Webcast transcript:
Willy Walker: Good afternoon, and welcome to another Walker Webcast. It is a true pleasure to have my guest, Alex Rampell with me today. I'll do a quick bio on Alex and then we'll dive into the future of fintech, venture capital markets and a whole bunch of other things.
Alex Rampell is a General Partner at Andreessen Horowitz where he focuses on financial services. He serves on the board of a bunch of companies many of you have probably never heard of before, but knowing Alex and Andreessen Horowitz his track record, many of them will likely be household names before long such as Branch, Divvy, FlyHomes, and Loft.
Alex led Andreessen investments in several companies that have gone public or acquired, such as Opendoor ($OPEN), Plaid, Quantopian (acquired by Robinhood), and Rival (acquired by LiveNation).
Prior to joining Andreessen Horowitz, Alex co-founded multiple companies including Affirm ($AFRM), FraudEliminator (acquired by McAfee in 2006), Point, TrialPay (acquired by Visa in 2015), TXN (acquired by Envestnest in 2019), and Yub (acquired by Coupons.com in 2013).
Alex holds a BA in Applied Mathematics and Computer Science from Harvard University. He was named to Institutional Investor's 2017 Fintech Finance 40 in 2018 and the Fintech Finance 35 in 2016.
Alex, first of all, thanks very much for joining me. It's a real pleasure to have you. You grew up in Florida and then went to Andover. Had your parents gone to boarding school? What was the reason you left Florida and headed off to boarding school in Massachusetts?
Alex Rampell: You know, I had no plan of doing so. If I remember correctly, I went to a local K-9 in Palm Beach. When I got to eighth grade, the principal was “you should look at boarding schools.” I thought, that's prison, who goes to boarding schools? And I went on a trip with my dad, which I remember very fondly. We went to all the different boarding schools. We went to Choate, Hotchkiss, Andover, Exeter, and a bunch of other places. And I remember I got to Andover, and they have nine foreign languages, a philosophy department, a computer science department and if you’ve been there before, it’s like a college campus that’s actually bigger than most college campuses. So, this seemed pretty cool. And then I looked at my local public high school in Florida. It was a school called Suncoast, which is the top-rated school in the area, which is a very, very good school in Riviera Beach. But I was like, wow, like I can go to the school that has 41 sports and nine foreign languages and all of these things and it just kind of seemed like a no brainer. My parents both went to Princeton and they both went to local public high schools. And they always kind of, “wow, those boarding school kids were kind of smart,” but there was no pressure from the parents. I think they were kind of sad that I decided to go, but I think it worked out pretty well.
Willy Walker: So, you're one of those pretty smart boarding school kids who ended up going to Harvard, which, by the way, I think in your class, Harvard might have been the number one school that students went to. So, I was a little disappointed you didn't kind of create your own path out of Andover and go somewhere a little bit more creative than the rest of your classmates. But you get to Harvard, and you've got this software business. And from 1742, when they didn't want students selling chickens out of their dorm rooms, Harvard had a prohibition on students operating a business out of their dorm room. But thanks to you and a lot of work of going up against an old, curmudgeonly dean, you got that rule changed. And as I thought about that, that was in 1999 or 2000. And I'm just curious, does Mark Zuckerberg owe you some money for allowing him to start up Facebook in his dorm room in 2002 at Harvard?
Alex Rampell: Yeah, totally. I think my finder's fee is about 20 percent. So, the invoice is in the mail. No, it's funny: my little business was a part time thing, I used to sell software on the internet. That seems kind of mainstream now with the apps store and the iPhone as people buy software. But in the 90s, this was not really a mainstream thing, which ironically made it much easier to do because you were not competing with a field of millions of software developers around the world. You build some product. I used to build little utility products that would make your computer easier to use or faster to use, so you could change a sound volume more easily, and I'd say pay me five dollars if you like this little tool that lets you change the sound volume on your computer by hitting two keys as opposed to whatever it used to require in 1997, and then people would send me checks for five or ten dollars in the mail, and that was my business. So, yeah, very different from selling chickens. But Dean Harry Lewis did not like me, and I did not like him. And I think that that mutual antipathy survives to this day.
Willy Walker: So, most people wouldn't think that someone who is starting up their own software company in their dorm room would also be an athlete. But you played squash at Harvard as well. What did you learn playing squash at the same time as studying at Harvard?
Alex Rampell: I guess one of the ways that I seem to react to stress is I just put on more activities. I remember the most stressful period of my life at Harvard was my sophomore year, I was taking five classes and like the normal schedules four and I was a math major and so they were kind of hard classes and I decided I wanted to be in a play because when else? Like if I'm 40 years old? (Which I am now) but I'm not going to do a play when I'm 40, but like, I'm in college, so I should do something, I should get out of my comfort zone.
I was a teaching fellow for this class called CS Fifty-One, and I was on the squash team and it's like we'd have all these matches, or we'd have to drive to Dartmouth when it was snowing, we got stuck in the middle of the highway and all this kind of crazy stuff happened. But I think it's great to have the camaraderie of the team and squash is very different. It's an individual sport, you win or lose as a team, so you've got to win your own match. If you win a match and then eight other people lose, that's no good. So, you're as much cheering for you or for the fellow members of your team and trying to make them better as you are kind of focused on your own individual accomplishment. And I thought that's just a very valuable lesson for life because a lot of people can learn things being on a team. Like if you're on a baseball team, that's very, very different than being on an individual. If you're just competing individually versus you're competing individually for the advancement and you win or lose as a team, but I loved it. One of the reasons why I think sports is great is it's one of the few areas in life where it almost is entirely about merit, because there are so many other idiosyncratic things about fairness or unfairness that happen in business, like so many strokes of luck that gets you to where you are today, it's almost not fair. You want to be lucky. Like, my view, it's better to be lucky than to be good. But in a sport, if you lose, you were worse than that person that day. If you win, then you were better than that person that day. And if you practice five hours a day, you're going to get better. And it's just the ultimate test of fairness. So, it's kind of a nice antidote to the sometimes unfairness of the world.
