Turner Novak The Past, Present, and Future of Consumer Social Companies - [Invest Like the Best, EP.182]


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I guess this week. Is Turner Novak? A partner had guilt. Many of the largest companies in the world today are consumer social companies, so Turner I discussed the past present and future of those businesses when executed right there often the fastest growing companies in history and the rise of Tiktok and some other companies we discuss, makes it clear that there may always be room at the top. The network effects that support these companies make them unique. These to analyze and Turner's writing has been my favorite content on the topic. Please enjoy our detailed conversation on this important area of public and private markets. Turner? Thanks so much for taking the time to do this today. The device that we're GONNA use for our conversation is the sort of past present and future of consumer social businesses, which obviously represents some of the biggest and most profitable businesses in the world. Some of the fastest growing will go in other directions as well, but that will be sort of our true north through this conversation to begin it. I think it would be neat for you to share with the audience. What you think is sort of the first relevant idea or data point in the past piece of this, what antecedents are important for us to consider before we get into today's landscape of consumer social companies? Thank special crab me. The first big thing that I really think through is there was a point in time where facebook was the fifth fastest growing social network. There's a lot of things you can on there, but I think one of the big things is that growth is really important, but the quality and the type of growth that you have is a social company is also very important. And they kind of ties into the competitive advantage that you're building over the long term, and with they'll still pretty good one and we've seen that reflected in how the companies and the business performed over the last two decades. Say More about that quality growth. So why is that interesting to you? How does the fact that they were once? Not The number one rocket ship in terms of growth matter in terms of how you think about investing in how you think about how these companies can build a durable advantage. I think one of the prime tenants of sort of social networks is UGC user generated content. And that essentially gives you higher margins over time, because you don't have to pay to acquire the content, your users who have for free, and then you can show ads in between the content in historical cases that's been the case, and that's super high margin when you hit scale. So I think that the quality and the competitive advantage of the facebook bill, it was all built on real identities in high quality, real identities that kind of use that as a position of strength to expand into what they built today. Maybe at the time. If you're looking at spreadsheets looking comparing user growth looking at charts, that might have been hard to see compared to some of the competitors. So I think it's really important to look at the product that's being built and social specifically. I think friends are A. Key component to building a strong social network and real identity to more about that. Why friends wise identity so important? Maybe why have some failed to invert the question a little bit when they have included those things? Ill I think a way to think about friends and identity read. It is a super popular social network. If you want to call it a social network specifically in the US, which is where people have the highest disposable income to spend on things that are shown in ads, but they really don't make that much money right now. Part of that's related to the AD product with part of it is also related to. They don't actually know who their users are, so they can't target them ads versus the way facebook built a business it was let's figure out exactly who these people are, and even before they rolled out a lot of the machine learning. Pushed advertising when it was update your profile, and you tell us your ten favorite movie, your ten favorite musicians, your favorite activities. That's basically what the AD system does now is it just figures those things out so face looks product was basically having people create their advertising profiles for them, so I think looking back. If you were to be looking at some of these companies decade earlier or two decades earlier, when facebook was kind of getting out, and you could say wow, they're. Users are not only creating user content. They're also creating user generated. Add profiles which I. Don't think anyone's matter anymore because facebook does it all medically. Based on how you interact with the product, but I think it's a core piece to how I think about social is. It doesn't have to be had, but it's more of what's the business model is GonNa. Look like. How do you go public with this? and Are you building towards that today or are you gonNa have to change, and then just how? How do you think about creating the business model as you grow? How often are you seeing new proposed social networks, and when you're evaluating them in addition to identity real identity again I would call it. What other major markers are you looking for in the idea behind new social network? So you've got deceive got real identity. What else matters again and again? And one of the big things helping. Consumer or helping the average person, express himself and connect with someone. I think that's the really social networks digital social networks they're replacing are offline. Conversations inhabit so. If you can figure out a way to make it easier for someone to have a digital conversation or digital interaction that they would have had in person, I? Think there's an opportunity to build a business there and there's a lot of people trying a lot of different things to your point of how often do I see them I think the flavor of the day lately has been Tiktok the next tiktok. TIKTOK were ticked off for X., but one of the interesting things about that proposal is those usually. Don't work trying to copy what other people have done. You typically have to find some sort of behavior that already really exists or is just starting to emerge, and no one else has seen yet and then create a new network of friends or people who interact with each other around that new behavior. and. Specifically I think to be really successful is a behavior that some of the other existing social networks will have a really hard time trying to copy or layer into their network, just because of the DNA of the product makes it of the existing incumbent product. Just makes it too hard to copy what you've done. What do you think is? Let's go to tick tock now because I think it's the big obvious topic by dances I. Don't know when they'll go public, but it's an enormous company that will go public. Public with a huge market CAP. It's a fascinating product. It's controversial. You've written an extensive history of Tiktok specifically I think we'll do a few times where we touch on existing companies as ways of exploring, you're sort of frameworks, so let's talk through Tiktok. What are you find so interesting about it? Describe what you think. They do best why it has been such a meteoric rise. I think the best way to explain what happened with Tiktok is to I look at some of the existing products, so facebook was founded. And grew up on desktop, and originally it was profiles that you could post to eventually tied together with the news. which was probably one of the greatest products of all time I think facebook did seventy something billion in revenue on a trailing twelve month period at extremely