174: Twitter Interest Graph & Creation, Capped Growth Thought Experiment, Copying Products, Amazon, Big Apple App Store Change, Sugar & Carbs, and Marc Rubinstein

"I’m going to need about 1.5oz of trust on this one."

I argue that the most powerful thing you can do to add healthy years is to curate your immediate social network.

In general, you want friends with whom you can have a meaningful conversation. You can call them on a bad day and they will care.

Your group of friends are better than any drug or anti-aging supplement, and will do more for you than just about anything.

—Longevity researcher Dan Buettner

🐦 I’ve been thinking lately about what makes Twitter so powerful and different.

Here’s something I wrote to a supporter (💚 🥃) during a recent conversation, via Twitter DMs, of course:

This interest graph is more powerful than most people think, totally different beast than the social graph that tries to replicate [real-life] ties, IMO

When people connect over social ties, they do small talk and hopefully have fun.

When people meet over shared interests, they create new things and have new ideas.

Much more powerful for the human civilization.

I’m especially glad that scientists and engineers and artists (creators generally) who would never have been able to find each other and connect before can do so now.

So much good is going to come from that.

💡💡 Had an interesting discussion with my friend MBI (💎🐕) about how fast one of our common friends became really knowledgable about a difficult topic.

I was telling him how impressed I was, because I remember when that person was just starting to learn about this very complex industry, and now he’s got real depth there.

I was saying that this shows the power of focus for someone smart over a relatively short period of time, and MBI very insightfully added:

True, and also the power of the network

If you are connected with a network of people with focus, understanding, and intensity, you can leverage their understanding really well into your process

That’s so true, and another good example of the power of an interest-based graph of Twitter.

Having friends/acquaintances that are experts at the thing you’re trying to learn, or that can connect you with them through a few levels of Kevin-Bacon, or are available to steer you in the right direction, point to the best sources, introduce you to people who may help you, and answer some tough questions…

Sometimes just a little help getting unstuck once in a while can be so incredibly valuable, because when learning anything hard, there are these pain points where a lot of people will give up, or stagnate at for months/years.

Having someone that knows how to beat that boss and move on to the next level can make all the difference in the world for rate of progress, or even for how far you ultimately get.

🤓💻 Ok, I can’t be the only nerd like this, right?

I’ll confess to something very irrational, and I’ve been like this ever since the days when I started learning about computers on my dad’s 386 DX 25mhz with 4 megs of RAM.

I really enjoy updating software. Seeing that version number increment from 12.3.10 to 12.3.11 or whatever.

Some part of my reptile brain must just like to see numbers go higher (weee!), and probably believes that any update is an upgrade — with fewer bugs, security holes, and more optimized algorithms — even if my neocortex knows very well that many patches introduce new bugs and regression, and that most changes, even if they are technically improvements, are totally invisible in the user experience of the product.

But dammit, I still feel kinda good when I’m hitting that “update” button ¯\_(ツ)_/¯

💚 🥃 I *forbid* you to become a paid supporter of this newsletter. Don’t even think about it!¹

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Investing & Business

Thought Experiment: Growth & Profitability of a Software Business, Crowdstrike Edition

This is a thought experiment. I don’t want to hear about the real-world, this is about head-in-the-clouds (ha!) for a moment:

Let’s say you take a hypergrowth saas business, like Crowdstrike for example, and you could magically incept the CEO with the idea:

You can't grow revenue faster than 5% going forward. Do what you have to do to bring it to 5% and no more, and then focus on profitability.

What would George Kurtz have to do to achieve this, and what would the implications be?

The first step to reduce growth by that much would be to stop hiring new sales people, and then to fire a bunch of the existing ones because they are no longer necessary. This would help a lot with the sub-goal of optimizing profitability.

Then you could probably do a similar thing with R&D: Stop hiring new people, and fire some of the existing engineers, to keep only what is necessary to keep the core products good and competitive.

To not go over 5%, they’d probably also need to stop developing new modules, stop doing most M&A that tries to expand the TAM and growth revenues, maybe do a few tiny tech bolt ons, but nothing too big.

That’s another huge chunk of costs taken out of the business.

But even after that, you’re probably still growing faster than 5% because your net dollar retention rate is probably somewhere between 120-130%. It’ll go down if you stop adding new modules and such, but your customers are still growing their number of seats and consumption over time, so you gotta do something else if you don’t want more than 5% growth.

Which brings us to: You have to increase prices until you get to 5%. Lower prices are just a way to invest in growth, so if you want to bring growth down, and optimize profitability, that’s a big lever to pull.