And it's like you can have a struggling business, there's nothing you can do unless you get this big client. The big client picks very unfairly like there is nothing you can do about that, whereas in a sport, if you just put your mind to it, I mean, you might not be Roger Federer. That's genetic unfairness if you will. But you've got everything else that is within your control, which I just think is a very nice antidote to the unfairness of a day-to-day life from time to time.
Willy Walker: And having started your first company while you were in college while most people who find their way to being an entrepreneur have gone out and worked for large companies before they all of a sudden either come up with some idea or say, I don’t really like the bureaucracy, or they just have some kind of itch they want to go scratch. You seem to have come right out of undergrad and said, I'm going to be an entrepreneur. Where's that drive come from? Is that a drive for freedom from a financial standpoint and then to go and create your own things?
Alex Rampell: Going back to luck is a major player in all forms of life. First of all, most people thought I was crazy. Luckily, my parents were understanding and were like, “OK, go for it.” Andover was a branded school, why did so many people from Andover want to go to Harvard? I mean, it was like 35 people from my class out of 330 went to Harvard, and it wasn't because they really knew the professors and wanted to study. It was like going up the ladder and trying to get the next accomplishment that was as branded as possible. And I mean, if you're in a competitive thing, “I want to win” in high school, you want to go to the best college. Part of winning in college is you want to get the best job. And what's the best job? (Again, not for the personal fulfillment perspective) everybody wants to work at Goldman Sachs or McKinsey, and not because they're good. I mean, you're making boring PowerPoint presentations all day. It's a terrible job. If you're 22 and working at McKinsey or Goldman Sachs and the pay isn't even that good relative to other things that you can potentially be doing with your time if you know how to optimize it, it has the imprimatur of “Wow, you are a very successful person!” and that's the hardest job to get after graduating from a school like Harvard. Meanwhile, I kind of zagged and said, I'm going to do my own thing, but it wasn't entirely insane because I already had my own business operating, not selling chickens, but selling software, and the software was doing really well. So, I was making more money selling my software out of my dorm room than I could probably make working at McKinsey. So that's why it wasn't as crazy of a decision where it's like, OK, I have no idea what I'm doing. I'm going to start a company which 99 times out of 100 would be a terrible idea. But I already had it running. I had no cost because basically, I was living in my dorm room, and I had all P and no L in my little business. So, I just got an office, I started splitting rent with my then girlfriend, now wife at the time, she was living at Harvard Business School, so it wasn't that crazy of a journey to go take a step. But actually, the cool thing for me now is if I talk to kids that are graduating from school in 2022, if colleges ever go back in season because of COVID It's great for the world if they decide not to work for McKinsey or Goldman Sachs, no offense to those two companies. But if they say, I'm going to take a bigger risk, I'm going to start something, I'm going to do something, even if it fails 99 times out of 100, they're moving the world forward as opposed to trying to climb the ladder and not just add a degree, add a Goldman Sachs to their very impressive resume, only for the sake of achieving a job at Goldman Sachs and not because they actually care or want to do that.
Willy Walker: So, you started a number of different companies, one firm which is on your T-shirt today.
Alex Rampell: I have unlimited free Affirm t-shirts, it’s half my wardrobe.
Willy Walker: One of the things that I've heard you talk about, Alex, is that as a venture capitalist, one of the things that you carry with you is empathy for entrepreneurs, empathy for people who are starting businesses. Can you give us an example of what you went through that gives you that sense of empathy for them?
Alex Rampell: Yeah, I went through so many. So, let me give you a little bit of background on TrialPay, so I used to write software. Most people wouldn't pay for the software and some people would – actually, that's how I learned everything about payment processing and that's how I got into fintech was I wrote software and then how do I accept payments and money for my software? But 99 out of 100 people don't like to pay for digital goods, they'll pay for a nice glass of wine, a cup of coffee but if it's paying $10 for an iTunes song, people are like “What? I'm not paying $10 for it on iTunes!” In fact, you might spend an hour trying to find a free version of it. Just googling away, as opposed to paying $10 for a digital good. So, I had this idea from a friend of mine, but I adapted it for my business. I said to all the people using my software, I'll give it to you for free. If you sign up for Netflix or if you shop at the Gap or if you get a Discover card. So, it was kind of like paying by trying something else, and this seemed like a really good idea because it doubled my little company's revenue. This other company that I started called FraudEliminator or SiteAdvisor, nobody wanted to pay for that software, either. It's kind of a theme – people don't like paying for digital goods but if you adopt this other mechanism – lo and behold, we doubled our revenue as well. When McAfee bought it half of our revenue was coming from people paying by getting a Discover card or shopping at the Gap or signing up for Netflix. So, then I started TrialPay to basically turn this idea that solves a big problem for me into something that lots of other companies could use, and it was kind of a rocket ship in 2006, was doing great, growing massively year over year until 2012 and then a bunch of things changed. People stopped playing a lot of these online games as much. Apple had basically nationalized the economy and what I mean by that is they made the App Store, which is great for users, but companies that sell software, they can't let you pay them independently. You're much, much better off having a highly, highly fragmented group of clients where the biggest one is 0.0001 percent than like three clients for each one is 33 percent. So, a bunch of things started going wrong. We had to lay off a lot of people. It was really tough. Everybody that worked for me thought I was an idiot. That was kind of tough. Every day I showed up to the office and it's like, Yeah, I am an idiot. One of my investors abandoned me. That wasn't fun. I remember this guy pitched me, “I'm going to be there with you in the foxhole. If things go wrong, I'm going to be there with you.” And then things start going wrong and I’m like, “Hey, where are you? Like, I'm in the foxhole.” And he's like, “Oh, I can't make it anymore.” Or came up with some kind of silly excuses.