high margins, so one of the best products of all time the whole product is built around desktop and even instagram, which was kind of its mobile play, which was a great acquisition. The product was designed for really the feed was designed around desktop. It's the same sort of idea and for facebook like it was a great acquisition who had I read somewhere that took them six weeks to basically copy paste and tweak the code from the facebook newsfeed into the Instagram newsfeed and instagram twenty billion in revenue in two thousand, nineteen, the anybody for billion eight years ago. So Pretty and so I think when you've kind of seen snapchat emerge, it was really mobile. I probably one of the first mobile or social networks to hit scale. Just the behavior on it was different on the kind of unlocked. Really, the ability to quickly communicate people with your phone. You could send a tax to someone. You could say hey patrick. I'm hanging at the beach I'm with my friends. My dog here here were having sandwiches and just crack. Open a beer. We're on the beach. or You could just take a picture and send the same thing in two seconds, so reduce the friction to communicate with your friends and snapchat did a lot around that general idea to build like a really big business, but as kind the court case, it was way different than what you do on facebook. And then obviously stories was a function of your sending messages to your friends. You'RE GONNA. Send it to ten people. Why not just throw it on your story? So you just click one more button and it just sends it to the feed of. Full screen video play back and forth. It's like A. Progression of all the different messages eventually not actually think that we're post story purpose, and that was obviously full screen mobile video. Probably one of the better advertising products you can have on mobile slowly got away from the feed which when you kind of think about how the feed works. You're scrolling your feed. You see an ad on facebook. There's a lot of white space is the ability to comment and light which blocks part of the video. There's persons name so when you really think about how advertising products work on. The facebook feed the instagram feed Hex, probably only taking up about thirty or forty percent of your screen versus in stories. It's a full screen ad so theoretically it's going to be more effective I think the pricing on those ads is still kind of figuring out what the equilibrium will be. They'll probably increase a little bit over time, but really those are probably the best ads for Mobile, and so instagram obviously saw the rise of snapchat how good it was doing and they said. Oh. Let's add this product to. Let's stick it at the top of our feet. What's have a feed? Though the APP open so the feed and we'll stick these little circles up at the top of the feed that you can tap into and get into this full screen product I mean in theory, and evidently what's happened? It's been very also very successful for them. But when you really think about it. Why do they still have a feed? Why do you have to tap to get into the stories experience? I think what Tiktok ultimately did. There were a lot of competitors over the last ten years that we're doing similar products, similar sort of full screen videos I think talk really did was. They designed the whole product for Mobile, and that's really what makes tiktok different from instagram and say twitter. Twitter's another classic example of it was gopher desktops text updates. For sort of the people that are growing up on mobile, it's probably not the most exciting product and go of you can be you obviously, because it's more tailored to let, and we used to stop a lot more tailored to kind of how we use social media, but really these mobile first experiences are more targeted towards the average person, and there's seven eight billion people on a world right now you have a much higher total addressable market of humans. You can reach with your product. So it took, it was entirely designed from the ground up for Mobile. It was full screen video. It was basically you open the APP, and it's instagram stories or snapchat stories without all the other thing. And tying to the monetization, potential stories or full screen video, the actions are right there. You have an opportunity to get every single user into one of those more active ads. I think that's kind of the core. What makes tick tock different from sort of the existing broadcast network? I think snapchat is a little bit different, because it's more focused on France versus something like twitter and Instagram is, and Tiktok is much more focused on following creators or influencers. There's a little bit more that you could probably unpacking what makes? I reminding that's really the big one is entirely built for mobile is really the first scale broadcast network that was designed for the smart money. Can you say a bit about how to talk deals with user friction and bring this topic up because your answer is going to be related to a social product, but I think one of the best things to think about when building any product is how to reduce the time or effort or cost between the user, being aware of something and getting what they want, and it seems like Tick Tock is the ultimate example at eliminating or reducing frictions. Can you talk about how they do that? And whether or not? You think that's important from a business standpoint. Yes Oh. What I think Tiktok did was dea. Of Follower, graph or social graph is completely nonexistent on Tiktok. The core product is an algorithm that shows you what you want. Without you actually knowing what you want. So they basically figure out similar to what Youtube or facebook or instagram will do where they basically figure out. Okay, person's this age in this country here. Their interest based on how you use the APP Tiktok does the same thing, but when you're on instagram me. You usually have to be shown contact of someone that you follow her. An account that you follow war on twitter, you'll see content from people you fall interacted with Instagram has the explore tab which is content you might like, but that's not the core product both the feed and story that are really the two top core use cases of instagram maybe third. Maybe even the fourth. You kind of think about viewing profiles and. So it's really not a core part of the product whereas Tiktok, it's we will literally show you what you think. You will like the most as it used. And as a creator or as an answer, You might go on Instagram and you want to start a cooking account where you post pictures or videos and talk about your cooking. Maybe want to sell a book or you want to launch a TV. Show eventually you want to get a show on the food network about cooking. You have to work extremely hard to grow that account and go from zero followers to whatever follower threshold you WANNA. Get versus TIKTOK. What they do is. They'll show the video to ten people. She performs and then from there they'll run other tasks the open up to a thousand see. How performs they kind of gauge how people interact with video day like it? Share it they. They re, watch it then they go to profile and they follow the person. What time of the day was it? There's thousands of different things they'll to figure out if you actually liked it as more and more people like it, they'll just keep showing it to more people. That essentially a fit, so you kind of think about it on twitter. Let's say you're trying to get started on twitter. You have something really smart to say, and it ends up being right in ten years, and you're the smartest investor ever, but nobody knows you exist vs on Tiktok, you put it out there and basically there's this concept of finding your hundred to fans or your. True