Pod Insights Invest Like the Best with Patrick O'Shaughnessy Turner Novak – The Past, Present, and Future of Consumer Social Companies - [Invest Like the Best, EP.182] About this episode My guest this week is Turner Novak, a partner at Gelt VC. Many of the largest companies in the world today are consumer social companies, so Turner and I discuss the past, present, and future of those businesses. When executed right, they are often the fastest-growing companies in history, and the rise of TikTok and some other companies we discuss makes it clear that there may always be more room at the top. The network effects that support these companies make them unique beasts to analyze, and Turner’s writing has been among my favorite content on the topic. Please enjoy our detailed conversation on this important are of public and private markets.
This week’s episode is sponsored by Bottomless. Bottomless is a smart coffee subscription which automatically re-orders coffee for you based on your consumption habits.
Bottomless is offering one month and your second bag of coffee for free at bottomless.com/patrick.
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club and new email newsletter called “Inside the Episode” at InvestorFieldGuide.com/bookclub.
Follow Patrick on Twitter at @patrick_oshag
Show Notes
(2:18) – (First question) – History of consumer social companies
(3:28 – The importance of quality growth over rate of growth
(4:43) – Importance of friends and identity in a social network
(6:21) – Major markers he analyzes in new social networks
(7:59) – The meteoric rise of TikTok and how it compares to other social networks
(8:08) – The Rise of TikTok and Understanding Its Parent Company, ByteDance
(13:38) – How TikTok deals with user friction
(17:28) – Why TikTok copies is a waste
(21:08) – Advising companies to build a media arm in this environment
(24:18) – Business models beyond advertising for social networks
(30:44) – His thoughts on Pinduoduo and the opportunity for a similar company in the US
(37:36) – What Snapchat is doing
(43:51) – How social eCommerce could be a competitor to an Amazon
(46:31) – His review of Zynn
(46:36) - Attack of the Clones: TikTok’s Rival Kuaishou Lands in the US
(52:22) – The geopolitical battle of social networks
(53:36) – Creating social commerce companies
(54:27) – Fantasy draft portfolio
(59:18) – Kindest thing anyone has done for him
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club and new email newsletter called “Inside the Episode” at InvestorFieldGuide.com/bookclub.
Follow Patrick on Twitter at @patrick_oshag
Transcript 12,356 words · 3 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Patrick 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. This week's episode is brought to you by Bottomless. Bottomless is a smart coffee subscription which automatically reorders coffee for you based on your consumption habits. You may remember Bottomless from episode 124, when we had co-founder and CEO Michael Mayer
0:45 Patrick O'Shaughnessy? on the show. I'm also a Bottomless customer and liked the service and idea so much, I became an investor. Here's how Bottomless works. They send you a complimentary Wi-Fi scale with your first coffee order. Just set up the scale with your Wi-Fi, store your coffee on top, and then from that point forward, Bottomless sends you coffee at the perfect time with no additional effort. The coffee itself is always roasted to order and shipped straight to you from a network of roasters across the country. My favorite part about Bottomless is how the technology could be used for almost anything I buy regularly. It feels like magic and how everything will work in the future. Bottomless is offering one month and your second bag of coffee free at bottomless.com/patrick. That's bottomless.com/patrick.
1:29 Patrick 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.
1:50 Speaker 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.
2:15 Patrick O'Shaughnessy? My guest this week is Turner Novak, a partner at Gelt VC. Many of the largest companies in the world today are consumer social companies. So Turner and I discuss the past, present and future of those businesses. When executed right, they're often the fastest growing companies in history. And the rise of Tik Tok and some other companies we discuss makes it clear that there may always be room at the top. The network effects that support these companies make them unique beasts to analyze. And Turner's writing has been among my favorite content on the topic. Please enjoy our detailed conversation on this important area of public and private markets.
2:50 Patrick O'Shaughnessy? Turner, thanks so much for taking the time to do this today. The device that we're going to use for our conversation is the sort of past, present and future of consumer social businesses, which obviously represents some of the biggest and most profitable businesses in the world. Some of the fastest growing, we'll go in other directions as well, but that will be sort of our true north through this conversation. To begin it, I think it would be neat for you to share with the audience, what you think is sort of the first relevant idea or data point in the past piece of this. What antecedents are important for us to consider before we get into today's landscape of consumer social companies?
3:27 Speaker 02 Thanks, Michael, for having me. The first big thing that I really kind of think through is there was a point in time where Facebook was the fifth fastest growing social network. There's a lot of things you can unpack there, but I think one of the big things is that growth is really important, but the quality and the type of growth that you have as a social company is also very important. And it kind of all ties into the competitive advantage that you're building over the long term. And Facebook built a pretty good one. And we've kind of seen that reflected in how the companies and the business performed over the last two decades.
4:01 Patrick O'Shaughnessy? Say more about that quality growth. So why is that interesting to you? How does the fact that they were once not the number one rocket ship in terms of growth matter in terms of how you think about investing and how you think about how these companies can build a durable advantage?
4:15 Speaker 02 I think one of the prime tenants of sort of social networks is UGC, user generated content.
4:23 Speaker 02 And that essentially gives you higher margins over time because you don't have to pay to acquire the content, your users do it for free, and then you can show ads in between the content. In historical cases, that's been the case, and that's super high margin when you hit scale. So I think that the quality and the competitive advantage that Facebook built was all built on real identities and high-quality real identities, and they kind of use that as a position of strength to expand into what they've built today. Maybe at the time, if you were just looking at spreadsheets, looking, comparing user growth, looking at charts, that might have been hard to see compared to some of the competitors. So I think it's really important to look at the product that's being built.
5:06 Speaker 02 And then in social specifically, I think friends are a very key component to building a strong social network and real identity.
5:15 Patrick O'Shaughnessy? Say more about that. Why friends? Why is identity so important? And maybe why have some failed to invert the question a little bit when they haven't included those things?
5:24 Speaker 02 Yeah, well, I think a way to think about friends and identity, Reddit is a super-popular social network, if you want to call it a social network, specifically in the US, which is where people have the highest disposable income to spend on things that are shown in ads, but they really don't make that much money right now. Part of that's related to the ad product, but part of it is also related to they don't actually know who their users are, so they can't target them with ads versus the way Facebook built the business. It was, let's figure out exactly who these people are. And even before they rolled out a lot of the machine learning pushed advertising, when it was you update your profile and you tell us your 10 favorite movies, your 10 favorite musicians, your favorite activities, that's basically what the ad system does now, is
6:09 Speaker 02 it just figures those things out. So Facebook's product was basically having people create their advertising profiles for them. So I think looking back, if you were to be looking at some of these companies decade earlier or two decades earlier when Facebook was kind of getting founded, you could say, wow, their users are not only creating user-generated content, they're also creating user-generated ad profiles, which I don't even think any of those things matter anymore because Facebook does it all automatically. Based on how you interact with the product, but I think it's a core piece to how I think about social is it doesn't necessarily have to be ads, but it's more of what's the business model going to look like? How do you go public with this? And are you building towards that today? Or are you going to have to pivot or change? And then just how do you think about sort of creating the business model as you grow?
