John Collison – Growing the Internet Economy - [Invest Like the Best, EP.178]

My guest today is John Collison, the Co-Founder of the digital payments company Stripe. Stripe’s mission is to increase the GDP of the internet, a lofty and deeply interesting pursuit. John is clearly a voracious learner across business and investing, which you’ll hear instantly. He started Stripe with his brother Patrick when he was just 19 years old, and has grown it to, at last valuation, a $36B business. In our conversation, we discuss conglomerates, the internet economy, the power of writing, and why board members are like Pokémon characters, each with different powers. It’s a lively and wide-ranging conversation with one of the entrepreneurs I’ve most enjoyed speaking with. Please enjoy. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag Show Notes (1:30) – (First question) – Interest in industrial conglomerates (9:10) – Their thinking on acquisitions vs starting new companies (11:42) – How the payment landscape looked when Stripe was started (15:55) – View on the internet economy (20:09) – Exciting possibilities for the future of the internet economy (22:11) – The forces of size vs speed among startups (26:53) – Driving reasons why employees choose Stripe starting with clear communication (28:55) – Tips for better internal communications (30:09) – The importance of rigor in Stripe’s corporate culture (32:15) – Investors and investing styles that are most intriguing to him (36:02) – Teaching vs experiencing business lessons (37:56) – Lessons from going to market with new ideas (50:58) – Allowing teams to explore new ideas at Stripe (44:11) – Best startup companies to study to understand the history of this space (44:52) – Softwar: An Intimate Portrait of Larry Ellison and Oracle (48:18) – Cable Cowboy: John Malone and the Rise of the Modern Cable Business (48:43) – Infrastructures of internet businesses that are missing (52:03) – Does general accounting practices need to change to capture the true value of a company like Stripe (1:01:53) – Shared playbooks in Silicon Valley (1:02:02) – The transition to the no code movement (1:08:22) – Other businesses that pique his interest outside of software (1:10:21) – Future trends that excite him (1:11:10) – First memory when he felt like he was participating in the tech economy (1:12:46 – The role of board members (1:15:48) – Kindest thing anyone has done for him (1:18:49) – Advice for young people Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on Twitter at @patrick_oshag

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

  I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount and more risk. RidgeLine offers a better way forward. One unified platform that automates away the complexity across portfolio accounting, reconciliation, reporting, trading, compliance and more, all at scale. RidgeLine is revolutionizing investment management, helping ambitious firms scale faster, operate smarter and stay ahead of the curve. See what RidgeLine can unlock for your firm. Schedule a demo at ridgeline.ai.

• 0:36Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 0:57Speaker 01

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:22Patrick O'Shaughnessy?

  My guest today is John Collison, the co-founder of the digital payments company Stripe. Stripe's mission is to increase the GDP of the internet, a lofty and deeply interesting pursuit. John is clearly a voracious learner across business and investing, which you'll hear instantly. He started Stripe with his brother Patrick when he was just 19 years old and has grown it to at last valuation a $36 billion business. In our conversation, we discuss conglomerates, the internet economy, the power of writing and why board members are like Pokemon characters, each with different powers. It's a lively and wide-ranging conversation with one of the entrepreneurs I've most enjoyed speaking with. Please enjoy.

• 2:02Patrick O'Shaughnessy?

  So John, I think a fun place to begin this conversation would be probably unexpected to the audience, which is with industrial conglomerates. I'd love you to explain why you've been interested in industrial conglomerates in some of your research. And then I want to talk about some of these principles applied to technology companies. But first, explain why you're so interested in this interesting niche of public companies.

• 2:22Speaker 02

  Oh, gosh, that's an interesting place to start. Well, I think, look, most of the technologists I know are really interested in studying the history of technology because you want to not just be a one-hit wonder, you want to not just have one product that works and then passes by, but you want to be able to surf multiple waves. I think all the kind of people have been talking recently about how much of the S and P 500 is now made up of the Googles, Facebooks, Microsofts, companies like that. I think if you look at all those companies, what's impressive about them is how they've managed to surf multiple waves and have multiple successful independent lines of business. And so Facebook making the move to mobile successfully, integrating acquisitions successfully,

• 3:03Speaker 02

  Microsoft missing the jump to the internet and kind of browsers, but initially, but now having many, I think it's six or seven independent, the dollar revenue businesses. And so most of the technologists I know are really interested in this topic. What I find interesting to look at is how it tends to be different outside of technology and the different dynamics you get in conglomerates and kind of enduring businesses in other industries, because we're kind of used to the particular way in which technology likes to do it. You talk to investors and they'll often be following successful companies like TransDigm in aerospace or Danaher, the industrial conglomerate, LVMH in the luxury business. They own Louboutin

• 3:47Speaker 02

  and somewhere, the champagne brand and things like that. I have found interesting in looking at these. First off, as you probably know from these, there are tons of really spectacularly successful companies that have grown at high rates for years and years and years outside of technology. Domino's Pizza is another one that people like to talk about because it's actually grown more impressively than all the technology companies. And that sounds incredibly obvious to say, but sometimes you have to remind people in Silicon Valley that this is the case. And the way they tend to do that is somewhat different to what happens in technology. And in particular, you've got a lot of these. If you look at single industry conglomerates, the classic conglomerates are maybe the Berkshire

• 4:28Speaker 02

  Hathaway is very famous for just having so many different intellectual hobbies of Warren Buffett under one corporate structure. RJR Nabisco is probably the classic multi-industry conglomerate. It's like what is a cigarette manufacturer and literally a cookie maker of Oreos during another run under one corporation. But if you just look for a second at kind of the single industry conglomerates, like some of the ones I mentioned, like LVMH and Beauty or TransDime or something like that, it's actually pretty interesting. Vale Resorts might be another one, actually. They own many of the ski properties in Vale and Heavenly and places like that. It's really interesting how they work, which is firstly, you have, they're very aggressive acquirers. A lot of their growth has come through selective acquisitions made at good prices.

• 5:12Speaker 02

  What's interesting is that then they often give the managers of the acquired companies still a loss of latitude in how they operate and how the companies work. And so it's not the case that they're really deeply tightly integrating them to the one platform, they're not kind of slurping up all the employees and making them work in a whole new way. They actually kind of buy these companies and then don't integrate them that tightly, but have still driven really interesting performance as a result of that. And it's interesting because in tech, it feels like we only really have one of two modes. One mode is there are certainly companies that have done acquisitions really, really well. I mean, Salesforce is probably one of the, or Cisco, maybe.

• 5:54Speaker 02

  Those are two of the most prominent examples where they've made acquisition after acquisition. Salesforce will acquire a company, they acquire desk.com. And turned it into a service cloud. They'll make one of these acquisitions and they'll very tightly integrate it with the rest of Salesforce. And then maybe on the other end of the spectrum, you can kind of think of venture capital as the much more loose version of this where they're actually not part of the same company at all, but maybe there's kind of common elements in how they're done. But no one really has within technology done what you actually see pretty commonly in the rest of the world, which is one holding company for a whole bunch of independent businesses that are sharing expertise, they're sharing management styles, there may be rotating managers across them. There's one counter example, which we probably both know, Constellation Software, which at this stage owns, do you

• 6:39Speaker 02

  know how many independent businesses they have? It's like 500 businesses.

• 6:41Patrick O'Shaughnessy?

  I was gonna say like four or 500, yeah, yeah.

• 6:43Speaker 02

  Vast number of independent businesses. And so one will sell like software to golf clubs and the other will sell plumbing software. And the managers will trade notes, things like that. But other than that, they're run more or less completely. Why it's not the case that we don't have this in technology. I mean, I'm curious, do you have any theories?

• 7:01Patrick O'Shaughnessy?

  I don't know. When you and I first talked about this, I think we were trying to pick apart the sort of jobs to be done for the selling or controlling owners of the businesses. And you made the great point that perhaps Berkshire is a beautiful off-ramp for those that are of a certain stage of their career or have certain priorities. It's a great home to stick a business and have an exit of sorts. And perhaps that there are far too many very young founders in technology, perhaps valuations have something to do with this. The prevailing public valuations of SaaS companies or whatever else are so high that it just doesn't make sense to run the classic old Henry Singleton issue at a high price, buy at a low price strategy that made that conglomerate so interesting. I'm curious if any of those resonate with you.