Fans, technique will just find them for you, so it really takes away a lot of the rich in of creating follower, baser fan base, and it's just totally different from how the other products work, and I think we'll have to see instagram completely rip the concept and the notion of a follower graph if it ever wants to truly compute Tiktok and I don't think they will. It's kind of a core DNA of how those products work, so that's another thing. Thing that took just don fundamentally different from everyone else and makes it just a completely new product that hasn't existed for is usually answer, really centered on the supply side that the creatives submitting videos it's also demand user side that of US Tiktok before to check it out and then had to delete it because it's so damn addicting that algorithm so good, but I don't think I ever followed anyone or created the user profile, but they just match the IP address. Address to my algorithm basically and so there's literally no friction like you downloaded in two seconds later. You're watching videos. You never have to do anything if you don't want to. I'm really curious. You said two things earlier now we've introduced why tiktok interesting to bring back to ideas. You said I was the tick tock for x just like we used to always here pitched uber for accent. The startup world why that is going to be a bad idea seems like. Like some of these ideas could be good ideas to apply to other places and second, you said on social friends and identity matter a lot and I get that identity here is sort of being served up without friction again because you're building a profile, what the person's interested in through the algorithm, but doesn't seem like you need to have friends identity on so I'm just curious how you think about that. Concept applied here and why Tiktok for axes about idea. I don't know of Tiktok is actually a social media company. It's a media company. It's not really a social product. It's really the first what many people would classify as social product. That doesn't have a social graph so they again. It's just totally different from what traditional social media has looked like an in terms of tiktok. For what you see a lot is we're GONNA. Make Tiktok for sports or talk kids, but Tiktok an already. Do those things based on? How described the product if If you want to watch sports in a TIKTOK Lake setting just go on tiktok. It will know that you WanNa Watch sports, or it will know that you're a kid, so I think you're always taught in typically, if you want to create some sort of Matt work related around that concept of product, you're competing against Tiktok for that sort of supply, if you think of social networks as a marketplace between supply and demand, the existing networks typically have some sort of monopoly on supply. People kind of social is to build a new social network. You need to create a new tool or the creators for the supply side. And what Tiktok did was they made something that was very easy to use on mobile, and this kind of gets in where tiktok is fundamentally different from Youtube. Kind of think of how do you make a youtube video while you set up camera? You sit down. You probably spend a Lotta time planning and thinking about what you're going to record you, might you? Might Story Board it? Some of these youtube videos are twenty minutes long, and also some of these youtube videos. Eighteen of those twenty minutes are not very insightful, and it's. It's like a blogger or influencer, just chilling you in on backstory of their. Their life or something it might not be relevant what you really WanNa. See and then also a lot of these youtube accounts once they get big. You don't have the time to invest in planning editing making connections growing the branding all that kind of stuff selling gift sponsorships. You can't really do that all by yourself. You start to hire a team and you. You go to a point where maybe you're the person in the video in your the person that's up space of the Youtube Account, but you haven't editor you have to cameraman you have to who during the brand deals, you have people who are commenting and interacting with your fans at the bottom of your video. You really disconnected from a product versus the way. Way Talk Works. It extremely easy to create videos and use on Moult, so you sort had entirely different, creative or class, where their DNA is built for mobile lot of younger users who are typically more cricket and more willing to take risks and try new things. They're also putting more effort into these things, and it's usually them. They're the ones that are. Using the product in knowing what is the best table content to create, and they're doing it on their phone and a lot of these videos are twenty seconds, so they can make them in an hour, or in some cases less than that and some people added on the computer, but for the most part really a kind of comes back to that end of it's really the first product from mobile mentioned that there may be a media company, not a social company as they don't really have the traditional social graph. There's this trope going around that. Every company needs to have sort of a media company attached to it today. Sometimes this is. Is Big brands pay absurd amounts to have a social media strategy or media strategy. I do think there's a lot of truth. Everything is going more direct to consumer and therefore products and services and brands and companies need to do the same and think about this for the Media Lens. How would you advise somebody? Go about building a media company in terms of? Let's assume that we've got some sort of content distribution wise. Is it a scattershot? When should they go to Youtube? When should they go to twitter? When should they go to tick tock? I'm just curious. Your thoughts on building a media strategy given the prevailing platforms of the day. I think it has to do with. The audience that you're going after wants to see where they are. And I think even before that. It's the question of what are you good at? I wanted to media company today have no money to hide her anyone by married with a kid. I don't have hundred twenty hours a week to work on creating content I need to figure out what I already know a lot. About what am I good at and just start doing it and just see what sticks and see who follows me who my fans are, and just put it out there and just see what works and go with it, and if my audience is predominantly on Tiktok, maybe it's. It's people who like watching lip synching, dancing, videos, or Tiktok, actually done a very good job of watering and other forms of content, which is a successful or maybe I'm on instagram and very attractive. I boast about how great my life is a lifestyle going out to eat all the time, and that's what I do naturally, or that's what I want purvey. That's where I need to go, so I think it's about understanding what social network reflects the ethos of that a network reflects what you're trying to accomplish as a media company. I think it's important to not rely on anyone. Platform or distribution channel. I think figure out one that works. It misses a common way to grow, actually create a social, your own social network I. Mean you look at Instagram really grew on the back of sharing the twitter. Facebook and after the acquisition. I think I. Look it just way user growth kind of shot up after the exhibition at look about seventy five percent of instagram's new installs or actually coming from facebook, just from the feed, so it can be super helpful to find another distribution channel to grow off, and there's a certain point where you WanNa make the trade off of when do I own my own distribution, and when do I diversified other channels but I think it can be super helpful to piggyback on another channel like