A lot of investors, if they have just looked at spreadsheets and they haven't actually operated the business, they don't understand what it takes to actually turn a strategy into an actual thing. It's like, hey, let's do X, let's do a deal with this big company. And I know having been in that position, it's a) unlikely and b) here are all the different steps, the different cultural issues that come up. Or here's what it actually means to lead people and convince them to do something that they're not really dead set on. Or here's how you deal with people that are applying for jobs every day because they think that your company is doing crappily as they should because we live in a free market economy. And if you've never done these things, if you've never actually operated the business, but you just invest, these are little bubbles on a spreadsheet. Column H1 says we should grow sales by 30 percent this year. Why aren't you growing sales by 30 percent this year? It's like, Yeah, well, the problem is my head of sales quit. And the other problem is that my H.R. person is making these crazy allegations against the company. The other problem is that big companies said they're not working with us anymore, like all of these things. It's not so much having empathy. It's actually having a grounded understanding of how the world works, which is as important.
Actually, I remember one of my investors. I was having a bad day and he had been an entrepreneur before, and we had lunch and he just gave me a big hug. It's awesome when things are going great if you build a company and you know, you go take it public, that's the greatest feeling in the world. It's like you beat everybody, all the doubters. You've proven them wrong. You built something of value. It's financially rewarding and also psychically rewarding. Like, everything about it is great, that's when it's going up. BUT if things go in the opposite direction, holy shit, that is not fun. And again, I think it's that empathy that's pretty important. But it's also beyond empathy. It's like having a realistic set of understandings around the probabilities of executing on a particular strategy and understanding like, yeah, that's a great idea, but it's not going to happen. Or this is a great idea and here's what we have to do to make it happen again, both in terms of motivating the troops, raising the money, getting the sales down like these are all things that again, just they don't fit very nicely in a spreadsheet.
Willy Walker: All of that makes a lot of sense on both why you're a really good investor and the experience you bring to your job at Andreessen Horowitz. Does what you just talked about differentiate Andreessen Horowitz when you're competing to get into an investment? I remember you mentioned to me that you invested in the Series B round of Coinbase, which was a really, really competitive round where lots and lots of VC firms wanted to invest. Is it talking about what you just said, Alex, that allows for you to get into a round like that? Or is it more of the size and scale of Andreessen and how you might be able to help Coinbase in other ways?
Alex Rampell: It's a very good question. I would say before our firm came along and we're about almost 13 years old now, the mainstream of venture capital was you would hire people from business school or from investment banking jobs. And like those were most VCs, we were one of the first, but that was certainly not the only that really focused on hiring CEOs. But actually, it turns out, like sometimes a great CEO might not be a good investor. So, if you're trying to deliver great returns to LPs, what you care about is like getting the best investors. the best investors have to win the best deals because really the job of the venture capitalists is to find, pick and win. If you want to find the good deals, you have to pick them because there might be 10 companies like Coinbase. There are a lot of other companies doing the same thing that Coinbase did. Coinbase has beaten almost all of them. So, you wanted to pick Coinbase and not Blockchain.com or something or some other company that had come along and doing the same thing. And then if it's really good and this is what's very different about private investing versus public investing, public investing, you kind of want to be non-consensus, right? Because if you're consensus right, then it's already baked into the price of the stock. Whereas in private investing, it's like sometimes everybody picks the same company. Like, everybody knew that Facebook was kind of a good company to invest in 2006, it was a very, very competitive round. And the way that it sometimes gets non consensus is you pay a higher price. But sometimes the entrepreneur is like, look, I don't want to set myself up for failure. I don't want to raise it too high of a price. It's kind of weird for people that don't work in this industry. They're like, well, why does the price just get higher? But what will happen is for something like the Coinbase round, it's like if they went and raised money at a $10 billion valuation or something at their Series B, they'd be screwed for their Series C. So normally a smart CEO will say, you know what? Look, I know I have 20 investors that want to go bid and they'll keep bidding it up ad infinitum. But I don't feel comfortable raising above a certain price, ironically, because it's going to set me up for potentially a challenge for future fund raising because nobody wants to catch a falling knife and people want to show this upward momentum.
So, I think why do we win that deal? It's like you want to have the person who's joining your board who has the ability to fire you as the CEO. Well, that person better understands the business very, very well, hopefully has empathy, but that becomes commoditized as well. Like what if there are five people that are competing for that spot, are competing for that deal that all had successful businesses? What can I learn from them? How can they help me? How can the firm help me? Because if you are a nascent struggling business, you want to have every advantage brought to bear because the default is, I mean, there's a saying that this startup incubator in Silicon Valley, often uses, which is “Are you default dead or default alive?” And your default alive if you’re cash flow positive and people like your product? But the vast, vast majority of companies that we back, it’s like 99.9% the day they start, they’re burning money, they have a product that nobody uses, but that’s natural, right? They start off with the PowerPoint. You have to start somewhere, and you want to just harness as many advantages as possible. So, if you have celebrities on your cap table that invest that promote this all of their fans, that's an advantage. So, we do a lot of that. We'll say, hey, we're going to invest. We'll bring it. Actually, I think for the Coinbase round we brought in Nas the rapper and he invested. He did very well on that, I should say. But that really impressed the founders. We just do everything we can to win the deal because that is very important when you're trying to be. It doesn't matter of being non consensus, right? You just want to be right. And sometimes the best deals are consensus right, because again, not everybody has access to private markets, and we only compete with a certain number of firms, and we got to beat them. And if we're doing things to show the entrepreneur more value, that gives them these compounding advantages, then that's going to help the company and that's going to help the entrepreneur. And then one of those things that we try to bring is, almost everybody on the team has run a company before and knows what it takes. But I would say most other venture firms have now responded in kind. I mean, most investors now don't come from high banking backgrounds, where they did that for 10 years, and now they've switched over into investing in two people in a garage. It was somebody who was one of those two people in a garage or who was an early employee of a company that started in the proverbial garage.
