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Consumer Investing in 2022 (with Brian O'Malley of Forerunner Ventures)

Limited Partner Episode

October 31, 2022
October 31, 2022

We sit down with Brian O’Malley of Forerunner Ventures to talk about where in the cycle we are right now for consumer investing. We touch on the macro environment (obviously!), but also how to navigate between and around the current generation of platform incumbents, and where the next breakthrough consumer technology companies might come from. And in true Acquired Playbook fashion we talk about the benefits of focusing on niches — and how on the internet they can expand ever bigger than you might initially imagine!


Links:


Sponsor:

Thank you to the Solana Foundation for being our presenting sponsor for the LP Show this season. Solana is the world’s most performant blockchain, the BEST place for developers to build Web3 applications, and of course very near & dear to the Acquired community’s heart. You get in touch with them here (just tell them them at Ben and David sent you), and you can find and listen to Solana's own podcast here, hosted by the Acquired community's very own Austin Federa!


Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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
October 31, 2022

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
October 31, 2022

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
October 31, 2022

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
October 31, 2022

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
October 31, 2022

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
October 31, 2022

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
October 31, 2022

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
October 31, 2022

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
October 31, 2022

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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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Hello Acquired LPs. Today, we have an awesome episode for you with Brian O'Malley from Forerunner Ventures. Brian is someone that David, I think, you've known for a long time.

David: Yeah. I think I first intersected with Brian back when I was an associate at Madrona. He and Greg Gottesman...

Ben: My co-founder at PSL.

David: Mentor to us both, Brian was back at Battery and co-led a seed, series A in Wavy, which ended up getting acquired by Google and has a long history.

Ben: Brian, of course, went on to be an investor at Excel and companies like HotelTonight and Anchor, which we'll talk about in this episode. But we wanted to have Brian on for, what is the state of consumer investing in 2022? Because his current firm, Forerunner, exclusively invests in consumer technology investments.

They've got a billion dollar fund. They're one of the foremost consumer-only firms out there, and they've really built a presence in this space. I was talking with Brian about what a good episode would be. And I realized that we really haven't touched the subject since having Sara Tavel on 2–3 years ago at this point to talk about this same idea.

David: A lifetime ago.

Ben: Yes, a lot has changed. I talked with Brian about where we are in the cycle of consumer investing, not just the macro cycle but also the current generation of platforms that enable breakthrough consumer technology companies. He also shares his specific thoughts on where we are in a handful of areas like direct-to-consumer, Web3, the metaverse, the benefits specifically of chasing niche communities online.

David: Before we dive in, we have a very fun little announcement to share with everybody.

Ben: As many of you know, we are doing a live show in Lisbon on November 7th at Solana's Breakpoint event. We thought a very appropriate episode to do while we are there, is Qualcomm. We are going to be diving into the full history of that company, CDMA technology that enables all the cell phones, everything that we do today, all the way that all of our phones can communicate to each other, and really how Qualcomm changed the world.

We were working with the good people at Solana and we were like, well, a lot of people aren't necessarily going to be attending Breakpoint, but we'll be in Europe, and I'm sure they'd love to come. They were kind enough to spin up a ticket that you can buy just to come to the Acquired event. If you go to acquired.fm/breakpoint, you can just get that single day ticket to come and be a part of our live recording, David and I covering Qualcomm.

David: I'm so pumped for this episode.

Ben: Hopefully, we will see you at Breakpoint, acquired.fm/breakpoint on November 7th or click the link in the show notes. With that, this is not investment advice, do your own research, and onto the interview. Brian O'Malley, welcome to the Acquired LP Show.

Brian: Hey, guys. Thanks for having me. I appreciate it.

Ben: Is this the Forerunner office?

Brian: This is. If you can see out back, we're looking out at the Presidio. But yeah, we're back in the office. We're here most of the week. We just feel like we get better work done that way. I don't know if that's a statement about what our home life is like, or a statement about how productive we are in the office. But either way, we're happy to be back.

David: Presidio is so beautiful.

Brian: Exactly. Crimea River, right? It's not a bad place to have to go work in a national park.

Ben: Is 100% of Forerunner in San Francisco?

Brian: No. We've got two people that are based out of New York that were pandemic transplants, who were on the team before. We've gotten a lot of value out of them being local. Then we've hired a few other folks—one person's in Sacramento, one person's in Toronto, one person's in Southern California.

We ended up just traveling a lot out here to spend time together in person, but it's something that we've erred on the side of hiring the best people possible. Then we're trying to find ways to get more FaceTime along the way.

Ben: It makes sense. Do you find yourself in LA a lot of being pure consumer investors?

Brian: Not as much. I think one thing that the pandemic did to help is it made us more productive on Zoom, so those initial meetings, both from a founder perspective as well as from an investor perspective. You can get a lot of those done over Zoom. But when you really want to get to know someone, that's when you just get on a plane and go see them or vice-versa.

I would say there are less meetings in person. But the ones that you are doing in person are the ones where it really matters, where it's not just like an hour and a slide deck. It's like a couple hours and a couple of beers. That's more of the way I like doing things anyways, so it's been a healthy balance.

I used to be in New York probably once a month. Now I'm there probably every 2–3 months, but I stay for a longer period of time and end up spending a lot more FaceTime both with folks in the portfolio, as well as other people in our ecosystem. That cadence has just been a lot better for me, both from the fact that I'm getting all my years and those red eyes aren't as pleasant as they used to be, and also just to really feel like you're there, you're present, you're in the moment, and you're not thinking about getting through TSA security and your next flight home.

Ben: Which is me every time, hauling into San Francisco for a quick day-and-a-half. We're talking about consumer investing today. I want to start with a provocative question, which is, a lot of venture capitalists have fled from consumer and are basically B2B SaaS investors at this point, maybe some marketplaces. But how do you justify investing in early-stage consumer, given how high the variance is, how high beta the investments are, given how hits-driven some of this is, how fickle consumers are? I get that the outcomes can be big, but how do you execute that strategy?

Brian: Venture capital has gotten a lot more competitive in recent years. If competitors want to vacate the premises, that's okay by us because there are enough people we do like to work with that we can find solid partners. But I think a lot of it comes back to folks really focusing on the wrong metrics. They're trying to spend time in-app, looking at the same thing as you would from a B2B SaaS perspective, which is very metrics-oriented. We try to be more focused on people, what's going on in their lives, what's top of mind.

I think our first principles as a firm are different. Some things that might seem vague to another firm is maybe just like someone listening to a foreign language or it's like looking at the matrix. We're trying to be like Neo and be able to interpret that in a way that we understand. We do that by not thinking we have the right answers, but by doing a ton of primary research and really trying to understand what's going on in people's lives, what's top of mind. That's going to help us understand what has resilience versus what might be a fad and be gone tomorrow.

That's something that I think to do well, you need to focus on it. It can't be a side gig. It needs to be the focus of where not just you as an individual, but as a team, you guys are all collaborated on because it helps get through some of those harder questions.

David: By what's going on in people's lives, you mean in consumers’ lives rip broadly across the country and across the world, not the founders' lives?

Brian: Exactly. I think you have a lot of venture people chasing founders around trying to get their time and attention. We want to go one step further and focus on the end consumer, because those are the same questions that the best founders are also asking. If we can be insightful about someone's customer, that enables us to show up and have a conversation with them.

That's not about what their monthly revenue looks like, who they just hired, or who they're going to hire, but what is going on with your customer? What pain points do they have? And what unique solutions do they have as a team that are different from alternatives that have been there before?