6:54 Patrick O'Shaughnessy? How often are you seeing new proposed social networks? And when you're evaluating them, in addition to identity, real identity, I guess I would call it, what other major markers are you looking for in the idea behind a new social network? So you've got UGC, you've got real identity. What else matters again and again?
7:13 Speaker 02 I think one of the big things is helping consumers or helping the average person express themselves and connect with someone. I think that's the really social networks, digital social networks, they're replacing our offline conversations and habits. So if you can figure out a way to make it easier for someone to have a digital conversation or digital interaction that they would have had in person, I think there's an opportunity to build a business there. And there's a lot of people trying a lot of different things to your point of how often do I see them? I think the flavor of the day lately has been TikTok, the next TikTok were TikTok for X. But one of the interesting things about that proposal is those usually
7:56 Speaker 02 don't work trying to copy what other people have done. You typically have to find some sort of behavior that already really exists or is just starting to emerge and no one else has seen yet. And then create a new network of friends or people who interact with each other around that new behavior. And specifically, I think to be really successful is a behavior that some of the other existing social networks will have a really hard time trying to copy or layer into their network just because of the DNA of the product makes it of the existing incumbent product just makes it too hard to copy what you've done.
8:32 Patrick O'Shaughnessy? What do you think is, let's go to TikTok now because I just think it's the big, obvious topic. ByteDance is, I don't know when they'll go public, but it's an enormous company that will go public with a huge market cap. It's a fascinating product. It's controversial. You've written an extensive history of TikTok specifically. I think we'll do this a few times where we touch on existing companies as ways of exploring your sort of frameworks. So let's talk through TikTok. What do you find so interesting about it? Describe what you think they do best, why it has been such a meteoric rise.
9:00 Speaker 02 I think the best way to explain what happened with TikTok is to first look at some of the existing products. So Facebook was founded and sort of grew up on desktop. And originally it was profiles that you could post to and eventually they were tied together with the news feed, which was probably one of the greatest products of all time. I think Facebook did 70 something billion in revenue on a trailing 12-month period at extremely high margins. So one of the best products of all time. The whole product is built around desktop and even Instagram, which was kind of its mobile play, which was a great acquisition. The product was designed for, really the feed was designed around desktop. It's the same
9:42 Speaker 02 sort of idea. And for Facebook, like I said, it was a great acquisition. I read somewhere that it took them six weeks to basically copy and paste and tweak the code from the Facebook news feed into the Instagram news feed. And Instagram did 20 billion in revenue in 2019 that they, and they bought it for a billion eight years ago. So pretty good acquisition. And so I think when you've kind of seen Snapchat emerge, it was really mobile first, probably one of the first mobile, first social networks to hit scale. Just the behavior on it was different. It kind of unlocked really the ability to quickly communicate people with your phone. You could send a text to someone. You could say, hey,
10:24 Speaker 02 Patrick, I'm hanging at the beach. I'm with my friends. My dog's here. We're having some sandwiches and just cracked open a beer. We're on the beach. Or you could just take a picture and send the same thing in two seconds. So it reduced the friction to communicate with your friends. And Snapchat did a lot around that general idea to build like a really big business. But that was kind of the core use case. It was way different than what you do on Facebook. And then obviously Stories was a function of you're sending messages to your friends. You're gonna send it to 10 people. Why not just throw it on your story? So you just click one more button and it just sends it to this feed of full screen videos that play back and forth. It's like a progression of all the different messages.
11:08 Speaker 02 And eventually not messages, actually things that were posted to the story purposely. And that was obviously full screen mobile video. Probably one of the better advertising products you can have on mobile. Slowly got away from the feed, which when you kind of think about how the feed works. You're scrolling your feed, you see an ad. On Facebook, there's a lot of white space. There's the ability to comment and like, which blocks out part of the video. There's person's name. So when you really think about how advertising products work on mobile. The Facebook feed, the Instagram feed. It's probably only taking up about 30 or 40% of your screen. Versus in Stories, it's a full screen ad. So theoretically, it's going to be more effective. I think the pricing on those ads is still kind of figuring out what the equilibrium will be. It'll probably increase a little bit over time.
11:53 Speaker 02 But really, those are probably the best ads for mobile. And so Instagram obviously saw the rise of Snapchat, how good it was doing. And they said, oh, let's add this product too. Let's stick it at the top of our feed. Let's have a feed, the app opens to the feed and we'll stick these little circles up at the top of the feed that you can tap into and get into this full screen product. I mean, in theory and evidently what's happened, it's been very, also very successful for them. But when you really think about it. Why do they still have a feed? Why do you have to tap to get into the Stories experience? I think what TikTok ultimately did, there were a lot of competitors over the last 10 years that were doing similar products. Similar sort of full screen videos. I think what TikTok really did was
12:39 Speaker 02 They designed the whole product for mobile. And that's really what makes TikTok different from Instagram and say Twitter. Twitter is another classic example of it was built for desktop. It's text updates. It's really for sort of the people that are growing up on mobile. It's probably not the most exciting product. I think a lot of like you and me use it, obviously, because it's more tailored to what? And we use desktop a lot, more tailored to kind of how we use social media. But really, these mobile first experiences are more targeted towards just the average person. And there's seven, eight billion people on the world right now. You have a much higher total addressable market of humans you can reach with your product. So what TikTok did, it was entirely designed from the ground up for mobile.
13:24 Speaker 02 It was full screen videos. It was basically you open the app and it's Instagram stories or Snapchat stories without all the other thing. And tying to the monetization potential of stories or full screen video, the ads are right there. You have an opportunity to get every single user into one of those more effective ads. I think that's kind of the core of what makes TikTok different from sort of the existing broadcast network. I think Snapchat is a little bit different because it's more focused on friends versus something like Twitter and Instagram is. And TikTok is much more focused on following creators or influencers. There's a little bit more that you could probably unpack on what makes TikTok different. But I think that's really the big one is just entirely built for mobile.
14:06 Speaker 02 It was really the first scaled broadcast network that was designed for the smartphone.
14:10 Patrick O'Shaughnessy? Could you say a bit about how TikTok deals with user friction? And I bring this topic up because your answer is going to be related to a social product. But I think one of the best things to think about when building any product is how to reduce the time or effort or cost between the user being aware of something and getting what they want. And it seems like TikTok is the ultimate example at eliminating or reducing frictions. Can you talk about how they do that? And whether or not you think that's important from a business standpoint?