Willy Walker: You talked about consensus right and non-consensus right in the public markets and how you need consensus right on both sides and in your two-by-two matrix in the private markets. Talk a little bit, Alex, about your view as it relates to capital and the fact that you really think that there's only call options and debt. As you dive into that explanation, which I've heard you give before, and I think it's fascinating – the piece to it that captured my attention the most is that view of a call option five years from now or a call option seven years from now. I think so many people like me this morning woke up and looked at CNBC and the markets are either up or they're down, and rates have moved up three basis points and down four basis points, and they think that they've got to do something to react to that. And as you talk about the way that you look at investing in call options, it just underscores this longer-term outlook. So, can I have you kind of fill in around the call options, the debt and then the way that you look at the investments that you're making at Andreesen?
Alex Rampell: The best way of thinking about this is we'll invest in a company at a $100M valuation and the press will say that's insane, they only have $10,000 of revenue, that doesn't make sense, these guys are idiots. And what I say is #1: we're not buying 100 percent of the company like you wouldn't buy 100 percent of a company for $100M that produces $10,000 a year in cash, it doesn't make any sense. What we're doing is we're buying what I would call the Out of the Money (OTM) call option where it's like this thing probably doesn't work, right? I mean, it certainly doesn't work right now, but we believe in this team. If it works in five or 10 years, this could be huge, and we can make 10,000 times our money. If it doesn't work, we lose 100 percent or actually the way that a lot of these rounds are structured is they are kind of a bond with the call option because we buy preferred stock, which means it has some kind of liquidation preference of the company that just shuts down the next day and says, Yeah, we can't get it to work. We get our money back. That's the One X liquidation preference that's very common with most venture deals. But that's not why we're investing. There's a friend of mine who taught me this one time where he said his father got pitched by somebody saying, hey, don't worry, you won't lose your money. It's like, why do I need you to not lose my money? I cannot lose my money on my own. It's all about the upside.
I always look at things, it doesn't matter what the valuation is right now at the very early stages, because at the very, very early stages, you're making a bet on the future you're buying again, what I would call an Out of the Money (OTM) call option and like the clearing price is not like this very, very complex Black Shoals math that propeller heads are working on behind the scenes, it's just like supply and demand. There's a deal that I just did, it's very, very nascent, and it's got like a few $100,000 of revenue, I really like the CEO. I think what they're building is very, very compelling. They seem to be the best in their field, and I paid $120M valuation for this deal, where if they went to sell one hundred percent of the company tomorrow, they wouldn't sell it for that price. But again, it's an out of the money call option, and that's kind of what we do. And I think it's important. That's what a lot of people that just kind of look from afar at the venture capital industry like, oh, all these companies are overvalued. It's like, sure, they are, but basically to me it is interesting about the public markets right now. The public markets are acting like this, too. Where basically Apple's worth three trillion dollars. And Apple at three trillion is actually not that expensive. If you look at how much cash they have. So, enterprise value is less than three trillion. They have hundreds of billions of dollars in cash, right? But they produce over $100B of cash a year. That's a lot. I would love to do that. You should do that too, Willy. We should figure out how to do this together.
But if a company is not expensive at that scale, it looks a little bit more like a classic, not super high multiple company. But then you have something where it's like, ooh, this could be Apple if everything goes correctly over the next five years and then it's trading. I mean, it's very, very expensive because a lot of what people are valuing is that if it works, it could be big. And like, I never used to see that in the public markets, but that's what the private markets in venture capital land have been like for a very, very long time. So that's kind of how we think about it as things get closer to being public then you want to look at, you know, what is it worth today or what are public comparables, and so on and so forth?
But I wrote something. I did this little blog post one time where I found a video of Tiger Woods when he was two and a half years old, and he hit a perfectly straight drive, but only went like twenty-five yards. And the thing that I wrote about this is there are two ways of looking at this video of Tiger Woods hitting his twenty-five-yard drive: One is like, “Hey, I'm 40, I can hit a drive much further than that little kid. He's pathetic, like, I'm much better than him.” But the other is like, “Wow, if that kid keeps it up, he could win 15 majors!” and both of them are true. But in a venture mindset, you have to default to that latter category and realize that most of the time you're not looking at Baby Tiger Woods, you're looking at something that's not going to work, but you can't have the mindset and you can't judge it on the present because judging something on the present is an extraordinarily easy way to never really win. You're just going to say This is bad, this is bad. This is bad.
Oh, one of my partners has a saying that everything starts off looking like a toy and being kind of gimmicky or hard to use or only nerdy people use it. Like try using the internet in 1994 on your crappy dial up connection where things took half an hour to load. And if you judge it on the present, you're like, this is never going to work. Like, what do you think TVs are going to go away and people are going to watch TV where it takes each frame 45 minutes to load, like that's never gonna work? That's judging it in the present. If you say, wow, this could work. And if it does, it's going to advance and get much, much better. You're looking at Tiger Woods with the 15 majors as opposed to like, yeah, this kid kind of sucks.
Willy Walker: You are what I would call an expert on operating systems. And when I say operating systems, I'm not talking about DOS or Windows 365, I'm talking about the way the financial services industry is networked and works, the underlying operating system that makes it so that payments go from here to there. How many people actually buy something at Target and buy it with my Visa card, and Visa doesn't get to see what I actually bought, and they love that data that Target knows that I bought the G.I. Joe with the kung fu grip. And then it goes through, and it gets cleared, and at the end of the day, JPMorgan, who has my card, actually sees what I bought. But they're not Visa. I've heard you also use the example, Alex, of dental software, and the fact that when we go to a dentist's office that all of our records are kept, that you look for companies that have an operating system that are used consistently by people and that we end up kind of defaulting to putting everything into them and if you can create that infrastructure, you kind of create a moat around your business and the ability to grow and defend against competitors. Talk for a moment about that operating system in financial services and the way that startup companies can kind of break in on it, vis-a-vis the Visa's and the JPMorgan's of the world that are these big, massive, entrenched incumbents.
Alex Rampell: Sure. I mean, but taking a step back, I’ll be old fashioned, to say every company is worth the present value of future profits. So, if you're going to take that stance, which I think is a very fair stance to take. You want to make sure that those future profits are resilient and have a high moat around them and ideally don't get commoditized if you're generating a widget and somebody else produces a widget at a cheaper price than you and markets are what they are, the person with the cheaper widget is going to beat you. So, it really comes down to kind of in my world of, how much do you retain the customer?