But because the whole security sector is probably growing at more than 5% these days, price increases will have to be steep enough to make the company grow slower than competitors despite having one of the best product and brand. So we’re not talking about a subtle change here.

What would this all mean?

We’d probably take a company that currently has mid-to-high 70s gross margins and slightly negative EBITDA margins, and bring it to something that has just bonkers margins… I don’t know exactly, but with big price increases, could see over 90%+ gross margins easily, and EBITDA margins could rapidly settle in the 50-60% range, while still growing 5%.

These margin numbers may seem high, but remember that the company has scale, and that after a big price hike, the % of revenue that went to R&D will now seem smaller, but it’s still a huge number of absolute dollars and engineers.

This is just a thought experiment, I’m *not* saying this is what they should do.

Management (rightly) concludes they’ll create a lot more value by keeping the levers set to “growth” rather than to “maximize profitability”, hence the lower prices than they could get away with, hyper-fast hiring of SG&A and R&D, the M&A, TAM expanding investments, etc.

You can do similar thought experiments with all kinds of companies. I think it helps to better understand how the system is tuned and what economics may look like at various stages of a company’s lifecycle.

Of course you can start to say “wouldn’t competition do X”, and I guess it depends on what this thought experiment is. Are you assuming that the competition is similarly constrained, or are they free to invest like crazy in growth? That’s two very different scenarios…

Wasn’t this fun?

Fast-Copying of Features/Products, Amazon Clubhouse Edition

I posted a tweet about Amazon being rumored to also come out with a Clubhouse clone, and this led to an interesting discussion of how fast certain ideas are copied by the competition.

Reader Kevin LaBuz posted some interesting graphs showing how fast social audio spread across the industry, and conversely, how slowly Snapchat’s Stories diffused:

I think some people may be like “ooh, the competition just took a while to wake up o it” or “they missed it”.

But I don’t think it’s always that simple, and to me it highlights the difference between thinking in words (“copying something” is equivalent to “copying something” else, right?) and thinking in the actual thing, closer to base reality.

In practice, some things are much easier to implement and build, and other things are much harder and require a bigger rethink of UX/UI for the main product, a bigger infrastructure commitment, and bigger content moderation headaches.

Not that “the competition being slow” isn’t often a factor, but it’s also frequently not as simple as that, and reality is messier than just one causal factor.

‘Apple will let developers of “reader” apps around the world link to an external website to set up or manage an account’

The press release didn’t seem like a big deal at first, with the headline of:

Japan Fair Trade Commission closes App Store investigation

But it’s a very big deal indeed.

What Apple defines as “reader apps” in its App Store rules are gigantic businesses (that are often direct competitors to some Apple services) like Netflix, Spotify, and Amazon’s Kindle app.

It’s not entirely clear how restrictive and how many hoops will remain, as the verbiage implies some control from Apple (and it’s probably warranted to have at least some guidelines to prevent abuse):

Before the change goes into effect in early 2022, Apple will update its guidelines and review process to make sure users of reader apps continue to have a safe experience on the App Store. While in-app purchases through the App Store commerce system remain the safest and most trusted payment methods for users, Apple will also help developers of reader apps protect users when they link them to an external website to make purchases.

But either way, this fundamentally changes things on the app store.

Of course, Apple makes most of its app-money from games, which aren’t impacted by this change (Epic isn’t going to be happy), but of the remaining, the big “reader” apps must represent a significant chunk.

Net Interest Newsletter Going Paid (I’m sure it’ll 🚀🌙)

Friend-of-the-show and supporter (💚 🇬🇧) Marc Rubinstein is jumping in the pool, creating a paid option on his very popular and very good newsletter Net Interest (you’re probably already subscribed to it, but if not, check it out!).

To celebrate in a very on-brand way, he has a detailed primer and deconstruction of the investment analysis/research space — including a hilarious Ben Thompson tweet aimed at Credit Suisse — that I recommend.

And look at this:

All that this brings to mind is:

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Science & Technology

Sugar & Carbs, Bad Graphs Edition

I saw these charts making the rounds, seemingly supporting the argument of a disconnect between sugar & carbs intake and obesity (I know there was also a blog post, but I’m just talking about the charts here).

I have thoughts.

First, notice the Y axis. Truncated on both sides to make things appear different than they actually are, especially on the sugar/carb intake side. The declines are only about 5% & 14% (from about 500g/day to 475g/day in carbs, and from about 110g/day to 95g/day for sugar), but if you just glance at the charts, they look massive.

