I stopped publishing The Flywheel shortly after announcing to you all that my cofounder and I took Swapstack out of On Deck and went for it on our own. Of course, that is no coincidence. Things got busy, stayed busy, and only recently became less busy.

I am now on the other side of my Swapstack story, and I wanted to share my journey with you all for two reasons: (1) I would bet some of you are navigating similar challenges, so I am hoping this might help; and (2) I want to put some asks out into the universe.

Since that article, here’s a (very) short list of what we accomplished with Swapstack:

• We raised $650K in a pre-seed round from angel investors, friends, and family

• We hired a team of 6 (at peak team size) and grew to $25,000 monthly revenue, navigating an enormous global shift in advertising spending along the way

• We decided not to raise again, and instead sold the company to beehiiv in late 2023

• My cofounder Jake Schonberger and his team moved over and are thriving. My team and I transitioned certain pieces to beehiiv and then parted ways

When put in a bullet form list, it almost seems like it was quick and easy! But in all honesty it was at once exhilarating and exhausting..a true rich life experience.

This Email

Why am I sending this email, now of all times? I’ve been (mostly) off Swapstack since the beginning of this year, and I have not yet prioritized writing more Flywheel articles. If I’m honest, I don’t know if I ever will.

But at some point I realized that this newsletter attracted an unbelievable collection of people who, at one point, placed at least some value on my thoughts and writing. And with this being a transitional moment in my career (more on that below), I figured when would be a better time to tap into this incredible network for advice, camaraderie, and support?

I also have spoken to other folks navigating the end of their startup journey, and realize that it’s a difficult moment for many of us. I am hopeful that this story encourages any of you who need it.

Inspired by my friend , I’ve therefore decided to repurpose (temporarily for now) The Flywheel to send a personal update on what I’ve been up to, and what I’m hoping to do next. I’ll end with a couple of asks and parting thoughts, and hope you don’t mind my personal indulgences.

2024 in a nutshell

Jake Cooks

This year has been strange for me. After wrapping up work on Swapstack, I was feeling pretty burned out. I had been glued to a laptop for the better part of 8 years (between Amazon and Swapstack), and needed a break.

People who know me personally know I’ve gotten very into cooking in recent years, and I married this passion with a need to be offline by applying for and landing a job at an upscale restaurant in my DC neighborhood. This was by no means a conventional thing to do, and I could not have cared less.

I worked there for just a bit over two months—it was always going to be a temporary experience—but it achieved precisely what I needed it to: a break from the computer, an immersion into a new world with new types of people, and an opportunity to not think for a while. I also achieved a “viral” Google Maps contribution with a picture of some garlic knots I made (legitimately the most delicious garlic knots you’ll ever have, by the way).

Mini Retirement

After cooking for two months, I decided to take some actual unstructured time off. “Unstructured Time Off” now holds two different places on my LinkedIn profile. Not sure what this says about me and my career choices.

The arc of my mini retirement was U-shaped. It started so well. I got into baking sourdough at home, I launched a nascent Youtube and Gumroad project following my passion for productivity apps, I worked out every day, I spent a lot of time in the mountains, and I did some freelance work. I loved it.

And at some point, I stopped loving it. I started thinking about what I might do next “for real”, and it started to stress me out. As a founder, one fills basically any role available. At Swapstack, I was the CTO, CPO, and CFO. That’s a lot of things at once, and it turns out that’s kind of right for me. But I knew that being a founder again straight away wasn’t going to work, and so the prospect of finding a ‘real job’ loomed. And nothing felt like the right fit. From my couch at home, I kept ruling things out, and I was blocking myself from moving forward.

This process lasted for a solid month or two. I won’t call it a depression, but it wasn’t too far off from one. From speaking to other former founders, I have come to learn that this isn’t a wholly unique experience: there is a malaise period that hits you at some point after a startup, when you start to seriously doubt yourself and your options.

Thankfully this didn’t last forever. I’m an energetic person, so I probably was always going to have an upper limit on how long I could mope around, but I think there was a key turning point for me: I re-read Cal Newport’s So Good They Can’t Ignore You and it shifted my mindset from worrying about what I wanted to do to what I was good at and how I could add value to someone. That simple shift spurred me into action once again.

Job Searching

Through this process, I landed on “telling stories about and with data” as my superpower skill that I want to continue investing in during the next phase of my career. And to readers of the Flywheel it should come as no real surprise; after all, that was basically the premise of this newsletter.1

This is a skill that can manifest in many types of roles, so I am trying to be open minded. For now, I’m exploring opportunities in three buckets:

• I’m exploring the possibility of becoming a “Data Scientist” at bigger tech companies. This would be a bit of a career pivot, but I think it would be absolutely awesome to learn how real Data Scientists do it in world class organizations. I have some interviews lined up (think places like DoorDash), and am working hard to be ready for those.

• I am also talking to a variety of large companies about data-heavy product management roles. This is closer to my roots (and resume), and that means I am targeting more senior roles for this functional idea.

• Finally, I am exploring the possibility of joining slightly bigger startups (think Series A) in a variety of roles as well. Anywhere from product to finance to ops to data, I think I can be useful, and while I think it’s a little tough to triangulate on the right role, level etc, I think this bucket is the most exciting for me because I love startups and I am probably more a startup person than anything else.

How you can help

Thank you for reading this far! I wanted to share this and put out into the world what I’m working on because good things have come to me when I’ve done that in the past.

Specifically, though, if you’re motivated to help, I’d love to ask for the following:

1. If you either work at, lead, or know someone at a company that fits into one of the three buckets above, and you think they might want to talk to someone like me, please let me know!

2. If you think my thinking is awful and you have some better ideas for me, please let me know!

3. If you are a fun and interesting person and you want to meet me for any reason, I’m a big believer in having agenda-less conversations with new people (back to the serendipity idea), so please let me know!

4. If you would like me to send personal updates like this again in the future (maybe 1 or 2 times per year), please let me know!

5. If you think I could be helpful to you in some way, please let me know!

I guess…just let me know!

OK, that’s it! Thanks again for reading, and actually..for everything.

If you are reading this but are not yet subscribed to The Flywheel, click below to join 5,023 of your smartest friends who receive each new post in their inbox.

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Today’s post was cowritten by me and my lovely girlfriend Tanya. Tanya always helps me edit Flywheel pieces, but she took an especially active role in this one, and it would be much less readable without her help 😘.