So, let me give you your example of dental software, which sounds incredibly boring. But let's say that you want to be in the business of making loans to dentists. There are a lot of dentists. They might need money. Or maybe you want to be in the business of making loans to people that need dental work, and that's also a very, very big market. How do you reach the dentist or how do you reach the customer? And if you want to reach the dentist, if you say, I've got a great idea, I'm going to build a lending company for dentists and how am I going to reach them? I'm going to buy ads on Google, I'm going to buy ads on Facebook. I'm to send out lots of postal mail saying, hey, great news, I'll charge you five percent for a loan to go build a new location out for your dental practice. Well, it turns out that other people can compete all the profits away because they're also going to buy Google ads and then the cost of the Google ad will go up. So, they’re also going to buy postal mail and send out the same thing. If you really wanted to build this business, the key thing and I wrote a blog post on this, which I called the TiVo problem, but the key thing is to actually build the boring part first. And the boring part would be like, hey, you know what? Let's just build a CRM system for dentists that keeps track of every patient, takes pictures of their teeth, reminds them to come to their appointment on time, and reminds them not to be late by calling them the night before. I always get called by my dentist saying, don't be the night before, all of these things that run the dental practice. And that’s actually what you want to build. And the reason to build that is because you have a free option not to overuse that term on the financial services piece. So, let's just say that I build boring software for dentists and actually there are a bunch of products that do this. And now, because I'm the daily thing that every dentist now uses to take the pictures of the teeth to log all the updates to go call their patients, maybe to advertise and get new patients. I have a free option on lending. I don't have to send out postal mail. I don't have to buy Google ads. I don't have to buy Facebook ads. I just embed in the little software product that the front receptionist opens up fifty-five times a day, that the doctor opens up one hundred times a day. Hey, do you want to loan? Click here! And I don't have to pay anybody for that because I own the distribution or take a company like Toast. Toast is now the operating system for a lot of restaurants, so you've probably seen this if you go to an average restaurant these days. Now there's a QR code on the bill and you can pay that way. Toast, they run the online menu, they integrate into DoorDash. They just do all the boring stuff around operating a restaurant. They do payroll for the staff. And how does Toast make money? Guess what again, embedded financial services where they markup credit card rates just by a little bit, but they make enough money doing that to build, to have a company that's worth $10 billion. They have a free option on making loans. And I think this is what a lot of entrepreneurs get wrong, which is they build the really exciting feature first.
And this is why I called the TiVo problem and I learned this firsthand, unfortunately. I thought Stripe it was a great idea and it worked out OK. I mean, we sold the company for a lot of money to Visa, and everybody was happy. But I should have built something very boring like Stripe and Stripe is like one of the biggest credit card processors in the world. And I didn't do that because it's like, well, there are a lot of credit card processors that's boring. It's not a high margin, but it's the way of really owning and retaining the customer. And the reason why I call this the TiVo Problem is, I mean, you're old enough. I give this example to people who are like 20 years old, like, what's TiVo? But TiVo was the first thing that came out that allowed you to pause live television or two companies TiVo Replay TV, and it really revolutionized just how humans operated at the time. Because before it's like I got to get home at nine pm on Thursday to go watch Seinfeld. And now it's like, oh, I can pause Seinfeld, I can come back later. It just made it very, very easy to not have linear TV programming. Great idea. But the problem is that it was a great feature, but they didn't own the distribution and distribution was Comcast or Adelphia Cable or Time Warner Cable. And eventually those guys can say, you know what, we already have all the customers. Let's just roll out our own crappy version of TiVo and charge less than TiVo and then TiVo dies. And that's exactly what happened. And this is what happens time and time again with businesses that don't understand the importance of distribution. Like most entrepreneurs they focus on. I have a great idea for a product, but it's not the product that's the best that wins – it's the product that actually figures out distribution. And there's a saying that I use a lot when I kind of compare like big incumbents, and I think this is how you and I met when I was kind of talking about what's going to happen to big incumbents in financial services. And in my view, by default, they win. Whoever is the incumbent by default is going to win because they have the distribution. They already own all the customers. And consequently, in my world, it's always a battle between the startups. Can they get distribution? Can they get a lot of customers for what is often a superior product or user experience before the incumbent who already has all those customers before they get a better product? And there are certain areas where like, you know, TiVo is a great example of this, you know, revolutionary product that basically turned into a patent troll because they couldn't figure out distribution and really the right way to have built TiVo would have just been, even though it sounds insane, would have been to have built a new cable company or to build a satellite TV company, which is not what they wanted to do, and they wanted to actually create this great product for the world. But the distribution was just owned by these incumbents that were not even fragmented. There aren't five thousand cable companies in the US. There is a very, very small number. And consequently, again, distribution tends to be a product.
Willy Walker: So, as you think about that tension between startup companies getting access to distribution versus the incumbents creating or buying or incorporating technology. In financial services, there are a lot of really sleepy, sleepy companies out there, regional banks and local banks and what have you and we obviously and as you just said, someone like JP Morgan has a distribution network that is second to none and JPM isn't going out of business anytime soon. But at the same time, you're also funding companies that are finding ways to sort of chip away at that. And I'm just curious as it relates to distribution because distribution financial services don’t seem to be any less centralized, any less controlled than any other industry in the sense that the oil exploration and distribution industry is very vertically integrated, it's got lots of CapX. And so going into that industry is very difficult. The retail industry before WalMart came in or then Amazon came in was controlled by some big shops that controlled distribution and controlled the customers. And so, as you look at those companies that you're investing in in the fintech space, what's the what's the wedge? What's the angle given the distribution network being controlled by these big incumbents?
