Chris Paik - Venture Investing Frameworks

8/17/23, 10:47 AM Venture Investing Frameworks | Colossus®
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Introduction

Patrick: [00:00:59] My guest today is Chris Paik, who is a general partner at early-stage
venture firm, Pace Capital. Before Pace, Chris actually spent eight years building and
investing alongside last week's guest, Josh Kushner at his firm, Thrive Capital.

During that time, he sat on the Board of Twitch. Our conversation explores Chris'
frameworks for investing, from atomic value swaps and the role of The Seven Deadly
Sins. We also discussed different consumer trends like the rise of virtual YouTubers,
Apple's Vision Pro and why everyone graduates off of YouTube. Please enjoy my
conversation with Chris Paik.

Humanity: A Data Storage and Transfer Problem

Patrick: [00:01:34] So Chris, I think an interesting place to start because it's something
keyboard_arrow_upsaid at lunch that I don't think I've seen you right about elsewhere, is the history of
you
humanity as a data storage and transfer problem. And how that relates to new kinds of
computer interfaces? We're lucky that we've now gotten to see the latest Apple Vision
󰍡which probably figures into this discussion somewhere. What is this big idea of
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Pro,
yours? And why is it interesting for those interested in technology?
https://www.joincolossus.com/episodes/44807654/paik-venture-frameworks 1/31
Chris: [00:01:58] Let me caveat this with it's probably in the bucket of half-baked and still in
the realm of theory and the world of audio files, there's this term called "lossless" where if you
are an audio file-buff, you're trying to get as close to the "source" or original thing as possible.

And so compression algorithms are your enemy and it's what drives people to spend insanely
ungodly sums of money on their audio setups. And I think this concept of lossless is really
interesting as it pertains to data and data transfer and what are high-fidelity experiences, what
are low fidelity experiences, what are lossless experiences.

If we think about data between humans in the same generation, data across generations,
information, the ability for us to transfer information, store it and access it is so important to
societal efficiency, I.t prevents us from reinventing the wheel time and time again. You can
learn from other people's mistakes.

And so one thing that's interesting to think about is songs. Songs as a compression algorithm
for data. We are wired in a certain way to feel certain tunes being catchy and we can
remember song lyrics. But if you think about it, the oldest forms of songs, poems, epics were
meant to transfer data between people and across generations. It's this data compression
algorithm and perhaps or the original form of data storage.

And when we think about the advents of technology that have allowed us to create these step
functions in data transfer and data storage, notably the written word, huge, huge
advancement. The biggest change though happened with the invention of the printing press
because it took stored data and made it scalable to distribute.

So all of a sudden, there wasn't one copy of one thing. There could be an infinite number of
copies or multitude of copies of the same thing. And so if you think about individual
conversations as an amount of data that's being transferred, we're having this conversation
right now, if it weren't recorded and it weren't distributed, the amount of surface area that, that
data could impact ends you and me in this conversation.

Patrick: [00:04:27] Or each of us take a little bit of it away or something like high
lossiness.

Chris: [00:04:31] Exactly. And if you think about the invention of the written word, that was it.
Somebody writes it down and then it is limited to that single copy being consumed. They
mentioned the printing press created this incredible distribution mechanism for that same data
to be consumed.

keyboard_arrow_uplook at the Internet as another form of data transfer, data storage. One thing that I think is
You
underexplored is the impact of data transfer speeds as actual why now reasons for companies
existing.
󰍡 Let's look at mobile social networks and the order that they were founded in; Twitter
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2006, Instagram 2010, Snapchat 2011, maybe most recently TikTok named Musical.ly in 2014.
It could not have happened in any other order because of the minimum packet size of the
content on that platform. So Twitter was text-based, smallest packet size. It was actually able
to run over SMS rails. And then when mobile bandwidth was in its infancy, it was still sufficient
to transfer those kilobits of information.

But it basically wasn't until 3G until Instagram was possible. You had compressed images. And
in order for the average person to have a high-fidelity experience, you needed wide
distribution and attachment rate of that. Snapchat coming shortly thereafter, also imagery and
short-form video, and then TikTok three years later with longer-form video with audio also part
of the consumption experience.

The thing is TikTok couldn't have started between Twitter and Instagram. And interestingly
enough, I would argue that Instagram could not have been started after TikTok. With all due
respect to a number of great founders building great innovative things, I would argue things
like Paparazzi, B-Real because they are not strictly more bandwidth-consumptive than TikTok.

The why now -- the technical why now is not sufficient. And if they were to have Darwinistically
existed and survived, you would have seen them emerge in the Instagram, Snapchat era of
3G. I think a lot about data transfer between humans across generations, but then also the
read/write speeds of humans to computers. So our eyes read data at about, I think, it's 100
megabits per second, basically Ethernet speeds.

Patrick: [00:07:25] Our whole environment just reading text, we read what we can see.

Chris: [00:07:28] Yes, exactly. The amount of data that our eyes ingest is about 100 megabits
per second. Compare that to linguists who have studied the bit rate transfer of spoken
language is orders of magnitude slower. Most current common spoken languages converge at
a data transfer speed of 39 bits per second.

Patrick: [00:07:52] Wow, tiny fraction.

Chris: [00:07:56] There are like a number of things that bound that data transfer speed. It is
both limited by the right speed of a human voice and the data processing speed of our audio,
of our ears. Interestingly enough, you think about people who can listen to...

Patrick: [00:08:10] Podcast at 2x speed or -- can't listen at 5x though.

Chris: [00:08:12] So actually read speed is twice as fast as the spoken word write speed.
keyboard_arrow_up language, the limiting factor is actually human write speed. And if you think about
Spoken
voice as an interactive modality to computers, that also suggests that a voice interface will
󰍡be limited in a data input write speed of 39 bits per second. Some examples may
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also
highlight things like, imagine a fighter jet, that's voice-controlled.
Patrick: [00:08:43] Doesn't work.

Chris: [00:08:44] It doesn't work for a number of reasons. We, as humans, we've created
tools to advance our haptic ability to input data into computers, whether it's the keyboard or
the mouse or the touchscreen. I think there's something interesting to think about
Darwinistically if voice had actually been meant as an input mechanism between humans and
computers, wouldn't we have also come up with some tool to advance our data input via the
sounds we can make?

We would have come up with some sing-song language or we would make specific sounds
that map to certain data, but we haven't. And I think that begs a question of maybe voice is
just not meant to be input mechanism between humans and computers. Maybe we have a
structural advantage with our other senses with touch and haptics.

And that is actually the highest throughput data transfer between humans and computers, and
it will be for the foreseeable future. We're not going to see because sight is our fastest read
speed from computers. We're not going to see a more dominant interface where computers
transfer information to humans that is not through sight.

Theoretically, this would argue that because voice hasn't actually been effective as a human-
computer interface, it never will be. There are limits to this framework. And again, I'll sort of
caveat it with like it being half-baked. But I think the most interesting part of the Vision Pro is
not the screen.

Patrick: [00:10:35] Screens can get more intimate.

Chris: [00:10:36] Screens get more intimate. We will always advance along better, higher
fidelity, more pixels in the screens. But the modality won't change. It will always be screens. It
will always be sight. What is changing though is the input mechanism from humans to
computers.

So every time we have advanced in human-to-computer write speeds, we've seen a complete
paradigm shift in what is possible. So you started with the keyboard and that was fine. It was
good. It was limited basically by the number of words per minute that somebody can type.
Average person types about 40 words per minute.

But then the mouse was invented. And all of a sudden, there is this watershed moment of
advance on how much humans can write to computers as data transfer. I think the thing that
happened with the iPhone that keeps misattribute to like, well, it's like mobile, smartphones
keyboard_arrow_upthings like that, it's actually just multi-touch.
and

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Multi-touch was the innovation that maybe iPhone in such a paradigm shift of human-
computer interface because we had plenty of smartphones. Remember T9, your Nokia dumb
phone, think about how ridiculously rate-limiting that was as a data input mechanism for
humans to computers.

So enter multi-touch, Apple bought the company, owned multi-touch and patents around multi-
touch two years before iPhone was launched. That was a thing that allowed humans to write
more information more efficiently to the computers that they were using. So I think the most
interesting part about the Vision Pro is its eye-tracking and hand-gesture tracking.

Because to me, those represent advances in humans being able to write information to
computers. If you think about eye-tracking, think about the process of clicking on something
with a mouse. You look at the thing, your brain subconsciously is thinking, okay, I need to now
physically manipulate my hand to move this hardware mechanism to then move a digital
representation of something to then meet where my eyes are looking and then I click.