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A Mad Distracted World

Thursday. Time to make this week count! Open Slack. What's my team up to? Check email. Cool, some stuff to process here. Snooze this one, reply to this, assign to my cofounder. Nice, inbox zero! I'm a legend. How's the business doing? I turned off sounds and notifications for text messages, no distractions here friend! Cool, lots of action, should find out who the most active users are this week. What's up in my Linear inbox? Check email. Oh wait, I just checked my email. Inbox zero baby! OK back to Linear - 2 tasks have comments. Nice! I should remember to respond to those. I wonder if any new investors have committed $ on AngelList. Check text messages app. Slack? Nothing new? OK, Notion might have some notifications, let's see. Did anyone like my tweet from last night? No? Twitter's probably down. Another AWS problem? Check status logs. Check Slack, anybody talking about this? Check email. Quiet morning. 3 WhatApp's from last night to respond to. How's my Robinhood portfolio today? Let me check email real fast. Any new action on Swapstack? Check text messages app. Check email. What's up in Slack?

Does this scene sound familiar to you? If so, then, like me, you might be highly distracted. More often than I’d like to admit, sitting down to work looks a lot like the cycle above. Between the compulsive checking of various inboxes and the notifications that help me catch whatever falls through the cracks, it's a true wonder I've ever gotten any work done in my entire life.

I know, I know. We Are Distracted is far from a bold and original claim: this is a well-known issue facing many of us in the smartphone era. Distraction joins widespread anxiety and the crumbling of our democracy as commonly cited symptoms of social media use. At this point, it's well established that constant smartphone use is leading our brains to become more distracted, our minds to be less open to different viewpoints, and our hearts to feel lonelier and more anxious.

Smartphone overwhelm—or social media addiction, digital distraction, or whatever you want to call it—is a massive topic that I am becoming increasingly passionate about. I fear we, as a society, are in for a shock when we, some day, come to understand the true impacts of constant smartphone on the human brain (and in particular, the developing one). 

It’s a huge topic, and it’s too broad to tackle in one article. But there’s one aspect of the subject that often goes overlooked: the impact on us at work.

What happens when a person who has been hooked by social media, conditioned to spend hours a day seeking dopamine hits on their phones, sits down to try to get some work done in the modern, increasingly remote, work environment?

It doesn’t always end well. 

In this article, I’m going to suggest two different but related problems that arise in the workplace as a consequence of our modern tech products, and then dive a bit deeper into two tools I’ve recently begun incorporating into my life as a counteraction against these problems. 

In a month when TikTok passed Google to become the top website on the internet and Instagram to become the top app on our kids’ phones, it’s an opportune time to spend a few minutes thinking about these issues.

Yalla.

Problems in the Boardroom

Dopamine Monkeys

This part isn’t new. You’ve likely heard of dopamine, and how it relates to smartphone/social media use. This blog post from Harvard Medical School is a great basic introduction:

“Dopamine is a chemical produced by our brains that plays a starring role in motivating behavior. It gets released when we take a bite of delicious food, when we have sex, after we exercise, and, importantly, when we have successful social interactions. In an evolutionary context, it rewards us for beneficial behaviors and motivates us to repeat them.” 

Smartphones provide a nearly endless stream of potential dopamine: a ‘positive social interaction’, or something resembling it, is always but a swipe away. As a result, we’re often mindlessly reaching for our phones without really knowing why and, if we cannot find our phone,  we may feel a pang of anxiety.

When we sit down to work, our brains don’t magically turn off this dopamine-craving. I’d suggest that our work apps have begun to serve a similar function to social media apps in feeding it. Checking Slack satisfies a similar part of my brain as checking Instagram. App developers know this, and are building products that fit into our expectations. Every popular work app has a mobile app replete with notifications and emoji reactions to everything. 

We have strong FOMO and don’t want to miss a single thing, and at work it’s no different.

Outsourced Everything

I can’t remember the last time I went into (or ordered from) a restaurant without looking up its Google or Yelp reviews first. 

We have become totally reliant on external factors to tell us how to lead our lives. 

Where should I go? Check Google maps. What should I  wear? Check Instagram shopping. What political opinions should I adopt? Check Twitter.

I think there’s an analogue to this at work: 

What should I work on? It’s become easier and easier to outsource the answer to JIRA, Slack, Notion, or some other external source.

It’s become easier to be busy, but harder to be productive. To work on the right things at the right time.

These two issues combine into a double whammy, a trap that’s extremely easy for us to fall into. We have a compulsion to constantly check all of our work inboxes, and when we find unanswered messages there, we’re all too eager to fill our days responding to them. 

The trap is that we could become completely reactive to whatever happens to come up, and not nearly proactive enough, determining ahead of time what our priorities are based on some higher order, independent thinking.

The same trap that faces us in our non-work world is coming for us at work too. 

A new wave of productivity apps is emerging that can help us avoid the trap.

Less and More

Recently I’ve become more motivated to make the digital tools in my life work for me instead of the other way around. In the rest of this piece, I’ll dive a bit deeper on two different but complementary tools that I’ve recently started incorporating into my life:

1. Digital Minimalism: to rethink and intentionally choose the role of digital technology in our lives; and

2. Productivity Consolidation Tools (like Akiflow): to help wrangle and organize the tools you must use, especially for work.

Digital Minimalism

Tl;dr: buy/borrow Digital Minimalism and read it. 

I intended to keep today’s piece focused on distracting workplace apps, but two things happened: (1) I read Digital Minimalism last week, and (2) I started writing this piece, and realized how connected the overall digital distraction world is to the topic I wanted to cover. So, I hope you’ll indulge this short book report and strong personal recommendation.

The core thesis of Digital Minimalism is that new, smartphone based technologies (social media at the forefront, but also email, Slack, text messaging, etc) have been thrust upon us and we have allowed them unfettered access to our brains and attention spans. We justify our use of these technologies by emphasizing the value we may get out of these—Twitter is good for my career! 

Newport’s argument is that ‘I get value from it’ is an insufficient bar: the value needs to exceed the costs, and far too often it does not. The intro to Digital Minimalism focuses on the full extent of these costs, to help us with our own accounting.

We’re all fighting a David vs. Goliath battle against smartphone addiction: as a natural outgrowth of their business models, companies spare no expense in finding new and novel ways—rooted in psychology—to keep us scrolling.

This is lowercase ‘a’ addiction, not like drugs or gambling, but dangerous nonetheless. The main danger is in subtle shifts to how we relate to one another as humans and, as a result, a loss of fulfillment and meaning in our lives. We rarely, if ever, spend time alone with our thoughts, and we’ve replaced a meaningful chunk of our high-quality social interaction with low-fidelity bits of social feedback like likes and emoji reactions. 

Digital Minimalism goes into much more detail on the ramifications of these trends and makes the case that we ought to retake control of our minds. 