• 7:45Speaker 02

  Yeah, I think those are some of the natural phenomena to talk about. I think venture capital feels like it must have something to do with this. Both the fact that, as you say, valuations of technology companies tend to be fairly healthy and best, and the strategy in a way works because all those kind of serial acquirers we mentioned are able to just do loads and loads of acquiring of businesses at essentially reasonable prices. The other thing that maybe is interesting to think about is, is there a platform? For common knowledge and best practices that you need in other industries, but actually is provided by venture capital in tech. A classic thing that Danaher, the industrial conglomerates will do, they were really big into, I mean, especially in the early days of their growth, at rolling out the lean manufacturing, you know, originally from Japan,

• 8:28Speaker 02

  these lean manufacturing techniques with classic American industrial companies. And so this was a way in which they could have a set of best practices, such that when they acquired a business, it would be better, it would perform better as part of Danaher, as opposed to as an independent business where maybe you didn't have these best practices. And as I look at kind of the tech landscape with venture capital, one thing that's striking is you can be an eight-person firm and you actually have really good access to best practices. Our main VC is Sequoia Capital, and there's a huge amount of expertise in that firm that you get to kind of unlock when they invest in you. And that's going to be the case across lots of other of the venture firms in Silicon Valley. Some of them even have in-house recruiting and executive recruiting

• 9:11Speaker 02

  and things like this, like actual in-house functions built out, such that in a way, you're getting a little bit towards that common platform that maybe the conglomerate would have had, but it's a VC firm and it's kind of provided on a service model. And so that's maybe another reason is that you actually don't need a conglomerate to achieve that best practice sharing. And of course, this is, by the way, something we're trying to do at scale with Stripe, which is we think about what are those Silicon Valley best practices? And how do we get them out to the millions of internet businesses over the internet with things like Stripe Press and increment magazine and stuff like that?

• 9:42Patrick O'Shaughnessy?

  Yeah, there's an interesting two-pronged thing here where you're both trying to increase the ease of starting an internet-based business, but also obviously running a large business yourselves where making smart acquisitions of other businesses could be a great strategy. So I guess I would turn the question into just how you think about it. As someone allocating capital inside of Stripe, I'm sure you've made acquisitions and have opportunities to make others. I guess the way I would frame it is, why haven't you made more?

• 10:07Speaker 02

  If you're running a business, being able to get it to the point where you can run it by acquisitions, not being in that kind of business myself, it seems like a very pleasant way to run a business. Because you have this fairly easy way that you can take capital and turn it into incremental growth for the business. I can imagine Stripe will get more acquisitive later on in its development. I think as we look at where Stripe is and what we need to do on the product side, honestly, there's just lots of really low hanging fruit that we kind of have to do ourselves internally. And so as we think about expanding Stripe internationally or making it even easier to get up and running with Stripe, that's one of the core ways that we have always differentiated the product since we got started is,

• 10:50Speaker 02

  you know, we want you to come along and in five minutes, set up a business by signing up for Stripe. If we want to make that three minutes, that's not something we can really acquire a business to do. Whereas those companies get more mature, it tends to be about platform breadth. I think you can then augment that platform breadth with acquisitions. So I think it's probably a bit of a stage of life thing. The other thing that's maybe relevant here is, again, what we've been building. I actually think it's been helpful that up to now, we haven't grown it with acquisitions. This is a little bit getting into the kind of payments industry wonkishness. But the previous generation of companies that people had to use to accept online payments were often assembled through strings of acquisitions.

• 11:32Speaker 02

  Global platform that people would be using was actually kind of seven different platforms mixed together by various acquisitions. What that meant was that for the end customers, it was incredibly painful. If they were going to expand to a region, they would have to change the integration. They would have to do even more engineering work to do that. I think, again, part of what's helped Stripe get to this stage is the fact that we made a decision very early on that we're going to start from the ideal API and work backwards. And so what is the API? I want to be able to accept money from people all around the world. And then we'll do the tough work to standardize that and not expose it to our customers. And so I think in a way, it's been valuable that we haven't provided too much on acquisitions for international expansion. I think if you're going to have an acquisitive business, certainly in technology, you need to have a plan for integrating them well.

• 12:14Patrick O'Shaughnessy?

  I think we have a neat opportunity here to do a quick crash course on payments more generally. I don't want to take for granted that everyone in the audience understands exactly how this works, because everyone pays for stuff all the time. Probably very few have thought about what's going on behind the scenes. So I'd love you to lay out maybe what the landscape looked like when you guys first incorporated Stripe. Getting into some of the details, I like the wonky details around facilitators and processors and banks, card networks. Some of these are the best performing stocks we sent MasterCard of the last decade, really. So I'd love you to lay out what it looked like when you got there, and then I'll ask some questions around the evolution since you guys have been building.

• 12:51Speaker 02

  Oh, I was hoping you were going to provide the crash course in payments. I'm still figuring it out. I mean, seriously, but we can talk about how the industry works. I mean, the first thing that I think you have to step back and realize is just how crazy, inefficient, and immature payments on the internet still are. And that sounds like a funny place to start, especially from someone who runs a payments company. You'd think maybe it would be better out of messaging or branding at this point. But can you imagine when we were starting Stripe? It was actually really hard, say, when you're raising money for the company. One of the biggest obstacles we faced was people thinking, this is just a solved problem. Aren't there already ways to accept money on the internet? It's the year 2009. I'm pretty sure we got this thing figured out.

• 13:32Speaker 02

  And having to repeatedly explain to people, no, this is actually still unsolved. That took some effort. That's the first place to start is if you contrast how mature the internet is essentially as an information exchange network, where we have a majority of people in the world now with some access to the internet, especially with all the recent smartphone growth. And it's highly interoperable. We're all, I mean, with some exceptions, we're all using the same internet. You can WhatsApp your friend in South Africa, or Pakistan, or India, and the whole thing just works. Now, if you look at the systems we have for economic exchange, basically, we have a highly complex heterogeneous and increasingly

• 14:18Speaker 02

  Fractured and fracturing landscape. And so in the United States, people rely mostly on credit cards, except for there's lots of places where bank debits or checks are the primary way of working. In China, as a lot of people like to talk about, there was a lot of Chinese Union Pay growth credit cards early on, but that has since all flipped over to Alipay, WeChat, things like that. In India, it's really different. People were really predicting the growth of the Chinese super app model all across Asia and Southeast Asia especially. And that hasn't happened quite as much as people expected, certainly not with those companies. And so in India, for example, you actually have the government taking a very active role in technology development, which is certainly for people in the United States, is not something they expect to see or at least see work,

• 15:03Speaker 02

  but it's worked quite well. So Aadhaar was the first, their identity scheme, and then UPI, which is their universal payments interface. Really, really cool, interoperable, and kind of built on top of a real time switch for payments. And so that's a different system still. You don't even have to go that far afield. If you look at somewhere like the Netherlands, people online there don't actually buy with a Visa or Mastercard. They predominantly use this thing called Ideal, which is a local Dutch bank transfer mechanism. And so the reason I bring all that up is if you want to start an internet business, say you wanted to start podcast monetization as the hip topic. You want to made a paid invest like the best. And I presume your audience is relatively global. Do you actually know the audience composition?

• 15:46Patrick O'Shaughnessy?

  Yeah, it's very global, most countries.

• 15:48Speaker 02

  Exactly. And so you just want to be able to accept money from people all around the world. But actually, historically have been, certainly when we started Stripe, no good ways for you to do that. And so that is the problem that we set out to address. And it's been really fun, as you can tell. I mean, weirdly, I've ended up passionate about this problem. We get really excited about the long term second order effects that it drives. But we've been expanding Stripe a lot by not just building this global economic interconnectivity, but actually over time handling more and more of the tasks that businesses find themselves faced with. But that's really how we got our start, the fact that it's really hard to accept payments on the internet.

• 16:27Patrick O'Shaughnessy?

  I love the idea that you guys are trying to extend the GDP of the internet specifically, which obviously payments is a critical component of that. But programs like Atlas that help companies form much faster than they could have also obviously contribute to this mission. I'd love for you to describe your view just on the internet economy, generally speaking, in terms of its size, its maturity, its "market share." How early do you think we are in this transition? I loved Toby Lukey's line that COVID has kind of pulled us 10 years into the future. I'm curious if you agree with that and how much room there is to run for internet businesses.

• 17:00Speaker 02

  Yeah, again, just like people kind of had a hard time believing that we weren't done with the payment systems that we had at the time. Similarly, I think people don't really intuit this. I mean, if you look at the raw numbers, the internet economy is a very small fraction of the overall economy, 5%, 6%, something like that. The vast majority of economic activity is not internet-enabled. I think it's fairly clear to all of us that that is going to flip. We're going to end up with actually a majority that's internet-enabled. But that means we're really at a shockingly early point in that sigmoid growth curve. The thing that gets me excited and one of the things that we spend a lot of time thinking about at Stripe and trying to drive is what the second-order effects are of that shift.

• 17:45Speaker 02

  And I think people spend lots of time thinking about first-order effects of technology changes. And so if you were an analyst looking at the growth of computers in the 50s and 60s, what are the effects going to be of computers getting faster? Presumably, you'd say, "Well, banks are going to be able to run their calculations faster and airlines are going to be able to handle even more routes in the route calculation computers." You'd look at what computers were already used for and just kind of project that forward more and faster. You would never forecast video games. I mean, to someone in the 50s, it would seem absurd, the notion that you could have so much excess computing power and it's so cheap that we're just going to use this for this wildly wasteful rendering of triangles.