Ben: I always think about consumer investing, pre-product/market fit and post-product/market fit as totally different asset classes, because pre-product/market fit, there are so many more companies, so many more theories about something that could work. And post is really just, actually, maybe I'll put it to you, about what is it about post that makes something really exciting to you.

Brian: I think pre-market fit, you're really trying to understand if something can be a thing. You're trying to understand the composition of what the product is, what it's solving. A lot of times, that's less about how great the solution is. That's about how bad the existing alternative is today.

If you think back to Uber, Uber version 1.0 was not an amazing experience in and of itself and probably wouldn't have survived in New York, where taxis were already pretty darn good. But when contrasted against the taxi ecosystem that we had here in the Bay Area, where you would sit on hold for 30 minutes, and then it was still 50/50 whether the car would actually show up, that product was a lifesaver.

A lot of it is not just how good these early products are. A lot of founders spent too much time trying to make those products really special. They're really clean or have a very high NPS, when it's more about how bad the alternative is and how important it is for people to solve that problem. That's really early on. It's just like, hey, can this be a thing?

From there, you're really trying to understand the resilience of the product. Can this stay a thing? Can this become more and more important to the people that it's serving? And look at it not from the standpoint of, hey, every customer you've ever had is going to stick? But the ones that do, they're going to use this product three, four, or five times as much, and it's going to become part of their daily habits.

Ben: If I can paraphrase, the pre-product/market fit is really about, is an entrepreneur onto something where the current state of things is really just not serving customers well, and then afterwards, it's about how durable is the heat and love around the solution that they've discovered?

Brian: Exactly. The average consumer downloads zero new apps a month. People don't wake up in the morning thinking about your startup. That's just the unfortunate reality. But they think about what's going on in their lives, and they need to find the initiative to look for a solution. Or they need to find the initiative to talk about the problem with someone else in their life, and maybe they've intersected the solution.

It's more about rising above the noise. When you think about just how many startups there are, how many new companies are out there, a lot of them have a really hard time rising above the noise, because they're not intersecting a narrow enough set of people where you're important enough.

This is one of the big issues (I think) a lot of venture people have. They try to solve for these large market sizes. Usually in the early days, it's about a smaller niche set of consumers who have a big problem, but where that can evolve into something that's more universally applicable once you get into more of that median crowd.

Ben: Where have you seen that in investments that you've been involved with over the years where it's neat to say, and I think everybody wants to believe that, oh, I'll go somewhere where there's a small market now, but where people really want to solve some problem? I'm sure you've actually experienced this stuff firsthand. I'm curious what felt like a toy to you and then turned out actually to be massive?

Brian: I was fortunate to be involved with the HotelTonight guys early on. Their initial product was live in three cities. It was New York, San Francisco, and LA. It was only available day of, and it was probably across a set of two dozen properties. The early customer, a lot of it was people who were commuting into New York who needed a place to crash on a frequent basis, because they just didn't want to deal with the commute going back home.

That might be less of an applicable problem today, but it was a much narrower set of consumers, where for a lot of other people, the idea of 1:00 PM not knowing where you're going to sleep that night, would have just felt naturally uncomfortable.

That's where the product evolved to. It got to the point where you could book three months out, you could book multiple nights, you could book across properties that HotelTonight had exclusive rates, as well as really any property that was available on Expedia. It evolved into something that really just looks like an easier mobile booking experience. But in those early days, it never would have risen above the noise if it didn't have a value to a niche set of audience.

Ben: It's interesting idea that you can appeal to a niche set of consumers and thus aggregate their demand, where once you have their loyalty for some specific narrow use case they have, you later can offer them a much broader set of things, because they already are conditioned to use your thing as channel for solving their problem.

Brian: Especially in marketplace-type businesses, there's always this push-pull between supply and demand. You might need that niche set of consumers in order to get the right supply online. But then once you get that supply online, you can build a more durable alternative that appeals to a wider set of folks.

Ben: That's a good place to dive in. You mentioned the average consumer downloads zero new apps per month. I want to flashback to the 2010 era, where people were discovering all kinds of new apps. This is when I released a to-do list app on the App Store. And that was novel enough to get millions of downloads, Facebook ads were really cheap.

David: Getting featured by Apple? That was like company making.

Brian: Still is. It's just part of the kit these days.

Ben: Right. I want to talk a little bit about cycles, but not about macroeconomic cycles, because I think everybody's talking about the, oh, we're going into this recession, layoff, and blah-blah-blah. Maybe we'll get to that, but I want to talk about consumer cycles around new technology waves. I'm curious where you think we are right now in that and if that impacts where you're excited about investing versus not.

Brian: In some ways, I think investors almost over rotate trying to find the next cycle just because this last wave of cycles was so powerful when you think about mobile, when you think about the movement to the cloud. You have a lot of these, I would almost say like false starts, where people were really excited about VR. That evolved a little bit, but you remember how excited everyone was about Google Glass and then the first time you're hanging out with someone that was wearing it? It just felt weird.

We're trying to map both what people need with a sense of taste and social norms to understand what people are actually going to adopt. A lot of times, these new cycles that are talked about—take things like the metaverse—they're less pulled from the consumer, at least metaverse in the way that Facebook is describing it. They're less pulled from the consumer and more pushed down by folks in the ecosystem where it benefits them.

I think a lot of the issues in consumer investing—to get to the point you made earlier where people are feeling a little bit lost—is because they're looking for that next cycle. And there have been a lot of false positives in what that next cycle is. For me, when I don't know what that next platform is that's so exciting and just everything's going to be reinvented, I go back to our northstar as a firm, which is this people component.

We did this consumer research project, which we're going to share some of the results later this year. There were three big themes that came out of that. That was that people were looking for purpose, direction, and resilience. They're actually feeling pretty good about themselves individually, but just feeling horribly about the rest of the world.

An example would be spirituality. I think a lot of people in my life live a relatively secular life. But there is this draw, especially from even younger demographics for a desire for a greater level of spirituality. That was something that was like news to us. We wouldn't have come up with that on our own. But once we saw that trend, we wanted to go and appeal to it a little bit more.

On the inverse, we spent a lot of time around sustainability. It feels incredibly important, given everything going on in the world. But when we started looking at purchase data where people were talking about what they wanted to do versus what they were actually doing, a lot of people hadn't really changed their behaviors that much to live a more sustainable life.

When we don't see clear cycles or clear shifts, we go back to these northstar traits and realize that even the movement to mobile is something that a lot of industries haven't done yet. I still have a checkbook. When I'm looking for investment themes, I'm like, where am I still writing checks? Where am I booking appointments on iMessage instead of an app?

We talk a lot about people. I think other folks naturally gravitate to like, oh, that must be a consumer solution, but people are adopting products in the enterprise. They're adopting products for their own small businesses.

A big theme that we've talked about a fair amount is the next generation of being Street America, and how can that be more digitized in a way where these merchants are competing with folks like Amazon and Walmart, but there's an inherent desire of consumers to shop locally? What technologies can enable those businesses in a way that still hasn't made it there?

There's this concept of the mobile cycle. While we feel like it's all problems are said and done sometimes living in a place like San Francisco, there's still a whole wave of people, where they're still living a very analog life, and they could benefit from some of these more digital solutions.

David: With a theme like this, like spirituality, community, belonging, how do you, especially at the early stage, then go prosecute it when you're looking for investments? Do you put a billboard up and hey, founders, here it comes? Obviously not.