That’s a bit of the ‘why’. The rest of the book is dedicated to the ‘how’, and I won’t spoil it, but the highlights include a digital detox, emphasizing healthy non-digital practices like solo walks, and a strategy for prioritizing high quality leisure activities—like building things and playing music—in one’s life. 

The purpose of the book is to help us make more intentional choices about how we use what Newport calls ‘optional’ technologies like social media and text messaging.

Even Newport acknowledges, however, that some technologies aren’t optional: if you need to use email or Slack for your job, then it’s not optional, and therefore falls out of the scope of Digital Minimalism. 

But in the intro, I made the argument that work digital products can be as addicting and problematic as non-work digital products if we don’t use them intentionally. If you agree with the premise, then we need a strategy for healthier use of our work technologies as much as we do for our non-work ones. 

The next section will go into a recent favorite tool and startup to watch in 2022 that I can help us to do so.

Getting the Right Things Done

I have been a productivity tool early adopter for at least 4 years now. Had I been writing The Flywheel during that time, I’m certain I would have written a piece about Notion in late 2018 and Roam Research in early 2020. I didn’t have The Flywheel then, but I do now, and my early adopter spidey senses are excited about a new tool called Akiflow. 

Akiflow has not paid me for this article, and I am not affiliated with them in any way (though I am considering investing in their next fundraising round). I am just a big fan, and think many different types of people can get a ton of value from adopting a tool like Akiflow. 

When I left Amazon and started working on independent projects, I studied and experimented with various different productivity systems. I ended up gravitating towards Getting Things Done. 

The philosophy can be boiled down into a simple idea: have a reliable method of capturing ideas, requests, and tasks—from internal and external sources—and a trusted mechanism of processing that list.

That’s it. 

Turns out, if you have a consistent place to save things that come up, and you trust that you’ll look at it later, you can stay focused on the task at hand. 

For a while, I had the beautiful, closed-loop productivity system of my dreams, built around one of the most perfect apps ever: Things3. But once I started working with other people again, it all went to shit. Things is a great app, but it’s not designed for collaborative work, and so it doesn’t fit with the modern work ecosystem.

When you work with other people, you’ll likely have a Slack workspace (or something like it), where requests come through periodically. Then you eventually add some kind of task manager app like Asana, and maybe a docs app like Notion which of course allows us to tag one another. 3 inboxes, and counting, to check. 

Pretty soon, it becomes surprisingly easy to fill a full work day simply responding to whatever pops up instead of intentionally working on the highest priority things. We can easily fall into the trap that I described in the intro where we outsource our prioritization with whatever comes up.

Without a trusted way of saying to ourselves and our teams  ‘I’ll look at this later’ and then actually follow through, we have no choice but to respond to things immediately. 

We need a trusted system. 

I recently discovered a new category of products that is attempting to fill this need. I’ll call these Consolidation Tools, because they allow users to consolidate their various inboxes into one. 

I believe there is an opportunity for a large company to be built in this space, and there’s one who has caught my attention that I think has a good chance to pull it off: Akiflow.

Akiflow

This past summer, colleagues at On Deck (when I still worked there) raved about this new app called Akiflow. The On Deck internal Slack has a channel for productivity wizards, a group with discerning taste and an extremely high bar for adopting new tools. If these folks were wild about a product, I had to try it. 

Having heard that Akiflow was only 1-2 months old, I came in with low expectations, but I was blown away by the level of polish that Akiflow had from the off. I was easily able to integrate all the tools I rely on for daily work in just a few minutes. 

Then, when a question about setting up my Notion integration led me to a chat with the CTO—who fixed the bug I was facing on the spot—I knew I needed to get to know this team and figure out how they were pulling it off. 

Before I get into Akiflow’s future, let’s run through its three key features:

Inbox Consolidation

The killer feature of Akiflow is the inbox consolidation feature. As a user, I can connect all the apps I use to Akiflow, and set up workflows that send things to Akiflow based on certain rules. For example, if I see a message in Slack that I want to add to my to-do list, all I need to do is save it in Slack, and it will automatically add it to my Akiflow inbox. See an example below:

I can have similar rules running on Notion, email, and Linear (using Zapier) which are the main tools I use for daily work. Of course one can also add tasks directly to the inbox from any context, using global shortcuts.

This is a huge improvement upon toggling between and among my many inboxes: when I want to plan my work, I can trust that everything is waiting for me in one inbox. It allows me to put every request, idea, or task on a level playing field. I can plan my time on my own terms, choose my highest priorities for the day, and feel confident that everything else will eventually be handled. 

When I complete a task, I can click the link to go back to the source of the request so I can close the loop. 

Calendar Based Planning

Once I have a proper inbox, I can turn them into concrete tasks and plan them for a certain time and day. I can also turn on a setting that blocks time on my calendar to work on them. 

For example, right now I’m in the middle of a 3 hour window I blocked off for myself to work on this piece:

You can optionally set your calendar to actually block that time so nobody can book a meeting with you when you’re busy with a pre-planned task.

There is a huge mental shift required to go from reactively working on whatever ‘feels’ urgent to intentionally choosing what is most important at a given time. To be completely candid, I’m still in the middle of this shift and figuring it out. 

Superhuman Style Keyboard Shortcuts

Akiflow has a comprehensive set of keyboard shortcuts and a commands search box, the likes of which was popularized by Superhuman: 

All together, there is a real emphasis on speed: it’s fast to capture and manage tasks, and get back to whatever it is you actually intend to be working on.

Flywheel

It’s always much harder to intelligently describe a startup’s flywheels than it is for an established company. For one thing, hindsight is 20/20 and all that jazz. Most startups have an idea of what their flywheel could be, but it’s still just a theory. For another, startups are dynamic beasts, and so even if they have the beginnings of a flywheel today, it might look very different tomorrow. 

But what the heck, let’s take a quick stab at it for Akiflow anyway? Akiflow is off to a hot start, growing 30% month-over-month and attracting an active community of users who are requesting and discussing features on its Feature Request board (side note: this is hosted on Canny, another of my favorite new apps, which we are using for Swapstack). 

For Akiflow to capitalize on its early success, it will need to establish more flywheels that help the product improve as it grows. Let’s try to understand what the future could hold for Akiflow.

Single vs. Multiplayer

Because it’s a layer on top of our existing suite of workplace tools, Akiflow can be adopted by an individual user without needing to convince an entire team to switch over.

There is good and bad in this: any individual user can easily adopt and connect Akiflow to their other tools? Great. Lack of inherent growth loops that would bring along other users? Not as great. 

By my very subjective taste, Akiflow has the makings of an Awesome Product, but for now it’s very single-player. For Akiflow to break through to the tier of Very Important Product, it will need to nail the multiplayer flywheel: my use of Akiflow should make me better to work with than I would be without it, and everyone should give some of the credit to Akiflow. Furthermore, when my colleagues adopt Akiflow, my experience using the product should get better as a result. 