• 18:27Speaker 02

  I don't know if you saw the Unreal 5 demo. Oh, yes. But imagine showing that to someone in the 1950s. Their brain might have exposed, or similarly with smartphones. I think people thought this could be, okay, salespeople are going to be able to do more email on the road. I mean, not predicting Uber. And similarly with us, we think a lot about what are the exciting second order effects of more commerce moving online? I think some of those we're already seeing. One is more globalization. We see this all the time with Stripe, but with Stripe Atlas, as you mentioned, which makes it even easier to start a company. We're trying to lower the barriers to creating a company. And in particular, we're doing something where we're making it really easy for anyone to start a Delaware company in the US. Even no matter what they themselves happen to be.

• 19:11Speaker 02

  But that means you get way more people in countries that are not the United States or Western Europe or somewhere like that, able to participate really meaningfully in the internet economy. And so we've seen all sorts of interesting businesses built on Stripe from, I mean, literally India to Venezuela to the Gaza Strip. I mean, you name it, we've probably seen people building businesses on Stripe there. I grew up in somewhere that can charitably describe the middle of nowhere in Ireland. And I feel like the internet was a really big part of getting to where I am today. And so, again, we get really excited about commerce moving online as a global equalizer and delivering more opportunity. That's certainly one. The second is just more innovation as you shake things up a little, change the distribution channels.

• 19:56Speaker 02

  I mean, over the top is a term originates in media, but I think you can apply it to lots of things. The idea of going over the top of the existing distribution channels, the existing gatekeepers, the existing strictures. We see a ton of over the top e-commerce where people starting stores, they have a product they're passionate about, and now they can sell to people all over the world. As a result, you're seeing more niches possible. People starting products that they would never have had a big enough audience for that product in Limerick, Ireland. But if they can address a global audience, then there's actually a pretty big total audience for that product. And so we get really excited about the increased specialization, the benefit that it delivers to upstarts for their speeds is actually an advantage. Those feel like trends worth betting on.

• 20:42Patrick O'Shaughnessy?

  As you think about the sort of fringe of the second order effects, so if maybe we were a few glasses of wine deep or something and sort of almost speculating about what might happen as a result of this transition, what are some ideas that you have there? What are some exciting possibilities?

• 20:56Speaker 02

  One that people love to argue about is, I haven't fully made my mind up on how I think about it, but I think it is very interesting, is what happens to the dominance of Silicon Valley in that we've certainly made a lot of, over time, Patrick and I moved to Silicon Valley to start Stripe. I think that was really beneficial for the company and where it was then. Over time, the company has been growing much more outside of Silicon Valley than within Silicon Valley. And so, most people at Stripe are actually not based in the San Francisco Bay area. Last year, we actually tripled the number of remote engineers in the company, but now a very significant fraction of the engineering core. But especially with COVID and you know, companies making a temporary move to the cloud essentially,

• 21:38Speaker 02

  I think there's really interesting debates as to how much of that is permanent. And certainly as we look at what's happening with our customers, with how we work, it doesn't feel like it's going to go back to the same equilibrium as it had before. The second is just one trend we pay a lot of attention to is, in which industries do the incumbents get good at digital faster than the digital native companies can grow? And in which companies do the digital native companies just outpace all the incumbents and not give them a chance? And so obviously, Amazon, we can call that the digital native one. Netflix versus Disney, that's actually maybe a bit more of an even battle. We see a ton of our Warby Parker, obviously one of the very famous original successful digital

• 22:22Speaker 02

  native e-commerce success stories where they took an advantage they have of operating online, which is the lower cost structure they're able to deliver due to the direct to consumer model, in such a way that the incumbents actually can't really follow them. That's true Christensen disruption. But we spend a lot of time thinking about which are the industries that go which ways, because it's not always obvious to tell at times.

• 22:43Patrick O'Shaughnessy?

  One of the things that I'm so interested in is legacy, traditional kinds of competitive business advantage like size. So you mentioned incumbents, they typically have size, they often have scale economies, versus what I would call an advantage that doesn't get talked about in, say like Porter's forces or something, which is speed. I'm curious how you think the world is changing and how you compare size versus speed as a company that's, I think, been very fast but is also now getting very big.

• 23:12Speaker 02

  When we started, a lot of people told us that payments is a scale business. You'll never make it, son, and only the very large companies can survive. We were like, no, no, no, you don't realize things are different, whatever. Now that we've gotten a chance to actually become familiar in our operating, we're like, wow, this really is a scale business in that as you look at what's required in operating, payments is a business where you make literally pennies on a per transaction basis, and you have to have an enormous number of them to actually be able to operate with any modicum of profitability. And you would not believe, I mean, it's fairly obvious that it's a fixed cost business, and then you need to get enough business flowing through you to make the economics work.

• 23:54Speaker 02

  I think what's interesting is as things have moved online, the fixed costs have gone way up compared to what was needed to run a domestic-only payments business. If we think about, just again, going back to your, the Invest Like the Best premium model, where you got access to exclusive content, the smart people that Patrick interviews are only available on the paid product. And so as we think about that business, and again, what just Stripe has to do to unlock the payment system for that, we have engineers who are based in Singapore. They have built custom integrations with the local Malaysian bank transfer system, and they actually are now friends with the people, the engineers at the local Malaysian bank transfer system, because it's still a work in flight itself.

• 24:38Speaker 02

  And so they're kind of working with them on some of the functionality that's needed. And so that way, if you have someone, a listener who's from Malaysia, they can pay the way that they're used to doing so, not just with a credit card, but with, you know, a bank account in Malaysia. Stripe has engineers in Ireland who are similarly, the French local card switch is actually different to Visa, Mastercard, and you need to be able to support that to be able to properly serve French customers. And so we've just been shocked to the degree to which, if you want to be able to reach every global customer, there really are very large economies of scale with that. All that said, I think where it gets interesting is when you have technology shifts that happen, where again, Microsoft had very nice lock-in and network effects with its

• 25:20Speaker 02

  operating systems business that helped us while that was the dominant paradigm. I think when the paradigm changes, that's when speed is of the essence and speed is a really defensible trait in companies. And so now, okay, it's all about browsers or it's all about mobile. The question is, how good are you these days at really quickly building an operating system? Because it turns out in mobile, that's what has to be the case. And by the way, I think the common narrative is just that it's a fairly simple regression with size, where small startups are fast and large companies are slow. I don't think that's necessarily the case at all, where I think Facebook's a good example of a company that's

• 26:01Speaker 02

  really remarkable at executing quickly from a technology point of view. And they've been fairly determined in a new trend will come along, say, live video. And Facebook will decide, this is something that we want to own as part of our platform, and execute very quickly from a technology point of view, to be able to build highly scalable products for that. Google, similarly, I think they do a good job of bringing to bear all the in-house technology they've built, that is oftentimes quite a bit better than maybe the open source alternatives that are available, and using that to drive product development. And so what we think about with Stripe as we grow is, I mean, there's some elements in which we're operating in a business that benefits from scale, but you cannot have

• 26:46Speaker 02

  that be an excuse to let your guard down. You constantly have to be testing yourself, checking yourself, like the military runs exercises. You need to be confident that you can really quickly roll out products for two reasons. One is, there's a business need to actually be able to do it. And oftentimes, in certain parts of our business, we are competing with startups. The second is that I actually think people find it much, employees find it much more enjoyable to work as a company that's moving quickly, rather than working for IBM. And so, we really think about speed as a quality of life improvement of working at Stripe.

• 27:25Patrick O'Shaughnessy?

  I'd love to talk about that concept that you sort of ended with there, which is the idea that Stripe is holding out a certain product to potential employees as well, not just to customers that are going to use your tooling, but you need great people to come work there. And to hear what you think are the driving reasons why people choose Stripe and how you've refined that over the years. I'll throw one example out there, which is this commitment that you guys clearly have to extremely clear communication, both internally and externally, often in documentation and writing form. Is that something that you do deliberately to attract more talented people? And beyond writing, what else is important?

• 28:02Speaker 02

  The great philosopher Patrick Levin said Stripe is a celebration of the written word, which happens to be incorporated in the state of Delaware. I'm not sure I'd go quite as far as Patrick, but it is a pretty important part of the culture. And we're always shocked that the returns to writing well are really high. And it feels like the world hasn't fully internalized that. Certainly, when you have a 3,000-person global company, as Stripe is, you're going to need to do lots of asynchronous communication. And also, obviously, not everything is going to the entire company, but generally, documents have many more readers than they have writers. And so it behooves you to put time into clear communication.