look at snapchat grew entirely on Iowa. They weren't even on Android, and their android was not very good up until a year ago. So I, think it can be growing on other people's platforms. Use Them for free discussion. Produce your hostile. All your customers users, so yeah, in terms of starting a media company. I think that there's a lot of different ways to do it, and you just have to be creative and know your audience and know where they are and how to speak to them, and just iterating on what they want and make them your fans, and then do things it helped them. What do they want to learn about? WHAT DO THEY WANNA watch? What are they enjoy doing? And if you build for that, you'll be able to building during the. We talked a lot about building really rich identity profiles to make advertising more programmatic easier, and we've seen facebook and Google absolutely dominate the AD market. Maybe TIKTOK now will be on the rise snap and twitter, maybe smaller players. What are your thoughts on other business models that social or social media or media companies could employ outside of advertising that could create really big businesses that investors might be interested in. One of the ones I've been thinking a lot lately is coming, I think subscription. Is you kind of set a ceiling for what your revenue looks like when you have subscriptions? Versus when you really think about commerce. So if you kind of think about facebook, most of the ads that you're seeing on facebook or snapper Instagram, there siltation cops I think facebook did a hundred and eighty six dollars in revenue per us user over the last twelve months at the lot, hundred and eighty six dollars of our poo if you assume that. The average marketer is spending. Spending already to about a three x return on their investment, you take one eighty six times three. It's five hundred sixty. In Commerce. That's, being, Transacted because of a book which sounds like a lot. But when you compare it to the average, US household income which I can try to figure this out. There's very wide estimates, but if you assume it's anywhere from fifty to seventy thousand. Probably about one to two percent of annual household spending, which some says, you think. Wow, that's pretty low like it's only one or two percent, but it's also wow. FACEBOOK, probably driving about one to two percent of all spending household do in the US. That's pretty incredible, so facebook is potentially leading some of that money on the table. They're facilitating the axe. They're saying okay. We're giving all these other companies that are using our product. We're giving them three more revenue that we capturing ourselves now. Obviously, there's different margins on that revenue, but I think there's an opportunity to get into something where you go more full stack in these different categories. That instead of generating money from advertising, what if you're? A Mobile Game Company, so let's say there's a good example in China with bike dance which owns Tiktok so by chance saw that a lot of gaming education companies were spending tons of money on their platform. So. My guess is they were thinking. You know what? Why don't we just yourself value? Why are we giving your door advertisers? There's a ton of opportunity for us to and I. Think it was two thousand nine hundred. Am I two thousand eighteen. But sixty sixty eight of the top one hundred mobile game spenders in China, so basically the companies that spend the most on advertising sixty eight of the top one hundred spent over half their marketing budgets on Tokyo, which is by answers, other product before Tiktok. So TIKTOK is starting to get into mobile gaming now at similar what ten date! If people are familiar with science? Basically we chat, which is kind of the facebook slash. What's APP of China? And then they started getting really heavy into gaming, and a lot of the revenue comes from gaming, so I think Tiktok is doing the same thing where there's been some pretty good early success where they've had a top APP or a couple weeks just a mobile gaming, APP in China but also Japan. So. TIKTOK is saying okay. Set up showing ads, someone. Let's show a quote unquote. Add for our own product and shift them into this game that we that also have forty percent fifty percent operating margins on, and let's start monetize that way. So I think there's opportunities beyond just advertising I think advertising is probably one of the best places to start, and you think of facebook and they've got their marketplace initiative. Kind of craigslist facebook. There's obvious benefits to having your facebook profile and being able to verify who you're buying from right there, and yeah, there's a lot of opportunities to push people in people sharing the sell things on facebook marketplace. What happens when you can suddenly place ads in the marketplace? What happens when you take that I don't know if this will work, but you start putting. Putting actual real firsthand products direct from brands and manufacturers in the marketplace, instead of just a second hand, people trading things so I, think we'll start to see a lot of the advertising companies in the US really start to get further and deeper into nine advertising based businesses, but I think it's a good place to start at the same time. You have to be careful because we've. We've kind of seen. FACEBOOK'S AD product is probably one of the best of all time you have I think it's eight million businesses advertising on Facebook, and a lot of them are on auto by the other credit card hooked up and they say to facebook if you can guarantee us, three x return on every dollar, we spend show that we don't have to do anything the facebook. FACEBOOK can make someone make one more scroll or a couple more scrolls, and show another or to. It's nearly zero marginal costs on that new revenue, so I think facebook runs into the challenge of okay. We're trying to shift people in the stories. We're trying to show people into the marketplace. We're trying to get people to use messenger this. We chat like system within our messaging product. Feed. Make so much money. It's on autopilot right now. So how do we make that transition? I think it's really hard, so then you have to be careful, and just you have to be very intentive about how you build your company, and how you add different product lines over time and make sure the incentives align. Not only for you as a business, but also for your users I think we've kind of seen sort of facebook. If you look at their user growth in the US, which is where most of their revenue and cash flow comes from, it's been flat for almost a decade. They're growing like one or two percent quarter. Since the IPO in the US, that's all the money comes from so that's a little bit concerning. Obviously, they've reach a lot of people in the US, but a lot of people are turning out. Out because the product they're just like I don't want to use this. As just. A bunch of ads and none of my friends are on here anymore. It's just not a product I enjoy using so. I think there's a lot of trade offs with different business models, and you have to think about the way that people use my product and the way I'm making money. Do they go hand in hand? I actually generate cash flow in revenue from creating a product. People actually enjoy using people are using a lot. He took a bit on the social commerce side about Pinto duo, and what that company does why it's interesting, maybe why a similar opportunity could work in the US and I thought maybe before you answer the question everything you just said reminded me of a tweet that bill really sent out on the topic of how advanced the Chinese infrastructure is kind of in social and on mobile that I thought I would read. It may be part of your reaction. I would