As that happens, growth takes care of itself: I use Akiflow and look amazing to my boss or colleague. This makes everyone I work with want to use Akiflow. Game, set, match.

How can Akiflow pull this off? 

I think two ways:

• Mutually Beneficial Integrations: right now, Akiflow’s integrations only serve the individual Akiflow user. When I save a message in Slack, it enters my Akiflow inbox. That’s useful to me, but not to anyone I work with.
  
  There’s an opportunity for the integrations to go deeper and provide value for everyone across a team. I’m imagining an experience like this: 

  • When I save a message on Slack, it automatically informs everyone involved that I’ve saved this message to my Akiflow inbox. This would give my coworkers some awareness that I’ve begun processing the request.

  • Later, when I plan the task, it might follow up in the original source to say ‘Jake has planned this for today!’. Similarly, when I complete the task, it could auto-notify everyone involved.

• Real Collaboration: most workplace productivity apps are built to support some element of collaboration. Task management apps, like Asana, Trello, Jira, or Linear, attach conversations to each task so teammates can go back and forth about the specifics of a given task.
  
  Akiflow should be no different: just because the source of tasks might be from another app, there’s no real reason why teams could not use Akiflow together to discuss tasks, link things together, and stay on the same page as one another.

By building for teams, Akiflow can establish the flywheel that will allow it to go from merely a great product to a great company. 

What's Next?

Any discussion of digital distraction, smartphone addiction, or social media consumption needs to acknowledge that these technologies are here to stay. Our task is to find ways to make them work for us rather than against us. 

Digital Minimalism is a great starting point: the entire philosophy is built around intentionally choosing how we use technology. 

At work, it’s equally important for us to intentionally choose how we spend our time. A new category of tools, like Akiflow, is emerging and can help. 

Akiflow is a very young company, the youngest I’ve written about thus far, but is well positioned to create a meaningful, lasting product that helps millions of people make their work apps truly work for them. 

But it’s early, and time will tell. I’m excited to track Akiflow’s progress and will keep you updated as they hit big milestones in the future. 

They are raising a seed round, and would be happy to meet any funds or large angels who read The Flywheel. If this piece has gotten you excited about the future of Productivity Consolidation Tools and you’d like to connect with the founders of Akiflow, please reach out to me and let me know; I’d be happy to make an intro.

If this article has gotten you curious to try Akiflow, they’ve offered Flywheel readers 20% off the first three months. To redeem the offer, sign up for the Akiflow free trial, and use the code FLYWHEEL20 when upgrading to a paid plan.

Try Akiflow for Free

These tools have been very thought provoking to me in recent weeks, and I’m excited to work with them in the new year. As 2021 comes to a close, I hope I’ve been able to add some value to your life throughout this year, and am excited to continue trying to do so in 2022!

May we all have a healthy, happy, and intentional year ahead.

That’s it for today’s edition of The Flywheel. Thanks again to Tanya for helping out with this one. Let me know what you thought of this piece by clicking one of the links below👇🏼.

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tl;dr: The Flywheel was the inspiration for my current full-time venture, Swapstack. Swapstack is a creator monetization platform, currently focused on enabling all newsletter creators to monetize their work through paid sponsorships.

Jake Schonberger (from The Premoney List) and I have been building Swapstack for ~8 months, and have seen enough validation via our current product to triple-down and raise a small pre-seed round to support our large vision for the platform.

If you want the condensed version of the vision and the fundraise details, check out Jake’s Premoney from today.

Read the Premoney Investment Brief

In my previous post I mentioned my intention to bring you, my dear readers, stories of exciting new companies that I encounter, along with opportunities to invest in their success.

In today’s post I follow through on that promise. 

It seems fitting that the first startup I bring to you is my own, Swapstack, a project that I credit in large part to my work on The Flywheel. 

Just about one year ago, when this newsletter reached the 1,000 subscriber mark in its first 2 months, I started wondering how I might be able to monetize The Flywheel. That small thought was the first step in a whirlwind journey that included starting, selling, spinning out, and ultimately fundraising for a company, all in under 12 months.

This is that story. 

Before we dive in, a disclaimer: yes, Swapstack is raising a pre-seed round, and yes, I’m inviting my readers to participate. However, please keep in mind that this is not investment advice. I will make the case for why I’m dedicating a meaningful portion of my energy for multiple years to this project, but each of you should do your own diligence and make your own decision accordingly. Similarly, investing in startups is highly risky, and if you choose to participate, the overwhelmingly likely outcome is that you will lose all your money. In the United States, you must be an accredited investor to invest in startups (though if you’d like to gamble your savings away at the casino or on lotto tickets, go right ahead!) for this reason. Onto the article!

Origin Story

I never intended to start an AdTech startup.

When I started The Flywheel, it was truly a ‘throw spaghetti on the wall and see what sticks’ kind of moment. I had just resigned from Amazon for the second time in ~8 months, and wasn’t sure exactly what I wanted to do next. All I knew for certain was that I wanted to never need to go back for a third time.

The Flywheel was one project among what I assumed would be many attempts to find something that might stick. At the same time I enrolled in the On Deck Founder fellowship, where I expected to meet people who might want to work on other projects with me.

Little did I know what the serendipity of the internet had in store. Within 2 months, The Flywheel started taking off. I was now a ‘Newsletter Writer’ with a fast growing audience, with messages from all sorts of interesting people in my Twitter inbox for the first time ever.

Suddenly, The Flywheel was no longer just an attempt, it was a Project with a capital P, one with potential to turn into a real business. Thinking about it like a real business changed everything for me.

I started contemplating monetization opportunities around the 1,000 subscriber mark. Yes, my audience was still small, but it was growing quickly, attracting hundreds of smart, interesting people every week or two.

This was during the height of the Substack boom, so the obvious first idea was to sell subscriptions to my writing. It felt like something I could pull off, but after attending a talk by Lenny Rachistky during the On Deck Writer’s Fellowship (like I said, I was a writer now), I decided against it.

Lenny explained that turning on the paywall effectively converts your newsletter into a job, and for me The Flywheel was much too new to make that level of commitment. I had spent years trying to break away from jobs I didn’t want so I could create something new for myself; the last thing I wanted was to create a job I didn’t love.

With subscriptions off the table for the time being, advertising was the other real candidate. I wrote about Not Boring much later; at the time, though, Packy was just getting his own ad-supported newsletter model off the ground and teaching the rest of us how he was doing it. 