With eye-tracking, you basically get to short-circuit that entire lossy physical loop. I feel like
that's why you hear from early users, it feels telepathic. It's such a gain of efficiency of human
write speed to the computer. I think the hope is that continued advancement of human write
speeds to computers lead to these watershed moments of advances in human-computer
interfaces.

Investing in Technological Change and Market

Dislocations
Patrick: [00:13:20] I think it's a great excuse to talk a bit more about this notion of why
now and how that critical question plays into your view of investing strategy. You gave
an example around the social networks. In each case, they were newly possible
because of some underlying platform change or technology change. Do you think the
answer to the question really needs to be ultra-compelling every time you make the
technology investments to say as much as you can about this idea of why now?

Chris: [00:13:48] Conceptually and from a platonic ideal perspective, yes, every venture
investment should have an essential, very strong compelling reason of why now, whether or
not that is actually perceptible, measurable and articulable in the moment of having to make
an investment decision or deciding to found a company, that's a totally different analysis.

But from a philosophical perspective, yes. Venture is a pretty unique capital instrument. And if
you think about efficient market hypothesis where if there's an opportunity, people create
companies to take advantage of the opportunity. A venture is supposed to be exposed to
companies capable of explosive enterprise value creation over very compressed periods of
keyboard_arrow_up
time.

󰍡 opportunities shouldn't exist unless like crazy dislocation has happened in the market
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because unless some crazy dislocation has happened in the market, there shouldn't be the
opportunity to capture such a large integral value. And so if there is no compelling why now
and maybe it's technological or regulatory, I would make a strong argument that, that is not a
venture. That's not a suitable candidate of venture capital.

Patrick: [00:15:13] When you're looking at an opportunity and you're thinking about that
question, how do you go about poking at it? Because right now, you might be able to
say, okay, a company enabled by the Vision Pro, I get it. Why now is that this thing is
new and for all the reasons you just described, gets exciting.

People get this. People understand that dislocations create opportunity, and they flood
it with capital. They flooded Web3 with capital. This happens over and over again. This
is old, old history. But how do you go about in the gray areas assessing this? Because
not every great company was created right on the back end of some major identifiable
tech change or something.

So what does this feel like in practice? What sorts of questions are you asking? Of the
company of yourself, it seems like an incredibly valuable exercise in the canonical
question, is the founder more important, is the market more important? I think what
you're saying is the market is really, really important and great markets that can create
a lot of enterprise value come from dislocations. So I'm just curious how you prosecute
this when you're looking at a company.

Chris: [00:16:13] So my best answer to that is it's hard to at a micro basis. I think the way that
I choose to spend my time, which is hanging out in the corner of the Internet on the edges of
things, that increases the likelihood that things that are happening there are happening
because of some new advancement. And so in some ways, if you choose to spend your time
in those spaces, you get a higher natural hit rate of the things that you are exposed to being
possible because of a why now.

Patrick: [00:16:50] It's a good example. Is VTubing a good example?

Chris: [00:16:52] VTubing is probably a good example. VTubing is...

Patrick: [00:16:55] You're going to have to explain what this...

Chris: [00:16:56] Super weird. So VTubing is a portmanteau of Virtual YouTuber, VTubers

have 3D models. They're built in Unity or Maya. Those are the digital representations of the
content creator. So they use motion tracking hardware and software to capture their
movements in their face and their body and those movements end up puppeteering this
avatar, this digital representation of themselves as a digital content creator.

keyboard_arrow_up
So you can watch a stream of a VTuber and you're watching the anthropomorphic fox or what
have you, and there's somebody somewhere sitting with -- maybe they're wearing motion
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capture hardware on their body or they're using cameras to track their face, and they are
creating content as that character.

And I think what's so interesting about that is enfranchises, a completely new set of potential
content creators. For better or for worse, to be a successful content creator in this day and
age, Instagram or TikTok, you basically have to be good-looking. It's sad, but I don't make the
rules.

And what this allows is for people who maybe aren't good looking, but are very entertaining.
They're super compelling. They're finding followers. This allows them to achieve the same
level of success when they previously were completely disenfranchised. I think that's so, so,
so powerful.

I think a lot about jobs that might exist in 10 years that don't exist today and jobs that exist
today that didn't exist 10 years ago. Like you told me as a 13-year-old kid that I could make $1
million a year streaming video games on the Internet, maybe I would have lived a very
different life and pursued a very different career. But that -- when I was growing up that was
unheard of, that was literally impossible. No one was doing that. And now it is eminently
possible. People can do that as their careers.

And so I think a lot about at a micro level, how people reallocate their own labor hours, where
they are advantaged, where they're disadvantaged, where they are newly advantaged. And as
labor flows to higher states of entropy because of these new advances in technology, whoever
is building that aqueduct, that water naturally flows down, will greatly benefit.

Patrick: [00:19:25] Let me say it back to make sure I captured the idea right. It's
incredibly valuable to offer enfranchisement, I guess is the word, to a new class of
creators that previously could not have been productive. And if you do that, this is like
the whole -- I think it was Bill Gurley or somebody at Benchmark told me that you can't
start a new social network with existing celebrities. It has to be with new celebrities that
you've made possible. Is that a fair summary?

Chris: [00:19:52] Yes, I could not agree more. That's right. Charli D'Amelio, TikTok. She's a
dancer. If you think about it, dance as a form of content disenfranchised on platforms prior. To
really appreciate dance, you need to hear the music. But audio is never a native endemic form
of content consumption on Instagram. It was always visual, or Snapchat, visual.

And TikTok was the first platform that made audio a native part of the content consumption
along with video. And so dance was elevated from this completely backwater. Maybe if
somebody happened to have their audio on while they were scrolling through Instagram, it
became a first-class citizen of this new economy of TikTok and it totally makes sense that then
being #1 most popular TikToker is a person who was previously disenfranchised, that is now
keyboard_arrow_up enfranchised.
currently

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Patrick: [00:20:47] Can you explain for people almost nobody listening will know this
term, who CodeMiko is?

Chris: [00:20:52] Yes, totally. So CodeMiko is a streamer on Twitch. She is a VTuber. The
woman behind it, Yuna, is wildly talented. She is 3D animator and was inspired to quit her job
and start CodeMiko as a Twitch channel because of what was then possible in VTubing.

You know where's motion capture hardware, basically all over body, that inputs motion-
tracking information into an environment that she has created in Unreal Engine that real-time
animates a character called CodeMiko in an essentially game environment inside of Unreal.

Her stream is basically one camera angle of that game environment inside of Unreal and
CodeMiko is the content creator, basically a player -- representative player inside of that
environment. What's crazy to think about though is what happens when CodeMiko is not the
only player that's represented in that in-game environment.

What happens when someone else who's also wearing motion capture hardware software that
is also a VTuber wants to represent themselves in the same 3-dimensional space? I think
there's this weird corner of the Internet in Grand Theft Auto where people create content on
role-play servers.

We're playing Grand Theft Auto, I'm role-playing a cop, you are role-playing a bank robber,
you actually have to rob a bank and I am supposed to chase you down as the cop, pull you
over and apprehend you. The beauty of this is the game basically turns into an improv stage.

And you have this network effect of content creators where if I, as a new content creator, to
drop into this existing role-playing server, it's so much easier for me to create compelling
content because there are all these actors that are already creating amazing content.

And so it's interesting to think about VTubers who exist as these digital content creators the
same way as characterizing Grand Theft Auto exist on these role-play servers and what is
possible when they are networked together and exist in the same 3-dimensional space.

Finding Great Opportunities and Business Models in

Unlikely Places
Patrick: [00:23:13] How do you think about that from the perspective of an investor
trying to earn a return? I totally get the idea that a great way to back into -- great why
now is to hang out at fringes, that whole William Gibson idea of distribution of the
keyboard_arrow_up being here already.
future

󰍡 [00:23:28] That's my fear. The future is here, it's just not evenly distributed.
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Chris:
Patrick: [00:23:31] Exactly. So I love the strategy to find interesting things. It's a great
sourcing strategy, where there might be a compelling why now that you'll be able to tell
very coherently 10 years from now, but it would be hard to articulate now. This one is
weird. For most people, probably very weird. How do you then leap from that to like, oh,
investment opportunity, I could invest $1 million and get $100 million back or
something like that, it seems like a big leap.

Chris: [00:23:54] So I think I feel like this is where economic framework comes into -- I think
there's this concept of product market fit, which we all know very well. And then this other
concept of business model product fit. Maybe you could argue that along the spectrum of 0 to
100 of product market fit, companies products attain, arrive at their fullest potential of users
using the product.