Brian: Yeah, billboards on 101, the prices are coming down these days. Maybe we'll be able to get there at some point.

David: The contrarian move is actually go buy those billboards right now.

Brian: Exactly.

David: What do you guys do to prosecute? You could talk about early and growth, but particularly at early I'm curious.

Brian: Again, one of the benefits of being one of the few firms that is really standing tall around these themes and around the consumer, the right founders know that they can come talk to us. We might not invest in their business, but we're going to have an informed conversation at a minimum.

The benefit of our job is that we don't have to have all the answers. We just need to know what we're looking for, and then it's up to people much smarter than us who are starting new businesses to come in and talk about their passion, talk about the problems they're trying to solve, who they're serving. A lot of times, that's one of the most exciting parts of the job. You never know what the day is going to hold, who you're going to meet, and how you're going to be inspired.

We don't try to have all the answers. We do a fair amount of writing. We have a newsletter if I could pimp it out a little bit, but it's called the CQ. We have something called perspectives on our website.

Ben: What's the CQ stands for?

Brian: It stands for the consumer quotient, which is a very elaborate way of talking about how people use both EQ and IQ to make decisions, because we really want to play into that emotional component. It doesn't matter whether people are making decisions for their personal lives or their business lives. There's always an emotional component that makes people do something that they didn't do yesterday.

We really want to drive into that component, because your stereotypical venture capital firm, it's a bunch of disconnected guys sitting around a table eating muffins or whatever the thing is, pontificating about what's interesting. That doesn't always get into the emotional reason why people do things, so that's how we came up with this CQ and our beautiful branding.

Now the piece around consumers, we leverage third-party data tools, we leverage survey tools, and we do our own primary research. Unless we're very serious about a particular company, we're not typically doing user interviews at that micro of a level. That's something that being remote and leveraging all digital tools that are available to us is much better than walking down the street, handing out flyers, and asking people what's going on in their lives.

Ben: One question that I always like to ask people is—you may not want to share this if you're like, that's my secret sauce, but I don't think you're that person—if you were talking to a version of yourself 10 or 20 years younger who wanted to become you but more quickly, how would you save them time? How would you tell them, hey, most people don't realize that my job is actually this, but it's mostly this, so you should focus on this more?

Brian: I think one of the hard things, at least for me, early on getting into venture, there was this general concept that people in venture don't do a lot for their companies. I lived through being at a few startups. I didn't really see our board doing much of anything. So when I got involved, I wanted to be able to measure my impact at those companies, because then I can look at myself in the mirror and be like, I'm not the stereotypical person  in venture who doesn't really contribute a whole lot.

What it took me a while to learn is that any direct interaction that I have is really a flawed approach. It's my job to be asking the right questions. It's my job to be putting the right people in the room to be answering those questions and then to get out of the way.

Ben: But you mean directly impacting the product, like a direct impact on the business?

Brian: Exactly. It'd be like, hey, let me go crunch your marketing numbers to figure out which channels are not being properly exploited. Let me go grab another developer friend of mine, and we'll hack away your site over the weekend. That was something that gave me confidence is maybe the right way of saying it. But I felt good about those direct contributions when it was exactly the wrong thing to be doing, because it wasn't helping that team become self-sufficient and not needing my involvement.

I ran into some issues early on which caused a bit of headache, because I was getting too involved operationally, because I thought that was me being an overachiever, as opposed to me being a meddler. I'm now much happier with my role on the sidelines. There's an understanding that I have that people need to go through challenges, and need to learn on their own. I'm not going to necessarily influence that entirely.

I'm really there to make sure that they're thinking about the problems they have from every different angle, and that they're getting in touch with the right people who have been through those problems themselves and who might have suggestions for how to solve it. It's like this recognition of where my role is in the equation and how I can help these people be most successful, which largely means that I'm not the hero, it's not my name and lights, and that's okay.

Ben: Do you think that's something you could have understood 15 years ago, or do you think that you needed to go through that in order to understand it?

David: Did you have to make your own mistakes?

Brian: I think I needed to go through it. I think I needed to go through not just the process of it, but seeing what happened to the teams where I was too involved, and that it just wasn't productive. That they would have been better spending an extra couple of thousand doing something on their own or having to take twice as long, but where I wasn't directly trying to do anything, because that was ultimately in the best interest of them becoming self-sufficient and them owning the decisions they're making and owning the results. I think I had to learn that independently, but it would have been helpful if someone told me this. I might have picked up on it a little bit more quickly that way.

David: Looking at that today in the modern consumer companies, what do you think are the core most important disciplines that companies develop? Obviously in-house, but what are the things that when you're looking at teams today, you're like, we need to either have on the team already or build into world class talent in XYZ disciplines?

Brian: I think your standard answers will probably be something to the extent of having a marketing function, which is really strong at understanding different pockets of acquiring new customers to not be overly reliant on paid media. Folks who understand how to build community, folks who understand how to leverage partnerships, different organic channels, that is becoming increasingly important for businesses to control their own destiny.

The next area is really around product and engineering from the standpoint of how you can leverage existing tools that are out there to deliver an experience more quickly. A lot of companies we bump into, they might have an amazing insight, but it just takes a long time for them to get from point A to point B. That speed is incredibly important.

Beyond those two, the other one that I think is becoming increasingly important as cash is less available is really an understanding of your margin profile and understanding of the underlying cash flow of the business.

A lot of companies have put together these beautiful solutions that have NPS scores that are in the high 80s, which is almost ridiculously good, but they're giving away too much for what they're ultimately charging, which leads to poor gross margin. They're not as thoughtful about the cash flow of the business. They have a negative cash flow, which the faster you grow, the more money you inherently need.

Expertise in understanding this margin structure, expertise and understanding pricing, these are areas that as capital becomes more scarce, are increasingly important. There's got to be a willingness to have some of your customers ultimately say no because of price. If you haven't fully pushed that threshold, then you're giving something away too readily available. That's going to come back and bite you in terms of the customer service costs of dealing with a wider audience versus a narrow audience that's ultimately paying you more.

Ben: If I'm giving away $1 for 90¢, there's an infinite amount of product/market fit for that.

David: That's so funny. If the NPS for something is too high, you almost get a little suspicious. You're like, all right, how sustainable is this?

Brian: Right. If your NPS is above that of an iPhone that's been crafted and engineered over a decade-plus of experience, has reached real scale, and becomes a daily component of people's lives, then you might be offering too much for what you're charging.

There's this fear that founders have which is understandable, but you need to be willing to fire or let go of some of your customers that are not ultimately profitable, because it's not the grow-at-all-cost mode anymore. It's about building sustainable growth. And if someone is only showing up because you're giving away the dollar for 90¢, they're not ultimately the customer that you want.

Ben: I also want to drill in on this cash flow cycle thing. It's not something that I totally grasped until the last couple of years. I always figured, well, how important are payment terms, really? You'll get paid eventually, so who cares when it's happening?

Folks who've listened to our Amazon episode, or have operated in a space that carries physical inventory or something will tell you, it matters a lot. But I just watched a friend of mine's company go out of business because they were growing super fast, they had to make their next large inventory purchase as a CPG company. They basically could not raise the capital to make that next inventory purchase, but they still had so much inventory on hand that they needed to sell through that they couldn't make the next inventory commitment until they sold through their existing inventory to get the cash to finance the purchase of the next one.