The benefit of ads is that it imposes much less pressure than subscriptions: you charge for your ads, and only make money when you publish. This tends to align your incentives with your own mental health quite nicely: publish more, make more. Crucially, your readers aren’t paying you, so it’s easier to grow your audience (thus allowing you to increase your rates), and if you don’t publish for two months or so—cough not that this would ever happen..cough—nobody can really complain.

The downside of ads, of course, is that it’s not easy (there’s no free lunch!). The incomplete list of things you need to do to effectively sell ads in a newsletter includes: identify, contact, communicate with, and transact with brands; maintain an inventory calendar, listings page of ad options, and inbound requests from prospective brands; write, review, edit, and receive approvals for ad copy and creative assets; collect and report results back to the brand.

Around this time, Packy open-sourced the impressive slide deck he was using to sell ads in Not Boring; this thing was intense, thorough, and impressive. It occurred to me that it might be useful to be an ex-investment banker after all. 

All things considered, sponsorship seemed a much better fit for me than subscriptions, so I applied to some advertising marketplaces I found online as a starting point. After all, email marketing is not a new industry, even if the Substack-led boom in newsletters was something of a resurgence for the medium. 

Pretty soon, I got rejected or ghosted by them all. When I received an explanation, I was told to come back when my audience was 100,000+.

This seemed clearly wrong—Packy was proving that an audience of 5 or 10,000 is valuable, selling ads for $3,000 a piece even at that size. At 1,000 subscribers and growing fast, The Flywheel had line of sight to those sorts of numbers. If these more established marketplaces were not willing to serve an audience like mine or Packy’s, I figured, someone ought to.

This ignited a spark of an idea for a business that would help newsletter writers like myself sell sponsorships. Pretty soon, I met a fella in On Deck Founders (ODF) who shared my name and my burgeoning interest in newsletters.

Swapping (Sub)Stacks

Jake Schonberger was working on a number of projects when I met him in ODF, the most relevant of which he was calling Swapstack. He had recently started a newsletter of his own called The Premoney List—featuring early-stage startups that were raising their first rounds of funding—and was interested in growing his audience.

He recruited a group of other newsletter writers, including myself, to run a bunch of Swaps: in other words, reciprocal promotions of one another’s newsletters.

I ran one of the first Swaps in this piece with Aja Singer of For the Love (I guess I like working with people who share either my first or last name), and Jake and I got to talking more about opportunities in the newsletter space. Eventually, I convinced him that there was probably more of a business in the sponsorships angle than the swapping angle. After a long period of cofounder dating, we decided to go for it—we officially teamed up to start building a company. 

Swapstack MVP

After deciding to focus on newsletter monetization, we started designing a MVP to validate whether there were meaningful problems in this space that we could solve for both creators and brands. The initial hypotheses for these were:

1. Newsletter writers don’t have the time or ability to secure consistent sponsorships from high quality brands. 

2. Brands are missing an opportunity for a high quality, high-ROI marketing channel because they either don’t know about it or it is too difficult to execute.

Through our collective work on The Flywheel, Premoney, Swapstack, and our combined three On Deck fellowships, we were as well positioned as anyone to test these hypotheses with both writers and brands. Jake’s ad sales experience at Facebook was a huge bonus, since it’s a space I personally knew little about.

With ‘do things that don’t scale’ at the top of our mind, our MVP was not really a product at all. We spent lots of time talking to potential customers on both sides, seeing what it would take to broker sponsorship deals. 

We created some Airtable lists to keep track of everyone we were meeting, along with a Slack channel to communicate with fellow writers. From there, we pounded the pavement, recruiting participants on both sides, suggesting ‘matches’ and if both sides wanted to connect, we sent an intro email. If not, we didn’t! Airtable and Zapier automations made the entire thing feel more put together than it really was. 

Though we had no way to capture payment, manage results, or really anything beyond that initial intro email, writers kept coming back for more and the brands called the process ‘magical.’ 

Based on this reaction from our earliest users, we felt confident that we had an opportunity to create value for users. We hadn’t yet committed to Swapstack full time, and we still needed to learn how much value we could create and whether we could capture some portion of it.

v2 of the MVP was designed to answer these questions. We launched Swapstack Beta at the end of January, which was essentially an invoicing tool and not much else. Writers could log in and cut invoices to the brands they met through us. While debate about what cut is too much to take from creators on various platforms is a hot topic today, we decided that our take rate from creators would be 0%. Instead, we added a 10% fee to every invoice, so that we could send writers exactly the amount they charged.

Our “product” now encompassed the beginning (introductions) and end (payment) of the sponsorship experience, with nothing in the middle. And, to our amazement, people started using it. In January, writers submitted 89 intro requests with a 45% approval rate, and invoices totaling $500. In February, we saw 140 intro requests (similar approval rate) and $3,000 in invoices. 

Although we were seeing promising results, the discussion around whether to go full time, whether to raise a round of financing, or generally what the big picture might be still loomed.

And then, something happened that fundamentally changed the very tenor of that conversation.

A buyer came in.

On Deck or Not On Deck

Before all this, I wrote a piece about On Deck (OD) that was—up til then—my most successful by far. Afterwards, I stayed in touch with Erik Torenberg and David Booth, founders of OD. They’d occasionally ask me questions about company strategy, to which I’d respond, ‘you know I don’t actually work for you, right?’. After enough times, their answer became, ‘well, maybe you should’.

That kicked off a series of conversations exploring what a role at OD could look like for me. Unbeknownst to me, other Jake was having similar conversations. When we started working on Swapstack together, we both told the other about these conversations, and that our ability to commit to Swapstack might be impacted by their outcome.

The conversations dragged on, and Jake and I got to building (see previous section). Eventually, we started seeing some real traction, and the conversation between us and OD shifted to an acquisition exploration. Yes, Swapstack was comically early at the time, but we were getting increasingly fired up about its potential, and OD became excited about the possibility of bringing us in to build it internally.

The prospect of selling a company that had barely just started, securing super cool jobs at a hot, rocket ship of a startup, and removing any short-term financial pressure proved too tempting to turn down, and we agreed to move forward. Though it wasn’t terribly straightforward, we closed the deal for an undisclosed amount and started working at OD in early April.

The narrative was compelling: OD had multiple fellowships for creators (writers, podcasters, and more on the way), and we were coming in to lead what would eventually be OD’s creator business. The Swapstack marketplace would be one component of many in this eventual broader creator organization.

It wasn’t long after, though, that our two companies started to drift apart.

OD—a fast growing and early-stage company in its own right—eventually decided to focus more on startup founders and less on creators, as its major announcement today testifies.

Meanwhile, Swapstack’s core marketplace started looking like a real business, and we decided to focus on expanding it rather than on building a big, new org which would inevitably distract us.