14:40 Speaker 02 Yeah, so what I think TikTok did was the idea of a follower graph or a social graph is completely non-existent on TikTok. The core product is an algorithm that shows you what you want. Without you actually knowing what you want. So they basically figure out similar to what YouTube or Facebook or Instagram will do where they basically figure out, okay, this person's this age in this country here, their interests based on how you use the app. TikTok does the same thing, but when you're on Instagram or Twitter, you usually have to be shown content of someone that you follow or an account that you follow or on Twitter, you'll see content from people that you follow interacted with.
15:24 Speaker 02 Instagram has the explore tab, which is content that you might like, but that's not the core product. Both the feed and stories are really the two top core use cases of Instagram and explore is maybe the third. Maybe even the fourth, if you kind of think about viewing profiles and so it's really not a core part of the product where it's TikTok. It's we will literally show you what you think you will like the most as a user. And as a creator or as an influencer, you might go on Instagram and you want to start a cooking account where you post pictures or videos and talk about your cooking. Maybe you want to sell a book or you want to launch a TV show eventually. You want to get a show on the Food Network about cooking.
16:05 Speaker 02 You have to work extremely hard to grow that account and go from zero followers to whatever follower threshold you want to get at versus on TikTok. What they do is they'll show the video to 10 people, see how it performs. And then from there they'll run another test where they open up to a thousand. See how it performs. They kind of gauge how people interact with the video. Do they like it? Do they share it? Do they re-watch it? Do they go to the profile? Do they follow the person? What time of day was it? There's thousands of different things that they'll do to figure out if you actually liked it. As more and more people like it, they'll just keep showing it to more people that could potentially be a fit. So you kind of think about it on Twitter. Let's say you're trying to get started on Twitter. You have something really smart to say.
16:46 Speaker 02 And it ends up being right in 10 years and you're the smartest investor ever, but nobody knows you exist. Versus on TikTok, you put it out there and basically there's this concept of finding your 102 fans or your 1,000 true fans. TikTok will just find them for you. So it really takes away a lot of the friction of creating a follower base or a fan base. And it's just totally different from how the other products work. And I think we'll have to see Instagram completely rip out the concept and the notion of a follower graph if it ever wants to truly compete with TikTok. And I don't think they will. It's kind of a core DNA of how those products work. So that's another thing that TikTok has just done fundamentally different from everyone else and makes it
17:30 Speaker 02 just a completely new product that hasn't existed before.
17:34 Patrick O'Shaughnessy? It's an interesting answer, really kind of centered on the supply side, that the creatives submitting videos. I feel like it's also true on the demand user side that I've used TikTok before to check it out and then had to delete it because it's so damn addicting, that algorithm is so good. But I don't think I ever followed anyone or created a user profile, but they just matched the IP address to my algorithm, basically. And so there's literally no friction. Like you download it and two seconds later, you're watching videos. You never have to do anything if you don't want to. I'm really curious, you said two things earlier. Now we've kind of introduced why TikTok is interesting. To bring back two ideas you said. The first was the TikTok for X, just like we used to always hear pitched Uber for X in the startup world. Why that is going to be a bad idea? Seems like some
18:17 Patrick O'Shaughnessy? of these ideas could be good ideas to apply to other places. And second, you said on social, friends and identity matter a lot. And I get that identity here is sort of being served up without friction again, because you're building a profile of what the person's interested in through the algorithm. But it doesn't seem like you need to have friends or identity on TikTok. So I'm just curious how you think about that concept applied here and why TikTok for X is a bad idea.
18:42 Speaker 02 I don't know if TikTok is actually a social media company. It's a media company. It's not really a social product. It's really the first, what many people would classify as a social product that doesn't have a social graph. So they, again, that's just totally different from what traditional social media has looked like. And in terms of TikTok for X, what you see a lot is we're going to make TikTok for sports or TikTok for kids. But TikTok can already do those things. Based on how I've described the product, if you want to watch sports, In a TikTok-like setting, just go on TikTok because it will know that you want to watch sports or it will know that you're a kid. So I think those are always tough. And typically, if you want to create some sort of network related around that concept or product,
19:25 Speaker 02 you're competing against TikTok for that sort of supply. If you think of social networks as a marketplace between supply and demand, the existing networks typically have some sort of monopoly on supply. There, a lot of people kind of think of social as to build a new social network. You need to create a new tool for the creators for the supply side. And what TikTok did was they made something that was very easy to use on mobile. And this kind of gets in where TikTok is fundamentally different from YouTube. You kind of think of, how do you make a YouTube video? Well, you set up camera, you sit down, you probably spend a lot of time planning and thinking about what you're going to record. You might storyboard it. Some of these YouTube videos are 20 minutes long.
20:09 Speaker 02 And also, some of these YouTube videos, 18 of those 20 minutes are not very insightful. And it's, it's like a blogger or influencer just filling you in on backstory of their life or something. It might not be relevant to what you really want to see. And then also, a lot of these YouTube accounts, once they get big, you don't have the time to invest in planning, editing, making connections, growing the branding, all that kind of stuff, selling ad deals, getting sponsorships. You can't really do that all by yourself. So you start to hire a team. And you get to a point where maybe you're the person in the video and you're the person that's the face of the YouTube account. But you have an editor, you have two cameramen, you have two people who are doing your brand deals. You have people who are commenting and interacting with your fans at the bottom of your video.
20:54 Speaker 02 You're really disconnected from the product. Versus the way TikTok works, they made it extremely easy to create videos and use on mobile. So you sort of have this entirely different creator class where their DNA is built for mobile. There's a lot of younger users who are typically more creative and more willing to take new risks and try new things. They're also putting more effort into these things. And it's usually them. They're the ones that are. Using the product and knowing what is the best type of content to create. And they're doing it all on their phone. And a lot of these videos are 20 seconds. So they can make them in an hour or in some cases, less than that.
21:33 Speaker 02 And some people edit on their computer, but for the most part, really it kind of comes back to that tenet of it's really the first product built for mobile.
21:40 Patrick O'Shaughnessy? Mentioned that there may be a media company, not a social company, as they don't really have the traditional social graph. There's this trope going around that every company needs to have sort of a media company attached to it today. Sometimes this is big brands pay absurd amounts to have a social media strategy or a media strategy. I do think there's a lot of truth. Everything is going more direct to consumer and therefore products and services and brands and companies need to do the same. And think about this through the media lens. How would you advise somebody go about building a media company in terms of, let's assume that we've got some sort of content. Distribution wise, is it a scattershot? When should they go to YouTube? When should they go to Twitter? When should they go to Tik Tok?
22:21 Patrick O'Shaughnessy? I'm just curious your thoughts on building a media strategy, given the prevailing platforms of the day.
22:27 Speaker 02 I think it has to do with what the audience that you're going after wants to see and then where they are. And I think even before that, it's the question of what are you good at? I wanted to start a media company today. I have no money to hire anyone. I'm married with a kid. I don't have 120 hours a week to work on creating content. I need to figure out what I already know a lot about and what am I good at? And just start doing it and just see what sticks and see who follows me, see who my fans are. And just put it out there and just see what works and go with it. And if my audience is predominantly on Tik Tok, maybe it's people who like watching lip syncing, dancing videos. Or Tik Tok's actually done a very good job of laddering into other forms of content, which is why it's so successful.