There's this really, especially in physical products, as capital dries up and you must finance future growth in your business with cash flow, you have to get unbelievably creative or make sure that you have really advantageous payment terms with your suppliers. That tends to show up a lot more in these consumer companies that may have some physical component.

Brian: I think this is especially relevant for companies that are operating in the physical world. Because you have this infrastructure built up, you think about especially people that have local operations. There are a lot of costs upfront that you need to think about before you even get into revenue. Even if you have great terms with a supplier, that's ultimately the leverage that they have over you that they can renegotiate.

Companies that have a negative cash flow cycle need to think about how you can shrink that down as quickly as possible in week's matter in this regard, because the faster that you're growing, the more negative your cycle is.

The inverse, we have companies where people are paying for a product a year in advance, and then the product gets delivered throughout that year. A company called Sunday in the lawn care space operates that way.

That ends up being a really nice positive cash flow cycle for them to be able to get cash in February, March, April when people are signing up and to deliver the product throughout the year.

I always remember, there's this company called Jetsetter which was built back in the day. It was this amazing travel product. Drew, who was the CEO there, was able to get it to $100 million.

Ben: Drew has been on Acquired.

Brian: Oh, no way. Okay.

David: Way back in the day.

Ben: But first year, like seven years ago.

Brian: He was always really impressive. They got people to effectively pay for the trips up front, and then they would pay the supplier when people actually went on those trips. That enabled them to get to $100 million off of only spending a million dollars along the way.

The faster you're growing, the better that positive cash flow cycle can help you. But the inverse is the faster you grow, the more negative cash flow cycle can hamper you. We're looking for founders depends on the business you're operating in. But the more that you're touching physical goods, the more you really need to understand the cash flow of what's going on in your operations.

Ben: Cash flow, margins. Operating these physical goods companies, there's less margin of safety. You can't YOLO the running of the business. You have to thread needle, after needle, after needle, and make sure it all flows together nicely.

Brian: That's why a lot of them, venture is not the right financing instrument for what they're trying to build. You can build a very profitable, durable business growing 30%, 40%, 50% a year that might be lucrative for the founders. It might be a great solution for the consumers, but it doesn't fit the ultimate goals of venture firms, which is to have things growing 100%-plus per year that can ultimately be worth billions of dollars.

If you look at some of the disconnect that's happened in the physical product world, it's just been not that these are bad businesses, it's been that the financing strategy around them has set them up for unachievable objectives. We're getting back to a point now, where that misalignment is getting fixed in a way where people are less likely to give really expensive venture dollars with lots of strings, but sometimes founders think that's an indictment on their business. It's not. It's just the wrong instrument for how to grow to the next phase.

Usually, the answer for those companies is to focus on angels and to figure out how to get to be profitable and in control of your own destiny on smaller dollars, because that's what companies did for decades before. We as a firm haven't done as many physical product companies in the last fund cycle. I'd say it was maybe 5 out of 2 dozen, 27, or something along those lines, because the intersection of our funds size today, some of the headwinds that are facing those businesses hasn't lined up as well as it did in the earlier days of Forerunner, where we had smaller funds so you could optimize for different sorts of outcomes. And you also had a much better tailwind around digital marketing, which today has gotten a lot more complicated.

Ben: All right, speaking of digital marketing, there's a question I've been wanting to ask you. What is the list of things where I can walk into your office and pitch you, and if I say them as a part of the pitch, you'll instantly trend south of a five on the investment and be not excited about it?

I'll throw out the first one, which I think is one that is likely one of these switches. We acquire the vast majority of our customers on Facebook ads. I assume that is a near instant pass as if there's no real line of sight to how I get the majority up to organic referrals.

Brian: The big question there becomes more, how are they thinking about the next chapter of their business? A lot of companies we talked to at the seed, series A stage, the founder is the one who's driving the marketing budget. The expectation is not that they're completely sophisticated about every possible channel. They probably don't have the budget to go more broadly, so we do meet a lot of people who, unfortunately, the reality is most of the dollars spent are in social channels.

The real question is whether they think that that's going to be the next phase of growth as well. They think that they can continue to spend the same CPA for 5X the budget, and that usually doesn't play out. As you increase your budget, you lose some of the low hanging fruit pools of customers, and it's going to get more expensive.

The folks that come to us and say, hey, look, we wanted to get in market quickly, we wanted to test this by going through social media because we felt like we had the right audiences we could target, that helped us get to our first thousand customers. But when we think about the next 10,000, we're going to evolve our strategy in these ways.

That's the level of thought we're looking for, and then we're going to evaluate whether those strategies are right or not. But the idea that they've been thinking about it and that they understand that that next chapter might be different from the last one is really all we can expect when we're talking with relatively early stage companies.

Ben: When is it credible, versus when is it sort of, I just don't believe you, when someone's saying, oh, well, so far, it's been 100% social ads, but in the future, it's not going to be? What causes you to believe that versus not?

Brian: This is where it's really not just about that one dimension. Some of this has to do with, how inherently interested are we in the category that they're ultimately operating in? Do we have a belief that other channels will work beyond that one? That's a big question. Number two is, who is the team behind this? Do these people that have an expertise have a unique understanding of who that customer is?

Those two things give credibility to the next chapter story, whereas someone else who's operating in a category that we've seen just be full of carnage, and they don't have a particular background. They haven't learned from other companies in the space.

That's one of the immediate red flags you asked earlier, is when someone doesn't know why a previous company that attacked the same problem space either worked or didn't work. That happens all the time. If I know more about your business, not even operating in it than you do, that's really scary when we're not supposed to be the experts in any given category.

You guys will be shocked at how many people will be like, what about this company and some business that raises $100 million in the exact same category and they don't even know about it?

David: Right.

Ben: Yeah, that's crazy. Okay, maybe that's another good one. One would be me welting and saying, yup, 100% of our spend is on paid channels right now, but I have really no credible reason why you would believe that any of that is ever going to shift away based on the team or based on our experience. The second would be having no idea who else is in the space attacking the same customers solving the same problem.

I'm curious what other ones, and maybe specifically to consumer investing, are things where you look at some company or some team and you're like, ugh, shoot, that is not a good sign?

Brian: Another one that we see frequently is people who don't understand the power of a competitor's existing distribution. In the marketplace space, you'll see a lot of people who will show up and they'll be like, look how crappy this Craigslist alternative is. It's like, okay, that's great. But people have been using that for the past 20 years, and a lot of them don't think it's broken, and they don't really care that the UI isn't as clean as yours.

You'll see companies where they have a great strategy for how they go from 1 million users to 10 million users, but they have no idea how to get their first hundred. They have no idea how to get their first thousand. And they think that it's going to be some beautiful UI or design trick that's going to get them there, as opposed to understanding that these inherent audiences are seeing the fact that not everyone uses their product because it's a beautiful experience. They use it because it works and it gets the job done for them.

Ben: In talking about some of this distribution stuff and acquisition stuff, there's a company that's in both of our portfolios—Arrived Homes. They had the opposite approach, where all of their initial sign ups were organic word of mouth. They only later, after demonstrating early product/market fit, got into the paid game.

I'm curious, if someone's really trying to get started on an idea, would you recommend using paid channels first and then having a credible strategy to move to a blend of organic? Or should they try the Arrived strategy and do it on hard mode and try without paying to really validate what the true cost of acquisition is?

Brian: When we're talking to founders, we're really looking for as much data as we can get, recognizing that it's an imperfect picture. If a company has been operating just that in hard mode, where they've been doing everything organically and they've been seeing success, on one hand, that's great, because it shows that there is an inherent desire.

