Markets Both Benefit and Constrain

Years ago I was in a conversation with someone who was asking some curious, albeit weighted questions around the subject of using the Office365 product suite over GSuite. It was a decision made in this organization prior to my coming on-board, but honestly I felt it was a good decision and supported it. One train of questioning was about some feature set related to cloud first solutions and collaboration features. The unfortunate part of the conversation is that, unless there’s a genuine intellectual curiosity about the subject, going into all the ins and outs of cost analysis and directionality is generally useless since it won’t be heard well.

It didn’t matter that the year was 2016, Satya Nadella had just started 2 years prior, the consent agreement that constrained much of their product development had ended only 5 years previously, and they were consistently retooling towards a cloud first posture. It didn’t even matter that the O365 was, even then, a greater ROI in terms of cost/feature comparable to GSuite. The person did not understand the market situations that led up to that moment and were just trying to get through their job.

It makes sense. So many times i’m in the same boat and judge a tool harshly without knowing further context into the whys and hows.

Obviously, we’re in a different world now. Not saying Microsoft is THE way, that very much depends on individual use cases. It is A way, and their innovation chops have been proven over the past decade. Full disclosure on my cards, in terms of use i’m at a 50/50 split. There are 2 organizations I work in that use GSuite and 2 that use O365. There are specific reasons you would use one or the other but none of those reasons are that one is better than the other.

Here’s the big idea: judging a product maker without a further understanding of the market dynamics that drove their product in one direction or another doesn’t help you understand something in a nuanced way where you can capitalize on it for greater returns. At the end of the day, a hard stance on a product isn’t the job. Making good decisions and understanding the nuance of those decisions in order to produce value for an organization is.

I’m interested in who else has run into this problem. Is there a “succesful” tool (good TAM, SOM, SAM) you look at that you think is THE WORST that you might need to re-underwrite?

Net Worth Isn’t Cash

Let’s talk about wealth for a minute. There has been talk about the rich paying their fair share. Someone made a comment to me the other day that anyone who is a billionaire should be able to pay some part of that into taxes. I had to explain why it’s not that simple. To be clear of my cards, i’m currently in an income level that places me in the top 20% but not the top 1% by any stretch. The place I sit is in the one that is the most taxed. So don’t get me wrong, that’s not exciting. Simultaneously, when you look at the percentages the highest percentages are in the top 20% by a long run. How asset values are discussed mostly involves a lot of financial magic that equates to pulling a rabit out of a hat, or in this case a rabit out of air.

Net Worth Calculations
Most of net worth, what we use to qualify someone as a millionaire or billionaire, is based on total assets. So companies are a portion of this issues. To bring it to a ground level, this means that your house is part of what qualifies your net worth. So, taxing on this at a federal level would be equivocal to having to to an appraisal of your house every year. (It’s arguable that this occurs already because of property taxes. So imagine that frustrating process occuring over and over again across everything you own.)

Valuations are problematic
The problem is less about your home value. That is a well trodden path. The problem is more in the private companies you own that are currently not taxable and figuring out the value of them. I was discussing an equity splitout of a potential business with some friends last week. To be clear, we’re discussing splitting equity of something that has $0 of value. Now, if someone wanted to buy that “company” right now at $10000 then the value would automatically go from $0 to $10000. You could tax that right? Sure, but all that means is the person who just bought it is having to pay taxes on $10000 of something that has earned literally $0. Valuations work similar to this. They aren’t based on the past performance of a business so much as an expected future reward.

There’s a reason that realization is encoded in our tax law.
To the previous section about the magic of valuations there’s a great MIT article called “If you’re so smart, why aren’t you rich?” and the truth of that article resounds here. No one has a great read on the pulse of this kind of thing and everyone can argue for a different number. Realization is a big deal because it’s the actual money made and from which someone might benefit. So that’s less about what you own and more about what you make.

Any move away from the foundational thoughts around realization, even with the constraints I’ve seen on proposals about how something like this would work, seem like something that would be extremely difficult to codify. This seems like a harder path than allowing for innovation that would increase our GDP.

What about you? Do you think this is more helpful than other levers we could pull?

Simple Explanations Show Understanding

Something I’ve noticed in some conversations is when a person tells me something is complex and difficult to explain it has become a red flag for me. I try to go by the napkin rule. If I can’t draw it out on a diner napkin over lunch with someone then it’s possible I don’t really understand the first principles of the subject.

To be clear, there are some things that truly are complex. Any discrete structures and algorithms class will teach you that is true. Even so, that same subject can be broken down to foundational elements that can be explained.