23:12 Speaker 02 Or maybe I'm on Instagram. I'm very attractive. I boast about how great my life is. I'm like a lifestyle going out to eat all the time. And that's what I just do naturally, or that's what I want to purvey. That's where I need to go. So I think it's about understanding what social network reflects and the ethos of that network reflects what you're trying to accomplish as a media company. And I think it's important to not rely on any one platform or distribution channel. I think figure out one that works and this is a common way to grow and actually create a social, your own social network. I mean, you look at Instagram really grew on the backs of sharing to Twitter and sharing to Facebook. And then after the acquisition. I think I looked at just the way user growth kind of shot up after the acquisition. It looked like about seventy five percent of Instagram's new installs were actually coming
23:57 Speaker 02 from Facebook, just from the feed. So it can be super helpful to find another distribution channel to grow off of. And there's a certain point where you want to make the trade off of when do I own my own distribution and when do I diversify to other channels? But I think it can be super helpful to piggyback on another channel. Like look at Snapchat grew entirely on iOS. They weren't even on Android and their Android app was not very good up until a year ago. So I think it can be growing on other people's platform. Just use them for free distribution, reduce your cost to acquire your customers and users. So yeah, in terms of starting a media company, I think that there's a lot of different ways to do it and you just have to be creative and know your audience and know where they are and know how to speak to them and just iterate on what they want and make them your
24:41 Speaker 02 fans and then do things that help them. What do they want to learn about? What do they want to watch? What do they enjoy doing? And if you build for that, you'll be able to build an enduring media brand.
24:50 Patrick O'Shaughnessy? We talked a lot about building really rich identity profiles to make advertising more programmatic and easier. And we've seen Facebook and Google absolutely dominate the ad market, maybe TikTok now will be on the rise, Snap and Twitter, maybe smaller players. What are your thoughts on other business models that social or social media or media companies could employ outside of advertising that could create really big businesses that investors might be interested in?
25:19 Speaker 02 One of the ones I've been thinking about a lot lately is commerce. I think subscription is one. You kind of set a ceiling for what your revenue looks like when you have subscriptions versus when you really think about commerce. So if you kind of think about Facebook, most of the ads that you're seeing on Facebook or Snap or Instagram, they're facilitating commerce. I think Facebook did a hundred and eighty six dollars in revenue per US user over the last twelve months. That's a lot, a hundred and eighty six dollars of ARPU. If you assume that the average marketer is spending Spending in order to get about a three X return on their investment.
26:01 Speaker 02 So you take one eighty six times three, it's about five hundred and sixty dollars in commerce that's being transacted because of Facebook, which sounds like a lot. But when you compare it to the average US household income, which I've been trying to figure this out. There's very wide estimates, but if you assume it's anywhere from fifty to seventy thousand, that's probably about one to two percent of annual household spending. Which in some senses, you think, wow, that's pretty low, like it's only one or two percent. But it's also, wow, Facebook is probably driving about one to two percent of all spending that households do in the US. That's pretty incredible. So Facebook is potentially leaving some of that money on the table. They're facilitating the ads.
26:46 Speaker 02 They're saying, okay, we're giving all these other companies that are using our product. We're giving them three X more revenue that we could be capturing ourselves. Now, obviously, there's different margins on that revenue. But I think there's an opportunity to get into something where you go more full stack in these different categories. That instead of generating money from advertising, what if you're a mobile game company? So let's say, there's a good example in China with ByteDance, which owns TikTok. So ByteDance saw that a lot of gaming and education companies were spending tons of money on their platform. So my guess is they were thinking, you know what? Why don't we just capture some of that value? Why are we giving it to our advertisers?
27:31 Speaker 02 There's a ton of opportunity here for us, too. And then I think it was two thousand nineteen, it might have been two thousand eighteen. But sixty, I think it was sixty eight of the top one hundred mobile game spenders in China. So basically, the companies that spend the most on advertising, sixty eight of the top one hundred spent over half their marketing budgets on Taotiao, which is ByteDance's other product before TikTok.
27:56 Speaker 02 So TikTok has started to get into mobile gaming now and similar to what Tencent did. If people are familiar with Tencent, it's basically WeChat, which is kind of the Facebook slash WhatsApp of China. And then they started getting really heavy into gaming and now a lot of their revenue comes from gaming. So I think TikTok is doing the same thing where there's been some pretty good early success where they've had the top app for a couple of weeks. Just a mobile gaming app in not only China, but also Japan. So TikTok is saying, okay, instead of showing an ad to someone, let's show a quote unquote ad for our own product and shift them into this game that we then also have forty percent, fifty percent operating margins on. And let's start monetizing that way.
28:37 Speaker 02 So I think there's different opportunities beyond just advertising. I think advertising is probably one of the best places to start. You think of Facebook and they've got their marketplace initiative, kind of Craigslist, but it's on Facebook. There's some obvious benefits to having your Facebook profile and being able to verify who you're buying from right there in the app. There's a lot of opportunities to push people in. People are trying to sell things on the Facebook marketplace. What happens when you can suddenly place ads in the marketplace? What happens when you take that, I don't know if this will work, but you start putting actual, real firsthand products direct from brands and manufacturers in the marketplace instead of just a secondhand people trading things.
29:15 Speaker 02 So I think we'll start to see a lot of the advertising companies in the US really just start to get further and deeper into non-advertising based businesses. But I think it's a good place to start. At the same time, I think you have to be careful because we've kind of seen Facebook's ad product is probably one of the best products of all time. You have, I think it's eight million businesses advertising on Facebook and a lot of them are on auto buy. They have their credit card hooked up and they say to Facebook, if you can guarantee us three X return on every dollar that we spend, show the ad. We don't have to do anything. If Facebook can make someone make one more scroll or a couple more scrolls and show another ad or two, it's nearly zero marginal cost on that new revenue.
29:56 Speaker 02 So I think Facebook runs into the challenge of, okay, we're trying to shift people into stories. We're trying to shift people into the marketplace. We're trying to get people to use Messenger and build this WeChat-like ecosystem within our messaging product. But our feed makes so much money, it's on autopilot right now. So how do we make that transition? I think it's really hard. So I think you have to be careful and just you have to be very intentive about how you build your company and how you add different product lines over time and make sure the incentives align not only for you as a business, but also for your users. And I think we've kind of seen sort of with Facebook, if you look at their user growth in the US, which is where most of their revenue and cash flow comes from. It's been flat for almost a decade.