• 28:45Speaker 02

  And so we have always been shocked to the degree of the underemphasis that people place on kind of crisp written communication. And we try to do that both internally in artifacts and externally, where we often talk about this on, say, the marketing side or something like that, that one of our principles when it comes to marketing at Stripe is that we speak up to the reader, not trying to dumb things down for someone who isn't familiar or something like this. You are speaking to an intelligent person who is busy, but knows what they're talking about, knows what they're doing. And it's your job to kind of help educate them on this. We've certainly made that a big part of the culture early on. And I think, I mean, like any culture, it's self-perpetuating. I think people for whom that's important tend to be drawn to it.

• 29:25Patrick O'Shaughnessy?

  Any tactical tips on what you think makes for good writing of this style? I'm especially interested in the internal communication component of this, which, as companies get more and more distributed, which now seems even more likely to be the case for a lot of businesses, this is just going to get more and more important. So anything that you've learned or improved since you originally made a commitment to this that you think others might be able to adopt?

• 29:48Speaker 02

  The classic one... Is still, I mean, I do a lot of editing of written materials at Stripe, and I still find myself leaning on the, it must be a cliche at this stage, but the, how would you explain this to your friend in a bar? Presumably, you wouldn't in this day and age, actually, you're not allowed to go to bars. But how would you explain it to your friend over Zoom, say? And people somehow adopt a voice that is full of complex filler corporate jargon when writing in a corporate environment. And then if you ask, what does Stripe Radar actually do? Oh, it prevents fraud for businesses. Why don't you just say that? I found that as a really useful device. Another device I tend to use is get people to read something and then just tell me everything they can remember for us, and then basically delete everything they can't remember.

• 30:32Speaker 02

  I mean, not literally, but I think people, most things tend to be too long and not edited tightly enough. I mean, there's plenty more, but I find those are some of the tactics I keep coming back to.

• 30:42Patrick O'Shaughnessy?

  What other key cultural elements of Stripe do you actively nurture, like you do the emphasis on writing?

• 30:49Speaker 02

  What we talk a lot about is rigor. And this shows up, I think, in different places, in different formats. But a lot of what we're doing, there's no playbook for. It's interesting, I mean, as you look at any business, what are the parts of their business where they can just take the best practice from everywhere else versus what are the parts of the business where you genuinely have to invent and genuinely be novel? And in our case, certainly the API for Stripe, a huge amount of the internal payments engine, that's new and requires invention. And so as you go work on that, there's probably a thicket of existing ways that it happens,

• 31:31Speaker 02

  beliefs people have about it that may or may not be true and may or may not serve you. And so what we've tried to get is having people

• 31:41Speaker 02

  Five whys, the problems that they're working on, and really get down to the root cause. And that's proved from a product development point of view, that's proved really useful for getting the right products out there. And so, I mean, to give you a trivial example, when we started Stripe, we were told many times that it was not possible to offer instant setup for a product like this. And so, again, imagine Stripe, part of the value is this, you can come along in five minutes, sign up for a Stripe account and get up and running. Many people within the banking industry and payments industry told us, well, for compliance checks and underwriting and AML and, you know, various scary sounding acronyms, it was just simply not possible.

• 32:22Speaker 02

  And I think the rigor piece comes from continuously chipping away at, why is that the case? What's the underlying reason? Where is this written down? But kind of constantly drill betting. And that's something that we broadly try to teach from a product development perspective at Stripe. Because that sort of rigorous product development methodology, writ large, is how you get original thought in a product development organization.

• 32:47Patrick O'Shaughnessy?

  Seems to me like you've studied investing as much as anybody in a position like yours. And I'm curious which investors or investing styles have taught you the most lessons?

• 32:58Speaker 02

  I think it's certainly useful to study investing because what is it but the act of allocating capital to the most productive uses? And that is what the stock market does. I think that's what the American stock market does a remarkably good job of doing is this incredibly efficient engine for allocating capital to the most productive uses. When you're running a small company, that's not really what you're doing. And I remember the first time I read the book Outsiders, you've presumably read of these case studies of eight different CEOs that did remarkable jobs of capital allocators. Remember the very first time I wrote that book? It didn't really resonate. And the reason was because Stripe is a small company and we're only just, we're doing one thing. And so, I don't get this book. We're just working on our business.

• 33:43Speaker 02

  As the business grows, what happens is you have multiple different investment opportunities. And then it becomes very like investing. Where again, The name of the game is allocating scarce resources. In the public markets, that's capital. Internally, a company is potentially a little different. Maybe it's scarce engineering resources or scarce management bandwidth, something like this, towards the most productive use. And I think when companies that are really successful are the ones that internalize this lesson and operationalize it. And so, Amazon, if you, I mean, they're well cited here for a reason. But I think they are probably the tech company that are closest to being pure capital allocators in how they work,

• 34:23Speaker 02

  where they have a very strict and intellectually rigorous framework for funding new bets and allowing people to try out new things. And then the initiatives that are working, they really pour gas on. Alexa has thousands or maybe tens of thousands of people working on it these days. These is one of the things that works. The initiatives that don't work just get resources withdrawn from them or eventually get shut down or something like that. And so I think as a company grows, the outcome for the company really depends on how good a job they do at pushing resources towards the most productive use of them. And by the way, I've often found that investors, when giving advice to operating companies,

• 35:06Speaker 02

  have a really good knack for saying intelligent-ish sounding things that are completely non-actionable. An example of this is an investor at a board meeting who's like, "Well, you really want a deep moat around your business." And you're like, "We're just trying to run the business here. How do I do that?" And so similarly, I think placing resources towards the area of highest future return, I mean, that is the framework for what all businesses are trying to do. It's actually not that actionable when you think about it, both for two reasons. One, you tend to have competing time horizons. Should I be looking for a return over one year or over 10 years from now? And there's no great answer to that. And it's hard to know without the benefit of hindsight what the best return is going to be because you're dealing with so much uncertainty. But I find that a useful framework for thinking about that with Stripe

• 35:51Speaker 02

  because we are really fortunate to have a huge number of potential areas in which we can expand. One area in which we're expanding is internationally. And so we just launched, I mean, just last week. We launched Stripe in Romania and Bulgaria and a handful of other new countries. And we continue to invest resources in making Stripe available to businesses in more countries. But then with all these interesting software products that we're developing that solve additional problems for businesses. We have our Stripe Radar for fraud prevention, or we recently started lending to businesses on Stripe. And so that's another potential use of resources. And so again, you are making these essentially capital allocation decisions, which is, should the marginal team work on fraud prevention or lending or international expansion? And Stripe gives you a framework for thinking about that.

• 36:35Patrick O'Shaughnessy?

  How much of that do you think can be studied and then applied versus you have to learn it through experience?

• 36:41Speaker 02

  Actually, another way in which Stripe tends to operate is we think a lot of this stuff can be studied. And that's not to say that, I mean, the experience isn't useful, it absolutely is. But as we develop our frameworks for thinking about these things, we try to at least come at them from an informed perspective. And so as we've looked at something, say like how you do company planning, how you plan what the company will do in 20 or something like that. This is the bane of our existence. I think it's the bane of every larger company's existence, where it's just a bear of a process and we continue to tweak it and try to make it less of a bear. But one of the things we did is we were putting this process in place is we went out and we studied, how do Apple do it? How do Google do it? How do Amazon do it? How do lots of other companies that have been this before do it? And what can we learn from those?

• 37:25Speaker 02

  Because I think an interesting thing that's happening in the technology industry is since there's so many employees who've been at different companies or things like that, there's almost a shared playbook that's being built on how we work. Companies wouldn't like to hear it described that way. So like, wait a second, that's our IP. But that's basically what's happening is there's a collaborative playbook that's being built in Silicon Valley, which is kind of the set of best practices for how we do things. Google imported lots of, Google is famous for OKRs. Google didn't invent OKRs. They took them from Intel. Facebook really built a lot of its advertising engine based on the prior R's that Google had established. And so I think if you are operating a technology business,

• 38:06Speaker 02

  you would be mad not to study all the companies that have gone before you. And that's not to say you just get fork their processes and run like they do. But you study them, you see what you like, you see what they don't. You see the set of trade offs they made for their business, but probably mightn't be the right set of trade offs for your business and you go from there. So we certainly try to come from a place of being informed.

• 38:28Patrick O'Shaughnessy?

  Mentioned that you recently launched in a bunch of new markets in Europe, Bulgaria, Romania, et cetera. I'm curious what you've learned about going to market with new things. So we've talked about speed and the sort of range of things now that Stripe offers in this mission to help internet businesses grow and begin life. What have you learned about effective ways of having a successful launch of something new?

• 38:50Speaker 02

  Not just a new country, I knew anything.

• 38:52Patrick O'Shaughnessy?

  I knew anything.