Alex Rampell: Well, the great thing about financial services, kind of to your point, is that you're dealing with bits and not atoms because money is fake. It's just a shared delusion. We believe that the representation of zeros, hopefully a lot of zeros at the end of your bank account balance is a real thing. But there's no dollar bills that have to be shipped around via paper. There's no complex logistics, the complexity. And that's why it's kind of like software, like software can have very, very high margins because you're effectively selling, not even air. It's better than air. You're selling licenses to code that is infinitely replicable. And you have the same thing with a lot of financial services products where it's like there's really no cost of delivering things. So, I would say that a lot of times, yes, JPMorgan has a huge edge. And what you have to do sometimes is just really, really innovate on the product, the pricing or the distribution and not to over harp on distribution. But like, it's funny, I was the guest speaker at a Chase executive offsite, probably five or six years ago for this guy, Gordon Smith, who runs the retail bank at Chase and they're like, hey, what are you going to talk about? And I give them my presentation and they're like, well, there's a whole section on your presentation that says that branches don't make any sense. Can you take that out? It's going to offend the people here that work on the branch expansion strategy. Like, no, because I don't think they make any sense. Like, why would you have bank branches? It's like 2017 or whatever it was back then, but this was still part of their plan. And I actually started off this presentation with an SAT analogy back when the SAT had analogies, which is like, Walmart is to Amazon as Chase is to what – right? And hopefully, if Chase is going to be successful 20 years from now, like they have to figure out how to knock Amazon, like Amazon, is a much, much bigger market cap and Walmart. Walmart could only expand insofar as they built more physical stores for the longest time. Oh, we don't have a Walmart in New York City. Well, how do we get sales in New York City? Well, no brainer. You go build a Walmart there, but maybe the citizens of New York don't want one there, and you have to argue with local whatever town councils and whatnot. But that's how they grew. And then Amazon said, you know, this is dumb. We're just going to build warehouses far away and ship stuff via ups, and eventually we'll go take that over and build our own trucks and have our own airplanes and everything else. Obviously, a very, very ambitious plan that Amazon executed well on. And is there a metaphor for that for banking?
You're seeing inroads of this right now with the leading Neobank in the country is a company called Chime, and they have something like 10 million accounts. And those accounts, those weren't 10 million new Americans that just plopped into the country six months ago, these are people who defected from Bank of America, they were pissed off because Bank of America was charging them overdraft fees. One of the wedges that Chime used, which again, is not the reason why Chime is hopefully a very good company, is because the retention again going back to net present value of future profits, the retention of users is very high because they get people to direct their paycheck into Chime. And how do they convince people to do this? A great example of the wedge, they said we'll give you an access paycheck two days early. One of the crazy, crazy things in the anachronisms of the US financial system is that to send money from point A to point B takes forever, you can do a wire but the Fed wire closes at 4:00 p.m. Eastern Time because that's totally how things should work in 2022 and it doesn't work on the weekends. And then an ACH transaction can take like two to three days. So, when you run payroll, I'm sure when you guys run payroll and you have to do it days in advance. And like, I'm getting my paycheck on Friday but the company, as my employer, had to start sending it on Tuesday, and that's kind of nuts. So, Chime said, hey, we already know that Walker & Dunlop is sending the paycheck, we'll just put it in your account right away and people are like, wow, this is awesome. And Chase will figure this out eventually. I think they’re probably going to match this, but it’s like five years later. So, a lot of what these companies, these startups have to kind of work with. It's nice in financial services where the big impediment tends to be legal or regulatory. And it's something that I think a lot of regulators often get wrong, which is, you know, regulation always tends to favor the incumbent. Because if I go back a startup and I say, “What are you going to use my $10 million-dollar initial investment that can go to zero for?” They’re like we're going to hire 100 lawyers and zero product people. I'm like, I'm not going to invest in that. Whereas JPMorgan can hire a thousand lawyers and figure out how they're completely compliant with Gramm-Leach-Bliley and Dodd-Frank this and like, and they do, because there's a lot of downsides if they're not compliant. It makes it harder for them to actually face pressure that they would face from real competition if they had a bunch of startups that had an easier path to market. The wedges vary. The Chime one's a good one where they figure out something that people really want or people are really pissed off about, and in many cases, it tends to coincide with some kind of technology shift. So, Chime coincided with people using their mobile phones as their primary everything device and Chase was kind of slow for the uptake there.
If you look at other examples of this, why did NetSuite become a big company? They went for Cloud. A lot of companies were like hey, I don't want to have On-Prem software that has 20 IT people that are maintaining it. So, the movement from On-Prem to Cloud was a very nice wedge for a lot of big companies to get built, the movement from desktop to mobile kind of same thing. And even before this, just like the move in from like mainframe to PC, like, say you want one of these technology shifts to really show up a lot of the big companies that have actually been built, like Airbnb, Uber, like why did these companies all tend to be very, very constrained around the 2009-2010 formative years. On the one hand, it's like markets have just crashed. So, it's kind of nice to start a company when you have no competition because like everybody, all the tourists go home. But that's actually not why Airbnb and Uber were successful, it was because of the iPhone.
You get an iPhone; the first page only has the calculator app and the Safari app on it. You haven't downloaded anything yet, and if you were the first thing in that App Store and you were Uber – it was just easier to get your install base. The paradigm shift that really had happened was that mobile, GPS and 3G connection and what used to be an iPod allowed for a lot of new businesses to be built, which is really, really powerful. And then the returns on that sector were magnified by the fact that the market was at an all-time low. But it had nothing to do with financial markets because their product cycles and financial cycles and like you really wanted to try to invest behind product cycles, and that's sometimes how you can beat the incumbent is like they just haven't followed the product cycle. There's an amazing chart that shows it doesn't identify the axes at first or the product, but it shows something that goes like this. And then another thing that goes like this, and the first one is film cameras. We're thinking about film camera sales, you know, massive, massive peak. And then they just die. And then you have actual digital cameras that went through the exact same thing. Well, why? Because the cell phone kind of bundles that in and this happens with a lot of products. So, you just have to kind of target your entry point and sometimes get lucky from a timing perspective as well.