30:39 Speaker 02 They're growing like one or two percent a quarter since they IPO'd in the US. And that's where all the money comes from. So that's a little bit concerning. Obviously, they've reached a lot of people in the US, but a lot of people are turning out because the product, they're just like, I don't want to use this. It's just a bunch of ads and none of my friends are on here anymore. It's just not a product I enjoy using. So I think there's a lot of trade offs with different business models and you have to think about the way that people use my product and the way I'm making money. Do they go hand in hand? And can I actually generate cash flow and revenue from creating a product that people actually enjoy using and people are using a lot?
31:16 Patrick O'Shaughnessy? Can you talk a bit on the social commerce side about Pinduoduo and what that company does, why it's interesting, maybe why a similar opportunity could work in the US? And I thought maybe before you answer the question, everything you just said reminded me of a tweet that Bill Gurley sent out on the topic of how advanced the Chinese infrastructure is, kind of in social and on mobile that I thought I would read because it may be part of your reaction. I would just love to hear your reaction on this. So Bill says, "The Chinese ecosystem has two things that the US doesn't. A competitive programmable payment system and competitive programmable logistics. Startups in China can build upon the core infrastructure pieces with an API call, cheap, easy payments and same day, next day delivery." So obviously, those are really important. Payments and delivery are really important for commerce.
32:01 Patrick O'Shaughnessy? Maybe with those two points in mind, talk about why China has been so competitive and what Pinduoduo is doing.
32:07 Speaker 02 This will give you a long answer, so I'll try to kind of tie in everything together. I think Pinduoduo, it's the same thing with TikTok and ByteDance. It's the first commerce company that's hit scale and reaches hundreds of millions of people that was built for mobile. So when you think of Amazon or in China, you think of Alibaba and JD, those are kind of the big two. A lot of these products, you go on Amazon, you search, you type in what you want. Whereas on Pinduoduo, there's no real concept of search. And it's really more of like a game. So the way Pinduoduo initially started, it's not quite like this anymore. When it initially started, you could do kind of group buying to get discounts on products.
32:50 Speaker 02 And they started with fruit. So jumping back a little bit, the core proponent of Pinduoduo is there's no search. So of course, it's similar with TikTok, you can place ads really easily when people just open the app and you're just showing what you think, what the app thinks you need to see and the user sees what they think they want to see. So it's like with the Facebook News feed, as you scroll, it's not chronological. It shows you quote unquote, what it thinks will be best for you. And oh, by the way, thirty percent of it is ads. So what Pinduoduo did was they partnered with basically fruit farmers and fruit vendors and basically said, hey, we will help you sell your products to people that you want to sell to. So if you really think about it as a farmer, twenty fifteen, when Pinduoduo was founded, as a farmer,
33:35 Speaker 02 you have to plant all your crops, you have to harvest it, you have to bring it to town, you have to sell it. That's kind of not quite how most people sell products in two thousand and fifteen. So they basically said, we're going to help connect you with products. So they basically said, we'll give the example of things like apples is one of the first couple of things they did. Apple farmer wants to sell their products. It's tough to just sell one apple or like a bag of apples. You can probably make the equivalent of one dollar. But if you could all of a sudden ensure that you could have a hundred apples being sold or a thousand or ten thousand, kind of starts to be worth it to start using this weird mobile app that you probably just got a smartphone recently, but this random app is helping you sell your apples.
34:13 Speaker 02 And on the consumer side, what they did was they said targeting people in sort of third tier and below cities in China, which is is just sort of a way of describing more rural areas. People who maybe didn't have quite as much income as the big cities. And they said, hey, we will help you buy your fruit and buy your groceries. And by the way, if you invite a friend to join and buy with you, we'll give you a discount. So what happened was a lot of people just started inviting their friends and instead of one person buying one apple, you'd have ten people buying an apple each, or maybe a couple apples each. And then you'd also with that same farmer, Pinduoduo would connect hundreds of other groups also doing the same thing.
34:53 Speaker 02 So as a farmer, you're like, wow, I just sold ten million apples or ten thousand apples over an app. This is amazing. For a consumer, you're like, wow, I just got fifty percent off of these apples of my groceries from inviting my friends. And as Pinduoduo, you're like, holy cow, we just got a ton of users for free because our users are all inviting each other. That's sort of the holy grail of consumer social products is friends inviting other friends to use the product and keeping them in ecosystems. Fast forward to today, really their core value prop for a lot of these manufacturers and brands is, hey, we will help connect you with consumers instead of, let's say you're, I don't know if this is the best example, but it's when I've been using, let's say you're a vacuum manufacturer, you create vacuums for
35:38 Speaker 02 ten dollars each, and then you sell them to an American company for thirty dollars each. And then the American company goes and sells them for two hundred dollars each overseas. Why don't we, instead of selling to a brand in the US, why don't we be that brand? And actually, one of the more interesting things that they did is first they took inventory and they took stock of all the things they'd buy from the manufacturers and then sell to the consumers. Now it's just literally a marketplace. So you kind of think about it. A good example would be in the US, you're on Facebook, you see a watch, you buy it for forty dollars. It's probably manufactured in China for like five bucks a unit. A brand bought it for twenty bucks a unit and then made a markup selling it here in the US. And what Pinduoduo did was they let
36:23 Speaker 02 those manufacturers in China sell directly to Chinese in China. Of course, the price point was a little bit lower than the forty or the two hundred dollars being sold in the US. But they probably got about the same amount that they would have gotten if they just sold it to the US manufacturer or the US brand that was selling it overseas. And then, by the way, they can also say, while this is all going on, they're still producing for these overseas manufacturers, but they probably have excess capacity. So Pinduoduo said, hey, you can produce a million more units, we'll help you sell, we'll do this whole process, just topping out your existing capacity in your factories. So they made it super intriguing for all sort of pieces of the ecosystem to build this product together, which now they have the second largest e-commerce company in China and they were founded five years ago.
37:06 Speaker 02 It's probably one of the fastest growing companies ever. I mean, the revenue year five of a business, I think they did four point one billion in US revenue. That might be off a little bit, but it's just insane how fast it grew. So I, I think that's an example of how you can, and really the products related to commerce, but most of their revenue comes from ads, actually. So similar to TikTok where you open the app and it shows you what it thinks you want to see. With Pinduoduo, you open the app and it says, hey, check out toilet paper, some paper towel, cheap lamp, a blanket, wrapping paper, because it's Christmas. Like they just show you random little discount things you might get at the dollar store. And some of those things are actually advertisements and it's Pinduoduo taking a cut of.
37:50 Speaker 02 I think they said in one of their disclosures, like point six percent is the average. That number could also be off. But it's just a really small cut. So I think there's a really interesting opportunity to potentially try that in other markets, which maybe that might tie into another question that you might have next.
38:08 Patrick O'Shaughnessy? Yep. I think you know where I'm going, which is Zin, an app that I think was at the top of the app store, which may be also relevant for this conversation, probably coming from a company that very few have heard of. So maybe go in that direction.