• 38:53Speaker 02

  One funny thing that happens is new things at Stripe are almost always started by really tiny teams in that any announcement that you've seen from Stripe probably was a team of less than 10 people when it launched and certainly was a team of less than 10 people and often less than five people in the kind of core part of its gestation and its development. And I think that is really important. I think it's often easier to get fast work done with a small team versus a large team. And also, I think the classic big company mistake is to throw 300 people at a problem and have them executing for three years before getting any market feedback. The case of the original version of Stripe, Patrick and I built the first version of Stripe

• 39:37Speaker 02

  and we had the first customer using it within three months of writing the first line of code. That was really helpful because then we had actual validation, customer feedback, know what's useful, know what's not, you're not working on the wrong things. Some people call this the lean methodology. Lean is a little bit different in a bunch of ways. I do agree with the basic spirit of it, which is when launching new things, you really need to start them small and make them earn their way, make them respond to customer feedback and see if they actually work. And again, this ties into the resource allocation, capital allocation framework that we were talking about a little bit earlier. So that's definitely anything you see that has been launched from Stripe and probably a pretty core team. They might have gotten help from lots of different parts of Stripe, but it probably had a pretty core team that was working on it.

• 40:22Speaker 02

  That's one thing. The second thing, this is probably Fairly obvious, but is worth calling out is that most markets are not like the United States. And honestly, I think one thing that's been pretty helpful for us is, I'm obviously, as you can hear, not American, and Patrick is not. Stripe has lots of people who are not from the United States, working in the United States, and now we have lots of global offices around the world. And so there really is a very global diverse perspective within the building. And as you think about engineering products, Stripe as a global economic infrastructure provider, it's really important to have those perspectives because the product that succeeds in the United States is actually going to be very different

• 41:07Speaker 02

  from the product that succeeds, I mean, even in the UK, never mind Japan, never mind India. You know, commerce is very culturally nuanced, and a business in Indonesia is not going to buy from an American company who thinks that they can swan in without taking into account the local considerations. And so that's been really important in our international expansion actually working.

• 41:30Patrick O'Shaughnessy?

  I want to go upstream even a little bit from that with this idea of a 10-person or less team that's, let's say, trying something, a source of experimentation. How do you even decide what to allow a team of that size to try to explore?

• 41:44Speaker 02

  There's two ways that product development happens at Stripe, tops down and bottoms up. And when you say, how do we decide what to let people at Stripe explore? There's a ton of exploration that's going on, that no mandate has come, there isn't any kind of sign-off process that's been established for us. And so just recently, the team that works on credit cards with Stripe, I mean, remember when I said that this really is a scale business, and you can just go arbitrarily deep in improving the product in all sorts of incredibly detailed ways that would never be worthwhile for any individual business. And so an example of this that was very bottoms up was the team that manages our integrations

• 42:27Speaker 02

  with Visa. We're directly integrated with all the card networks, so we have our hardware sitting in their data centers. And we notice these occasional blips. In service coverage where just really for a moment it would be interrupted. And what we realized was that it was a failover of hardware or a switchover of hardware that was happening on their end. That as a result, a few transactions would get dropped. No one would notice this. No customers really even noticed this because it was such a temporary blip, but it was bothering them. And so they went and they found a way to be able to predict when one of those failovers was going to happen. And anticipate it and switch over to the new hardware before it happened, such that customers wouldn't see any interruption.

• 43:06Speaker 02

  You get a tiny increase in the number of payments that will go through successfully for the business using Stripe. No business could ever kind of afford to do this optimization themselves. But in aggregate, when you add up all these optimizations, they're really meaningful. That's an example of the kind of thing that's really neat and happens in a bottom up way. I think the top down side of it comes from what is the strategy of the company? And I think the, well, it's probably painful for a lot of technology founders is their eyes are bigger than their bellies. And there's a huge number of enticing investment areas and more than they have resources to actually be able to go after.

• 43:47Speaker 02

  And so there we have to be fairly disciplined on, again, if you think about these two layers of how the Stripe business works. One is this really powerful global payments and treasury network that makes it easy to move money anywhere around the world. We'll be fairly opinionated in a top down way on part of the most important initiatives for, okay, we have to make it easy for businesses in around Europe and Southeast Asia. Those are two of our priority markets. We're going to make it easy for those businesses to accept money. We'll do that in a fairly tops down way and then similarly for the software business. And so you end up marrying together those tops down and bottoms up initiatives where you provide high level guidance on, this is how much effort, roughly speaking, will be spending on international expansion versus

• 44:32Speaker 02

  software to make the businesses' life easier and kind of take some of the administration off their place. But then what actually gets worked on within those constraints will often be determined by the teams.

• 44:43Patrick O'Shaughnessy?

  I know you're a huge student of startup history, just like we started with industrial conglomerates. So you've also studied some of the giants of technology companies. If someone wanted to understand kind of how we got to where we are today in 2020, what technology companies would you encourage them to study and why?

• 45:01Speaker 02

  It depends a little bit on what aspect of technology you're interested in because Stripe sells to businesses, so I probably index more on boring B2B, behind the scenes content than maybe someone who's starting a consumer company. The history of Salesforce is quite interesting to look at. Somebody, the history of Oracle is interesting to look at. There's a good book on Oracle called Software by, I can't remember the author, but the name of the book is Software, Software with a E chopped off. It actually has this really interesting format that I've never seen in the book, which is, the guy got a lot of access to Larry Ellison while writing it, but the condition for getting that access was that Larry Ellison got a right of reply within the book.

• 45:46Speaker 02

  And so, kind of like newspapers have a left to the editor or something. And so you'll literally see him describing some situation that happened and then a footnote at the bottom, and the footnote is Larry Ellison saying, "This guy got it completely wrong." He was an idiot, I was going to fire him, or something like that. It's Larry Ellison, it's usually something like, "This guy was an idiot." I've never seen that format, it's super interesting. But anyway, I'd probably index a little bit more on that. I would say, there's obviously tons of content on Google, Facebook, the super prominent mainstream companies. I think the interesting things to think about are, one, there's a lot of content out there that's essentially propaganda by these companies, the blessed accounts. And so, it's not like there aren't interesting facts there, but they're probably not as

• 46:30Speaker 02

  interesting as the things the company really wish you didn't read, because they go a little bit off script, the official accounts, and those can be a little bit harder to find. The other one is, there's a number of technology transitions that are maybe a bit understudied compared to all the prominent major internet businesses these days. And perhaps, two, to highlight the telco Bubble of the late 90s, early 2000s, people don't really remember this, but by market cap, the 2000 bubble was really a telco bubble and not an internet bubble in that the run up of the WorldCom stocks and people like that was much larger in terms of total size than all the internet companies and things like that. And so there's some good reading to be

• 47:12Speaker 02

  done on what happened with that. And it really drove a lot of then the, you basically had all this investment and optimism around the growth of the internet. And I think it was either it was WorldCom that kept going around with this talking point of the internet is doubling every four months, felt like it was going to the moon and bandwidth and things like this. That ended up with this incredible oversupply of internet capacity, fiber especially, that then made things really cheap and everything washed out in 2001, 2002. And as a result, it was a platform on which everything else could build during that period following. That's one that's probably interesting to study. The second is actually, I was pretty interested in the cable companies that emerged in the late 80s, early 90s. This is like a

• 47:55Speaker 02

  particularly American phenomenon. I don't think there was really quite as much of a scramble in other companies, but cable, this new technology laying, it was a new technology platform, new technology paradigm laying coax cable to all these towns across America. And you had way more, I mean, television bandwidth, number of channels possible than previously was the case. When you read it, it actually rhymes a lot with some of the technology shifts that we see. And so firstly, you had actually in our discussion of serial acquirers, we left out John Malone, who's presumably one of the most successful serial acquirers of all time with Liberty Media, where they basically continued to roll up small cable companies and build a very large company out of acquiring kind of small, little local cable companies.

• 48:38Speaker 02

  But the second thing that was of course interesting is it was one of the original kind of new technology company from out of town versus local municipalities. And it was funny, as I was reading it, when I say it, I think it was the book Cable Cowboys.

• 48:51Patrick O'Shaughnessy?

  Cable Cowboy, yeah.

• 48:52Speaker 02

  Yeah, yeah. But as I was reading this, they describe how one of the cable companies, I can't remember who, getting in a spat with a local Colorado town and changing the programming to just be, call your mayor and tell him you want cable in your town, exactly like the tactics Uber might have used during that period when they were getting into fights with local cities. And so again, there's a lot of history repeating itself. Those are maybe two of the histories that spring to mind.

• 49:16Patrick O'Shaughnessy?

  Back to this notion of internet businesses and of course you guys representing a big chunk of the infrastructure that will enable this wave of businesses. What other infrastructure chunks, inside or outside potentially of Stripe's eventual scope, do you think are still missing to really make this this kind of vision that you have of internet business growth possible? What's the missing pieces?