But on the scale of 0 to 100 of business model product fit, the company approaches its fullest
potential of enterprise value. So you can have a product that is amazing product market fit,
Open Source, for example. Open Source is a great example of product market fit with zero
business model product fit.

Linux, incredible technology. Linux itself, there's no enterprise value inside of Linux. I think this
is arguably what's happening with Twitter. Twitter is a great example of a company that has
product market fit and is struggling to find business model product fit in this very public stage.

So when it comes to -- and going back to your question of how do you evaluate something
that has potential product market fit at the edge, maybe a good candidate for why now, maybe
not a good candidate for why now, I do through the lens of business model product fit.

There are only so many business models that exist arguably. You can buy widgets for X and
sell the widgets for more than X, that's a business model. One of my favorite business models
is you can help people make money and then you take a cut of the money that they make. I
think this applies to most marketplaces.

There are other business models of you pay me to save you time, productivity tools or the
convenience economy, delivery, things like that. I think, basically, every company distills down
into one of these core business models. When it comes to something like a CodeMiko, I think
a lot about how these emergent VTubers are choosing to spend their time, what must be true
for them to allocate their time in this way and where the business model opportunity might
exist.

So if people at a micro level are allocating their labor in a way that they previously didn't or
weren't able to, they are likely doing so only because it is economically attractive for them to.
keyboard_arrow_up are making more money in a way that they couldn't have done before.
They

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And so likely, the best business model there is the second one we talked about, to help people
make money and then just take a cut of the money that you help them make. With MikoVerse
specifically, the business almost certainly is going to follow the Chris Dixon's, come for the
tool, stay for the network.

Yuna has created this incredible, incredible streaming studio setup that's optimized for
VTubing. And what we did is we backed her to take that, flatten it down into something that is
a single run time and give it away, democratize the tools.

It's very technically hard to become a VTuber if you don't know anything if you're nontechnical
content creator. So we backed her to take her entire setup, her workflows, condense them
down to a product that then could be disseminated as this democratizing toolset to empower
and franchise a whole new set of would-be VTubers.

And then the long-term bet is if there is this network effect, the supply-side network that I was
articulating with the Grand Theft Auto role-playing servers, if there's a supply-side network
effect of content creation, that is this compounding moat where you get this fundamental
network effect that advantage you against would-be competitors that offer similar tooling.

And then you can layer on things that allow the people that are using the tool inside the
network to make more and more money and take a share of the money that they're making.
Specifically, I think one of the insights with CodeMiko and MikoVerse is interactivity, live
content. Has been searching for a monetization mechanism.

I think one of the challenges of existing monetization mechanisms, like advertising or

subscription is that it doesn't take advantage of the natively new possible things with live
content, relative to [ crib ] the benchmark any new network or new platform or home grow its
celebrities, I would argue that any new modality of creation will home grow its own business
model that's unique to it.

For better or for worse, other content areas have long pioneered this monetization insight,
notably Camgirls. Camgirls on the Internet monetize very well through interactivity. You are
watching this live stream, you pay some amount of money, you are basically immediately
gratified with the output of the intended intention. That is actually what is now natively possible
with live content that was not previously possible with video on demand.

And so what CodeMiko has done is taking the same principle of interactivity, where if you
watch her stream, there is a menu that you can see where you can donate some amount of
money and actually manipulate the content you're seeing. So there are this digitally defined
interactivity.

Sokeyboard_arrow_uplike I want to drop a piano on this VTuber, I want a car to race across the screen and hit
them. And these are all digitally defined coded inside of the environment, also built in Unreal
environment, you get the same instant gratification.
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And it turns this stream basically into a game that the viewers play by paying. And what's wild
is that the streamers are making basically 10x as much money using these interactivities as
they were before. So for example, there's a streamer, awesome amazing streamer, great
VTuber, pre-MikoVerse software was earning about $2,500 a month as a streamer streaming
60, 80 hours a week. Using the MikoVerse software with the native interactivity, made that in
three streams.

Patrick: [00:30:29] Wow, crazy.

Chris: [00:30:31] And so that economic value proposition is this underpinning that will drive
adoption of the tool and then with enough adoption of the tool, the opportunity of the network
opens itself up. And then you can imagine this entire ecosystem of, well, maybe there are
people out there that are just really good interaction designers, interactivity designers. They're
super creative.

And maybe somebody is going to make a theme park that these VTubers can digitally visit
with their own set of interactivities that the audiences come manipulate. What happens when
audiences want to trigger interactivities against other VTubers that are in the same
environment as the VTuber that they're watching? I think this is a super-exciting, under-
explored frontier of content consumption that is also almost really perfectly aligned with a net
new monetization mechanism of interactivity.

The Atomic Value Swap as a Tool For Thinking About

Value Creation
Patrick: [00:31:25] You've got a bunch of interesting ideas around value creation that I'd
love to explore to keep drawing this picture, the first of which may be the most
essential of which is this idea of the atomic value swap. Can you describe what you
mean by that term and some of the implications of it for thinking about companies?

Chris: [00:31:41] Concept to the atomic value swap is what is actually going on? What is the
exchange that is happening? Let's take this to a lay example. I walk into a grocery store. I
want to buy a head of lettuce. I pay $2 for his head of lettuce. The value swap is $2 in
exchange for this secular-to-secular exchange of money for goods. That's very easy to
understand.

If the grocery store wanted to charge $20 for that head of lettuce, that exchange probably
wouldn't happen. The imbalance, the asymmetry between what is expected in return for what
is being delivered, won't achieve a market clearing mechanism. What's interesting is applying
this to things that aren't maybe as easily measured from a quantitative perspective.

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It boils down to why do people do things period. Because it costs everyone something to do
anything. And so what are they getting in exchange for the time expended, the effort
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expended, the money allocated, and how durable is that exchange? How repeatable is that
exchange? Does it increase in attractiveness over time? Does it decay in attractiveness over
time? Is it a one-time thing? Well, let's think about, I don't know, a company...

Patrick: [00:33:04] Twitter is an interesting one.

Chris: [00:33:06] Yes. Twitter is a really interesting one. Let's think about why people do
things on Twitter. Why does a content creator create content on Twitter? I would argue that
somebody creates content on Twitter to increase the distribution of their thought and future
thoughts -- future content.

No one makes money on Twitter. So people create content on Twitter to become more
famous, become more successful, basically build their distribution, and it's baked into the
follower model in and of itself. Conversely, there are some platforms that no one makes
content for to increase distribution. They only do it to monetize. Patreon is a good example of
this, or Shopify.

Nobody creates content on Patreon to increase their distribution. They are likely increasing
their distribution in other spheres, whether it's -- they have a podcast or they have a YouTube
channel or a Twitch channel, they are using Patreon as a monetization mechanism for the pre-
existing distribution that they already have.

Going back to like Twitter's atomic value swap. This is why the idea of a paywall is so scary for
Twitter because the only reason why people are creating content on Twitter is to increase their
distribution. What happens when you introduce a chilling effect to distribution? Arguably, this is
why I think Medium failed as a product.

Medium originally was a tool that allowed people to more aesthetically or own brand in the
way that they wanted to distribute their content. I mean, if it was good content. Theoretically, it
would be more widely disseminated. But Medium wanted to monetize their traffic and they
thought they had enough leverage to install a paywall on the consumption side.

The issue with that is that violated the original atomic value swap with content creators
originally. When you change the balance of the values on the scale, sometimes it no longer
makes the original atomic value swap actually as market clear or repeat.

And so when Medium introduced this paywall on the consumption side, all of a sudden, every
person that was creating content was incrementally disincentivized to create content because
the proposition of uncapped distribution no longer existed. There is a ceiling. There's an
exogenous force, this compressive force on what distribution they could attain.

keyboard_arrow_upthe biggest problem is we don't exist in these platforms in a vacuum. There are always
And
alternatives to these platforms. If I was an aspiring blogger or content writer and I was getting
strictly worse distribution through a platform with a paywall, I'm just going to reallocate my
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labor and time and energy to a platform that has unbounded distribution.
It will be interesting how Twitter navigates through finding business model product set. It has
product market fit. The biggest risk is that their attempts business model product fit violate the
original atomic value swap, which gave Twitter product market fit and it all starts to inwardly
compound on itself negatively.

