of gravity for tech was Cambridge, Massachusetts, and the planets orbiting around it were sprawled across the Route 128 corridor in greater Boston. Then from the 90s onward, Silicon Valley took over. There are many reasons why the west coast won, but one of the most widely agreed-upon was the fact that California state law forbids non-compete clauses. Tech workers can move between competitors at will. It sounds like this would be bad for commercial innovation (many people still seem to think so!), but the truth turned out to be the complete opposite.

When employees pass freely from company to company, they bring process knowledge along with them. They can’t bring explicit IP, but employee movement helps circulate know-how and best practices faster than if individual companies had to discover or evolve them on their own. This levels up everyone’s game: excellence inspires excellence. Engineers were free to be more loyal to their craft than even to their employers. When you let great process circulate freely, good things happen to the whole industry that outweigh any loss of trade secrets or exclusivity for individual firms.

Over time, networks of excellence and dedication to the craft become gravitational attractors for talent. The West Coast was where the world’s best software got built, and if you cared deeply about that kind of excellence, that’s where you had to go. If you cared about the craft of software, you want to be in an environment that celebrates that craft. This kind of attitude produces better software: built right, because it’s what you do. Silicon Valley today still functions on a strange but highly effective kind of “honour system”, which could not work without that rich history of doing the right thing by your craft, and by your peers.

The second important lesson from the 90s was the importance of message boards. As the whole world got connected, craft practitioners found one another on forums and message boards, and obsession flourished. The free software community, which got off the ground as the internet was born, started coming together around bigger and bigger projects, eventually building Linux.

Linux broke every rule we thought we’d learned about how to motivate and manage knowledge workers. Software development was not supposed to work like this: adding engineers to a project is supposed to make it more delayed and worse, not get built faster and better. Eric S Raymond wrote in his timeless essay The Cathedral and the Bazaar:

Linux was the first project for which a conscious and successful effort to use the entire world as its talent pool was made. I don't think it's a coincidence that the gestation period of Linux coincided with the birth of the World Wide Web, and that Linux left its infancy during the same period in 1993–1994 that saw the takeoff of the ISP industry and the explosion of mainstream interest in the Internet. Linus [Torvalds] was the first person who learned how to play by the new rules that pervasive Internet access made possible.

While cheap Internet was a necessary condition for the Linux model to evolve, I think it was not by itself a sufficient condition. Another vital factor was the development of a leadership style and set of cooperative customs that could allow developers to attract co-developers and get maximum leverage out of the medium.

Linux proved that there is no upper limit to how much value you could extract out of a message board or email list, if you got the social dynamics right. The internet made it easy for craft practitioners to find one another, fraternize and argue over methods and best practices, almost like artists. The fact that none of these people had ever met in person, or had any shared culture or life experience, made zero difference. Their craft was their shared culture.

So we have these two examples from the 90s which at first appear to contrast with one another. On the one hand, the rise of software as a craft meant that strangers who found each other on internet message boards could bond and work so successfully together that they could build incredible things without ever meeting in person. On the other hand, that same rise of software as a craft created a tremendous local network effect in the Bay Area, which prompted a huge talent influx into several dozen square miles along the peninsula.

But really, they're not in conflict at all. They're both the same force, and they were both ahead of their time.

Since then, the cost of finding and engaging in your craft of choice has gone to zero, thanks to the internet. You can learn anything on Youtube. You can find any subculture of people, interested in the same minute set of interests, on Twitter. As this happens, people are waking up to the idea that mastering a craft is how you find professional and personal fulfillment. This creates an irresistible draw: people want to go where their craft is celebrated, just like you're drawn to where your culture is celebrated. 

Today, we're opening a chapter of the world where many of us will be working remotely by default. This is exciting, but scary: as a prospective employee or employer, you have to complete against the whole world for talent. Employers and employees both value stability, so extreme liquidity in the talent marketplace is scary for everyone. In a hiring environment like this, one question becomes paramount: is this a company where your craft is celebrated?