Eventually, we both realized that for Swapstack to reach its full potential, it would need to break free of the OD umbrella, and mutually decided to spin the company out. The move would allow Swapstack to become its own independent company once again, with Jake and Jake no longer employees of OD.

That brings us to where we are today—the OD spin out is nearly complete, and Swapstack is off to the races. 

In case you are wondering how sincere OD’s desire was for Swapstack to reach its potential, they’re putting their money where their mouth is: OD is our first investor, and Swapstack is also participating in the brand-new ODX accelerator which was announced today.

Our time at On Deck was highly valuable—between advisers, customers, and collaborators, we are more likely to be successful because of our time at OD—and we think ODX will prove to be the same. 

Swapstack 2.0

That’s the story, now let’s talk about the business. First I’ll describe what problems Swapstack solves, how it works, and what it looks like. Then we’ll talk about how it’s going. Finally, I’ll share some vision for where we think it could go, and how the fund raise fits into that vision.

Problems

I already described the difficulties that creators encounter in running an ad-supported business. At first, we were primarily focused on solving problems for creators:

• How do you get the attention of a brand?

• How should a newsletter ad be priced?

• What does a pitch look like?

• How can you convert a single ad to a long term relationship? 

Over time, we started to better understand the problems that brands face too:

• How do you identify the right creator?

• How do you manage potentially hundreds of individual creator relationships?

• How can you close a deal with creators quickly and efficiently?

Our goal with Swapstack is to alleviate these issues and help brands unlock the power of creator marketing without the headache.

Product

The current Swapstack product is oriented around a marketplace with two sides: on one side we have brands (demand) looking to purchase ad space, and on the other side we have newsletter writers (supply) looking to sell ad space.

The process is as follows: after signing up for Swapstack, participants in the marketplace can browse listings from the other side in the gallery. Either side can initiate a request to the other side (we call these relationships) alongside a pitch explaining why the sender’s brand or newsletter might be a good fit for that of the recipient.

Relationships work on a double opt-in system. If the recipient approves the request, we introduce both sides (today it’s via email, in the future we will have messaging on platform) to finalize the details of their sponsorship.

When the two sides eventually come to an agreement, we ask them to use our invoicing tool to request payment. Our revenue comes from a 10% fee we add on top of the invoice charged to the brand. Our goal remains to be the most creator friendly platform out there, so we send writers 100% of their asking price on every transaction.

Lastly, users on both sides of the marketplace manage everything on the Swapstack dashboard. We’re always adding new features, and if there’s anything you’d like us to consider, feel free to add it to our feature request board here.

Results

The results have been very encouraging so far. Like any business, there are lots of metrics we look at to assess the health of our business. The most important one—as it is for most marketplaces—is marketplace gross merchandise value (GMV), which is a measure of the total dollars earned by creators via Swapstack. After launching the ability to invoice through the platform in late January, we hit a cumulative GMV of $100K in June, $200K in September, and are on track to hit $300K in October.

We also look at a long list of metrics that are an input to GMV, but I’ll try to keep it concise. GMV is a function of the number of transactions and the average size of each transaction. The number of transactions is a function of the number of approved relationships and the conversion rate from approved to paid. The number of approved relationships is a function of the number of total relationships and the approval rate. And the number of total relationships is a function of how many unique newsletters and brands initiate relationships, and how many relationships they each initiate on average.

At each of these levels we’ve been encouraged by what we’re seeing. For brevity, I won’t share numbers for each and every one of these levels, but we have all of this data available. This chart summarizes our input metrics quite well:

Flywheels

This is The Flywheel, so of course I must include some discussion on the flywheels we’re building here.

Note: I so wanted to include some flywheel drawings here, but unfortunately I discovered this morning that my iPad pencil was the unfortunate victim of a backpack-crushing. I will update this piece with said drawings as soon as I can.

Network Effects Flywheel

The first is not overly unique: we run a marketplace, and like many marketplaces it has network effects. This means that when a new user joins, the product becomes more valuable for every other user, both current and future.

On one level, this is rather obvious. Of course you’d rather join a marketplace with lots of options over one with fewer. Mathematically, it’s also obvious: the number of total possible relationships on Swapstack is equal to the number of newsletters listed times the number of brands listed. This suggests there’s at least a possible exponential effect from each new user who signs up.

But in practice, there are subtle ways in which this advantage manifests:

• We have seen that users who participate in a successful relationship in their first week are more successful overall than users who don’t. To support this, we do a lot of different things when a new user signs up to get them off on the right foot. When a brand signs up, we try to have as many writers as possible send them requests as soon as we can.
  
  At the beginning, this was tough: we’d often have to manually broker deals between the new brand and one of the small number of writers on the platform who might be a fit. We spent a lot of time and lost a lot of deals that way. Now, though, there are enough writers on board that we simply tag a bunch of users in Slack when a new user joins, and each new brand receives 5-10 requests on their first day.

• When a brand with a sufficiently large budget joins, we offer them a white-glove service, in which we essentially handle the manual work of choosing newsletters and coordinating the details. Although this is a lot of effort on our part, we think it’s worth it to give the brand a great experience.

  Early on, this was nearly impossible. We simply didn’t have enough users to fill the brand’s budget. We tried 3-4 times earlier on, and couldn’t deliver against hte brands’ goals. Lately, though, this has become not only possible but increasingly easy, and we are now successfully managing multiple simultaneous campaigns. The next step for us is to build products that make this entire experience easier so we can scale this even further. 

Supply -> Demand Flywheel

A recent Lenny’s Newsletter piece talked about different types of marketplace advantages, and it described one we’ve naturally observed: when supply becomes demand or demand becomes supply. The examples from Lenny’s post were Lyft, where riders might enjoy their experience and then decide to become a driver, and Airbnb, where guests become hosts.

We’ve seen this go both ways thus far with Swapstack, but I’m most excited by our supply (writers) becoming demand (advertisers). This is how it works:

• A writer signs up for Swapstack and starts selling ads.

• Eventually, they are so successful, they realize they can actually pay to grow their audience (feeding their own flywheel, as a larger subscriber base allows them to charge more).

• They sign up as a brand on Swapstack and buy ads in other newsletters.

• Their newsletter grows, and their invoices on Swapstack get larger.

We’ve seen this happen quite a few times; perhaps my favorite example is JR Raphael of Android Intelligence, who never monetized the newsletter until he started working with us earlier this year, is now buying ads on Swapstack too, and expects to earn enough to go full time on it in early 2022.