just love. Love to hear your reaction on this, so bill says the Chinese ecosystem has two things that the US doesn't a competitive programmable payments system and competitive programmable logistics. Startups in China can build upon the core infrastructure pieces with an API call, cheap easy payments and same day next day delivery, so obviously those are really important payments and delivery of really important for commerce, maybe with those two points in mind, talk about why China has been so competitive, and what can do does doing. This is gonNA. Be a long answer so I'll try to kind of tie everything together I think Hindu do it's the same thing with Tiktok Bite Dance? It's the first commerce company. The tit scale reaches hundreds of millions of people that was built for Mobile. So when you think of Amazon or in China, think of Alibaba and JD hosmer Kinda take to a lot of these products on Amazon. You search you type in what you want. Whereas on kindle do. There's no real concept of search and it's really more of like a game, so the way pin duo duo initially started. It's not quite like this anymore when it initially started. Could. Do kind of group buying to get discounts on products, and they started with fruit so jumping back a little bit. The core proponent of duo duo is there's no search, so of course it's Tiktok you can place ads really when people just open you happen you just you're showing what you think with the things you need to see in. The user sees what they think. They WANNA see, so it's like what. What the facebook newsfeed as you scroll, it's not chronological. It shows you quote unquote thinks will be battery Ho by the way thirty percent of it is at so can do. Oh, did was they partnered with basically fruit farmers in fruit vendors, and basically said Hey, we will help you sell your products to people that you want to sell to. So if you think about as a farmer twenty fifteen when? When Pandu I was founded as a farmer. You have to plant all your your craft harvested. You have to bring the town. You have to sell it. That's kind of not quite that most people sell products in two thousand fifteen, so they said we're going to help connect you with product, so they basically said we'll give the example like apples is one of the first couple of things that they did. Did Apple farmer wants to sell their products. It's tough to sell one apple or like a bag of apples. You can probably make the equivalent of one dollar, but if you could all of a sudden ensure that you can have one hundred apples, being sold thousand or ten thousand kind of starts to be worth it start using this weird mobile app that you probably just got a smartphone recently but this. Is your apples. On the consumer side what they did was, they said, targeting people in sort of third tier, and below cities in China, which is is just federal way describing more rural areas, people who maybe didn't have quite as much income as the big cities and they said Hey. We will help you. Buy Your fruit and buy your groceries, and by the way. If you invite a friend to join and by with you, we'll give you a discount. So what happened was a lot of people started inviting their friends, and instead of one person buying one apple. You'd have ten people buying an apple, each or maybe a couple of apples each. And then you'd also with that same farmer Hindu would connect hundreds of other groups, also doing the same thing so as a farmer. You're like. Wow! I, just ten million apple's ten thousand apples over an APP. This is an easy for consumer. You're like wow. I just got fifty percent of these apples on my groceries from minding my friends and his can do do oh, you're like holy cow just got a ton of users for free because our user all by each other, that sort of the holy grail is consumer products, friends, inviting other friends to use the product and keeping them in Ekofisk. Fast forward to today. Really their core value proper. A lot of these manufacturers and brands is hey. We will help connect you with consumers instead of let's say you're I. Don't know if this is the best example, but it's when I think. Let's say you're vacuum manufacturer you create vacuums for ten dollars each, and then you saw them into an American company for thirty dollars each then the American company goes and sells them for two hundred dollars each overseas. Why don't we? Instead of selling to a rand in US why don't we be that brand and actually one of the more interesting things that they did is first they took inventory in. They took stock of all the things they buy from the manufacturers and then sell to consumers now just literally marketplace. So you kind of think about it. A good example would be the US. You're on facebook you see a watch you buy for forty dollars is probably manufactured in China for like five bucks. A unit brand bought it for. Twenty bucks a unit and I made a markup selling it here in the US, and what into a did, was they? Those manufacturers in China sell directly to Chinese in China of course, the price point was a little bit lower than the Ford year the two hundred dollars the US, did probably got about the same amount that they would have gone if they just sold. To the US manufacturer the US brand of selling it overseas, and then by the way they also say while this is all going on. There are still producing for these overseas manufacturers. They probably have excess capacity so pinned to do outside. Hey, you can produce a million more nets. We'll help you sell. We'll do this whole process just topping out your existing capacity in your factories, so they made it super intriguing for all sorts of pieces of ecosystem to build this product together, which now they, the second largest e-commerce. E-COMMERCE company in China and they were five years ago. It's probably one of the fastest growing companies ever I mean the revenue year five of a business I think they did four point. One billion in revenue might be a little bit, but it's just insane. How fast group so I I think that's an example of how you can. Really the products related commerce, but most of their revenue comes from ads actually so similar to Tiktok where you open the APP, and it shows you what it thinks you wanna see. With Pinot duo you the APP, and it says hey. Checkout toilet paper, some paper towel, cheap lamp, a blanket wrapping paper because it's Christmas. They just short. You random well of discount things you might get at the dollar store, and some of those things are actually advertisements and it's. Taking a cut of I think they said in one of their disclosures point six percent is the average that number could also be off, but it just a really small cut so I think there's a really interesting opportunity to potentially try that in other markets, which maybe that might tie into. Another question that you might have next. Debt. I'm going which is in an APP that I. Think was at the top of the APP store which may be also relevant for this conversation, probably coming from a company that very few of us have maybe go in that direction. That was actually a different question than I thought. You'd ask, but I wanNA answer this one to let's keep our ordering right. What question do you think I was going to ask? And the answer that one and then we'll come back to say. Okay. I thought it was going to tie into snapchat and what they're doing, so maybe the backup, just a little bit and kind of jump into what I think about what snap is doing so. When you really look at the numbers snapchat. Eighty six, eighty, four million daily active users in North America which was about half as much as facebook pretty close to Instagram and analysts peg instagram as being worth. Anywhere from two hundred four hundred billion dollars I mean the numbers pretty insane. How valued they think