• 49:39Speaker 02

  Well, you really have to contrast where we are with where we were 10 or 15 years ago in that it's it really is amazing that so much of that, I mean Stripe is obviously part of this, but Stripe is absolutely not all of this. The infrastructure that you have available on tap at a very affordable price so that you can reach a global audience, whether it's, I mean, you mentioned Toby from Shopify. Shopify, obviously a very big part of that. The tools for software development in GitHub and all the deployment hosting platforms, the cloud platforms, things like this, is a radically different environment than we were in 10 or 15 years ago. And I'm young, I'm 29, but I'm already at the stage where I'm talking about, well, when

• 50:21Speaker 02

  I started in the technology industry, and I feel like I'm that guy. You young quipper snappers don't realize what it was like in my day, but it was much tougher, there was much less on demand, I'm not that old. It still feels to me like the way we build and deploy software now is not what it's going to be 10 years from now. That's going to change. And in particular, we've actually regressed a little bit where it has gotten harder to build a consumer startup than it was 10 years ago, I think. Because 10 years ago, it was, you were just on the web and you had, I mean, those WordPress 10 years ago, you could use some pretty simple frameworks to get a product out there broadly to people on the web.

• 51:06Speaker 02

  Now, if you are starting a consumer company, you probably need an iPhone app, you need an Android app, maybe there's some other platforms or mobile platform, you need to take into account, still the art for web has evolved and maybe kind of the expectations for real time or kind of the capabilities of your application, those standards. are higher. And so as a result, I think just launching a consumer service, the bar for that is a little bit higher than it was. And I think you've seen this reflected in, it's a little bit harder to do like a really lean consumer startup than it was before. Maybe if you're doing anything involving video, again, I think that infrastructure is not where it's going to be 10 years from now. We have a lot of challenges there. And the other thing maybe is that obviously as much more of the internet becomes regulated,

• 51:50Speaker 02

  I think we haven't fully caught up with that in terms of making it easy for the companies that are regulated. And so again, there's not all the infrastructure we need there. One area of business that we've just started dabbling in is identity verification, because there are so many different parts of the internet where you need to verify someone's identity. If you're going to pay out money to someone, that's one that's fairly close to Stripe's business. Then you need to verify people's ID, apply with all the AML rules. But even you think about it, if you're selling any kind of an age restricted product, you need to check their ID as to the company of their age. That's something that historically has been really, really hard. I mean, it kind of reminds us of payments before we started Stripe. And so we've started playing in that space again, to make it easy for if you're doing anything that involves verifying someone's identity, it should be easy to provide that.

• 52:36Patrick O'Shaughnessy?

  You and I are both really interested in public markets and public businesses. And one of the topics that I think is really of the moment is how different a business like Stripe is relative to the standard, let's say, public S and P 500 company for which the standard structure of an income statement and balance sheet kind of makes it easy to compare across those businesses. I'd love you to describe whether or not you think general accounting needs to change to accommodate the type of business that seems to be dominating today and likely will continue to dominate tomorrow. And then maybe to pick a starting point, just the idea of the importance of your engineering talent as an asset and skill of the business and how that really isn't captured inside of a,

• 53:20Patrick O'Shaughnessy?

  if I just looked at an income statement and a balance sheet, I probably couldn't really tell that. I'm curious your thoughts here on accounting and its need to change.

• 53:28Speaker 02

  Yeah, well, if you start with, it'll sound like a funny question. If we imagine we're the product manager for accounting, we're just hired as, I can't remember the name of the agency that manages GAAP, the accounting principles. Let's imagine that we're hired as a product manager there. And so like any good product manager, we start with, okay, well, what are the jobs to be done? Who's our target customer, our target persona? It's interesting to think about, we're actually trying to do a number of different jobs with accounting. We're trying to figure out how much profit we earned, so we know how much tax we have to pay. That's one job we have. We're also trying to help the business run itself. We're trying to provide a view of the business managers so that we can determine whether we need to invest in new machinery to be more efficient or something like that.

• 54:13Speaker 02

  We're also trying to solve for the needs of creditors, where people want to be able to evaluate the business and understand, will I have enough money to pay off its debt? And then we're also separately, importantly, trying to solve for the needs of equity holders, where they're trying to understand, what are the long-term cash flows for this business going to be? And the reason I bring that up is, people think of accounting and GAAP as these fundamentals that are etched into stone tablets. I mean, accounting standards are invented by us humans to give us a view of a business. And they're up to us to choose. I mean, they're generally in kind of long, boring committees, but we humans choose how we look at businesses. And I think we should be able to reason about, what's a better way, what's a worse way to look at businesses?

• 54:58Speaker 02

  And that's why I have absolutely no patience for the crowd that's always whinging about non-GAAP metrics, because, I mean, you just, they're a relatively arbitrarily chosen and constantly tweaked set of standards for looking at a business. And so if they're constantly tweaked, presumably you would expect that they can be improved upon. And one of the areas in which I think the standard way we look at businesses is just completely wrong, is in reasoning about essentially research and development and intangible capital. And so capital, obviously, has really moved over the past 100 years away from

• 55:37Speaker 02

  Heavy machines that you'll really hurt your foot if you drop one on them to intellectual capital and intangible capital. And so traditionally, if you read a balance sheet and a company has a bunch of stuff, has a bunch of assets on its balance sheet, what would that company have? Well, if you're a cafe, maybe your assets are the coffee machine because you bought a really expensive coffee machine. These days with technology businesses, what is the capital within the business? What are the assets that the business have? It's probably software that has been developed in-house by the business. Google, it is the search engine that now for 20 years engineers have laboriously worked on to make good. And the case of Stripe, it is the payments engine along with Stripe Radar, the fraud

• 56:21Speaker 02

  detection engine, along with lots of process knowledge on how we all work together. Again, how we kind of make sure that the maximum number of payments go through online and we have all the hookups to various other places. But again, the capital has come from something really tangible. An espresso machine doesn't change in value that much. You can reason about the value really easily. Why can you reason about the value really easily? It doesn't change that much over time. There's a clear market first. You could go out and sell this espresso machine. You paid something for it. You just bought this espresso machine. And so one of the accounting principles is you just carry things at cost for depreciation. But again, it's really easy to reason about the value of tangible capital like that espresso machine.

• 57:02Speaker 02

  It's really hard to reason about the value of intangible capital like Stripe Radar. What is the value of that system that we built? I think the reason this gets interesting is because you and I might very reasonably want to think about what is the profitability of a business after you strip out all the investment in future growth? Because as you look at the technology sector... The entirety of the technology sector, one of the things that kind of unifies technology companies is that they don't tend to produce kind of huge amounts of cash flows, certainly until later in their maturity. Companies that are in their growth phase, either pre-public companies or recently public companies, tend to be mostly reinvesting that in growth.

• 57:47Speaker 02

  And so, okay, one question you might have is, how much of this is a profitable underlying business versus how much of it is investment in future systems? The best answer that people tend to have is that they split out different lines of business and kind of categorize them as cash flowing or growth. So if you're looking at Amazon, you might say, okay, well, the retail business produces money and then we plow this back into AWS as an investment area. And so we'll just kind of separate out AWS and the retail business and we'll look at the profitability of each and we'll treat AWS as an investment area. But of course, that's not quite right because the retail business, it's fractal. The retail business itself, as you look at it, they are expanding to new lines, they

• 58:30Speaker 02

  are expanding to new geographies and things like that. And so the retail business itself is composed of a cash flowing core business and then new expansion areas that they're planning that money into. And so as we look at how kind of accounting works for this, it's really basic. All you have is companies that are spending lots of money on operations, engineering salaries, operation salaries, lawyer salaries, kind of those general OpEx, and no real intelligent view on what is the capital that we're developing? What is the multi-year value that we're getting from this system that we're building versus what is the actual ongoing cost of operating the system? And so that's something that, I mean, we spent a lot of time at Stripe getting good

• 59:14Speaker 02

  internal management views into at a system by system, line by line level, how much are we investing in kind of the future potential of this system versus what is the existing profitability of the system? But I'm always surprised, I mean, you must be too, as you read kind of the statements of various public companies out there, how unhelpful they are at answering what is really the core question for a technology business, which is, how much are you paying to operate this business versus how much are you investing in a long-lived technology advantage?

• 59:46Patrick O'Shaughnessy?

  Everyone will pay a lot of lip service to the concept of free cash flow. But I think for all the reasons you've pointed out, it's a very hard metric to get to. And then there's also just silly concepts, like I think you were the one that said it to me. What is the useful life of a piece of software? How do you even reason about something like that? And therefore, think about something like depreciation. A lot of what is registered as operating expenses in business is really kind of like what we used to call capital expenses because it's going to be useful for a long time. It's a really important topic for public investors with more of these businesses due to become public. It's interesting to hear someone running one of those businesses and their thoughts on it. I think ultimately, the best thing in the world would be for public investors to have whatever dashboard it is you use internally.

• 1:00:31Patrick O'Shaughnessy?

  You're the one that understands the company best and has built your own metrics and then have to back them to GAAP. I just think it's very strange.