Vision

The marketplace is just Swapstack v1. We have the chance to become the way every company buys ad space from creators of all types. We’ve started with newsletter writers, but plan to expand to others, including bloggers, twitter influencers, podcasters, community managers, and more. Already, many of our creators are active on other mediums and are starting to use Swapstack to find sponsors beyond their newsletter. On the brand side, we are focused on servicing larger brands with bigger budgets.

Now’s the perfect time for Swapstack.

Digital media advertising has become increasingly challenging for brands. I saw a tweet recently that said that 30-40% of all venture capital dollars go directly to Google or Facebook for digital advertising. That would be fine if the ROI was there, but the cost to advertise on these platforms has increased dramatically in recent years.

Google and Facebook offer precise targeting in a way that nobody else can replicate. However, feed-based advertising results in extremely low engagement & the introduction of new device-level privacy updates like iOS14 have completely disrupted attribution and measurement. That, in addition to rising CPMs (and thus, CAC), has driven brands elsewhere.

Creator marketing provides the ability to target specific, extremely engaged audiences through a trusted voice. That combination drives high ROI.

Brands know this—already, $14B is spent on creator & influencer marketing, and we think that will only continue to grow. Brands increasingly are on board with this, and are mainly turning to their marketing teams and agencies to help them figure out how to buy these ads. 

Agencies & internal marketing teams are consistently looking for the best, most impactful growth channels and tools to use to hit their business objectives. Swapstack will become one of those tools, to enable these teams to reach & advertise through creators at scale.

Meantime, it’s never been easier for anyone to make a living ‘creating’ online. There are tons of different monetization options, but sponsorships/ads has and always will be one of the more compelling.

So with tailwinds on both sides of the market, we think now’s the time to go for it, and we’re raising a pre-seed round to get us off on the right foot.

Fundraise

We’re looking to raise $750,000 on a SAFE with a $10m cap. If that looks like a foreign language to you, you might feel better when I tell you that it did for me too only a few weeks ago.

If you’ve ever watched Shark Tank, you’re likely familiar with the valuation and ownership % question. “I’ll give you $50,000 for 10%” equates pretty neatly to a valuation of $500,000.

In startup-land, companies as young as Swapstack don’t typically have a real ‘valuation’. This is because valuations are a function of profits, and most companies at this stage don’t have profits now and don’t plan to have profits anytime soon. A valuation, then, would be totally made up.

Additionally, if you sell a certain % of equity at a real valuation, that’s legal and administrative work that actually has to happen, and that can get expensive for early stage companies.

The standard is now to use a SAFE, instead, which stands for Simple Agreement for Future Equity. For all intents and purposes, $750,000 on a SAFE with a $10M cap is equivalent to 7.5% of the company at a valuation of $10M, but it makes things easier because the equity isn’t actually provided now; instead, it’s granted in the event of a future priced round (like a Series A) or an exit. You can read more about SAFEs here.

We’re in ‘find product-market fit’ mode, which means we’re going to use these funds to hire a lean but mighty team to keep experimenting ‘til we get there. We love the traction we have so far, but we don’t think it’s true PMF just yet. This recent thread explains the difference, and we’re trying to avoid the pitfalls of premature scaling.

About half of it will go towards paying the team (which is me, Jake, and our phenomenal growth lead Vidya, and 3-4 additional folks we’ll look to bring on in Q1 2022) for 12-18 months. The other half we will use for 1) software costs, 2) liberal use of Fiverr and Upwork resources to do undifferentiated heavy lifting for us, and 3) to have the option to go faster when we feel the time is right. We think it would be risky to raise less, and then need to raise another round right at the time where time is most critical.

If you are an accredited investor and are interested in getting involved with the raise:

Book a meeting with me and Jake

If you are a brand or creator interested in exploring Swapstack:

Sign up for Swapstack (it's free!)

Anything else? Reach out to me via email or twitter and let me know!

I have had more fun working on Swapstack than anything else I’ve ever worked on professionally. Through this process, I’ve learned a lot about what I like doing, what I don’t like doing, and how wrong I was about some of that in the past. 

Although it has certainly cost me the ability to consistently publish in The Flywheel, I couldn’t be more thrilled to keep going on Swapstack, and I’d be honored to have any of you along for the ride in one capacity or another.

That’s it for today’s edition of The Flywheel. Thanks a ton to Jake and Tanya for helping out with this one. Let me know what you thought of this piece by clicking one of the links below👇🏼.

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Hi everyone ✌🏼!

The Flywheel turned one last week! I published the first ever Flywheel piece on August 25, 2020. Having a newsletter for a year presents a cool opportunity to follow the same company over time, revisit arguments made, and see what was right and what was wrong.

In that spirit, we're going deep again on the subject of that initial post—Peloton—because there have been some surprising developments over the past few months.

Let’s get to it!

A year ago, you couldn’t get your hands on a Peloton without waiting 3 months. If you ordered one today, not only would it arrive within 2 business days, but you’d pay almost 40% less. 

Ladies and gentlemen, the rise and fall of Peloton.

Peloton was one of the biggest winners during the big COVID rally in spring and summer of 2020. By mid-August when I wrote my maiden piece, $PTON was pushing $70 a share, up over 3x since its early-March lows. It would end the year in the $165 ballpark. The company even posted its first ever profitable quarter.

Then the wheels came off. 

Since the end of 2020, Peloton's financial profile has gone downhill in epic proportions. Look at this breakout of quarterly net income for the past two years.

(Note, Peloton's fiscal quarters are off relative to calendar quarters. Q1 is July-September, and Q4 is April-June)

Although this looks dramatic—and, truly, a loss of $301m in Q4 2021 compared YoY with a gain of $90m is an eye-catchingly abysmal result—it's worth putting these numbers into perspective. The way we'd typically do this is to look at them as a percentage of revenue, which is also listed on the chart. In this case, the net margin is -32%, and it's about 50% worse than its worst quarter to-date on this measure (if we exclude its first ever quarter as a public company).

That Peloton would dip from the heights of the early COVID boom was not surprising. But this is something entirely different.

Plainly, this was a disastrous result, and in this piece we're going to try to understand what on earth happened to Peloton's business over the past 6 months, and what it means for the company's outlook.

What happened to Peloton's profits

Gross Margin

If I had to choose only one figure to explain what happened to Peloton's financials, it would be gross margin.

Hardware gross margin simply fell off a cliff. When Peloton sells a bike, there are direct costs associated with fulfilling each unit, such as manufacturing, shipping, distribution, warranty replacements, etc. Whatever is left after these costs is gross profit.

Historically, Peloton's gross profit margin was in the low to mid 40s. So if they sold a bike for, say, $2,400, the gross profit would be around $1,000.

In this most recent quarter, the gross profit of the same bike would be below $300.

There are two ways gross profit can take a nosedive: costs can go up, or price can go down. In this case, I think both happened.