that businesses men's Nafta has a really similar reach in Saint. Countries that instagram and facebook make money. When you look at sort of the Delta between the pricing of the ads on how many users and how many total impressions they could potentially show. How much time is spent in the APPS? There's a pretty big disconnect I. Think we'll slowly close over time. But snap. That's also product that a lot of people in the ballots countries use. A. Lot of these people are early adopters and people who try new products. Young Teenagers People in their twenties people. Thirties so in snap his sort of always had this sort of ambition to become a little bit like we chat. Which is we talked? What earlier is one of the big social products in China? And that's actually how do grew. So Hindu duo in the early days, it was basically when you do. One of those group is when you get your friends. It would say hey. Shared on chats. He'd go, and you post to your feed, or you'd send a message and reach at someone and get them to join purchase. Over time. We chat slowly added these in APP mini programs. It's like an APP with inside we chat. Call them mini programs and they made it so that other developers could build little pared-down APPs super lightweight. Maybe a couple megabytes, maybe even last that you could actually run your APP Within reach at so a couple of the really big mini programs that really took off were can do which as of two thousand nineteen had hundred million users in there. We Chapman Program. May Thuan, which is, it's kind of like ubereats or Grub of China mixed with a little bit expedia mix with a little bit of for some of these other on demand last novel, every providers. Jd was also big. One had about fifty million users lie different commerce companies. There's a lot of these somebody that grew really quickly on these we chat programs and Pinto duo was the standout two times bigger than the other ones group away faster I think market cap is over one hundred billion as of today when we're having this conversation. Conversation this founded in two thousand, fifteen, pretty incredible, so snapchat recently rolled out a new initiative that it's calling snap minis, which is the same thing there these little bite size third party apps that live inside of snapchat and I think understand the context of snapchat is actually used a similar amount by people in the US, and in Europe s some of these other big companies who think of these dom and social platforms like facebook instagram. You're like There is actually a pretty big opportunity for building third party products inside snapchat. And then you kind of think as well, you say okay snap. Has This third party Avatar thing called the Bit Mogi sort of a digital avatar that you can change, and it actually plugs into other APPS and there's a keyboard that goes into all these other APPS. So you kind think Sanchez has his bit Mogi Keyboard. That is basically a back door into facebook into messenger and instagram into twitter. That sort of like, if you were pushed gifts out that you post online, just the same thing with Mogi, I wonder if there's an opportunity to actually put these mini programs in that keyboard, and you also look at one of the announcements that they just made snap recently announced the keyboard was going to be integrated into every single. Samsung, which the pig smartphone manufacturers to say so the opportunity for snap minis, actually potentially extend beyond snapchat and the actual user base of snapchat with pretty. Pretty big, so my thinking is I wonder if someone will be able to build a really quick company really fast on the back of the snapchat, many programs and I've thought a little bit about what it look like. I think the stage that was sat in China with your original question about being able to really quickly do payments for a small fraction of the two or three percent of its charge today, because that eats your margin, and then also these programmable last mile delivery providers I. Don't know if that's quite yet, but I think there are some companies that are doing things like post made stored ashington hoover. Sort of last mile AP is I. Don't know if it quite ready yet, or if they're cheap enough yet for companies to really sort of scale business on, but it might be there eventually, so that's one of the big feces. I've been kind of playing around with over the last. I mean really for the last year when I heard and when I realized what they were doing with their snap, get product which is. Is Basically an extension of that, which is sort of like their developer toolkit. Where if you're developing your making a product, you can use some of snapshots tools to build your product on, so it Mogi a few launch an APP. You have an instant always on avatar every single user if they use their Emoji, there's no default cities ugly avatars. It looked like no one's using the APP. Every single user has an identity. and they're integrating things like Sanchez advertising program will probably eventually incorporated many programs as well so I think it's really interesting ecosystem to build on, and it probably means great things for snaps business performance. There's probably a lot of opportunities for them to make them on to. So I've been trying to pay attention trying to think about. How could you really do us I don't know it'll look like kindle do, but I think there'll be something on so I kind of thinking about and been on the lookout for the last couple of months. It makes me think that this is a much bigger conversation than consumer, social or social media, really down to brass tacks about the businesses themselves were talking about commerce. This is relevant for Amazon I. Remember Scott Galloway suggesting one time Amazon, just start sending you the equivalent of physical feed the box of what guesses you might want, and you keep what you want and what you don't, and it builds an algorithm over time and I thought. Thought that was so clever at the time until you realize that these social companies are doing that at far faster feedback loops like they're learning way faster than sort of physical feed ever could, and I have to admit like I order everything on Amazon. If I was in S- constant, some social product that knew me intimately and just made my life easier, I probably switch my commerce there. It seems like it's literally a competitor to Amazon. Yeah I. DO think that and I think the interesting thing with retail is that a lot of these retailers are built on figuring out new forms of distribution and logistics, so sears was basically built on the catalog, and the for like the Postal Service back in the day, and it really hit a lot of people who are marginalized people who couldn't afford to or were shunned from going into these big department stores with. With wealthy folks they'd say you're not allowed in you, so you can get a catalog to your house, and you can buy a lot of same things. That was a big mistake by some of the sears, competitors by basically cutting off half the population, just because of the color of their skin, or how much money or income they made, or they weren't able to commute into the city, and then you think of Walmart. SORTA did a similar thing where they hit this sort of different demographic. That wasn't quite being hit properly by. SORTA by sears, but also optimize a lot of things on the infrastructure side. And then even with Amazon Amazon, really is a logistics company, I mean. The core products for consumers isn't really that great. I don't know of anybody who opens up Amazon says. Wow, I love ordering the experience of using Amazon is so much fun. I think the experience people like the quick shipping when they built out that logistics infrastructure, so I wonder if. You can kind of sort of the