• 1:00:38Speaker 02

  And sadly, we don't even have kind of the metrics that we're fully happy with internally yet. But I think it's interesting that I have not seen a company publicly in how they kind of talk about things where I'm like, oh, that's clearly the answer and that's how we should do that. And I think what you see is a number of proxies that are maybe, I mean, unsurprisingly, the proxies are perhaps overly generous to the companies where they say, okay, we're going to count all of this spend as R and D, something with a long-lived payoff. But I thought it was interesting, people talk about the concept Buffett introduced in his 86 letter of owner earnings. And the more interesting thing about that definition for me was splitting out the two forms of CapEx. CapEx, spend that has a multi-year horizon or a multi-year payoff.

• 1:01:22Speaker 02

  But splitting out CapEx into what is just needed to tread water. Investment required for the company to keep its same competitive position, keep its unit volume versus CapEx required to expand. We haven't fully chased this through, but I think that's a really interesting distinction because oftentimes you can have technology companies that really spend a lot of, I mean, Buffett obviously always talked about the example of the textile mills that Berkshire Hathaway got started with and just being such an incredibly terrible business because you're always spending this CapEx just to tread water. Water just to stay in place. I think similarly, it's important for companies to be honest with us. I mean, not only external investors, but companies to be honest with themselves on is this spend just

• 1:02:08Speaker 02

  the cost of doing business, the cost of operating our business and we are maintaining our competitive position? Or are we expanding in some way? Are we growing our share of market? Are we expanding to a new country? Are we developing a new product that will monetize separately? But it's probably worth you being honest with yourself on the answer to that question.

• 1:02:25Patrick O'Shaughnessy?

  What topic do you not understand well yet that you wish you did?

• 1:02:30Speaker 02

  Payments. No, I mean, it's still learning. I mean, we're touching on it here, but I talked about this phenomenon of the shared playbooks that Silicon Valley is developing. And I really think this is what's going on. It's one of the things that is probably under discussed. The notion that there is a common playbook that goes from company to company in people's heads. Maybe one of the most mature ones is the B two B sales playbook. I mean, there is really a set of best practices there and Silicon Valley is on version twenty seven of the playbook. And it's always being updated. People took the playbook from Oracle and applied to the sales force with improvements. And now all the up and coming B two B startups today are kind of modifying that and making improvements.

• 1:03:14Speaker 02

  But it really is a shared playbook. As we look at engineering, it is interesting to me, one kind of related to the measurement question we were just talking about. It is frightfully hard to measure engineering. And so within sales, there is measurability down to the level of the individual person and even down to the level of month by month on an individual person that you've probably seen these curves. But companies talk about time to productivity curves with salespeople where it's actually a measure of a product's complexity. That maybe in B two B SaaS, a standard time to productivity curve would be people are at more or less their terminal productivity within six to nine months. That would be relatively standard.

• 1:03:56Speaker 02

  But that is the level of granularity you have on a domain like sales. Then meanwhile, you look at the domain of software engineering. Look, I come from, that's when I wrote the first version of Stripe, my first love and domain where I spent a huge amount of my time. But it's incredible to me how hard it is to measure the output of software engineering. And you can measure us in, you can look at the goals that we set out to accomplish and how good a job we did at accomplishing them. But if you're trying to put any kind of Overarching metrics to compare and contrast the productivity of different segments, that's something that we are really interested in, that we have not made that much progress on. We have found, I would say we do probably at Stripe, a lot more surveying of engineers

• 1:04:40Speaker 02

  than other companies. And it's not the best system metrics, but I think it's better than nothing. It's kind of analogous to look at how all the media companies work and it's lots and lots of, or any kind of advertising company, lots and lots of consumer survey. Yes, brand awareness and TV ratings and things like that. So that's how all those industries run. Similarly with Stripe, if you're an engineer at Stripe, you spend a lot of time being surveyed because that way we get a sense for, okay, how productive are you in this domain versus where you were six months ago? How productive are you in this domain versus this other domain where you used to work? And that can give a sense for when we're making overall macro developer productivity improvements where we spend our efforts and stuff like this.

• 1:05:22Speaker 02

  So we are, I would say it's something we probably spend a lot of time on compared to other companies is developer productivity and getting scientific about developer productivity. And yet I still think we're really early in our journey compared to where we're at.

• 1:05:34Patrick O'Shaughnessy?

  I'm curious how you think about the transition to what's now being called the no-code movement. So the first part of the question is, how undersupplied is the world in terms of just talented software developers? But may that potentially not be as big a problem if we do get no-code tools that would allow someone like me that has dabbled, but is certainly not terribly technical on software, more so on data science, to build things for myself and not need engineers? What do you think that glide path looks like over the next, say, 10 years?

• 1:06:04Speaker 02

  So I mean, the answer to how short-staffed we are in engineers is still clearly loads in that Stripe is an investor in a company called Lambda School, and you've probably seen what they do, it's nifty. But I mean, they're essentially, they often explain themselves in financial terms of being an arbitrage play where they help people who are in, software engineering is such a highly compensated field, that people who might be working some other job that want to make, jump into software engineering, they help them via remote night courses over the course of, I think it's nine months. Get trained up in a software, effectively a software engineering degree and then move into the field. And so the fact that they have had such success, I think speaks to the fact that we're still really short of software engineers. And again, that's our experience with Stripe, doing lots of hiring in that field. Again, I think one of the really exciting

• 1:06:49Speaker 02

  trends for me that we touched on earlier is more and more software engineering moving outside the Bay Area. Like when I go back to Ireland, it's crazy. It's night and day, the difference in the Irish technology industry and technology scene versus when I left back in 2009. That's something the case. On no codes, I don't think no code is fully a panacea, because I think to the set of, even when you're doing no code, you're still reasoning about the relations between different objects and data flows and things like that. And so I think when you're building an app with Zapier or something like that, you're still doing a form of engineering, you're just not necessarily writing codes. And so hopefully

• 1:07:32Speaker 02

  that's something that can give leverage to people without necessarily needing to have to spend quite as much time in it. And this is not new, by the way. If you look at Excel, you know, no one calls it a no code tool. But Excel, I think, is one of the most underappreciated programming environments in the world. The number of Excel programmers versus people using what we think of as more traditional languages is really something to behold. And actually, there's lots of features of Excel that make it a really nice programming environment and really nice to learn in, where the fact that it's continuously executed means that unlike you running your code and it doesn't work and you get some error that's hard to comprehend, instead code is just continuously executed in the form of the sheet you see in front of you. And similarly, you know, the fact that it's individual cells

• 1:08:15Speaker 02

  means you kind of lay out the program spatially where the code and the data is interspersed together and no one part of it can get too big. Anyway, there are all these ways in which anyone who's developing a no code or new software paradigm should look at Excel, because so many people have managed to essentially learn how to do some light programming from looking at other people's models and other people's workbooks and kind of emulating what they see. But I mean, to answer the direct question, I don't think no code will obviate the need for software programmers. I would hope that it can make many more people able to participate in software creation and kind of smooth the on-ramp, which is right now there's like a really sharp vertical part of the on-ramp.

• 1:08:55Patrick O'Shaughnessy?

  We've talked a lot, obviously, about software for the obvious reasons. I'm curious if there are any other businesses or business types that you've studied and find interesting that really aren't built primarily on software. Everyone, of course, uses software and will continue to do so. Any other lessons from businesses as different from Stripe as possible?

• 1:09:15Speaker 02

  I mean, I still find technology one of the most interesting places to look because what I find so exciting about technology is from a business point of view, it's positive sum. So many other businesses are essentially, I mean, they learn not to talk about them this way, but there's all these business euphemisms for the fact that there's a fixed amount of supply in this industry and we're getting really good price discipline. That's one of these investor euphemisms for not competing too much on price or revenue optimization and things like that. As you look at something like, I mean, real estate in many kinds of parts of the world, barriers to building mean that part of what makes it a good business is the fact that there's a fixed number of assets that can be monetized.

• 1:10:00Speaker 02

  And so you are getting the, in the case of San Francisco, a huge amount of the wealth creation has flowed directly to landlords in San Francisco because it's so hard for new construction to take place there. I think that's actually true for a lot of other businesses. I mean, banking is another classic one where there is not a giant number of new banks in the United States. So instead, what we've seen is a lot of consolidation of share in the industry. I mean, airlines, another classic example. And so, I mean, you can look at lots of these other industries and their structure and how they work. But part of what I found so exciting about technology by contrast is it is not a fixed pie that everyone's looking to find creative ways to redo the capital stack or do a roll up or something like that.

• 1:10:40Speaker 02

  But instead, we can just create all sorts of new technology wealth and all sorts of new technology value. Someone will come along and do something super interesting and payment. So I'm like, whoa, that's awesome because it's not just kind of taking share away from Stripe.

• 1:10:53Patrick O'Shaughnessy?

  I love that. What about the future are you most excited about?