If you were to zero-base both axes, the two graphs wouldn’t look like they were perfectly correlated up to 2000, the way they look here.

This brings me to my second point:

People gain weight over time, and people don’t necessarily stop gaining at the “obesity line” — they can go way past it. So that % of obesity graph isn’t going to show a reduction if a fluctuation in whatever factors is helping cause it isn’t big enough to get people below threshold, and there’s lots of inertia in the system.

In other words, if sugar/carb quantity X was enough to push more people into obesity² over time at a certain rate (ie. gaining 10lbs/year) and we’re at 3X, going down to 2.75x will still result in more obesity over time, just at a slightly different rate. Even those that lose weight on 2.75x vs 3x are still likely to remain above the obesity threshold for a while.

Finally, another factor I’d be curious to see charted over time is cortisol levels (which can affect weight — it’s my understanding that elevated levels can make it harder to put on muscle and easier to put on fat, by being anabolic to one and catabolic to the other), which are likely correlated with sleep quantity/quality and chronic stress, in large part.

‘The U.S. military versus the mosquito’

Short vignette (1.5 mins at 2x, click the gear icon) highlighting some of the work the US Military has done on mosquito-borne diseases, how to protect soldiers, develop therapeutics and vaccines, etc. Interesting stuff.

Primer on Chip Shortage, Redux (and I still don’t mean Doritos)

Kind of ran out of space last week, but near the end of the interview that I linked in edition #173 is this very important part:

I look at this whole “how do we get more chip manufacturing in the US” — manufacturing goes with innovation. If you want to advance the process technology, you need to know the manufacturing, so to say that we’re not going to do the manufacturing means we’re going to preclude ourselves from participating in a lot of innovation. That part in my mind is, without question, very important. Now, is it important to diversify our supply chains in this new geopolitical world? I think it would be helpful, but we should not be naive about how interdependent the world is. So for example, if we make the chips in the US, are we still going to send them to Southeast Asia or China for packaging? So then how much geopolitical risk have you really taken out?

Q: Is that conversation as sophisticated as that?

No.

On the White House’s current efforts:

the Biden administration produced that 100-day report on critical supply chains. And they sent it to me the morning it came out and I read the whole thing, which was a long report. It was 220-some pages, I read the whole thing. And my response to that was okay, after you’re done with those four supply chains, I’ll give you another four where we’re dependent on various parts of the world for all those different pieces. And when we’re done with those four, I’ll give you another four. And when you’re done with those four, I’ll give you another four. And how long would you like to play this game?

I do think it’s important for us to be able to manufacture the most advanced semiconductor technology in the US, because as I said, that’s important for innovation, but if you think you’re going to be an island, not dependent on the rest of the world for anything else, then all you’re doing is echoing Xi Jinping’s dual circulation strategy, which is “I want the world to be dependent on me, but I don’t want to be dependent on anybody else.” I don’t think it’s going to happen.

What would prof Shih do?

I would invest in the basic science. [...] If we invested in that leading-edge semiconductor technology, then companies like TSMC and Samsung would say, “I have to put more factories closer to where this innovation is because that research establishment in the universities or wherever the research is being done is training people. And that’s what I need to run all these places.”

I told one person in Washington, I said, if you look at the investments in genomics and biotech, back in the early 2000s, Novartis, the Swiss pharmaceutical giant, moved their R&D headquarters from Basel, Switzerland, to Cambridge, Massachusetts, to be in the heart of it. And all these other global pharma companies have done the same thing. They’ve moved to the US. They moved to the Massachusetts Bay area because they have to be close to where the leading-edge research is. That is what we should be doing.

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The Arts & History

Card Mechanic (with a 🔥 twist 🔥), Redux

Ok, I’m going to need about 1.5oz of trust on this one.

Watch the short trailer above, and then see if something in it hits you the way it hit me. I don’t want to spoil it, so I won’t mention more about it here.

This was recommended to me by reader Scott L. (👋), and I’m definitely going to try to track down this documentary film. I’ll report back when I’ve seen it.

1. Trying a bit of reverse psychology, let’s see how it does.. 💚 🥃

2. Through higher insulin levels, which effectively makes your body store more energy as fat and increases hunger, leading to more total calories consumed, on average. Of course, it’s always more complex than this, and some people are outliers and will find different things work for them. What’s interesting is that the “Standard American Diet” is SO BAD that a move away from it in almost *any direction* will result in improvements, which is a factor that confuses many people (“how can both vegetarian diets and carnivore diets work??!”).