bill. Gurley tweet the. You're talking about programmable last mile eight minutes. I wonder if you can build something on basically this outsourced Amazon's fulfillment network and that's maybe something. That shop is kind of doing. But Amazon's also doing it as well with some of the stuff that they're doing the third party. Phil by Amazon, so I know it's tricky thing with commerce. There's a lot of related to getting a distribution and reaching consumers, but also related to you ship things to people, and also how do you pay and make make profits doing that? which lets the key generating cash flow? Flow, let's come back now to Zinn, which was probably an APP that almost no one's heard of I hadn't heard about it before reading your post on the topic, I think the top downloaded APP in the US at some point recently describe what that is, and why that's related everything we've been talking about yes. Oh, Zinn was an APP will is was I'll get to that where it was basically, Tiktok was exactly the same thing, not quite the same sort of polished features. The big difference was you've got money for watching videos. You got about a dollar or a dollar fifty cents per hour watching videos which? took. Waste my time doing that, but for some people you watch Tiktok a couple of hours a day you can make. Videos online people do that kind of stuff all the time. And then they did a thing. Where Hey, if you invite a friend, we'll give you twenty dollars so as someone in this launched in the beginning of May middle of May. So if you kinda think about the state of the US, we had something like forty million people that were on unemployment, so people didn't have a job. So if you could suddenly open up an APP and make a hundred a day, inviting people to it and watching videos, which you've probably doing anyways when you don't have a job, were you do have a job actually? It made a really interesting sort of environment for an athlete this to grow when you really think about a lot of these people who are maybe you're working at a hotel. You're working in a restaurant. You're not really making that much money the amount of money you're making from an apple. This always similar, so it's basically this complete entire copy of tiktok. They went to profiles on. On tiktok and actually rich videos, so they went to certain creators, and they just download their entire profile in re uploaded in Zip. They would also go to popular sounds. Music audio is a really big thing that talks done. You can search for a certain sound. You'll see all video that have that same sound. We didn't really touch on this when we talked earlier about talk, but. That was one of the big things that Tiktok did. They basically created audio means. Familiar with memes are typically more used by Gen Z., Eleni elder, a way of expressing something funny, and typically at you take the form of media that was posted, and you do your own take on it and related current events or something culturally so tiktok basically did this with sounds where there's a funny video with a certain sound, you could then use that same sound in reenacted, and it was really a to its DNA initially being a lip synching APP when it was called musically before by cancer acquired them in two thousand seventeen would sit in. Some of these popular sounds and just ripped all the top in heels, and put them in their own APP, so the whole thing was. It wasn't very good. I mean it was executed. They steal really quickly derogating getting hundreds of thousands of dollars today they were the number one APP for a couple of weeks. It wasn't just number one in a certain category like I think they were an entertainment. They were the number one overall APP suddenly they were just removed from the APP store. The reasoning for removing them was that they copy contact, which is really interesting, because both paying users to do things and coughing content from other companies is par for the course in China. I mean it happens all the time. That was one of tectonics big growth. Growth strategies just copied videos and use their ability to feed the best people wanted to see. Teach them and make the product really enjoyable, so they copy of video that did well somewhere else, and then it would do ten times better on Tiktok so that's what ended in the reason. This was interesting so when I i. sort of saw the top of the actor I'm like silly like just a giant pyramid scheme, but when I looked into it I found out that they were actually backed by show, which is light dances big competitor in China. If you WANNA, compare the twitter or snapchat in relation to face. Sort of like a little brother. People maybe didn't quite give them quite as much respect because they had slightly more rural user base, the revenue and cash flow wasn't as high, but they're still valued at like thirty billion dollars and right for in December of two thousand eighteen. They raised three billion dollars from. I think Sequoia tencent. Pretty big. Chinese venture in growth state busters so I mind. I was like wow. You guys have a lot of money to acquire giveaway to people to download and use the APP in one of the big things. That Zanan quite shouted in China was. There a little bit different from dance dance generates most of its revenue through ads. Quite show generates a little over half of their revenue from live streaming. which is, it's basically TV qvc where you watch, and then you can buy products from them directly from the content that you're watching it. Kinda made me wonder in it. Kind of gets more conversation earlier about friends. A lot of these new media companies that don't rely on a friend graphic constantly brings the user back into the experience and re engage them. You really have to do it. Through content of some kind or push notifications gets onto open the APP net costs money. If you on creating for free, so one of the thoughts had was are our of these sort of next generation TV networks where quiring content, and the probably not gonNA. Be Five hundred billion dollar businesses like facebook or instagram. But you could probably make ten twenty fifty billion dollar company like CBS Viacom or like a Disney where you've just got a lot of media in your acquiring Ed, or even like a Netflix so it kind of tweaks the way, maybe think about social and the different opportunities and I think if you really want to build a business has a defensible competitive advantage that has textbook definition is higher than industry average, operating margins for an extended period of time I think you really have to have a component that helps you do that. which is probably friends that are creating content. What a fascinating competitive story! If nothing else right I mean, you really do get the sense that these are were like battles between these huge massive global platforms just yesterday as we're talking here today on the thirtieth of June, the majority are a bunch of the. Chinese APPS were banned in India whether or not that lasts I. Don't know, but it does seem like this is a geopolitical conversation to Amazon cares nations. Dates care I mean this is literally talking about what hogs. The attention of all humans are pretty big market. And you kind of think of what's probably the most powerful person in the world I mean the president of the United States is typically one of the most powerful in the world. What does he do all day? What product does us all day. Thinking of how much strategic. Business power societal power that product has over the rest of the world and we're talking about twitter. You really need to think about these is. They're not just social networks there I mean they are should works, but they compass so much more than that, and there's a lot of different ways to think about them in ways to think about the value, the