W2 multiple is a great example of this. I’ve seen very odd calculations of this. Things where someone looked at all the time a person was putting that was billable and non-billable, etc. The measures i’ve seen this way and their use case made sense because the term was being used as a descriptor of how hard someone was working. The thing is, that is not a W2 multiple.

Simply put W2 multiple is how much revenue you get per W2 payout. e.g. if you earn $120,000 and you pay out $60,000 then your W2 multiple is 2 because $120,000/$60,000=2. If you use any other calculation and call it W2 multiple then you’re saying the wrong thing and there is a high potential that others are hearing the wrong thing.

I’m using W2 multiple as the example, but we can say the same thing about many areas like this. When you say EBITDA, don’t say “community adjusted EBITDA” because that’s not a thing <cough>WeWork</cough>. If you’re “full stack”, please understand hardware too. Containerization is needed but it’s not the full stack.

With industry standard terms it helps to use the industry standard definition. If you don’t know how to define some of those things then it’s possible you don’t know your job as well as you think you do. I’m still there many times. What’s the goal then? Not to not discuss, the goal is to be aware, curious, and questioning. As questions and approach as a learner not as a learned. For me this has to stay true. My current thing i’m learning is containerization so I can increase my BS meter when talking to devs. Let’s all stay curious.

What about you? Please comment, what are you learning?

Free Markets Prove Better

Last year there was a proposal to set pricing limits on food. Here’s the thing, I don’t know if you’ve ever seen a grocery buyer negotiate pricing but it’s down to the 100th of a cent at times. Why? Scale. If you’r off on a purchase of a million+ watermellons that 100th of a cent can erode margins by a lot.

There is no evidence of price gouging
Putting aside my own problems with the grocery industry and simply addressing the market dynamics of this situation, groceries are a highly competitive market and there’s no key evidence of anything related to price gouging. Kraft, as an example, has lower profitability this year.

Free Markets Lower Prices
I was talking to my son yesterday about a plastic part of a trimmer that we purchased yesterday for $9. He thought it was expensive until I explained that it was produced by oil drilled out of the ground and refined into something that could cool and harden to hold shape, then someone created a design of a tool and a mold for the thing, produced it in a factory, shipped it to a store, and sold it. This is not including all the other work such as marketing, etc.
Like that situation, groceries are a highly competitive free market and the number one result in that is competing of prices down as close to $0 as possible. As an example, Strawberries are actually down in price to pre-covid levels.

Why does stuff cost more?
Yeah, about that. There’s a chart on the pic of this post. It shows the growth of all the cash in the system. Notice the jump at 2020? Went from 16 Trillion to almost 22 Trillion. Yeah, I know we’re tired of hearing about covid, still the results are continuing to work their way through the system.

Legally imposing a limitation on prices has never fixed a systemic issue.
In fact, it’s historically backfired and there’s no evidentiary reason to conclude that it will resolve the inflationary issues we’re seeing in the system at the moment. There is only one way to bring prices down and it’s not limiting inflation so much as innovation that is deflationary in nature. That type of innovation has not happened with any significant oversight that caused reduction in margins which would limit any kind of investment into R&D.

We need to stop the silly game of thinking someone else will rescue us instead of simply getting to work and solving the problems in front of us. Ok. Rant done.

Best Time to Build a Business is Now

Had a conversation with a friend the other day who works for a municipality. There is a software that they use, basically every county uses it. There’s one vendor for everyone. It’s a monopoly. Support is bad (days for the initial response), product is bad (still requiring windows 10 and haven’t began testing for deployment in windows 11), and prices are high (no market competition = high prices). The issue is anytime a new company begins to disrupt they buy them.

To be clear, i’m not against monopolies if you got there through innovation. I’m not even against M&A as that is a solid strategy that fuels startup funding and what folks like Lina Khan are doing is showing how little some understand about the free markets and game theory. However, in this instance it’s a clear case of anti-competitive behavior and the reason it hasn’t become a case is because the acquisitions aren’t large enough to garner attention.

Back to the conversation with my friends, one was saying they didn’t know how to code this. My case to him was that it was unnecessary. He had the right knowledge.
1) problem set
2) deliverables and requirements
3) understanding of current constraints
4) industry experience and relationships

In this case, the issue would be the why to build. If the real core why is to disrupt by adding competition, there are risks there and they’re all surmountable. Just have to be clear enough on the why to not sell when the money is a high multiple and look for a better exit with good partners to keep the competition alive.

Given the state of tech today, it’s the easiest time to build a company with $0 in funding so long as you’re willing to put in the work. What about you? Feeling the itch to innovate? What’s stopping you from starting as an intrepreneur where you’re at? Whats stopping you from starting as an entrepreneur and launching out? Now that you know what’s stopping you, you’re a very powerful person so what’s the plan to remove those obstacles?