Patrick: [00:36:44] Is there a difference between your notion of atomic value swap and
Christensen's idea of Jobs To Be Done? Is the key idea under the atomic value swap
just that you know what it is and that many don't know what it is, and if you do, you can
then all of a sudden unlock a lot of potential?

Chris: [00:36:58] Yes, I think that's right. I think that maps very closely, if not is the same thing.
I think every company, every product, generally speaking, has multiple atomic value swaps.
They basically have as many atomic value swaps as you have constituents. So as you pointed
out, on the consumption side of Twitter, I, as a user of Twitter, I'm paying with my time in
exchange for entertainment.

Twitter as a company gets to take the integral of time across all of its user base and then turn
around and sell that to advertisers. The advertiser atomic value swap is pretty straightforward.
It is a secular-to-secular value exchange of what's the ROAS, what's the return on ad spend
as an advertiser on Twitter. And if it's there, it happens; if it's not there, it doesn't happen.

As a user, same thing. I'm going to spend my time so long as this is the most entertaining way
for me to allocate an increment of my time. The interesting thing is neither of those things
happen if the original value swap with content creators doesn't happen.

That supply-side content creator value swap for any UGC platform is so sacred. Once that's
compromised, it's basically the beginning of the end for it. It will just downward spiral and be
competed away by other platforms that are willing to reward those incremental content
creators with a more attractive distribution value proposition.

Monetizing The Seven Deadly Sins

Patrick: [00:38:29] I'm interested how you think about things like elasticity of demand
and sources of value creation overlaid against all the stuff that we've been talking
about. I've seen you write about The Seven Deadly Sins before and the degree to which
each sin is monetizable. It does probably maps on to your business model, the product
fit a little bit, too.

Walk through this idea for us because I do think all of these are devices I think of as
keyboard_arrow_up of evaluating a company or a product or a team even. I love the stable of
ways
questions that you've effectively created. So what's The Seven Deadly Sins, one, how
does it map onto the other concepts?
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Chris: [00:39:05] Firstly, I feel like The Seven Deadly Sins have gotten a bad rap. I feel like
they should be rebranded as The Seven...

Patrick: [00:39:13] Human tendency...

Chris: [00:39:15] Core motivators, whatever. I think The Seven Deadly Sins are basically like
the essential reasons why humans do anything. I have a relatively Kantian view of altruism. I
think people generally do things because they're self-interested without exception.

In terms of elasticity of spend, I don't know if these Seven Deadly Sins themselves have a
spectrum of elasticity of spend. But I do think that Maslow's Hierarchy of Needs does.
Maslow's Hierarchy of Needs, like food, shelter at the bottom and self-actualization at the top,
I think humans’ elasticity of spend basically increases as you ascend Maslow's Hierarchy of
Needs. Will I pay $100 for a head of lettuce? No. Will I pay $100 for better education for my
child? Absolutely.

And so I think it's interesting to think about where different things land on Maslow's Hierarchy
of Needs when companies offer them and then what is that elasticity of spend. If we look at
gaming, for example, one of the greatest business model innovations in gaming over the last
decade -- two decades is the invention of what are called, cosmetics.

Cosmetics do not change gameplay. They only change how in-game assets are visually
represented. Think of it as clothing. You're wearing a polo shirt, I'm wearing a button-down
shirt. They serve as functionally the same thing, but they say different things about us. They're
different self-expressive choices.

In some ways, they probably encroach along self-actualization of this is who I am. I dress in a
way to communicate to other people who I am. It's a nonverbal mean of communication and
self-expression. And so cosmetics are this incredible innovation that has occurred in free-to-
play gaming, bucket free-to-play gaming monetization in two categories.

There is freemium monetization and then cosmetic monetization. So in the beginning of free-
to-play games, the general consensus was, hey, we're going to give this away for free, but
then we're going to make it kind of hard to continue playing it unless you pay, or you can pay
and save time or you can pay, you can get this unique asset in game that makes it a little bit
easier.

The issue with that kind of monetization is it leads to what are called, pay-to-win dynamics
within the game, where it's fine for the beginning part of the game when it still feels
meritocratic. But as gamers advance to medium and end game, they start to become
increasingly disenfranchised unless they pay, and it starts to feel futile. It's almost like the
keyboard_arrow_up of Monopoly. No one actually plays the game of Monopoly to the end of the game.
game

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Patrick: [00:42:11] Right. It's a foregone conclusion halfway through.
Chris: [00:42:13] And that's the issue with freemium free-to-play games. The elegance of
cosmetic monetized free-to-play games is there is no difference in the game experience that
someone gets if they pay or they don't pay. And the access along which the company
monetizes is purely along the self-expressive spectrum.

There are only like 10 of these skins out there. And I think it says something about me as an
individual if I have one of these 10 skins. There's a reason why Bernard Arnault was the
contender for the wealthiest person in the world. Luxury goods, things that we wear, the things
that we consume, they are higher up on Maslow's Hierarchy of Needs, higher elasticity of
spend, a higher willingness to pay for that social signal.

I would argue that Bernard Arnault has dramatically benefited from Instagram and TikTok as
well. The same $3,000 handbag that you purchase now is signalable over a dramatically
larger surface area than 20 years ago, where it's basically only in person. And that drives this
parallel demand for consensus signals. So for every Louis Vuitton, there are a 100 mid-tier
luxury brands that no longer exist because society has converged this as the dominant social
signal.

Patrick: [00:43:39] We really haven't talked about people behind these businesses at all
yet, which is leaving me to believe that you are like a market maximalist. You're thinking
more about what is the enabling dislocation or something, like you talked about earlier,
that makes this new idea that I'm being pitched possible.

And what is the dynamics of the market as it might grow, and we could talk more about
that in the future. But I want to spend a minute on the founder side. What do you care
about, look for, watch for, prefer when evaluating the people behind these ideas,
assuming you've gotten there on, okay, there's some market story that is really
compelling here, now I have to focus on the people, what do you care about there?

Chris: [00:44:19] I think there's the traditional things like aptitude, integrity, sociability, that
kind of thing. All those traditional vectors are super, super important. They evaluate the
person's ability to execute, recruit, inspire, leadership qualities, future fundraising. One of the
things that I deeply care about that maybe others don't is what I would put in the bucket of like
founder-market fit.

To use an analogy, in the music industry, there's this term called the sophomore slump, where
usually, the second album that an artist puts out, it's kind of not good. In many ways, I think
about the same journey of a founder. Investors get to cheat. You get to intercept that artist the
year before they release their first album, but you weren't there for the 10 years of earned
insights that it took them leading up to it.

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And maybe more tactically, I might be able to articulate founder-market fit and earned insights,
how they manifest. So the founder has the correct intuition about a product. And so you start
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compounding those things and you sum total, "Oh, we don't have to test this thing because I
intuitively know for X, Y and Z reasons. I have this earned insight. I was the customer. And so I
know that we need to build it in this way." And then the company and the product building
process is so much faster because intuitively, the leader knows exactly what needs to be built
without having to ask anyone else.

So I like to think about founder-market fit earned insights. How long of a period of time this
person has basically been collecting the dust of insight over, usually, very long periods of time
and then are able to compress it into these diamonds, that somebody else starting from zero
wouldn't be advantaged with.

Thoughts on Reddit, YouTube and Product-Market Fit

Patrick: [00:46:19] So it's really the pathway of slowly versus quickly earning an insight,
literally could just be that simple. There's just some core thing that you couldn't have
known had you not spent the 10 years in the muck either as the customer or as
someone trying to produce the outcome or whatever.

If you think about other sources of where these people might start to emerge, the idea
of sourcing from the edges is really interesting to me. I've seen you write, any Reddit
sub community that has a million people in it probably could support a venture-scale
outcome business. What do you think about everything going on with Reddit?

And I just would love to spend more time exploring other pockets of sourcing
advantage, I guess, is what I would call it, that you use or have used in the past. But
we'll start with Reddit. It's a topic de jure because lots is going on there today.

Chris: [00:47:05] Reddit is such an interesting company. I think of Reddit as basically an

interest graph. There are plenty of subreddits that people are subscribed to that aren't suitable
for social media. There are divorce subreddits. There are grief subreddits. Nobody is going to
post on Facebook or Instagram, "Hey, I'm going through a breakup. This is who I am." So
there's this entire side of who people are, what they're interested in, that isn't met by other
platforms.

And when I think about Reddit, it is really an interest graph. And as such, if across humanity
users of Reddit, there is enough of this critical mass of people who express interest and
engagement around the same interest, I think that is a good litmus test for it having enough
critical mass to birth something capable of significant enterprise value capture. It's a silly
example, but if you follow the WallStreetBets subreddit, where it's basically degenerate
gamblers...