creatine world and also sort of the business power when you think about a competitive edge. How that all relates with each other, so it's fascinating I'm sure we could probably talk with this remarkable hours if we had the. What have we not mentioned about? Social Technology Media is whole general area that you're really interested in that. We haven't covered yet I. Mean I think one of the interesting things I've been playing around with is kind of relates to Hindu duo in commerce. They basically created a social commerce. What other things can you at a social graph to to create a product? Then Mos a really interesting example added a social component to payments and sort of a peer to peer network, which it worked really well for them. I think cash Abbas I. Guess outperformed out executed in, and they don't really have a social graph, so I don't know if a social graph necessarily works exceeds business models in other industries, but I think there's interesting ways to incorporate social components to sort of AD network effects to products that might not have network. So my closing question before my traditional final question, talk to us a bit about this idea of a fantasy draft portfolio sounds like a fun game to play, but I suspect there's more going on there in terms of what it forces you to think about and learn, so let me share why you do that and what lessons you've taken from the exercise. So for me in order to get into venture capital. There are typically certain. Requirements that Avi see who's going to hire you or L. LP? That's GonNa Invest in your fund is looking for and pretty much had none of that. So. I didn't go to a school. Anyone's heard of I. Never worked at company I also didn't have any money to invest. So what I did was I basically just I shake angel masted I mean I didn't do this. Is Fantasy fantasy football. It was for investing pure public market investor. It's kind of like a paper trading account. Where and that's maybe a better analogy of that your listeners as a paper training compromiser, I basically picked the first one, that I did I picked seven startups that. Had maybe rates couple million dollars. The valuations were ten to twenty million dollar valuations, basically not on anyone's radar. There is no massive sequoia capital coming in and putting in hundred million dollars, and everybody knew about the product. It was mostly stuff that other people were really adding on and I was kinda trying to prove the insights that I had of. This random guy listen at West but I follow this pretty closely and I really think about venture is is investing a lot of people see it as company building and catching momentum waves, and looking at charts, ramping up I think about it a lot, and all that stuff's important to you by also joined busting so I think about every investment like what's the competitive advantage here? How does it go from being a ten million dollar business to going public one day, so that was sort of the land I took I didn't have any data for any of these companies I reached out some founders and There's mixed reaction. It's not everybody really got back to me. Some offered to beat up or send me their doc or I never actually ended up getting any data for anyone I basically just looked at the website scanned, looked online as much like finding articles finding podcasting your views, youtube interviews looking at their social media profiles. Try to get an idea who they were, and just figuring out what I bet on his founder of House VC. and. It's easier to do that when you don't actually have real money and it's just kind of game. It's fake, but that's what I used to build a track record. Nine of the second one is well. I picked up eighteen companies when I broaden my scope a little bit on it was. Kinda supposed to be usually when you do venture, you raise a small fund. Then you raise a bigger fund and you slowly raise larger funds as you go until you hit. Hit the sort of your sweet spot of what your strategy is going to be long term, but typically you can't go, say hey, I've never done this before, but I want to have a two hundred million on. You have to start at three or five, and then go tan and I go to fifty, and then go to maybe a hundred. You slowly build up over time, so I started to kind of do that some companies that I would do very well and. And I kind of use that a fake track record, and just say hey. Six of the seven companies in this portfolio have race all on financing three have raised multiple rounds of financing, which some cases in venture that much, but it means that somebody else thinks that the valuation aside because of how the company's performed an wanted companies got acquired so I kind of use as a track record of going interviews and say maybe I could good at this I think a. A lot of ullmark investors do similar things when they're trying to get their first job, and it's similar to venture where you may be Angel Invest. You have fifty thousand dollars to put a couple of thousand dollars in this in France. Companies just like in the public market a fake account we have a million dollars, and you just do a strategy, or maybe you have your own account, maybe a million dollars, and he just make an for yourself and bill tracker so. That's what I did and I recommend it to a lot of people. It's actually a lot of fun. I learned tonight, basically learn how to be had to force myself to make good investments. which I thought would be able to do. It's harder than you think. It is especially if you come from. More of an investing background you're thinking about what's the opportunity here? You're probably looking at financials and audited data, whereas if you're a startup investor, basically somebody telling you an idea that they have and here's a product or a product. We have that we have four customers. Are we have three employees and we WANNA go out and build a public company so the way you think about it as a little bit differently, but I still think there's a lot of lessons to be learned by from his going on. On, and just doing it, and just trying to go through the motions, and whatever way that you can so I recommend it to everyone trying to venture, just do a fantasy portfolio especially, if you don't have a lot of money, and you don't have the capital, the right off a couple of hundred thousand dollars, just putting into startups and seeing what happens, I think it's definitely the way to go the closing question that I ask of everybody is for the kindest thing that anyone's ever done for you. I knew you were. GonNa ask this I was thinking about this. It's a hard question to answer. I think I had a friend in sub-grade I kind of grew up with a single mom. We have have a lot of money. There's one week we didn't have enough money for groceries and the actually bought with his own money. We were in seventh grade. We bought groceries and I've always thought about that. That's sort of didn't have to do that. He was totally looking out for me. Obviously it was one of the nice things anyone's ever done for me. I just kind of try to have that same. Give it back. Sort of mentality and everything that I do. I love it simple, powerful story, and get a reminder to us all so turner. Thanks again for all your time today, and for everything that you've taught us awesome. Thanks for having me looking forward to the next. If you enjoyed this episode. You can sign up for a new email. Newsletter sent out each week called inside the episode each week. I convinced that weeks episode to my favorite big ideas, quotations and more I've been recommending books to members of this email is for years, and we'll keep doing so in this weekly email. You can sign up at investor field. GUIDE DOT COM forward slash. Book Club. Our.

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