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Book Club Discussion: Brotopia with Emily Chang

Limited Partner Episode

October 22, 2020
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On our latest Acquired Book Club session, we were joined by Brotopia author and Emmy Award-winning host of Bloomberg Technology Emily Chang to discuss everything that went into writing this important book, and everything that's happened since -- especially now in the age of social distancing. You can listen to the full recording on the Acquired LP Show.

Our book notes on Brotopia

Summary Thoughts:

In some ways Brotopia feels like it was published just yesterday. The first edition came out in February 2018 when Susan Fowler’s blog post, the Google walkouts, Binary Capital, Gamergate and myriad other scandals were all exploding across tech alongside the broader #MeToo movement. The fallout of those events is still being felt today; tech (and we all) are nowhere near out of the woods re: coming to grips with sex and gender harrasment and discrimination in our industry.

Of course at the same time, re-reading Brotopia in 2020 feels like opening a time capsule from another age. The days of creepy VC cuddlepuddles, sex in Zenefits’ stairwells, entrepreneurs passing the “hot tub test” to get funded, and the Gold Club (the infamous San Francisco strip club located in the heart of Soma) being such a common startup team lunch spot that it was known as “Conference Room G” have all been washed away by our new Zoom reality -- hopefully permanently. And, while discussion of tech’s racial imbalance does play a big role in the book, we all know now that it deserves much deeper examination.

But, the core message of Brotopia still resonates just as strongly: tech didn’t have to be this way in the past, and doesn’t have to be this way going forward. As it continues to reshape more and more of society (especially now post-covid), the industry needs to change or we all risk living in a “utopia” that’s utopian only for a very few.

Notes and key themes:


Silicon Valley is *inexcusably* behind on gender equality (and diversity in general)

Tech trails just about every other major American industry on diversity statistics. Even investment banks — long a province of white male dominance — are now 50/50. Tech simply has no excuse.

Why did this happen?

1. The “pipeline problem”: the percentage of computer science degrees awarded to women hit a high in 1984 at 37%, and has declined ever since (until recent years). Why? Computers became a “boy” thing in the 1980’s alongside the rise of video games, and as overtaxed CS departments faced capacity constraints they implemented GPA cutoffs -- which favored students who came in already familiar with computers and knowing how to code.

2. Chauvinism was baked into much of the industry’s DNA from the very beginning. E.g., the canonical first JPEG image that generations of graphics students used to test their algorithms was a Playboy centerfold.

3. Startups and tech firms decided to embrace “culture fit” as a primary hiring criteria (see: Atari, Trilogy, etc). In practice this translated to: “blanket justification for blackballing anyone you don’t like”, which especially harmed women applicants.

4. Women who do manage to enter tech leave the industry at twice the rate of men. Even powerful female executives like Sheryl Sandberg, Marissa Mayer, etc. are subjected to WAY more inappropriate scrutiny of their personal and family lives than male counterparts. Imagine if Elon Musk were a woman… what would the internet have to say about X Æ A-12?


Beyond blatant sexism, deeper forces have kept tech male (and mostly white) dominated

Success in tech begets more success in tech… which usually looks a lot like said past success.

To a much higher degree than other industries, Silicon Valley finances itself from within. Individuals who achieve success as founders or employees at a hot company go on to invest in the next generations, either as angels or by becoming VCs. They tend to fund mostly people who look and think like them -- see e.g., the PayPal mafia. Even as outside capital has flowed into Silicon Valley over the past several years (from banks, hedge funds, etc), allocating early-stage financing is still mostly the domain industry insiders.


Myth of the Meritocracy

How do you define “merit” in an industry governed by power-law outcomes? Hard work? Did Mark Zuckerberg work one million times (the delta in outcomes) harder than the founders of MySpace? Smarts? Was he one million times smarter? Of course not. Clearly other factors impact tech outcomes far more than individual or even company-wide talent. (luck, timing, access, etc) Even beyond these other factors, the idea that a purely-merit based reward system can exist at all is a flawed one. We all know that privilege compounds, so even if someone’s original ticket in was their smarts or hard work, their subsequent accomplishments are attributable to that AND their membership in some new exclusive club — be it an Ivy League school or startup mafia.