Willy Walker: So, you had Henry Fernandez, CEO of MSCI Inc., on your podcast a little while ago. And first of all, the performance of MSCI, just pull up the stock chart and take a look at what Henry and his team at MSCI have done because it's just eye popping. But in that interview, Henry says crypto is the tip of the iceberg, and what people should focus on is blockchain and its implications for industries around the world. As you think about the Out of the Money call option that's constantly running in your mind and making investments, are you buying Out of the Money call options in blockchain? And if so, in what part of the blockchain universe?
Alex Rampell: Henry is a smart guy, but I have to violently disagree with him on this. It actually reminds me of the early days of the internet where people said the internet is bad and scary, but the intranet is big, like it's all going to be about lotus notes in the intranet. I don't know if you remember this, but like intranets, we're going to be the future and the internet is dangerous and they had porn on them and they were like people wasting time and nobody would ever use the intranet. And, you know, Paul Krugman said that it's going to have a lesser impact than the fax machine that was like the predominant take on the intranet, probably 25 years ago.
Willy Walker: Do you still read Krugman after saying something like that?
Alex Rampell: No, no. I think I can’t believe the guy won the Nobel Prize and not just because of things like that, but he’s like a fake economist.
Willy Walker: He’s a Princeton guy. You can give your parents a hard time for it. Anyway, go ahead.
Alex Rampell: That guy is such an idiot, partisan idiot. Let me just explain why crypto is interesting and like, you can’t really disentangle crypto from blockchain.
Willy Walker: So, in saying what you've just said, you're basically saying Henry's dismissal of crypto is wrong?
Alex Rampell: Well, let me explain. So, I met with a big bank four or five years ago. They said, “Hey, we really want to use blockchain because blockchain is big and innovative and we like innovation.” I love it when people say they want innovation. So, they want innovation, they want to use the blockchain, but adds, “we don't want anybody else to have access to it and we want it to be in our own server room and have the blockchain just in our own office.” And I was like, “Oh, you know, there's a company that does that, they’re in Redwood Shores. They have these five big towers. It's called Oracle, and what you're looking for is a database.”
Let me explain like what crypto and blockchain are, there's something called a permissioned blockchain, which is again, this is kind of the mumbo jumbo on innovation blockchain thing that Henry was talking about again, smart guy. But I don't think he understands the space extraordinarily well. But his current business is amazing. And that just says, all right, I have a database that I want five people to have access to and maybe isn't stored in one place. But the real power of what's happening with blockchain and cryptocurrency and the reason why they're intertwined is because the cryptocurrency is effectively an incentive to have people host a distributed database. Let me give you an example of what this means.
So, I'm sure you know Dropbox, right? So, Dropbox lets you store files. How does Dropbox store those files? Well, they used to be one of the biggest Amazon Web Services clients, but now they operate their own data centers all around the world. If one of those data centers gets hit by a meteor or if the government comes with guns and says, shut down this data center like your files are gone or they're given up, there is a blockchain project to kind of do the same thing, and blockchain just means that it's not stored in one place, it's distributed, it's very, very resilient and it's censorship resistant. So, there is something called IPFS, which is the InterPlanetary File System, which is very auspicious because we only live on one planet. But this is basically like Dropbox, but it's hundreds of thousands of hard drives around the world, including mine that say, hey, you know what? I'll store files for Willy and lots of other people. I don't even know who I'm storing files for, but I'm going to store files on my partially empty hard drive. It's kind of like Airbnb for storage. Well, why would I do that? That seems kind of dumb for me to just give up my hard drive space to people that I don't know. Well, I'll do it if I get paid. Well, how do I get paid? How are you going to send money to my hard drive that doesn't even make any sense or how are you going to send 24 cents to me? Well, there is a currency called Filecoin. So, I earn Filecoin by hosting storage on my hard drive. If you want to buy storage on this crazy distributed system that's not Dropbox, but is much more censorship resistant, you have to buy Filecoin. Filecoin is a cryptocurrency and IPFS is not a company. There's no Delaware C Corporation that Congress can call and say, we're shutting you down. Whether you love or hate Donald Trump and other people that were kicked off from Twitter, now it is kind of interesting that there are a few different areas where people tend to speak publicly, and these companies can just shut down anybody that they want with no due process as they should because their private companies.
But another company actually popped up that was trying to compete with Twitter called Parler, and Parler was kind of like the right-wing version of Twitter. Parler lasted like a week. Why did it last week? Well, because they were running on Amazon Web Services and Amazon Web Services shut them down – and then no more Parler. Well, so if you wanted to build something that was again censorship resistant, truly distributed, the way that you'd have to do this is you'd have to have distributed storage and distributed compute. So distributed storage is something like Filecoin, where like, you just literally cannot shut this thing down, it's like Whack-A-Mole. It's like there are hundreds of thousands of nodes around the world. You can't shut it off. There's no company, there’s nobody to subpoena and then you need compute, and there are lots of these kinds of networks of computation that run the same way, it's like, hey, you've got a computer run algorithm, run code on it and you'll earn tokens as well.
The key thing is that in order for a blockchain to operate, you need an incentive for the participants on the blockchain. This is the key, and the incentive is the cryptocurrency. That's why you can't disentangle the two and this is what a lot of people get wrong. Now there are things saying, hey, you know what? We want to have a bunch of banks that shouldn't be running transactions through Visa, let's do a permissioned blockchain where every bank stores a copy of the same thing, and we clear that way. But that's really just kind of like a glorified database. It's not doing anything around censorship resistance. You know, bitcoin is this for money? Arguably, like, you know, bitcoin is a shared delusion that it has value but if enough people believe it, it kind of does. Like why does gold have value? Like, I don't know. It doesn't make any sense. It's not used for anything. If I'm on a desert island starving, I want water, not gold. But it has value because people think it has value, the same with Bitcoin. If enough people think it has value, it probably has value. And you can't shut down Bitcoin either because again, the blockchain for bitcoin is just storing who owns what, it's not storing files. It's not, it's not doing computation. But it was kind of the first thing to kick off this revolution of, hey, we can have something that is never reliant on a central party. And if you think that there is government overreach, or if you think that tech companies are acting irresponsibly by censoring speech, well, it's not like you just build a competitor because you build a competitor and then, as Parler showed, it gets shut down because AWS is another centralized company, Amazon, that can say, I don't like that either. Kaput. And the way of dealing with that is, again, it's blockchain and cryptocurrency.