It seems obvious to me that this world we're entering is just a more intense, and more widespread, application of the lessons we learned 30 years ago in the early California tech industry and on the early internet. Hiring and craft become the same thing. The more effort you invest internally into craft development and celebration, the more people will want to work with you. (On the flip side, in a remote work world, craft and process knowledge are even more important than they used to be, because we have to trust each other a lot more.)

I suspect that within a few years, we (and others) will go through a complete rethink of how hiring works, that's re-oriented around craft: how do we celebrate it, how do we communicate the ways that we celebrate it, how do we find people who crave celebration of that very specific thing, and then how do we hire them, wherever they are? 

One obvious thing that I suspect will happen everywhere, and which we're already doing on Shopify Money, is that everyone who practices a craft (which is to say, everyone) has recruitment and hiring as a part of their job. Knowing how to source, do hiring interviews, manage bias and prioritize diversity, and all these other skills are becoming an explicit part of everyone's job, because it's inseparable from craft excellence. Another essential part of our jobs, which I bet will be made explicit before too long, is knowing where the highest-quality pockets of craft practitioners are. "I know you from this message board; you're someone who cares a lot about our craft" will beat any resume line or work credential. Forums will unbundle LinkedIn, for any job where craft matters. 

The internet made this possible, and digital by default made it practical: there are no barriers anymore to learning where your craft is celebrated, and then applying to work there. The software community has been ahead of the curve here, but the rest of the world will catch up soon.

I'm lucky to be at Shopify right now. This company takes the idea of craft incredibly seriously; not just for software development and product management, but for everything. Even something like customer incident response, which at most companies is treated as a regretful chore, is explicitly celebrated as a craft here. That's why I'm not so worried about whether Shopify will be able to continue creating or perpetuating our culture in a remote-first world. Craft is culture. If you care about craft, you've done the hard part. 

One small but meaningful change I'd wish for in tech: I hope we get rid of the phrase "culture fit" and replace it with "craft fit." Culture Fit has come to stand for a lot of not-so-great things in hiring: our tendency to hire people just like us, who make us comfortable, and who don't challenge us in meaningful ways. I'd love it if we got rid of that idea entirely, and replaced it with the idea of Craft Fit. For the things we want, craft is culture anyway. But for the things we don't want in hiring- bias, homogeneity, risk aversion - I hope that framing a hiring choice in terms of craft fit helps redefine a choice in terms of what alignment actually matters, and along what dimensions we ought to be challenging ourselves to reach out. 

On that note, Shopify Money is hiring. Come work with me! I mean it. If you want to work with us on Shopify Money, and celebrate our craft with us for many years to come, we would love to talk to you. I made a Google Form you can fill out here, or just email me directly. We’re especially looking for engineers and technical people (I mean, who isn’t), and we’re hiring across the Americas time zones (GMT -3:30 to -8.) So if that’s you, please do email me. If you’re after the sublime satisfaction that comes from mastering a craft and building something special for merchants everywhere, and you want to be on a team that is just absolutely going to get the future of work right, drop me a note. 

For more on how to work with me on Shopify Money: go to alexdanco.com/shopify

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Thank you for the tons of emails and thoughtful questions about last week’s email on thermodynamics and loops; I apologize I haven’t had the time to respond to all of them. Thank you especially to Bob Hacker for bringing Thermoeconomics to my attention. I’ve never heard of this concept before, but I immediately loved it and I plan on really digging into it when I can find the time. It looks like the book is hard to print and hard to find (reselling for $500+ on Amazon) so if anyone finds somewhere it’s on sale for cheaper than that, I’d love to hear from you. (Waterstones in the UK might have it; somewhere North America side would be nice to know about.)

And finally, this week’s Tweet of the Week: something I just can’t stop staring at in total confusion / awe / disbelief:

Have a great week,

Alex

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