Patrick: [00:48:08] Robinhood lines up nicely.

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Chris: [00:48:09] Exactly. You could argue that they go hand in hand. There are some really
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interesting subreddits out there. There is a subreddit just dedicated to 3D printing firearms. As
you can imagine, wildly popular. I think Reddit is such an underexplored fertile ground of
signal, almost like hesitant to say that it is. Most people aren't curious enough to actually
explore all the corners of it and glean it for insights.

Patrick: [00:48:3] What do you make of what's going on there now, which is this revolt? I
don't know what else to call it. And it is a great example of the conflict between their
business model and the value swap for the customer in this case. But just since it's
happening right now and you hang out there, I'm curious what you think about
everything that's happening and how you would handicap what might happen in the
future.

Chris: [00:48:57] I actually think people's prognostication of what will happen with Reddit is
relatively indicative of how much they understand the way that Internet platforms work. I think
my punch line conclusion is that Reddit mods think they are landlords when they're actually
sharecroppers, for better or for worse, whether it is justified or not justified. Mods, who
contribute their labor for free in exchange for power, are doing so, building their castles in
somebody else's kingdom. That kingdom is Reddit.

And so it's kind of implicitly part of the social contract. If you do that, you are at the whim of the
governing kingdom. I understand why they're upset. I understand why the protest is occurring.
But if I were to predict what will happen, mods who black out their communities, interestingly
enough, are probably exactly the mods you don't want on the platform, the ones that are
willing to compromise the end user experience to sate their own power trips.

And so at the end of the day, I think either -- one of two things happens. Let's say you run
r/NBA, and you're the mod, and you choose to black it out. One of two things happens, either
some other enterprising person, who wants to contribute their labor in exchange for power, will
start r/realNBA or r/NBA -- like trueNBA and create a competitive product, again, in this
marketplace of ideas and market efficiency and ultimately end up replacing the same intent
that r/NBA captured originally.

Either that will happen or Reddit, which is totally justified in doing so, will remove that
moderator and allow other people to mod that same community. Again, what is in the end
user's best interest. I think a lot of what's been written misunderstands the atomic value swap
between moderators and Reddit and conflates moderator opinion with redditor opinion.

Moderator opinions are not redditor opinions because their value swap is different. They are
rewarded with power in exchange for their labor. They are not going to Reddit to be
entertained. Redditors go to Reddit to be entertained, to engage in dialogue and become part
of communities, but mods don't speak for the average redditor. And I think what most stories
that are written about Reddit miss is that mod atomic value swap is different.

Patrick: [00:52:42] Let's say you're teaching a class about, okay, you've got product-
keyboard_arrow_up fit. You've successfully built something that people want. Now you need to
market
figure out what the best value capture mechanism is that business model, product
alignment or whatever. And you're instructing a class of people that had product-
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market
What would you tell them to go do? What are the steps that they could take or the
questions that they could ask or any activity that they could pursue to try to nail this
because it seems so incredibly critical? What would you urge these people go do to try
to solve that second challenge?

Chris: [00:52:15] This framework of user-generated content networks really only monetize via
ads, and editorially generated content can only really monetize off of subscription.

Patrick: [00:52:26] To find editorially generated, just like you pay someone to produce
the content.

Chris: [00:52:30] Exactly. If somebody is being paid to create content, the only way that you
can really monetize that is through consumer subscription. Otherwise, you're competing
against UGC platforms basically for the same user entertainment minute, and you're
competing against these platforms that have a structurally better COGS. They pay nothing for
the content that they're creating.

UGC platforms can never monetize via subscription. Because going back to the Medium
example, their value proposition to content creators is distribution. And introducing a chilling
effect onto that theoretical distribution disincentivizes existing and incremental content
creators from contributing their content to the platform.

But what they have is free content that they can then monetize via ads and effectively
undercut editorial content. Conversely, editorial content, because people who are paid to
create content are primarily incentivized by economic value, not potential distributed value and
future potential, you can and should monetize via subscription.

Twitch was the first Board I ever joined. And when we invested in the company, they're burning
$1 million a month just on CDM bills. I mean we had 14 data centers in the world, and we had
another CDM bill. Turns out, serving video content is pretty expensive.

You pair that with no one wanting to advertise against live content on the Internet, not
misunderstood, just nobody understood it yet, brand, advertiser adjacency, apprehension
through the roof, we're staring down the barrel of this increasing cost center and trying to
figure out how to make money.

And there was one Board meeting where the team proposed two monetization mechanisms.
One was called Twitch Turbo, which was a monthly subscription. You would default to a HD
stream, 720p. This was back when actually the difference between 480p and 720p was
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meaningful. No ads, basically focusing on a better content consumption experience.

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And the other product that we would launch or were experimenting with was what was called
subs, subscriptions. And interestingly enough, subs didn't offer a better content consumption
experience, but it did allow you cosmetic changes. So it made your name a different color in
the chat room of the channel you're subscribed to. You have access to a specific set of emojis
that you could use in that chat. And you were supporting the streamer who you're subscribing
to.

The next Board meeting after was so wildly telling. Twitch Turbo performed as you would have
expected. One of the big issues is the Venn diagram of viewers on Twitch and people that
used ad block was basically a perfect circle. So there was no utility in removing ads. But
Twitch subs exploded, absolutely exploded. And it was clear that by the end of the year, the
revenue off of subs was going to cover the entire OpEx of the business.

That's the thing. They had to go through this intrinsic experimentation process of, okay, where
is the platform delivering value? Where is there leverage to potentially extract value? Where is
the attachment to different constituents on the platform? And what are products that you can
offer that align all incentives?

So Twitch subs is such an elegant product because it aligns incentives across the board.
Streamers can make more money. The viewers feel like they are more deeply engaged as
part of the community. They get to self-express. And they know that they're supporting their
favorite content creator. So they have that additional emotional payoff.

And I remember thinking to myself, wow, this is a new business model that the Internet has
not seen before, and it's crazy that it only exists for live stream gaming content creators. When
I saw Patreon, I was like, this is Twitch subs for the rest of the Internet.

Patrick: [00:57:03] What do you make of YouTube? I'm really interested in everything
you said around distribution versus monetization. I know you've also written about, the
specialized strategy will always beat the generalized strategy. And so specialization is
offer one or the other, don't offer everything. But YouTube seems to have succeeded, to
a great degree, offering both. People blow up on YouTube. There's this inherent virality
possible there, but people also make a living there.

And I'm also going to ask about podcast, which seemed to be like the opposite of
YouTube, that they provide neither. Super weird. I wonder why you think that might be
the case. But starting with YouTube, why has it been able to succeed in both? Or am I
missing something?

Chris: [00:57:40] No, you're not missing something. And honestly, like YouTube is a data point
that really challenges my assumptions and frameworks, as thinking my best answer to the
continued success and monopolistic position of YouTube is that by trying to offer both
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monetization and distribution, it opens itself up to being flanked on both sides.

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And I think there are small things that you can look at that examine whether YouTube is strictly
better or strictly worse along both of those vectors to its constituents. For example, Justin
Bieber, blew up on YouTube, discovered in YouTube, no longer on YouTube. You have this
dynamic of your best users graduate from your platform. You aren't actually the best way for
them to monetize anymore.

I think there are plenty of examples like of MrBeast or other successful YouTubers, where it
works for them, they still make a lot of money on YouTube, but I'd be really curious if those
YouTubers weren't making more money more lucratively outside of YouTube as a platform,
away from the direct monetization from YouTube.

So if you were to look at a successful YouTuber, how much do they, one, multi-home as a
content creator, so create content on YouTube, but then create content on TikTok or
elsewhere? And then how much do they encourage their audience to effectively meet them
elsewhere?

Patrick: [00:59:19] It's like Emma Chamberlain selling coffee or something.

Chris: [00:59:21] Exactly. Oftentimes, successful YouTubers will achieve enough distribution
that it opens up more attractive monetization mechanisms for them to monetize their engaged
audience. And if you think about ads, ads are super effective at monetizing mass, shallow
engagement.

Prank videos. Prank videos work on an ads-driven platform. But when it comes to deep
engagement and narrow, deep engagement, ads are terrible for that because you are
artificially capping the monetization that a consumer of content can deliver to the content
creator.

This is why like nobody's incentivized to upload 30-minute deep dives into niche content on
YouTube as the dominant form of monetization. Or more likely, if you were to find a niche
content creator, in every video description, it would be, "Support me on Patreon." Because
Patreon is a perfect way to monetize narrow, deep engagement.