On the other hand, that can be more challenging to evaluate, because you don't have any understanding of whether paid channels or more deliberate marketing channels will work, or how hard it will be to light those up.

Sometimes, as much as people hate paid marketing, it is a blunt tool that if it's working very well, it will probably continue to work to a deteriorating amount. But it's understandable in terms of how it's going to evolve. Versus if you've been entirely organic, and now you need to start up the machine for doing something differently, that's effectively an unknown area that you're going into, so there are more open questions.

Ben: You don't know for sure that you can drive scale, even though you have this unpredictable but cheap well that you're currently fishing in, and you don't know how deep the well really can go.

Brian: With Arrived, specifically, we thought the problems that they were solving was really about giving regular, retail investors access to real estate investments that previously you could only really do if you're wealthy. We thought that value prop would ring true and that over time there would be communities and pockets of people that they could attach themselves to that wouldn't rely on paid marketing. But that was a belief based on existing research we had done in the category and not something that we maybe would have been as comfortable going after if we didn't already feel like we had a read on what people wanted to do.

Ben: It makes sense. I want to bounce around to some different areas of consumer investing. One that was all the range five, six, seven years ago was this direct-to-consumer movement. We saw it with Warby Parker early. We saw it with Allbirds. It feels like it was kick started originally by Dollar Shave Club.

We quickly got to this saturation point, where there were three DTC brands in every category, and then people moved into highly unprofitable categories that were perhaps low revenue, thin margin, two-year payback periods. Then we all got subscription fatigue. I'm describing this in a very low resolution way. But I'm curious, since you spend a lot of time thinking about this, where are we in the direct-to-consumer space right now?

Brian: I think when you're speaking specifically to companies that are offering a physical product, we're in this period right now where there is a return to reality. We talked earlier about cash flow cycles, we talked earlier about some of the challenges of scaling physical product adventure scale, and it's really difficult. It's increasingly difficult when these marketing channels that a lot of these companies relied on have gotten harder and harder to grow at a rapid rate.

Some of that's actually been getting better over the past couple of months. But with changes around the Apple platform, that’s got to be really difficult for a good 18-month period. With that, we're seeing some companies go away, the ones that don't have a strong-enough value proposition to the end consumer. Some of those are just not going to survive. That's unfortunate, but that happens.

Some of them are turning into good quality cash flow businesses, but ones where there's a real question about the strategic value around those companies, is there an inherent moat? Should they be valued at 10 times revenue? Or is this really an 8–12 times EBITDA profile, which is a very different picture of how companies can be valued?

Some of them are able to capture culture in a way where they become part of everyday conversation, they become part of the fabric of how people think about a product category. They start out in a narrow set, and then they're able to evolve that more broadly.

We're still interested in the category, but we want to be mindful that a lot of businesses don't fit the current environment, they don't fit what people need, and they maybe don't fit our fund model today. Again, that is okay, but we are looking for businesses, where we can have it make a dent in a billion dollar fund, which is a very different objective than Forerunner one, which is a $40 million fund.

Ben: What do you think those are in this macro economic cycle if we had to shift in a little bit closer? For point of comparison, the 2008 crisis saw the rise of Airbnb, where it was attractive to people to make a little bit more money to help put toward their mortgage or their rent. I'm curious, what will be the things that drive the counter cyclical companies that come out of this macro?

Brian: A lot of the businesses that were really successful coming out of that last recession were ways for people to leverage their existing assets in a creative and new way. The ability to leverage the car that you already own to be able to go drive, the ability to get a better car than you could maybe afford otherwise by driving on the side.

You mentioned Airbnb earlier. There were excess assets and excess items before. We're seeing a lot of businesses these days that are a little bit more focused on leveraging people's excess time. How can you build a business by taking advantage of the fact that people have inherent social reach, they have curiosities and existing interests, and they have more availability of time that they can contribute in one way, shape, or form?

Some of these have been dubbed this broader creator economy, which I think in some ways is the wrong way to think about it, because a lot of folks want to post on social media for all the inherent personal reasons, not because they're trying to build businesses. You really need to be thoughtful about hey, who actually is willing to put the work in to do this in a way that's going to create economic value for them and the people in the underlying marketplace?

We have seen this element of time. We've also seen a lot of marketplaces (I think) for the last decade really be focused on supply side innovation. We have a whole piece talking about that focused on the supply side, but I think there's also a shift to businesses that have more of a demand side mode. What I mean by that is it's become to the point where there are just so many alternatives for you to be able to get what you want.

When you talk about secondhand clothing, there are five or six relevant sites there. When you think about vacation rentals, you need to go on Airbnb. You need to figure out which place is going to make you do all the laundry and mow the lawn yourself, versus which place is actually going to feel like a relaxing vacation. It's a lot of factors. It becomes a lot more difficult for the end consumer to be able to understand the trade off of one alternative versus another.

Think about this almost like a concierge service. We're seeing companies come into play, which are trying to make that easier on the people willing to spend their money in these marketplaces by not having them have to come and figure everything out on their own.

David: On this topic of “creators” and building businesses versus posting social media, I'm curious what you guys' thoughts are on YouTube, because I think YouTube and creators on YouTube, to me, YouTube is this really interesting platform, where for people who choose to, they've removed the burden of building a business.

If you can build a following on YouTube, you just click a button and turn on monetization, and they handle the business for you. Have you guys made any investments in creators on YouTube, the YouTube platform? Or how do you think about it for your companies?

Brian: We haven't made any investments in that category. It's hard to think about it as a third-party operating specifically within Google's four-walled environments and what moats you can build there. But going back to the point earlier around creative marketing channels, YouTube is a fascinating place for early-stage companies to be able to play, because the creators have a lot of influence over their audience. They have a fair amount of reach. And the tools that Google puts out are really pretty good.

When we meet with a company where they say, hey, we've done these things on Facebook, but more importantly, we're seeing early signs of success, leveraging YouTube, that's an exciting thing for us to hear because that feels like you can probably 10X the budget there and not quite hit the diminishing returns that you would in other social channels.

We've been more, I would say, consumers of those tools, as opposed to investing in the creators themselves. It is a massive ecosystem, especially when you skew to younger folks. They spend all their time on YouTube. When I think about where over the next decade is there going to be more and more attention, YouTube is definitely one of those channels that feels like there's more to be done in.

David: I just find it fascinating. Mr. Beast, he's now building a business outside of YouTube in a big way. But before that, for years, he had a great business without having to do anything typically associated with the business. It was just aggregate views, and YouTube took care of the monetization.

Brian: Mr. Beast, specifically, initially, has been very sophisticated about how he's gone about these different channels. There's been third-party investors that have gotten involved along the way. We've had conversations about this.

He's also a unique entity that sometimes investors will extrapolate what works for him. There's really only a dozen or so people that maybe fit in that bucket, and then it tails off pretty quickly. It almost reminds me of when we used to look at a lot of these in-game advertising businesses that were like, oh, there were all these video games. They have all this attention, so we're going to sell items within the games.

The example would always be like, we're going to sell a Gatorade or something like that, that will help your player, your character, or whatever it is, do better. But then the examples fell off a cliff pretty quickly once you got beyond a few of these Gatorade, Redbull, Clif Bar, or whatever it is.