Yet the meritocracy mindset pervades successful technology companies and leads to a toxic consequence: those who’ve achieved success start to believe they deserved it. Which — besides just not being a good look in general — makes them think it was due to specific traits in themselves and their companies, traits which they then intentionally select for when financing and mentoring the next generations. (Even if those traits have absolutely nothing to do with building great companies... e.g., being able to last 8 hours in a hot tub.)  


Tech’s sex and gender imbalance has far-reaching implications for society as a whole

Most large tech platforms -- and in particular most large social media platforms -- were designed by men, with little/no input from women (or minority groups) while they were in their infancy. One enormous consequence of that is the epidemic of trolling, hate speech and harassment that happens online… see e.g., Gamergate, etc. While the men who designed platforms like Twitter and Reddit certainly didn’t intend them to become havens for trolls, they also didn’t think about it or take measures to prevent it. Now that these platforms are large, it’s nearly impossible to put the harassment genie back in the bottle, despite companies’ continued moderation efforts costing tens if not hundreds of millions per year. As Emily points out, it’s not hard to imagine that a woman or women might have been more attuned to the potential for harassment, and things may have played out differently if they had an early seat at the table.


Fixing this issue isn’t just about doing what’s “right”, it’s about doing what’s right for business

The social media example above raises a critical point: tech is no longer a narrow or insular sector. It impacts every person and every company, in every country in the world. Products that win biggest will be those designed with the widest set of users in mind… which means companies should want teams with the widest set of backgrounds and experiences to build them.

The days of the “best” engineers being anti-social nerds who sit alone and create some platonic ideal of code are long over… and were probably never real in the first place. Rather, today’s best engineers are curious, empathetic, work well in teams and seek to understand what users of their product actually want and need. Even if you take James Damore’s infamous Google memo at face-value (which, to be clear, we don’t), his argument boils down to women having a preference for “empathizing over systematizing” as compared to men. Well, empathizing over systematizing is actually an advantage in today’s tech world.


Change IS happening -- even if still slowly

Nothing has changed about the pattern and structure of power in SIlicon Valley: success still begets success, and the industry still funds its own. However, over the past ~5 years some (but not all) of the people in power have finally started to make efforts to change the makeup of who wields that power.

Male CEOs of many new and newly public Silicon Valley success stories have instituted explicit gender and diversity targets for hiring and for their executive teams -- to varying degrees of success to be sure, but compared to the past this is progress. In one shining example, the entire named executive team in Zoom’s 2019 IPO S-1 was female (besides CEO Eric Yuan).

On the venture side, 5 years ago neither Sequoia nor Benchmark had any women members of their US investing teams; today both have ~20% female partners. Still a long way from 50/50, but alot better than zero. Groups like All Raise, BLCK VC, Latinx VC and others have emerged to support women and minority VCs and founders in entering the industry and achieving success.

The industry today is undoubtedly in a better place than in 2016. But, we shouldn’t kid ourselves: there is still a long way to go, and we have much more to improve.

We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Marvel
Season 1, Episode 26
LP Show
1/5/2016

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
8/28/2019

8. ESPN

Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

ESPN
Season 4, Episode 1
LP Show
1/28/2019

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

PayPal
Season 1, Episode 11
LP Show
5/8/2016

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
6/25/2017

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

NeXT
Season 1, Episode 23
LP Show
10/23/2016

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Android
Season 1, Episode 20
LP Show
9/16/2016

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

YouTube
Season 1, Episode 7
LP Show
2/3/2016

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Instagram
Season 1, Episode 2
LP Show
10/31/2015

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!

Sponsor:

  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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