Or conversely, if you are a celebrity, if you have celebrity value, the best way to monetize
celebrity is consumables. Arguably, the only durable way to monetize celebrity is through
consumables. And this is why Emma Chamberlain Coffee or MrBeast Burger or SKIMS or...

Patrick: [01:00:50] Jordan shoes.

Chris: [01:00:52]
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󰍡 Fenty Beauty. And every time that celebrity has tried to monetize outside of
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Exactly.
consumables, failed miserably.
Patrick: [01:00:59] No counterexamples.

Chris: [01:01:01] Shots. I think it was Justin Bieber who tried to launch an Instagram
competitor called Shots. Celebrity affinity is a onetime subsidy in user activation energy in an
exchange and not a persistent one. Let's look at Shots as an example. Maybe it gets people to
sign up, but it can't perpetually subsidize in activation energy of consumption or content
creation.

Patrick: [01:01:27] Whereas if you're buying gin, you're buying a piece of George
Clooney -- or I guess, that's tequila.

Chris: [01:01:31] Exactly.

Patrick: [01:01:32] They're imbuing a consumable with their celebrity and brand.

Chris: [01:01:36] Exactly. That's the best way I can articulate it. And so going back to
YouTube, I think where I would really have to revisit my assumptions is if the most successful
content creators on YouTube, single homed on YouTube and didn't try to monetize in other
means. That would mean that it was the dominant strategy of both distribution and
monetization, and they didn't want to diversify.

But the thing is that's not the way that they behave. And so it suggests to me that while it's an
attractive value proposition for distribution and monetization, it is not strictly better than all
alternatives. And there is a gravitational pull in both directions away once they achieve a
certain level of success.

Chris' Favorite Investment and The State of Consumer

Investing Today
Patrick: [01:02:25] Can you tell the story of the investment decision that you are most
proud of having made?

Chris: [01:02:33] It's probably Twitch. Maybe it's because it was just the first time that I joined
the Board of the company and stuck my neck out to make an investment. But upon reflection,
it was probably the first time that I touched ground on my own path to conviction.

Askeyboard_arrow_up
an adolescent, I had played my fair share of computer games and video games. I'd pulled
my fair share of all-nighters playing Counter-Strike. And I think the insight that I had as an
investor and user is that gaming content is entertainment.
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I think one of the questions that was asked at the time of the investment was, why do people
watch other people play video games? Why don't you just play video games yourself? The
answer I would give is, when people watch Monday Night Football, why don't they just play
football?

It's because when you develop an attachment and an affinity to something, and you can
recognize what excellence looks like or you can appreciate what excellence looks like, it
becomes a form of entertainment, in and of itself, watching it.

So I reached out to them. One of my friends went through YC. I got connected to Justin Kan,
and he introduced me to Emmett Shear, the CEO. I spoke to him. I was like, "Hey, guys, I
really believe in the direction. I think it's amazing. I work at this small venture capital firm
based in New York called Thrive Capital. We're a $40 million fund at the time. I'd love to find a
way to work together." Great. We're raising $15 million. I was like, "Oh, that's awesome, and
we cannot do that."

And they went on to raise their Series B from Bessemer, and it was tough because we didn't
have a capital product to meet their capital needs. Then we raised our third fund, that's $150
million, and they were my first call. I was like, "Okay, guys, we have the fund size. It will be
amazing to be able to work together." So we engaged with them. They were running a
fundraising process.

Again, it's expensive to host and distribute this content. And this is before they had found the
monetization mechanism. I go to my partners. We have the deal lined up. It was hard. It was
really hard because we got stuck in the fundamental question of, why do people do this? Is it
valuable engagement?

From my perspective, it was so obvious. People are engaged. They're deeply engaged, and
engagement can be monetized even though it may not be monetized currently. And I think the
issue was this existential question around whether that "engagement" was real or true.

Actually, we didn't get there. I was in one end zone, one of our partners was in the other end
zone, and other people are in the middle of the field. And we just couldn't reach a decision. I
had to call Emmett and Kevin Lin, the COO, and I was like, "Hey, guys, I'm sorry, we couldn't
get there. But I wish I had different news. I think we're out as a potential investor. And wish
you all the best."

That night, I couldn't sleep. I stayed up until 4:30 rearticulating my thoughts, compiling why I
thought it was a compelling investment opportunity, comping the minutes consumed against
other platforms, Netflix, Facebook, all these other platforms where they were able to monetize
that engagement and what it might look like at scale.

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I sent it to my partners, and we talked about it the first thing in the morning. To everyone's
credit, we were able to get there. We reversed our decision. I was so excited to call Emmett
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and Kevin back and be like, "Hey, actually, I'm sorry about yesterday, but we'd love to lead the
investment." And we got there. And we led the investment and rest is history. That's probably
an investment decision I'm really proud of.

Patrick: [01:06:17] It's same story of the insight, the earned insight. Same story that
might be behind a great company.

Chris: [01:06:20] Totally. And I think I'm proud of myself because I didn't let go. I didn't like -- I
felt like I put it all in the field. And honestly, conviction is such a rare bird in this industry. It can
get snuffed out by process. It can get snuffed out by decision-making structure. And for me,
that was the first time that I ever really pounded the table on anything, and it was the first time
that I ever stuck my neck out professionally, but it felt right.

Patrick: [01:06:48] How would you describe the state of the union of consumer investing
then today? Because it seems like the case you made earlier is that absent of new
major dislocation, maybe the vision represents that thing, we're deep into the
saturation of things dependent on mobile, maybe even on cloud. The technologies that
enable new stuff have been explored. It's mapped territory. And therefore, you probably
shouldn't do digital consumer investing. Is that a fair summation of the consumer
investing landscape today? Or is there something else that we have to say about it?

Chris: [01:07:18] Whether it's a hot take or a hard truth, I think that's exactly right. You look at
the most recent "success" in consumer, it was nine years ago. It was TikTok, it was Musical.ly
and nothing since.

Patrick: [01:07:34] And this is what I'll call fast, the ability to create lots of enterprise
value per year very quickly. As distinct from there will always be new consumer brands
that have grown more organically, maybe they're bootstrapped. They don't -- they
shouldn't be financed with this kind of capital.

Chris: [01:07:50] There are plenty of examples. There's a business to be built selling widgets,
and that doesn't require venture capital and doesn't require a, why now?

Patrick: [01:07:58] What does this make you do with your time? Because you're an
investor curious about and interested in the space and deploying capital in this space.
That's your job. And the opportunity set is -- left us a bit wanting, for the reasons you
just described. What do you do in the face of that? Do you change your interest? Do
you pivot elsewhere? It seems like -- do you see existential problem?

Chris: [01:08:19] It does beg the question, what are you supposed to do? Barring an excellent
answer to that question, definitely a good use of time. I tend to follow my curiosities. I like
hanging out on the edges of things. I think the reason why I was so attracted to VTubing is not
keyboard_arrow_upthat it enfranchises this new form of content creator, but it was also experimenting with a
just
new modality of human-computer input, motion tracking.
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It maps to, I think, the advance of the Vision Pro, which is taking motion tracking, maybe not to
the extent of eye tracking, but definitely motion tracking as this fundamentally new human-
computer input, based off of my framework of we need new human-computer paradigms to
create these new radioactive isotopes of capturable enterprise value.

And the only way that we're going to be able to get that is if we have new methods of input
into computers. I think that's what I have been looking for. I don't want to over-index on the
potential of it, but it is really exciting to think of the possibilities that will emerge on the back of
a new piece of adopted technology that increases the data write speed between humans and
computers. It's almost incomprehensible to fully grasp what will be possible. We're limited by
the scope of our imagination right now.

The Value of Staying Curious and Methods for Finding

Interesting Content
Patrick: [01:09:53] What is your method for finding the most curious stuff? Is it just
reps? Are you just constantly pulling on a thread and devoting real hours of the
workday to just seeing what is going on? Or is it your personal entertainment, you
watch and code and you go? Or is it more that you're just, "Wow, this is a phenomenon
that's interesting to me, but I'm not going to sit and watch it"?

Chris: [01:10:15] I think it's a quirk of mine, that I don't know what this says about me as a
person. All of my "Internet time" or social media time, I spend none of it interacting with people
I know. I spend no time on Facebook, no time on Instagram, no time on -- I don't even know if
I have Snapchat installed on my phone. All of my time is spent on Reddit, TikTok, Twitter, other
platforms.