When you think about the examples of the YouTube businesses, while the Mr. Beast example is intellectually really interesting, it's the question of, how does it work for the creator with 100,000 followers, where they're putting time and they're making some money at it, but it's not quite their life's mission at this point?

That healthy middle ground is ultimately something that is easier for us to think about how it can be a scalable, durable business, as opposed to more talent-led businesses, where you're really reliant on that person's personal brand for the future of the company. That can ultimately make it more difficult for you to sell that business down the road.

Ben: Like Acquired, not a saleable asset. Without David and I, it's not particularly useful.

Brian: Exactly. It comes down to talent.

Ben: As you look at different channels or different creator mediums, which one has the healthiest fat torso? I could imagine trying to contrast TIkTok creators, podcasters, YouTubers.

The example I'll get from when we started Glow was that there actually were not as many healthy, fat torso podcasters as I would have thought. That podcasters who had reached scale, but weren't quite Joe Rogan. It seemed like there were a handful of the Rogan types, and then a whole bunch that nobody listened to, and maybe 1% of all podcasts fell into what I would consider like a healthy torso. Have you given any thought to what that looks like across mediums?

Brian: We have. There still is a big opportunity for a next-generation affiliate platform. If you think about the way that affiliates operate today, it's largely like use our code, you have to remember the code, you have to enter it at checkout, then they get paid back.

We invested in a company called Canal, which really enables anyone to become a third-party seller. Whether that's creating their own storefront, whether that's been existing brand, and be able to put other people's products on your site, we think there's an opportunity for having an affiliate be less of a back alley a conversation and more of a front of the office, like this is a great way for people not to be advertisers, but to actually be sellers of your product.

But also things like podcasts, I was involved early on with a company called Anchor. They were experimenting with the longer tail podcast creators and different monetization strategies. What was really interesting that we saw, this was all right before the company got bought by Spotify, so it didn't fully get played out as much as I would have hoped. But folks that had a podcast that might only have 100 listeners, it's like their mom, it's their girlfriend, it's their dog, there's not a lot of people that are ultimately listening, the conversion rates on the ads that they put out are astronomical.

If you were able to get to some of those longer tail creators, people that had an audience, and that audience knew them in the real world, when they talked about something, people listened. Then it was really just a question of how can you stitch this together in a programmatic way so you're not going and doing one-off ad deals with each one of these individuals, but can you bring the programmatic advertising read to a broader scale, which I think would have been really interesting and would have played out?

Obviously, it went in a different direction once the team joined Spotify. I think some of that comes back to some of these tools that the platforms are able to put out that make it easier for the longer tail to be able to do some of the practices that historically were only done by the head end. But those are ultimately in control of the platform creators, not third-parties that are operating on those platforms.

Ben: It makes sense. I like your observation about the higher affinity and higher conversion rate. If you can aggregate every podcast that has 100 super, super high affinity listeners, theoretically you should have the most high efficacy advertising platform on the planet because everybody is putting their own little unique spin on it and talking about why they endorse particular products. But obviously, building that machine is so difficult, time- and resource-intensive in practice.

Brian: That’s where (again) if you have the right targeting, you understand what people are talking about, and you make it easy for people to interact, anyone who has a hobbyist podcast, the idea to them of being able to do an endorsement read is exciting because that's what big guys like yourselves do. For them, as they're growing up and developing their own audience, we actually found that people were willing to do it for free just because it made it look like they had made it.

David: Oh, we definitely thought that way in the early days of Acquired. We were like, yeah, are there brands that actually benefit us?

Brian: Exactly. If you're talking about Eight Sleep, Ritual vitamins, or whatever it is, there's something there that people can get behind and can get excited about. And if you have a personal connection with that individual, it's more likely to convert on a percentage basis. It's just the absolute question.

Ben: You brought up mattresses, so we're going to talk about mattresses because I think there's almost no purer way to have a consumer products conversation than mattresses. Let's talk about three companies and dissect these. I don't know if you're an investor in any of them, but you've got Eight Sleep, you've got Casper, you've got Purple.

Purple and Casper, same era. One VC-backed—Casper—one of the worst IPOs of the crazy run up. One Purple, I think got to a reasonably similar scale fully bootstrapped with a much better margin profile. Those two companies, Lisa, a lot of those companies, there are 40 other companies selling effectively the same product out of the same warehouses in China, the very same manufacturers, but built totally different brands around them.

I would have guessed 3–4 years ago, after all of this, I would have said, direct-to-consumer mattresses, probably not an investable category. And yet, Eight Sleep comes on the scene, and we seem to have a completely new wave of direct-to-consumer mattresses. What do you make of all that?

Brian: I think first of all, it was this evolution of being able to sell a product that historically you had to go through a pretty poor sales experience if you guys have been to any of the in-person mattress stores recently. You have to take a shower when you leave the organization.

Having this beautiful brand, having these very liberal return policies, having better pricing, that helped these companies get going. Because you were selling effectively foam and you had an $800 average purchase price, you could spend a fair amount of money on your CAC and still get the money back pretty quickly. The unit economics look pretty good.

But what happened is along the way, there was no inherent moat, and the brand component wasn't strong enough for one product versus another. It was harder to differentiate the actual features of one versus another, so the category commoditized. Those companies that were trying to continue to hit venture returns or even harder public market returns, ultimately fell under the weight of what those expectations were.

I'm less familiar with Purple, but I do know the story with the Tuft & Needle guys. They embraced Amazon in a way that a lot of other companies didn't. They had a different cost structure that ensured that they were thinking about profitability at all times.

As a lot of companies that were venture funded, it started out being profitable. And then every year that they grew, the economics got worse, and worse, and worse. That should be a red flag that maybe this category is just not right for venture funding in its current format.

Just when everyone got as far away from mattresses as they could, you have Eight Sleep come along. That's a product that gets to the point where for people, one of the best questions we talked about NPS earlier, is less about like, hey, would you tell your friends about this product? It's like, hey, if I took this product away from you, how disappointed would you be? And if you talk to Eight Sleep customers, they'll tell you that they can't sleep without it.

They ultimately have this hook where people feel like the product is very differentiated and that they're willing to pay a heavy premium in order to get access to that brand. The question there will be, look, does this get commoditized like other companies in the category have? It's got a better moat around it because of the sensors, because of the cooling technology, and they're now trying to build a subscription business on top of that that will leverage data and be personalized.

It's all the things that like venture people love to hear, but it's yet to be proven out whether that is an inherent moat, but kudos to that team for sitting there and thinking about a commoditized category, and then coming back with something that the end consumer ultimately felt was very differentiated and hasn't been as easy to replicate from some of the competitors in the category.

Ben: Over the last 20 years, the time for 10 brands to come to copy you if you do something innovative and don't own your own supply chain has shrunk dramatically. If you come out with this cool new foam mattress, and there are some suppliers you're working with in another country, there are probably going to be 10 other companies that fast follow you. This moat that you have by being first in building these consumer brands seems to be shrinking to me.

Other good examples are AirPods. Apple comes out with it, then you see very credible and sometimes even better competitors, Bose, and Microsoft has a pair of these. But now there are $10 pseudo AirPods at the CVS checkout with no brand on them at all. When someone has a breakthrough new consumer concept, how do you decide if you think that that will have staying power or if there'll be a zillion CVS checkout copies?

Brian: I think the first assumption is that anything that is interesting will have a zillion copies. The question is just whether those copies resonate with consumers in the same way. You talked about all the Apple AirPod copies, but meanwhile, AirPods alone as a revenue business is one of the top companies in the entire world.