Willy Walker: So, you own the domain name www.paymesooner.com, do you still own it? So, give us a little bit of the looking at your deck or your hand of cards. You got any other domain names, Alex, that would give us some sense of the spaces where you're investing in that you own the domain name today?
Alex Rampell: You know, I used to buy lots and lots of domain names when I was a kid. And some of the better ones I did not hold on to. I could have bought beer.com when the internet was just starting because it used to be free to buy domain names. But I didn't buy that. I wasn't old enough to buy beer. I bought my last name, that was my first domain name that I bought. But no, not really.
Willy Walker: OK. A couple quick things before we run out of time because I got about two more pages of notes and questions, but we're not going to get to them all today, which doesn't surprise me whatsoever. You invested in Opendoor; it is now publicly traded. Zillow obviously had a pretty sharp fall from grace. Is eBuying here to stay, Alex?
Alex Rampell: Well, I’ll say two things about this. Like, the thing that Zillow got wrong is they didn’t understand cohorts and selection bias very well. So, if you buy a thousand homes in February of 2022, the last 10 to sell, there's something wrong with them. That's why they're the last 10 to sell. So, you might think if you're holding your entire portfolio at market for 11 months and everything is selling just fine and dandy like you think you're actually a genius. But then the last 10, if you sell it at a 50 percent discount and you're making 50 basis points on everything else in your portfolio, you've actually lost like the whole cohort once a cure is bad. And Opendoor had just suffered this lesson, unfortunately, but fortunately, actually in retrospect, very early on. So, they figured this out.
So, I'll say, market making is a very, very valuable activity across all markets. Like why? Why does the stock market have so much liquidity if you want to sell 79 shares of Facebook right now at a certain price? There's not actually somebody that wants to buy exactly 79 shares at that exact price right now. There's a market maker who will warehouse that, earn a spread, and then sell it. And this is why you have so much liquidity, and liquidity begets liquidity. If I know that I can sell this at a fair price, I'm more likely to sell. If I know I can buy it at a fair price, I'm more likely to buy and market making helps with that. It's very hard to do for housing.
Opendoor has normally focused on high cap rate markets just because you know that there's a floor on price because you know the rental yield, which is hard to do in Pac Heights, California, or luxury condos in Manhattan, like that kind of algorithm doesn't work there. But, you know, a sizable percentage of everything that they buy, they sell to just large residential REITs like Invitation and American Homes for Rent and all of those guys. But the thing that actually the reason why I invested in Opendoor was, I do think that iBuying is interesting if done right. It's dangerous, as are all forms of market making. But if you get very, very good at it and you have enough liquidity to weather any kind of high volatility storm, you'll make more money at high volatility times than you will at low volatility times. That's how all market makers function.
But the reason why I thought it was interesting is how do you compete with the multiple listing service, or MLS? And this is obviously a big white whale. If you could figure out a way of competing with the MLS, you would obviously piss off the National Association of Realtors (NAR), but you would build a very, very valuable business. It turns out the best way of doing that is to have proprietary supply. And what I mean by that is take Amazon. Amazon now sells everything, but they started off just selling books. They started off actually stocking every book that they sold and Jeff Bezos’ garage or something. They got lots of demand because they had all the supply. They had the supply of books, every book in the universe or its biggest bookstore. They got lots of demand. And then they said, you know what? We would love to sell TVs and other things without taking risks. Let's just let people show their TV on Amazon web results and then we’ll ship it to them and not take any kind of inventory risk. And this is a business that's massive at Amazon. It's like half of the revenue, at least on the retail side called FBA, fulfilled by Amazon. And this is what I thought about Opendoor. And I still think they can do this, which is they start off with proprietary supply. I mean, they buy the house. It's kind of crazy. They hold it on their balance sheet. If they're 10 percent of the market in a town like Charlotte, which they are, then they don't have to go list those homes on the MLS. They can say we're only going to be list it on Opendoor.com. And then if you're in the market to go buy a house in Charlotte, you're like, I'm gonna check everything that represents the MLS. I'm going to go to Zillow or Redfin or whatever that pulls from the MLS. But shoot, I'm not going to see all the inventory unless I also go to Opendoor. And then Opendoor can actually not pivot but add a fulfilled by Opendoor model, where if you want to go, list your house for an all-in one percent fee then list it on Opendoor. You wouldn't do that on day zero, it's only going to have one small percentage of all the traffic on the MLS. But if Opendoor can actually aggregate all the demand, then that's a massive, massive market because if you have six million homes that are sold every year and you're paying five to six percent commissions, which doesn't make any sense except for the monopolistic tendencies of NAR and whatnot and the MLS system, then it would be great to have competition. How do you structure that competition? What's your wedge? Well, it turns out to be a good wedge is iBuying.
Willy Walker: So that's such a great segue into about five of the things I want to talk to you about, but we're going to have to end our conversation here. It's fascinating, both the investments you're making, the way you think about the world, and I think more than anything, Alex, as I did research on this, I think we're pretty good at Walker & Dunlop focusing out five years and creating five-year business plans. But your whole framework of buying call options, out of the money call options on these technologies that are going to have a major impact on our economy. Obviously the winnowing process and picking the winners and the losers is what makes you and your firm so successful. It's not like you can just kind of throw a dart against the wall and say, If I'm directionally correct, I'm going to be correct. And at the same time, for all of us who are in the more traditional economy trying to figure out how to compete with these technology firms, your overall view, and the way you frame the market is just so insightful and so helpful.
So, thank you for spending an hour with me to talk about this. It's been a real joy and good luck to you and all your investing. You don't need the luck, but you're just awesome. Thank you for spending the time.
Alex Rampell: All right. Thanks, Willy, Take care.
Willy Walker: Great to see you, Alex. Take care.