And I think what I like the most about spending time on those platforms is it gives you, let's call
it, a lossless view into humanity. It gives you these anthropological primary sources of what's
going on. I just read Rick Rubin's...

Patrick: [01:11:00] The Creative Act.

Chris: [01:11:02] Creative Act. He describes it as this thing called source. And one could
argue, that is this concept of data out there to be absorbed. And I think for me, I spend so
much time exploring on these platforms in search of source. I have my antenna trained, my
radar dish is pointed into the sky, constantly looking for this source. And then I'll see signals
that will suggest to me that there's something there. And then that will be the beginning of a
thread that I start pulling on.

keyboard_arrow_up [01:11:35] Totally fascinating and fun.

Patrick:

󰍡 [01:11:37] It's so fascinating.

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Chris:

Patrick: [01:11:38] People are interesting.

Chris: [01:11:39] There's a company called Games Workshop. They own IP called
Warhammer. That is a tabletop miniature game. And that's all they make. They make tabletop
miniatures. It's a publicly traded company worth $8 billion. And they sent a cease and desist to
a site that was hosting 3D models that ostensibly encroached on their IP. So for me, that
signal, in and of itself - there's this really large company trying to stifle this bottoms-up motion,
that blips.

Patrick: [01:12:13] Pulls at your heartstrings.

Chris: [01:12:14] That there's something there. It's things like that, almost countless other
ones, where this person, they're a sophisticated actor, they are saying to themselves, "This is
economically worth my time to allocate in this way." And that is so interesting to me. And the
more repeatable that is, the more that, that is just a tip of an iceberg is the extent of my
exploration of pulling on threads.

Patrick: [01:12:40] Is all value creation, at the end of the day, just increasing
convenience or reducing friction, and that's the story of technology, just over and over
and over?

Chris: [01:12:48] That's definitely a large bulk of it. I think that, that doesn't meet some of the
other needs around self-expression and self-actualization. If it was just Homo economicus and
not Homo sapien, those would be the only two things. Better, cheaper, faster. We're not Homo
economicus, we are Homo sapien. And somebody will pay more for a T-shirt because it says
something about them than another T-shirt, even though from a utilitarian perspective, Homo
economicus wouldn't do that because they're fungibly the same thing. They serve the same
utilitarian purpose. But again, going back to Bernard Arnault, the wealthiest man in the world…

Patrick: [01:13:27] Yes, they increase friction to buy their stuff, I suppose.

Chris: [01:13:29] Hell yes. A Louis Vuitton handbag has functionally the same utilitarian value
as any other bag out there, but it says something completely different from a social signaling,
expressive utility perspective.

Power Law Curves and The Dark Side of Tech

Patrick: [01:13:40] Yes, maybe it's true for technology and not beyond technology, the
handbags, the famous ones, that Hermès basically looked the same as they did 60
years ago. So it's much more about they make it easier for you to signal something
keyboard_arrow_up yourself. So it's still making something easier. You're willing to pay a lot of
about
money for it. But technology seem to always just be about friction reduction. That's
what it seems like to me.
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And I'm curious if there's a dark side to that, too. We talked a little bit earlier about the
inequities that result from new technology. Naturally, technology creates more inequity,
not less. How do you think about the dark side of tech and maybe with an example of
what's going on in the world today?

Chris: [01:14:17] Yes, it's tough. Technology tends to introduce power law curves of demand
and adoption or exacerbate those curves where they previously weren't power law
distributions. You end up with this dark side, the shadow that gets cast by the power law
distribution, examples of taxi medallion holders committing suicide because of the economic
disparity created by Uber. They're so in the hole that it just doesn't make sense for them
anymore. Because what they thought was a projected future cash flow was no longer based
off of competition.

Or we talked a little bit about mobile dating and Tinder and the effect that, that has on the rise
of incel culture. Anytime there is a new power law distribution, that granted, awards a ton of
value to the head of that power law in the form of enterprise value capture.

Patrick: [01:15:16] For these girls.

Chris: [01:15:18] Yes. It just wipes out a ton of integral value in the middle of that curve and
the long tail, without exception. And so for every Uber, we have the taxi medallion holders.
Airbnb, we have countless mid-market business hotel chains that have gone out of business.

So the answer is yes. There always is a cost associated with that reallocation of value. I think
there is a good amount of net new value creation anytime there's technological advancement,
but there is also a ton of reassignment of value away from that mid to long tail to the head in
that new distribution.

Patrick: [01:15:56] I have one more question about the role that system settings play on
investment opportunities. You've talked a lot about this why now idea and dislocations,
enabling technologies, et cetera, and why they're so important. What about at a national
level, specifically around the United States? It's amazing how disproportionate it's
been, the percent of new innovation that's come from the U.S. versus anywhere else in
the world.

Why do you think it is that basically all of the major innovations have come, in the last,
call it, 100 years or maybe even longer, from the United States specifically? What is it
about the system itself do you think has caused that to be true? And do you think it will
persist in the future? This is one fancy way of asking if we could just invest in
American-based companies.

keyboard_arrow_up [01:16:39] Gosh, the United States is such an interesting N of 1. I don't want to come
Chris:
out across as just hyper-nationalist here, it's truly remarkable. And I think it boils down to a few
things. One is the United States, and it's been analyzed by people much smarter, around the
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access to natural resources and the geography of the United States, but simplistically, from a
system design perspective, the United States had a last-mover advantage as a country that's
so young.

But it got to learn from all of the errors and unforced errors of the system design and
governments from every other country. It turns out, yes, monarchies, not good. Benevolent
dictator structure, yes, I guess that works only if they remain benevolent dictators, and power
corrupts, absolutely. So you get to design this incredible system of checks and balances.

And I know we talk a lot about the founding fathers in the systems in the United States. And I
cannot stress enough the elegance of the fundamental system design. If I were to distill down
America's advantage at a global scale, it is that we have a monopoly on ambitious
immigration, which is insane to think about. As a country, you get to skim the cream of the
crop of hungry, smart, talented people from every other country. That is insane, and it exists
because of this concept of the American dream.

This idea of social, economic mobility, the idea that you can leave ostensively everything
behind and come to a country that is a meritocracy and create a better life for yourself and
future generations. That position is so dominant. It's almost this compounding moat of talent.
There's a lot of people that say the United States is dead or it's end of the era.

As long as there are lines around every visa immigration center, the U.S. isn't going anywhere
as a dominant power. I can't stress this enough. To be able to just take every smart, hungry,
talented person that wants to bet on themselves and absorb that ambition, that entrepreneurial
nature, that enterprising nature into this country of immigrants, that's broken. That's such a
broken advantage at a global scale.

Why Marketplaces are Fascinating and Finding Potential

in Bad Business Models
Patrick: [01:19:11] I forgot to ask earlier about a category which is always fascinating to
me and everyone because they tend to be such good businesses, which is
marketplaces and this idea of how to start one effectively, which I've seen you write
about.

I can't remember exactly what you said, but someone to the effect of, "If there's multi-
SKUs in the marketplace, it has to start with an opinionated individual," or something
like that. I'm sure I'm messing that up. But I love this business model and therefore,
love any thoughts on how these things most effectively start and grow, in your opinion.

Chris: [01:19:39] I don't know if I have an answer. It's a repeatable motion to create
keyboard_arrow_up
marketplaces. Actually, let's define what a marketplace is because I think there are varying
interpretations of what the "marketplace" is. Loosely, I would describe a marketplace as where
supply competes for the benefit of demand, and supply does not engage in demand
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generation.

Counterexamples. Shopify. Shopify is not a marketplace. Shopify is not a marketplace

because all of its supply does its own demand generation. Amazon is a marketplace. Amazon
is a marketplace because none of its supply does its own demand generation. It relies on
Amazon for demand generation. I have a framework which is all behaviors that exist at scale
in a lower friction format exists at subscale in a higher friction form first.

Patrick: [01:20:41] So go look for that.

Chris: [01:20:42] Exactly. So I think a way to identify marketplace opportunities is looking at

places where people are jumping through hoops, crawling through glass to meet liquidity.
There's a lot that's been written about what makes a good marketplace. Bill Gurley has a great
blog post of what makes a good marketplace and what are the different dimensions to
measure marketplace.

But at a minimum, I think that if there are primitive examples in the wild of supply and demand
engaging in extenuating behavior to meet each other, that is a need to have before you're able
to capture that in a lower friction-scaled model. Marketplaces are so rare. Their rarity is
proportional to how good of businesses they are.