• 1:10:56Speaker 02

  I mean, it kind of has to be right now, the increasing globalization that's been driven. I mean, COVID has certainly given it a fill up, but it was a trend that was happening anyway. But from a product point of view, we're deeply investing in this. We didn't really cover this, but Stripe, the company, is very global, where we have engineers in Dublin, Singapore, and Mexico City, and all these places around the world, building for all the startups that are springing up in all these countries around the world. And again, COVID drives it even further. But the fact that if you are a kid in one of these countries who grows up interested in technology, and previously you could look over the fence at the game that everyone else was playing, but not participate, and now you get to really meaningfully participate

• 1:11:40Speaker 02

  in the internet economy, that's exciting.

• 1:11:43Patrick O'Shaughnessy?

  What was your first memory of feeling like you had started to participate? You mentioned grew up in the middle of nowhere in Ireland. Was there a moment or an episode that sort of was the transformation?

• 1:11:54Speaker 02

  Patrick and I, it was actually a little contemporaneous with Stripe. We had a set of iPhone apps for the first, for the iPhone from the very start. You probably remember there was that one year between 07 and 08 when there was no App Store, and so there were jailbroken apps. And Patrick and I ran a business that was offline Wikipedia for your iPhone. And so compress it, English Wikipedia was the largest by far, but if you stripped out tables and images and everything like that, you could compress it to have a fit on a four gigabytes was the first release iPhone, you could have a fit on a four gigabyte iPhone. And it was especially popular overseas because unlike in the US, the iPhone didn't launch often with good data plans. And so you had people without internet access, and it was really useful to have this Hitchhiker's Guide to the Galaxy.

• 1:12:40Speaker 02

  But we were at the time, when we started doing this, we were teenagers. We were selling it in the App Store and we were making to, I mean, pop to teenagers felt like just raking it in. I mean, just absurd amounts of money for kids at the time. And just the notion, and we would look at the App Store, would give you these reports of where people are buying the app, and you have sales happening in Saudi Arabia and Mexico and all these places buying your app. But again, the, these two Irish hooligans running a multinational business, I mean, I think that was one of the first times for me where it was really striking to feel that.

• 1:13:19Patrick O'Shaughnessy?

  I've been to ask this earlier, so I'll ask it now as we wind down here, which is about board members. So as someone interested in being a board member for other companies in the future, it's an interesting role. It strikes me as one that would be tough to be a really good board member. I'm curious what you think board members should do and in your experience, if you've had a great one or two, what they've done for Stripe.

• 1:13:41Speaker 02

  I mean, we've been lucky to have incredible board members. And I think part of, they're all different Pokemon with different strengths and weaknesses and attacks and such like that. And so I think it's important to kind of, for the board member to know what they are providing and for the company to know what they should be getting from the board member. First and foremost, obviously, it is a governance role. You are managing the management team. And I think there's a, Buffett called this out in his letter this year complaining about the cozy relationship between board members and management at company. But I think that is an important aspect of it, which is board members need to realize that they work for

• 1:14:24Speaker 02

  the shareholders and they are the boss of management and not the other way around. I think once that's internalized, that relationship tend to be the most effective. And look, that's generally pretty friendly because oftentimes the best way to help the shareholders is to help the management, but there can be no confusion about that. There's some specific rules that exist within the boards, the audit committee, the compensation committee, things like that, where the board member will actually be put to work inside the company to be a relatively high workload task. So that's one set of responsibilities. Then depending on the experience the board member has, I mean, generally you have people who are much more experienced at a certain set of things and they're able to contribute

• 1:15:06Speaker 02

  that experience to the company and to people who maybe are much less experienced in that. To give you a few examples, we're hiring a CFO right now. Jonathan Shadwick, who's on our board and previously was CFO of VMware and Skype and various places like this, has been extraordinarily helpful to us as we run that search because he's actually done the role of a public company. And so he's much more experienced in the domain than we are. Similarly, you see in lots of kind of early-stage companies, we talked about with venture capital, this notion that you're getting a bundle of experience the partner can bring. So Mike Moritz is Sequoia Capital and he invested in Stripe in 2010 and joined our board in 2011. And so again, it's been really fabulous from

• 1:15:47Speaker 02

  a company strategy and from a hiring perspective to have that experience, which is a totally different set of experience to Jonathan's experience that I just mentioned. It's been really helpful to have that as we've built out the company. And so again, I think what you're looking for is in building a board is a set of experiences that will be really valuable to the company, both in building the company, but in occupying that governance seat, who are the people that you want ultimately accountable to shareholders.

• 1:16:13Patrick O'Shaughnessy?

  I love the idea of Pokemon. My six-year-old son is into that right now. So it definitely resonates as a great way to think about boards. Well, John, I've learned so much. My closing question for everybody, which I'll ask you as well, is to ask for the kindest thing that anyone's ever done for you.

• 1:16:27Speaker 02

  You really set it up with a high bar when you say kindest to run an expensive query over a large dataset there. I was reflecting on this. And so I grew up in Ireland. I spent all my years there until I moved out to the United States for college. And I feel very culturally Irish. And there's something about acts of kindness I've experienced with Irish people that's maybe different to that I've experienced with Americans. And just there's something about kind of the culture there. Just to give you maybe two examples. One is first moving out to San Francisco, the person we stayed with. Was an Irish guy and the way we got to know him is Patrick had a going away party at MIT. There was an Irish guy who came to the going away party, didn't know,

• 1:17:12Speaker 02

  me and Patrick didn't know each other that well, but oh sure, you're in San Francisco, you can stay with my brother. So we'd, I mean, barely met the guy, never met his brother, but this guy, Lorcan, very Irish name, was willing to let us stay at his place for a week. And so we get there and it wasn't one of his many guest rooms. Get there and it's a studio apartment. And so he's like, okay, you can take the bedroom and he sleeps on the couch. But that was for me kind of very Irish act of kindness when first moving here. Similarly, when I was in secondary school, we just had this incredibly understanding principal where we always had various pursuits and weird things going on. And we know we were serious about academia, but we're taking maybe an unconventional path. And so this principal guy called Martin Wallace, who's since passed away sadly, but he was always

• 1:17:57Speaker 02

  incredibly understanding that we had a path in mind that we wanted to take. And it might not be fully aligned with all the rules that were written down that they had for running a secondary school. And so I just dropped out of half a year of high school that I more or less skipped when we were running on a kind of a previous technology company prior to Stripe. And he just kind of made it work despite the fact they had all their attendance requirements and things like that. He was willing to enable that because he felt like it was a good thing. Or in the case of Patrick, Patrick just decided to skip the Irish end of school exams and do British ones as well because he could shortcut and

• 1:18:37Speaker 02

  go to college earlier. This kind of extremely benevolent oversight of us and flexibility and understanding in a very unassuming and quiet way where it never really came up as a big thing. It was just, he almost assumes that of course I want to enable you on the path that you want to be on, even if it makes my life hard and it's extremely different to what I might be used to. And so, because I think a lot of the acts of kindness that people have done for me, and especially the Irish themed ones, some of the most interesting ones are ones that are much bigger steps than certainly you would expect from someone in that position, delivered really unassumingly.

• 1:19:19Patrick O'Shaughnessy?

  Your answer makes me think of just one more question, which is obviously a big part of your guys' success has been, now it's become an overused term of first principles thinking, but just applies well. You mentioned the five whys earlier as one sort of fun example. Is there any advice, and the stories you just told are also like the enablement of people just going their own way, which is really cool. Any advice that you would give to very young people that are kind of searching for what they want to do, given your success at following that unique path?

• 1:19:50Speaker 02

  There's so much to say. Patrick actually wrote up a guide to this. It's actually pretty good that he put on his website of advice for youngsters. But I think for me, it is being willing to go down the rabbit hole, whatever your particular rabbit hole is, in that I think all the institutions you're probably part of want to help you, want to bring you back on the normal track, as it were. And again, kind of Martin Wallace, the principal I mentioned. One of the things that was remarkable about him is despite the fact that he was a principal, that's almost the perfect societal clip art of someone who brings you back on track and makes you do the done thing. Instead, he was incredibly

• 1:20:29Speaker 02

  supportive in us wandering in all our weird and wacky ways. And so we're really interested in how you, or I'm really interested in how you help people wander and go down those rabbit holes. Similarly, actually Stripe invested in a company called Pioneer, which is...

• 1:20:47Patrick O'Shaughnessy?

  I was with Daniel yesterday, yeah.

• 1:20:48Speaker 02

  Okay, here's my time with Daniel. Daniel's fabulous. And again, it's Pioneer, I feel like is going after the same opportunity, which is how do we help people go further down the rabbit holes rather than trying to bring them back on track?

• 1:20:59Patrick O'Shaughnessy?

  Fantastic. Well, John, as always, when we talk, I learn a ton. I learned a ton today. Thanks so much for your time.

• 1:21:05Speaker 02

  It was really fun. Thank you.

• 1:21:06Speaker 03

  Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter, at Patrick underscore Oshag, O-S-H-A-G.

• 1:21:36Speaker 03

  If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening. [Music]