38:19 Speaker 02 Oh man, that was actually a different question I thought you'd ask, but I want to answer this one too.
38:23 Patrick O'Shaughnessy? Let's keep our ordering right. So what question do you think I was going to ask and then answer that one and then we'll come back to Zin.
38:30 Speaker 02 Okay. I thought it was going to tie into Snapchat and what they're doing. So maybe to back up just a little bit and kind of jump into what I think about what Snap has been doing. So when you really look at the numbers, Snapchat has about eighty six, eighty four million daily active users in North America, which is about half as much as Facebook, pretty close to Instagram. And analysts peg Instagram as being worth anywhere from two hundred to four hundred billion dollars. I mean, the, the number is pretty insane how valuable they think that business is. And Snapchat has a really similar reach in same countries that Instagram and Facebook make all their money. But when you look at sort of the delta between the pricing of the ads and how many users
39:15 Speaker 02 and how many total impressions they could potentially show and how much time is spent in the apps, there's a pretty big disconnect that I think will slowly close over time. But Snapchat's also a product that a lot of people in developed countries use a lot. And a lot of these people are early adopters and people who try new products. Young teenagers, people in their twenties, people in their thirties. So Snap has sort of always had this sort of ambition to become a little bit like WeChat, which, as we talked about earlier, is one of the big social products in China. And that's actually how Pinduoduo grew. So Pinduoduo, in the early days, it was basically when you would do one of those group buys, when you'd get your friends, it would say, hey, share this on WeChat. So you'd go and you'd post to your WeChat feed or you'd send a message in WeChat to someone and get them to join your purchase.
40:00 Speaker 02 Over time, WeChat slowly added these in-app mini programs. It's like an app with inside WeChat, called the mini programs. And they made it so that other developers could build little pared-down apps, super lightweight, maybe a couple megabytes, maybe even less, that you could actually run your app within WeChat. So a couple of the really big mini programs that really took off were Pinduoduo, which as of 2019 had 100 million users in their WeChat mini program. Meituan, which is, it's kind of like Uber Eats or Grubhub of China. Mixes a little bit of Expedia, mix with a little bit of sort of some of these other on-demand last-minute delivery providers.
40:44 Speaker 02 JD was also a big one, had about 50 million users. A lot of different commerce companies. There's a lot of these companies that grew really quickly on these WeChat mini programs, and Pinduoduo was the standout. Two times bigger than the other ones, grew way faster. I think market cap is over 100 billion as of today when we're having this conversation. And it was founded in 2015. That's pretty incredible. So Snapchat recently rolled out a new initiative that's called Snapminis, which is the same thing. There are these little bite-sized third-party apps that live inside of Snapchat. And I think understanding the context of Snapchat is actually used a similar amount by people in the US and in Europe as some of these other big companies.
41:27 Speaker 02 We think of these dominant social platforms like Facebook and Instagram. You're like, huh, there is actually a pretty big opportunity for building these third-party products inside Snapchat.
41:38 Speaker 02 And then you kind of think as well, you say, okay, Snap has this third-party avatar thing called the Bitmoji, sort of a digital avatar that you can change and it actually plugs into other apps and there's a keyboard that goes into all these other apps. So if you kind of think Snapchat has this Bitmoji keyboard that is basically a backdoor into Facebook, into Messenger, into Instagram, into Twitter, that is sort of like Giphy where push gifs out that you post online. It's just the same thing with the emoji. I wonder if there's an opportunity to actually put these mini programs in that keyboard. And you also look at one of the announcements that they just made. Snap recently announced that the Bitmoji keyboard was going to be integrated into every single Samsung phone,
42:21 Speaker 02 which that's one of the big smartphone manufacturers to say, huh. So the opportunity for Snap Mini is actually potentially extends beyond Snapchat and the actual user base of Snapchat. So it's pretty big. So my thinking is I wonder if someone will be able to build a really quick company, really fast, on the back of these Snapchat mini programs. And I've thought a little bit about what it could look like. I think the stage that was set in China with your original question about being able to really quickly do payments for a small fraction of the two or three percent that's charged today, because that eats into your margin. And then also these programmable last mile delivery providers. I don't know if that's quite here yet,
43:04 Speaker 02 but I think there are some companies that are doing things like Postmates, DoorDash and Uber all have these sort of last mile APIs. I don't know if they're quite ready yet or if they're cheap enough yet for companies to really sort of scale a business on, but it might be there eventually. So that's kind of one of the big feces I've been kind of playing around with over the last, I mean, really for the last year when I heard and when I realized what they were doing with their SnapKit product, which is basically this is an extension of that, which is sort of it's like their developer toolkit, where if you're a developer and you're making a product, you can use some of Snapchat's tools to build your product on. So Bitmoji, if you launch an app, you have an instant always-on avatar for every single user if they use their Bitmoji.
43:47 Speaker 02 There's no default, these ugly avatars that look like no one is using the app. Every single user has an identity. And they're integrating things like Snapchat's advertising program. They'll probably eventually incorporate these mini programs as well. So I just think it's a really interesting ecosystem to build on. And it probably means great things for Snap's business performance. There's probably a lot of opportunities for them to make money, too. So I've been kind of trying to pay attention, trying to think about how could you really do it in the US? I don't know if it'll look quite like Pinduoduo, but I think there'll be something. And so I've kind of been thinking about it and been on the lookout for it for the last couple of months.
44:23 Patrick O'Shaughnessy? It makes me think that this is a much bigger conversation than consumer social or social media. Really, when you get down to the brass tacks about the businesses themselves, we're talking about commerce. This is relevant for Amazon. I remember Scott Galloway suggesting one time that Amazon just starts sending you the equivalent of a physical feed, a box of what it guesses you might want, and you keep what you want and send back what you don't, and it builds an algorithm over time. And I thought that was so clever at the time until you realize that these social companies are doing that at far faster feedback loops. Like, they're learning way faster than a sort of physical feed ever could. And I have to admit, like, I order everything on Amazon. If I was ensconced in some social product that knew me more intimately and just made my life easier, I'd probably switch my commerce there.
45:08 Patrick O'Shaughnessy? It seems like it's literally a competitor to Amazon.
45:11 Speaker 02 Yeah, I do think that. And I think the interesting thing with retail is that a lot of these retailers are built on figuring out new forms of distribution and logistics. So Sears was basically built on the catalog and the, sort of like the postal service back in the day. And it really hit a lot of people who are marginalized, people who couldn't afford to or were shunned from going into these big department stores with wealthy folks. They'd say, you're not allowed in. So if you can get a catalog mail to your house and you can buy a lot of the same things, that was a big mistake by some of Sears competitors by basically cutting off half the population just because of the color of their skin or how much money or income they made or they weren't able to commute into the city.