People are still paying the $200 or $250 depending on the model for that premium experience of being able to just put it on your phone, see it pop up, the charging, and the way that that ecosystem works together, as opposed to just a third-party Bluetooth product.

We put, I would say, very little faith in the first mover advantage. If you look at a lot of the companies that have become $100 billion businesses, the Googles, the Facebooks, even something like an Uber, those were not the first movers in that category, but they had a unique insight. That's the area that we want to play in when we think about the categories of companies that we want to be building.

Very rarely is the winner the first mover. Often, they can ride on the coattails and do something different and more sustainable to the end user. We're looking at moats.

Sometimes there's a technical moat, but frequently, technology can be recreated because open source availability and existing tools are getting that much better. Sometimes it's a distribution moat, where you have access to consumers in a lower cost or more effective way. Sometimes it's a brand moat, where people resonate with your product. They want to be customers.

A lot of times, people think about that solely in the consumer world. But when you think about something like Slack or Figma, these are software products. Ultimately, by being a user of those products, it said something about the individual in a way that was harder for a company like Adobe to come along and recreate, because it became less about the individual features and more about what that community and what that product said about you.

When we think about those different moats, again, a lot of times, they resonate in consumer spaces, but increasingly as people are making decisions around the tools they're using in their day-to-day job, they're using the same frameworks. They leverage for their own personal dollars with their business dollars as well. And that's becoming a moat even in the enterprise as well.

Ben: Bear with me on this segue. Let's see if I can accomplish it. Speaking of people's personal dollars, I think we should talk about crypto.

David: Okay. We'll segue.

David: I'll know about that one, Ben.

Ben: It's a stretch. You and I had a conversation three or four months ago. We were talking Web3, we were talking metaverse stuff. Your take was basically, I think there is almost nothing of value in the crypto ecosystem right now for the end consumer. I'm curious if that's still where your head is at. And if you are excited about any Web3 or crypto things, what are they?

Brian: I think the most exciting thing about crypto is the fact that it's getting ripped apart right now. What that means is the folks that are left fighting the good fight are the ones that are really there for the true principles.

One of the concerns I had six months ago looking at crypto is that people would talk this big game about how it was about democratizing access, how it was about bringing power back to the people, and then you looked at it and it was worse than a Vegas nightclub in terms of who actually had access to the real early dollars and the real keys to the kingdom.

A lot of that felt a little bit like how I remember the web felt in 2000, where it was a lot of looky-loos and people that weren't really about the underlying technology or weren't really about the end customer, but were just showing up because in San Francisco at the time, the streets were paved in gold, which felt very similar to selling mortgages in Miami in 2008. Crypto got that CD flavor to it over the last year, where there was a lot of hype.

I remember you would have these funding announcements, which almost looked like tour posters about all the people involved. It felt like the end user, the person that these solutions were ultimately supposed to benefit, was getting forgotten along the way for the goal of speculation.

I think with some of the hype coming down a bit, the people that are building are going to be the ones that are in it for the long haul. And they might be more true to the principles of what it was originally supposed to be about in the first place, but I still think it's a high bar.

You think about all the generations of technology companies that have come along. People talk about how Amazon was so innovative. They were riding on top of existing credit rails. They were riding on top of things like FedEx. A lot of these Web3 solutions are really building everything from the ground up, which historically has been very hard.

I still think some of the best Web3 plays will be companies that have already built products in Web2 who already have an audience, who already have a value proposition, and then are able to add that on top if there's an actual benefit.

But in a lot of cases, the benefit is harder to articulate. There's a real environmental footprint in terms of just the energy it all consumes. I have been spending less time there because I think people have problems that are solvable with existing technology stacks. Those are easier to understand for how the solutions can be built.

Ben: If there's a very credible argument to be made, that once there's a lot of real consumer value and real economic activity happening on a blockchain in a decentralized manner, then you can have blockchain companies serving blockchain companies, and that can make a lot of sense in the same way that you have a multi-billion dollar ecosystem of people who are just serving the people who are merchants on Amazon. But first, there was a very tangible value of, wow, I can get something in my house in two days, and I can punch my credit card into the Internet, and it's this miracle that just arrives at my house.

The question for crypto remains like, what is the miracle to the people who are not currently immersed in the crypto ecosystem for which this is much better than their alternative, where you can bootstrap that ecosystem, and then on top of that, you can have a variety of crypto native providers serving other crypto native providers?

Brian: I think it's actually a lot harder from a product discovery perspective, because when you put economics into one of the clear incentives, it's hard to discern whether someone's doing something because they really love it and because it's better than their alternative, or whether they're doing because they're trying to make money alongside.

If I open up a new restaurant and I'm serving the best burgers in town, it's very different if I'm just serving burgers and people have to pay me $10, versus if I'm serving burgers and I'm giving people 20 burger coins that may be worth a thousand dollars down the road. It's hard to tell whether the product is actually really good or not.

David: How good is the burger?

Brian: How good is the burger? That is a simple question, which is harder to answer. You think about some of the crypto games that are out there, people aren't playing them because they're more fun than the alternatives they have. They're playing because they believe they can make money and get rich off of it, which flies in the face of the original objectives.

I still think some of these companies, where it's a clear value proposition to the end consumer, their product lives and works in the existing environment, and then, oh, by the way, you didn't even realize it, but part of the ownership of the assets was built on the blockchain.

Or you didn't realize it, but your share of your marketplace earnings is actually structured as an NFT. It's not in the marketing materials that they're throwing in your face, but it's actually the better technical solution behind the scenes, and they maybe don't even tell you about it.

Those are interesting companies to me because they're thinking about the end user and whether the benefit lives on its own, even if it's not branded as a crypto company, just because it's the right technical solution.

Ben: The Solana folks who introduced us to Roneil Rumburg from Audius opened my eyes to this, where Audius has 5 million users that are all getting them token. You don't realize that you have this Audius-hosted wallet that has this token in it.

It feels like it's the same way that you'd be accruing a karma on Reddit, but actually they've abstracted away all the crypto stuff from you so you just have this like experience where, oh, I can listen to music that I can't listen to anywhere else. That's cool. Oh, I seem to be accruing rewards for listening on this platform. That's cool. And I don't have to bust out my ledger to sign up for it.

Brian: The wallet, the connectivity, it makes it really hard for first time users. The question I would ask then is like, hey, is that something that's unique compared to Spotify or SoundCloud that they couldn't bolt on later?

Sometimes it's really hard. You have this innovator's dilemma to be able to do something differently, but then you look at someone like Starbucks that has this wallet, which gets back to cash flows again, it gives them $2 billion of additional cash just because people are putting money down.

If people got to the point where they're adopting crypto wallets, is it easier for them to evolve to that, or is it easier for someone else who has a coffee coin to be able to evolve to being Starbucks?

Ben: All right, I have to ask you about the metaverse. What is the most credible example that you have seen of something that you would consider a metaverse in consumer land today?

Brian: I'm going to go out on the record and be like, the metaverse is already here, but it's this thing called iMessage. I don't know if you guys have ever heard of this product before, but it's this really cool thing. It's on my phone, it's on my computer, it's even on my watch, and I can talk to anyone in the world, people I know, people I don't know. I can share photos, I can share videos, and it's really cool.

My belief is that the connectivity promise of the metaverse is something that goes all the way back to AOL Instant Messenger or things like ICQ, which was really about connecting people in their daily lives. And then everything that's put on top of that either falls into more of a gaming use case, like a fantasy use case, or it just adds additional friction along the way.