They're such good businesses that the efficient market is ruthless in attacking any and all
opportunities that are exposed to them. And so barring, again, a dislocation in a market of a
new technology or regulation, you could probably safely assume that if there was going to be
a marketplace...

Patrick: [01:21:55] It would exist.

Chris: [01:21:56] Darwinistically, it would exist.

Patrick: [01:21:57] You started the conversation a little bit talking about business
models. Is there something that's the opposite of that? If marketplaces are so good that
it's like the hypothetical $20 bill, someone would have picked it up already, is there
something where the business model is generally so bad that it's actually, potentially,
an interesting place to apply entrepreneurial effort and creativity?

Chris: [01:22:15] Yes and no. One thing that I like to explore in the age-old debate between
idea and founder, is there founder that could make a company successful, where they sell $20
bills for $10? I think the answer is no. No one in the world can make that work. It's just so
fundamentally flawed from a business model perspective, that no amount of charisma,
salesmanship, recruiting, fundraising can make that work.

Onkeyboard_arrow_upa long enough timescale, that falls down like a house of cards, if it gets stood up at all.
Now that's different from things that may be perceived to be irrational at first glance. So let's
take Robinhood as an example. Robinhood gives away trades. Trading is free on the platform,
󰍡
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which is insane if you look at the market pre-Robinhood. You had companies like Scottrade,
TD Ameritrade that we're charging users $6, $7, $8 per trade. That was responsible for 1/3 of
their profit.

And you have this set of incumbents who would never have thought to make their trades free.
And a new entrant saying, "We will make trades free," is completely irrational at first order.
And honestly, without payment for order flow as a business model, maybe Robinhood wouldn't
be possible without the credit card companies being willing to pay for leads. Credit Karma
wouldn't be possible. Credit Karma is like, "Okay, we're just going to give away credit reports
for free."

And Equifax and TransUnion are like, "What are you doing? That's crazy. We're making so
much money charging people for this." And Credit Karma is like, "No, that's not what we're
playing for. We're playing for something else."

So it's possible to look at an ecosystem that's been relatively calcified and say, there is this
opportunity to do what is considered first-order irrational by the existing incumbents, if there is
a greater opportunity to play for that is second order. There is a business model that is
accessible on the other side, but only if you're willing to do this thing that is...

Patrick: [01:24:19] Classic counter-positioning. Tegus did this really well with expert
calls, where it's the fraction of the cost, which seems stupid.

Chris: [01:24:25] Exactly. Exactly.

Patrick: [01:24:26] But they make it up elsewhere, through subscription.

Chris: [01:24:28] Yes. Could anyone have actually turned WeWork into a success? Or was it
just so structurally plagued? Was it selling $20 for $10? How much of the industry
misidentifies business models as value generative and sustainable when they're actually just
selling $20 for $10?

Patrick: [01:24:23] Are you talking about sculptors versus painters?

Chris: [01:24:25] It's an analogy that I reach for depending on the framing. I think about
painting as additive. It's an additive process. You start with a blank canvas, and your
differentiation is the amount of paint that you add to it. Sculpting is a subtractive process. You
start with a block of something, and then you subtract from it until you find the thing.

Michelangelo very famously has a quote, "I saw the angel in the marble and set it free." That
iskeyboard_arrow_up
describing what the process of sculpting is in company building and many things, actually.
You start as a painter, and you end as a sculptor. And sometimes people miss that step.
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Founding a company is painting. You start with nothing. You have to bring 100% of the things
that differentiates you and add it to the canvas.
But oftentimes, what founders miss is the point at which they need to start sculpting because
you can overshoot. Sculpting is a lot like management. You only become more efficient if
you're able to cut things away and entrust them to other people. Otherwise, you can't let go of
things. You're never going to get anywhere deeper than the starting block of marble.

There are some operators that need control over everything. They need to make the final
decision and micromanage every single thing. And that is the equivalent of 0 definition on a
block of marble. What a truly defined, beautiful sculpture looks like is the courage to cut
deeper than others and to carve that out and be comfortable with it. And then last, as an
operator, as a founder, you can do that, you will just have this undefined blob that looks like
nothing at all.

Patrick: [01:26:57] It's a really interesting way to think about people, too. There's
probably inherently people that are more prone to one versus the other. I love these
binary sorters.

Chris: [01:27:06] Oftentimes in life, we have to switch between the two.

Patrick: [01:27:10] What does it mean for an investor? Are investors painters and
sculptors?

Chris: [01:27:13] Maybe. I always tell people that to be a great investor, you need to have
great taste in investing. The same way that we have taste in music and food and art. I think as
an investor, you spend your formative years training, developing an understanding of what you
like and what you dislike, what you're good at, what you're not good at, what you think you're
good at that you're actually bad at, or you think you're bad at that you're actually good at. And
then developing this felt sense and strong opinion.

No three-star Michelin chef does anything that other people do. They have such a unique
perspective. They have such a unique point of view and taste in what they want to put out in
the world. And that is what separates them apart. I think about the existential question of, what
companies, businesses out there am I the perfect investor for?

Patrick: [01:28:08] I think it's an incredibly interesting place to wind. It's been a
fascinating discussion. I have one traditional closing question that I ask everybody.
What is the kindest thing that anyone's ever done for you?

Chris: [01:28:19] It's got to be my wife marrying me.

keyboard_arrow_up
Patrick: [01:28:23] Chris, thank you so much for your time.
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Chris: [01:28:25] This is amazing. Thank you for having me.
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Chris Paik - Venture Investing Frameworks

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Chris Paik - Venture Investing Frameworks

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8/17/23, 10:47 AM Venture Investing Frameworks | Colossus®

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RECOMMENDED CONTENT TRANSCRIPT SHOW NOTES

Humanity: A Data Storage and Transfer Problem

Patrick: [00:07:52] Wow, tiny fraction.

Patrick: [00:08:10] Podcast at 2x speed or -- can't listen at 5x though.

Patrick: [00:08:43] Doesn't work.

Patrick: [00:10:35] Screens can get more intimate.

Investing in Technological Change and Market

Patrick: [00:16:50] It's a good example. Is VTubing a good example?

Chris: [00:16:52] VTubing is probably a good example. VTubing is...

Patrick: [00:16:55] You're going to have to explain what this...

Chris: [00:16:56] Super weird. So VTubing is a portmanteau of Virtual YouTuber, VTubers

Finding Great Opportunities and Business Models in

I think one of the challenges of existing monetization mechanisms, like advertising or

Patrick: [00:30:29] Wow, crazy.

The Atomic Value Swap as a Tool For Thinking About

Patrick: [00:33:04] Twitter is an interesting one.

Monetizing The Seven Deadly Sins

Patrick: [00:39:13] Human tendency...

Patrick: [00:42:11] Right. It's a foregone conclusion halfway through.

Thoughts on Reddit, YouTube and Product-Market Fit

Chris: [00:47:05] Reddit is such an interesting company. I think of Reddit as basically an

Patrick: [00:48:08] Robinhood lines up nicely.

Patrick: [00:59:19] It's like Emma Chamberlain selling coffee or something.

Patrick: [01:00:50] Jordan shoes.

Patrick: [01:00:59] No counterexamples.

Chris: [01:01:31] Exactly.

Chris' Favorite Investment and The State of Consumer

The Value of Staying Curious and Methods for Finding

Patrick: [01:11:00] The Creative Act.

keyboard_arrow_up [01:11:35] Totally fascinating and fun.

󰍡 [01:11:37] It's so fascinating.

Patrick: [01:11:38] People are interesting.

Patrick: [01:12:13] Pulls at your heartstrings.

Power Law Curves and The Dark Side of Tech

Patrick: [01:15:16] For these girls.

Why Marketplaces are Fascinating and Finding Potential

Counterexamples. Shopify. Shopify is not a marketplace. Shopify is not a marketplace

Patrick: [01:20:41] So go look for that.

Chris: [01:20:42] Exactly. So I think a way to identify marketplace opportunities is looking at

Patrick: [01:21:55] It would exist.

Chris: [01:21:56] Darwinistically, it would exist.

Chris: [01:24:25] Exactly. Exactly.

Patrick: [01:24:26] But they make it up elsewhere, through subscription.

Patrick: [01:24:23] Are you talking about sculptors versus painters?

Chris: [01:27:06] Oftentimes in life, we have to switch between the two.

Chris: [01:28:19] It's got to be my wife marrying me.

Chris: [01:28:25] This is amazing. Thank you for having me.

Need help? Email help@joincolossus.com

® 2023 Colossus, LLC. All rights reserved.

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