45:53 Speaker 02 And then you think of Walmart, sort of did a similar thing where they hit this sort of different demographic that wasn't quite being hit properly by Sort of I see yours, but also optimize a lot of things on the infrastructure side. And then even with Amazon, Amazon really is a logistics company. I mean, the core product for consumers isn't really that great. I don't know of anybody who opens up Amazon and says, wow, I love ordering things. The experience of using Amazon is so much fun. I think the experience that people like is the quick shipping. I mean, they built out that logistics infrastructure. So I wonder if you can kind of sort of the Bill Gurley tweet that you're talking about programmable last mile payments.
46:35 Speaker 02 I wonder if you can build something on basically this outsourced Amazon fulfillment network. And that's maybe something that Shopify is kind of doing, but Amazon's also doing it as well. But some of the stuff that they're doing, the third party fulfilled by Amazon. So I don't know, it's a tricky thing with commerce. There's a lot of related to getting a distribution and reaching consumers, but also related to how do you ship things to people? And also, how do you pay and make make profits doing that? Which that's the key is generating cash flow.
47:03 Patrick O'Shaughnessy? Let's come back now to Zen, which was probably an app that almost no one's heard of. I hadn't heard about it before reading your post on the topic. I think it was a top downloaded app in the U S at some point recently. Describe what that is and why that's related to everything we've been talking about.
47:16 Speaker 02 Yeah, so Zen was an app, well, is slash was, I'll get to that. Where it was basically Tik Tok, it was exactly the same thing. Not quite the same sort of polished features, but the big difference was you got money for watching videos. You got about a dollar or a dollar fifty cents per hour of watching videos, which like to me, I'm like, I'm not gonna waste my time doing that. But for some people, if you watch Tik Tok a couple of hours a day, you can make 10 bucks watching videos online. People do that kind of stuff all the time. And then they also did a thing where, hey, if you invite a friend, we'll give you $20. So as someone in this launched in the beginning of May, middle of May.
48:01 Speaker 02 So if you kind of think about the state of the US, we had something like forty million people that were on unemployment. So a lot of people didn't have a job. So if you could suddenly open up an app and make a hundred bucks a day inviting people to it and watching videos, which you would probably be doing anyways, when you don't have a job or when you do have a job, actually. It made a really interesting sort of environment for an app like this to grow. When you really think about a lot of these people who are maybe you're working at a hotel, you're working in a restaurant, you're not really making that much money. The amount of money you're making from an app like this is probably similar. So it's basically this complete entire copy of TikTok. They went to profiles on TikTok and actually ripped videos.
48:46 Speaker 02 So they went to certain creators and they just download their entire profile and re-upload it in Zin. They would also go to popular sounds. Music and audio is a really big thing that TikTok's done. You can search for a certain sound and you'll see all videos that have that same sound. We didn't really touch on this when we talked earlier about TikTok, but that was one of the big things that TikTok did. They basically created audio memes. If you're not familiar with memes, they're typically more used by Gen Z millennials or a way of expressing something funny. And typically, if you take the form of media that was posted and you do your own take on it and it relates to current events or something culturally. So TikTok basically did this with sounds where if there's a funny video with a certain sound, you could then use that same sound and reenact it.
49:30 Speaker 02 And it was related to its DNA of initially being a lip syncing app when it was called Musically before ByteDance acquired them in two thousand and seventeen. What Zin did was actually go to some of these popular sounds and just ripped all the top videos and put them in their own app. So the whole thing was, it wasn't very good. I mean, it was executed well. Like they scaled really quickly. They were getting hundreds of thousands of downloads a day. They were the number one app for a couple of weeks. It wasn't just number one in a certain category. Like I think they were in entertainment. They were the number one overall app. Suddenly, they were just removed from the App Store. The reasoning for removing them was that they copied content, which is really interesting because both paying users to do things
50:11 Speaker 02 and copying content from other companies is par for the course in China. I mean, it happens all the time. That was one of TikTok's big growth strategies was they just copied videos and use their ability to feed the best videos that people wanted to see to each of them and make the product really enjoyable. So they copy a video that did well somewhere else and then it would do 10 times better on TikTok. So that's what Zen did. And the reason this was interesting, so when I first sort of saw the top of the App Store, I'm like, this is silly, like just a giant pyramid scheme. But when I looked into it, I found out that they were actually backed by QuaiXiao, which is ByteDance's big competitor in China. If you want to compare like the Twitter or the Snapchat in relation to Facebook, they were sort of like the little brother.
50:54 Speaker 02 People maybe didn't quite give them quite as much respect because they had slightly more rural user base. Their revenue and capital wasn't as high, but they're still valued at like $30 billion. And right before in December of 2019, they raised $3 billion from, I think, Sequoia, Tencent and a couple other pretty big Chinese venture and growth state investors. So in my mind, I was like, wow, you guys have a lot of money to acquire and give away to people to download and use the app. And one of the big things that Zen and QuaiXiao did in China was they're a little bit different from ByteDance. ByteDance generates most of its revenue through ads. QuaiXiao generates a little over half of their revenue from live streaming,
51:38 Speaker 02 which is it's basically TV, QVC, where you watch someone and then you can buy products from them directly from the content that you're watching. It kind of made me wonder, and it kind of gets to our conversation earlier about friends. A lot of these new media companies that don't rely on a friend graph that constantly brings the users back into the experience and reengages them, you really have to do it through content of some kind or push notifications to get them to open the app. And that costs money if users aren't creating it for free. So one of the thoughts I had was are a lot of these just sort of next generation TV networks where they're acquiring content and they're probably not going to be $500 billion businesses like Facebook or Instagram.
52:22 Speaker 02 But you could probably make 10, 20, 50 billion dollar company like a CBS, like a Viacom, or like a Disney, where you've just got a lot of media and you're acquiring it, or even like a Netflix. So it kind of tweaks the way you maybe think about social and the different opportunities. And I think if you really want to build a business that has a defensible competitive advantage, that has textbook definition is higher than industry average operating margins for an extended period of time. I think you really have to have a component that helps you do that, which is probably friends that are creating content.
52:54 Patrick O'Shaughnessy? What a fascinating competitive story, if nothing else, right? I mean, you really do get the sense that these are warlike battles between these huge, massive global platforms. Just yesterday, as we're talking here today on the 30th of June, the majority or a bunch of the Chinese apps were banned in India. Whether or not that lasts, I don't know. But it does seem like this is a geopolitical conversation, too. Amazon cares, nation states care. I mean, this is, we're literally talking about what hogs the attention of all humans. A pretty big market.
53:24 Speaker 02 Yeah, and you kind of think of what's probably the most powerful person in the world. I mean, the President of the United States is typically one of the most powerful people in the world. What does he do all day? What product does he use all day? Think of how much strategic, not even just business power, societal power that product has over the rest of the world. And I'm talking about Twitter. You really need to think about these as they're not just social networks. They're, I mean, they are social networks, but they encompass so much more than that. And there's a lot of different ways to think about them and ways to think about the value they create in the world, and also sort of the business power, when you think about a competitive advantage, how that all relates with each other. So it's fascinating. I'm sure we could probably talk about this for another couple of hours if we had the time.