Ben: I've had this belief for a decade that just because our phones aren't implanted in our body, it doesn't mean we're not already cyborgs. My phone is always within a foot of me, and it's the way that I do everything. If you drop me in a city and I don't have my phone, I'm just screwed. I probably don't have my wallet with me, I don't know where I am. I've already become so unbelievably connected to it.

I think the same can be said for, how would you define a metaverse? It's a thing you spend all of your time in. To your point, you communicate with these other people who you know, who you don't know. There are multimedia experiences. For the amount of time per day that my head is glued to that tiny little glass screen, just because it's not a 3D environment, how is that not the metaverse? It's also hard to pull me out of it most of the time.

Brian: It's also like, is it the best form factor for what you're trying to do? A lot of people think about the metaverse as this immersive VR experience. Frankly, I haven't done anything in VR recently, but when I have, it feels nauseating. I think it's gotten better, but I don't want to be interacting with people with something on my face all day.

I remember back when all the TV manufacturers were really pushing 3D television, because it was something the chips could already do, so why not just market it as well? But I don't want to be sitting in a living room watching football with my friends and we're all wearing 3D goggles. That's just socially awkward.

I think the metaverse concept, when you're playing an immersive game where the benefits are there, that's great. But if I'm sitting watching the new Top Gun with my friends, I don't want to be looking at them as a purple rhinoceros, and then my other friend is dressed up like Freddie Mercury or whatever, and we're all sitting there watching this weird small screen. I want to be in front of the big screen TV watching that show. Whether they're there physically with me in person or whether we're chatting with each other about what's going on, I think that there's something inherently good with that better personal dynamic.

Now, what I think is maybe missing with some of these digital experiences is the concept of time shifting. We're talking about iMessage before, but let's say I didn't watch the most recent Game of Thrones episode yet. If I'm on my text thread with my friends, they're already talking about it, so I better not pay attention. But if there is a way to synchronize that thread with the show itself, and whether that's with my friends or that's people more broadly, I think that's really cool. You're able to experience something collectively as a group.

Another example would be like the show, The Wire. I will admit, I have yet to watch it, but I'm dying to watch it with someone. But everyone else I know consumed it like ten years ago. I'm sure there's at least one other person out there that wants to watch it, where the first time someone gets killed or whatever, we could be like, no way. We could do that collectively and have that shared experience.

I think there are opportunities to take existing third-party media and not have people consume that synchronously with the broader world, but with that media in a way that's interesting. But this idea of everyone wearing VR goggles and me looking at a virtual Zuck doing things, that's not the future I'm looking for. I want to help people solve real problems in their real lives. If we end up in a world which looks like Ready Player One, then I feel like we've failed at our day job of making people's real lives better for them.

Ben: I can't decide if I completely agree with you or if I think this is a failure of imagination.

Brian: It's probably a little bit of both.

Ben: Fifty years ago, I probably would have been like, if someone's like, do you want to go to an NFL game? I'd be like, sure. I'd go and I'd be like, this is so much better than watching it at my house. Now, I'm watching it on an 85-inch TV, it's in 4K. Every single element of the experience from the game on the field to the production value, to the timing, is perfectly sequenced for my enjoyment on my couch, where I'm iMessaging other people who are also watching that game on their couches.

That experience, in some ways, is worse than the in-person experience, but in many ways is much better than the in-person experience. I'm making whatever food I want. I can do whatever I want right up until the moment the game starts. I can—this is very lame—fold laundry.

It's like a different way to experience the activity, but it makes me experience the activity ten times more than I otherwise would. That's the way that I'm trying to frame VR for myself. What is a thing that I do rarely, but if I could experience it in a super highly tuned, decades of iteration VR way, would that actually be better than the way that I do it today in most cases?

Brian: I think it's a good question. It's something that you also got to think about all the negatives of physically going to that game in person. You're spending hundreds of dollars on tickets. You're spending $12 for a beer. You have to deal with traffic. You got to deal with parking.

There are also some cons to going in person, but I think it's hard for people sometimes to take a step back and be like, hey, the experience we have right now is pretty good. One of the things that people don't think about with VR is that when you're able to control where the camera is looking, you are now taking over editorial control of that experience.

That is a lot harder for individuals to do. You think about it from a game perspective. You think about it from a movie perspective, but let's take it from a sports perspective. It might be this interesting novel approach to see the view from where the ref is, for example, for a five-minute period of time to be in the action.

Ben: But most of the time, it's way worse.

Brian: But most of the time, it's way worse. The fact that you have a professional editorial crew working with probably 30 different cameras around the field, picking the right shot at the right time for you to experience, and if there's a great play, you can look over to someone sitting next to you, or again, you can be on chat with someone, that's a really good experience.

The real question to me is only like, hey, can they make the social experience better through VR, where you're able to experience something with other people who aren't there physically in the room? That's why I just don't know if the experience is better than a big screen TV with 4K and chatting with people or heaven forbid, driving 2 miles and going to watch the game together in someone's house.

Ben: That's the right question.

Brian: It's always the top of mind thing, but for me it keeps coming back to, great, the technology is really cool. Who is this better for and why?

Ben: That seems to be your overarching thesis across all things—the crypto, Web3. If I had one big takeaway from this episode, it's not that Brian is really into some particular technology wave because he thinks it's going to make for a trillion dollars of interesting companies. It's, let's start with who is this better for and why on the consumer side, and then we can work backwards from there.

Brian: Exactly. Also, there's this ‘why now’ component for why are people going to change their behavior. And then also there's this why now component from a distribution perspective. We talked a fair amount about marketing, but are there new channels that particularly cater to that product or services?

There are a lot of timing questions that pop in, where maybe a previous version didn't work or didn't work as well as you would like it to, but the timing is different. You think about a lot of the waves of the Webvan companies that didn't really play out or the pets.com. But then you fast forward, and I think the jury is still out on Instacart, but it is a durable business that a lot of people really enjoy using as a consumer.

You think about things like Chewy. It's a sustainable public company. Sometimes it just takes a while to hit the right timing. I look at companies like Groupon that were massive, but then didn't have the right product execution. I would really love to have entrepreneurs revisit some of the more value-oriented plays, because we are in a period where people might have more time than money, where a lot of the other solutions historically in the last couple of years have been the inverse of that.

Think about, is there a new format for some of the companies that were really big ten years ago, but didn't quite materialize in the way that they could? Revisiting some of these questions under the premise of today and what's going on now is an interesting way to think about things, as opposed to always looking around the corner for something new and different.

Ben: I love that. That feels like a great place to leave it. Where can listeners get in touch with you?

Brian: I'm on Twitter. It's @omal.

Ben: It's a great handle, by the way.

Brian: Yeah. It took a little effort to get into that. I had to pull a few strings. Originally, it was like @brianomalley7. It was just too long, so I was able to get that one figured out. Email works as well, so it's bomalley@forerunnerventures.com.

Ben: Awesome. We'll put a link in the show notes to that blog post you mentioned. I think it was something about focusing on the supply side.

Brian: We have a few of them that I would encourage people to check out. One is really thinking about supply-side innovation. One is thinking about evolution and mainstream commerce. And there are a few others that are there that I'll let people discover on their own.

Ben: Awesome. Thank you, Brian. Really appreciate it.

Brian: Thanks, guys. Appreciate you having me.

David: Thanks, Brian.

Ben: Listeners, we'll see you next time.

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