54:08 Patrick O'Shaughnessy? What have we not mentioned about social, technology, media, this whole kind of general area that you're really interested in that we haven't covered yet?
54:16 Speaker 02 I mean, I think one of the interesting things I've been playing around with is, kind of relates to Pinduoduo in commerce. They basically created a social commerce company. What other things can you add a social graph to, to create a product? Venmo is a really interesting example. They added a social component to payments and sort of a peer-to-peer network, which it worked really well for them. I think Cash App has, I guess, outperformed, out-executed, and they don't really have a social graph. So I don't know if a social graph necessarily works and exceeds business models in other industries, but... I think there's interesting ways to incorporate social components to sort of add network effects to products that might not have network effects.
55:00 Patrick O'Shaughnessy? So my closing question before my traditional final question, talk to us a bit about this idea of a fantasy draft portfolio. It sounds like a fun game to play, but I suspect there's more going on there in terms of what it forces you to think about and learn. So I'd love you to share why you do that and what lessons you've taken from the exercise.
55:18 Speaker 02 So for me, in order to get into venture capital, there are typically certain requirements that a VC who's going to hire you or an LP that's going to invest in your fund is looking for. And I pretty much had none of them. So I didn't go to a school anyone's heard of. I never worked at a tech company. I also didn't have any money to angel invest. So what I did was I basically just I fake angel invested. I mean, I didn't do this illegally anyway. It was like fantasy. It was like fantasy football, but it was for investing. If you're a public market investor, it's kind of like a paper trading account where, and that's maybe a better analogy for some of your listeners, is to think of it as a paper trading account
56:00 Speaker 02 for venture. I basically picked, the first one that I did, I picked seven startups that had maybe raised a couple million dollars. The valuations were 10 to 20 million dollar valuations, basically not on anyone's radar. There was no massive Sequoia capital coming in and putting in a hundred million dollars and everybody knew about the product. It was mostly stuff that other people weren't really betting on. And I was kind of trying to prove just the insights that I had of, yeah, I'm just a random guy who lives in Midwest, but I follow this stuff pretty closely. And I really think about venture as investing. A lot of people see it as company building and catching momentum waves and looking at charts ramping up. I think about it a lot and all that stuff's important to me, but
56:42 Speaker 02 I also really enjoy investing. So I think about every investment, I'm like, what's the competitive advantage here? How does this go from being a $10 million business to going public one day? So that was sort of the lens I took. I didn't have any data for any of these companies. I reached out to some of the founders and there's mixed reactions. Not everybody really got back to me. Some offered to meet up or send me their deck or I never actually ended up getting any data from anyone. I basically just looked at the website, scanned, looked online as much as I could, finding articles, finding podcast interviews, YouTube interviews, looking at their social media profiles, trying to get an idea of who they were and just figuring out what I bet on this founder if I was a VC. And it's easier to do that when you don't actually have real money and it's just kind of a game. It's fake, but that's what I used to build a track record.
57:28 Speaker 02 Then I did a second one as well. I picked about eighteen companies. When I broadened sort of my scope a little bit, it was kind of supposed to be usually when you do venture, you raise a small fund and then you raise a bigger fund and you slowly raise larger funds as you go until you hit the sort of your sweet spot of what your strategy is going to be long term. But typically you can't go say, hey, I've never done this before, but I want to have a $200 million fund. You have to start at three or five and then go to 10 and then go to 50 and then go to maybe 100. You slowly build up over time. So I started to kind of do that, pick some companies that I thought would do very well. And I kind of use that as a fake track record and just say, hey, six of the seven companies in this portfolio have raised some follow-on financing. Three have raised multiple rounds of follow-on financing,
58:13 Speaker 02 which in some cases in venture, that doesn't mean much, but it means that somebody else thinks that the valuation is higher because of how the companies performed and then one of the companies got acquired. So I kind of use that as a track record to go in interviews and say, maybe I could be good at this. I think a lot of public market investors do similar things when they're trying to get their first job. And it's similar to venture where you maybe angel invest, you have $50,000 and you put a couple thousand dollars into some friends' companies, just like in the public market. A fake account where you have a million dollars and you just do a strategy or maybe you have your own account, maybe it's less than a million dollars. And you just make a name for yourself and build a track record. So that's what I did. And I recommend it to a lot of people. It's actually a lot of fun. I learned a ton. I basically learned how to be a VC.
58:55 Speaker 02 I had to force myself to make good investments, which I thought I would be able to do. It's harder than you think it is, especially if you come from more of an investing background. You're thinking about what's the opportunity here? You're probably looking at financials and... Audited data, whereas if you're a startup investor, it's basically somebody telling you an idea that they have and here's a product or a product we have that we have four customers or we have three employees and we want to go out and build a public company. So the way you think about it is a little bit differently, but I still think there's a lot of lessons to be learned by just going on, just doing it and just trying to go through the motions in whatever way that you can. So I recommend it to everyone
59:39 Speaker 02 trying to get into venture, just do a fantasy portfolio, especially if you don't have a lot of money and you don't have the capital to write off a couple hundred thousand dollars just putting into startups and seeing what happens. I think it's definitely the way to go.
59:50 Patrick O'Shaughnessy? The closing question that I ask of everybody is for the kindest thing that anyone's ever done for you.
59:55 Speaker 02 I knew you were going to ask this. I was thinking about this. It's a hard question to answer. I think I had a friend in seventh grade. I kind of grew up with a single mom. We didn't have a lot of money. There's one week we didn't have enough money for groceries and he actually bought with his own money. We were in seventh grade. He bought us groceries and I've just kind of always thought about that. That's sort of, he didn't have to do that. He was totally looking out for me. Obviously it was one of the nicest things anyone's ever done for me, but I just kind of try to have that same give it back sort of mentality in everything that I do.
1:00:27 Patrick O'Shaughnessy? I love it. Simple, powerful story and a good reminder to us all. So Turner, thanks again for all your time today and for everything that you've taught us.
1:00:35 Speaker 02 Awesome. Thanks for having me. Looking forward to the next one.
1:00:39 Patrick O'Shaughnessy? If you enjoyed this episode, you can sign up for a new email newsletter sent out each week called Inside the Episode. Each week I condense that week's episode to my favorite big ideas, quotations and more. I've been recommending books to members of this email list for years and will keep doing so in this weekly email. You can sign up at investorfieldguide.com/bookclub.
Previous Charlie Songhurst – Lessons from Investing in 483 Companies - [Invest Like the Best, EP.181] Next Eric Vishria – The Past, Present, and Future of SaaS and Software - [Invest Like the Best, EP.183] Page updated September 29, 2026 · transcript and summary are machine-generated