Price

The original Peloton bike cost $2,245. With the launch of the Bike+ in September 2020, at $2,495, the price of the original bike was reduced to $1,895. Between the two models, they may have figured, the average price would remain roughly in the middle, where the original price had stood.

The problem is that the Bike+ didn't have enough interesting new features. As I highlighted in December, a swiveling screen and slightly better speakers weren’t likely to move the needle.

Based on these results, it looks like customers agree with me. 

Peloton thought they had an iPhone. They don't.

Just last week, Peloton further dropped the price of the original bike to $1,495, which we’ll discuss a little later. 

Cost

It's a little harder to assess this side of the house. I've done some rough estimations of the number of units Peloton sells each quarter and can use that number to back into the per-unit cost. These numbers aren't perfect because there is a lot I don't know.

However, my model does show a ~10% increase in per-unit cost. Peloton cites increased costs related to Treadmill recalls, which we'll come back to a bit later.

Operating Expenses (OPEX)

A hit to gross profit is a problem because it’s what a company uses to cover its fixed costs—in other words, the costs that don't vary 1-to-1 with each unit sold, like marketing, employees, R&D investments in new products, etc.

Remember those beautiful profits Peloton showed in Q4 2020-Q2 2021? 

In the December piece, I argued that Peloton's short term profitability is mainly due to a temporary decrease in operating expenses. I even showed this nifty chart—I've updated it to include the more recent quarters this time around.

The argument then was that gross margin was flat, so the per-unit economics hadn't changed all that much. Instead, they reduced other costs, like marketing, and that was artificially showing Peloton to be a profitable business. The implication is that when OPEX goes back to 'normal' levels, the company will lose its profits.

This is exactly what happened in this recent quarter. OPEX went back to 59% of revenue, which isn't terribly out of line with its earlier history. However, this time the major difference is the gross margin line didn't remain flat; it tanked (as discussed above). This double whammy caused a massive decline in net profit margin. 

Peloton needs to figure out how to either get its gross margin back to where it was, or it will be forced to reduce its operating expenses.

Revenue Growth

Peloton's top line growth has slowed down materially as well. Growth rates of digital revenue, which are the $39/month subscriptions for hardware customers and $13/month subscriptions for digital-only customers, continue to inch higher over time. But digital is typically only ~20% of total revenue. 

This slowing growth is driven by hardware revenue.

Since revenue is price times quantity, much of this is due to the price cuts we discussed above. But I think quantity is also down (or rather, up less than you'd expect).

For one thing, sales of the Tread that I preemptively declared a flop in August 2020 have been suspended since a recall in May of this year. Turns out you could get hurt (or worse) using the thing if you didn’t tread carefully. 

Presumably, without these issues, tread revenue would be higher, but probably not much higher: in the recall announcement, Peloton showed that only ~1,000 Treads had been distributed prior to the recall. My flop call is looking pretty good at this stage.

I think bike unit sales have slowed down too. Again, my analysis isn't bulletproof on this one, but I've calculated that units are up 'only' 75% YoY, while previous growth rates were in the 200-300% range.

Revisiting Hypotheses

In Peloton's Food Network Opportunity, my first piece, and later in my year-end update, I laid out several hypotheses about Peloton’s business. Since many of you were not subscribed when those pieces went out, allow me to summarize the main arguments:

• Peloton is overly reliant on hardware success for its core business and is underinvesting in its non-hardware opportunities (social network effects, data, and talent).

• The recently launched Peloton Tread was a flop and the digital subscription was no better than free workout classes on YouTube; this highlighted that Peloton is essentially a one product company (the bike), and that when the bike starts breaking down they will likely lose customers.

• Though Peloton turned a profit for the first time in its history, its profitability wasn't sustainable. Rather, it was driven by a temporary reduction in operating expenses. Among others, Peloton was essentially not spending money to market its product because (1) it was flying off the shelves anyway, and (2) they were having trouble keeping up with demand on the manufacturing side, so more demand wouldn't have helped. The argument was that once manufacturing issues and COVID both subsided, Peloton was likely to revert to unprofitability.

Without cherry picking, it appears these hypotheses are almost entirely correct, at least so far.

In fact, I probably erred in not going far enough. Maybe because it was my first piece, I lacked the confidence to make big claims (I've worked on that problem).

Implications

Hardware is hard. Each new SKU is really expensive, so every bet is a big bet by nature. Even if you avoid building products that injure people and lead to recalls of thousands of units, which is far from a given, you are still at risk of building something nobody wants and finding out too late. This appears to be the story of Peloton so far.

The Bike was a smash hit, but Peloton made a strategic mistake. Rather than doubling down on the fervent excitement of Bike users—the unique, special sauce of Peloton—by building richer and deeper ways for them to engage, they gambled on new hardware products in pursuit of ever larger markets. 

The tactics behind this strategy didn’t work out particularly well.

The Tread was not only a flop in terms of customer demand, but also in terms of the tablets that fell off and hurt people.

The Bike+ appears to also be a flop. Though I missed it in my December piece, in retrospect, it could have been an easy call: there was simply nothing much new there. A swiveling screen and some better speakers..it's just not much.

When the original bike came out, it was a new and novel enough concept to attract a large, growing, and excited audience. Peloton interpreted that to mean that people would buy new products because they were made by Peloton, even at higher prices. But those passionate users already owned a bike, and once you own one bike, you’re not likely to buy another.

Now, the concept is no longer new or novel, and competition abounds from bike/tread manufacturers, as well as newer-age offerings like Mirror and Tonal (among many others). 

These new hardware launches didn’t add much new to the market, but the truth is there never could have beenanything new. Peloton's delusions of grandeur notwithstanding, ultimately, we're talking about an exercise bike and a treadmill. 

What is unique about Peloton are those Bike users who still ride rather consistently, and Peloton still has time to properly invest in its experience and save the company from financial ruin along the way. 

Looking Forward

It's easy to say in retrospect that Peloton should have instead invested in its software, data, community, and talent. But it was also easy to say that in whatever the opposite of retrospect is, because that's exactly what I argued a year ago with my very first shot on goal. I only now have the data to show that it would have likely been the right move.

The good news for Peloton is that it’s not too late. With over 2 million Connected Fitness Subscribers, the company’s term for subscribers with a bike or tread, the user base is there to be built for. But time is most certainly running out; my original thesis was that customers would likely be one-and-done with Peloton hardware, and I’ve seen nothing to change my mind on that as yet. 

Looking at the latest quarterly report, management mentions that the coming year (fiscal 2022) will see a “continued prioritization of subscription growth over near-term profitability”. In other words, we need to sell some damn bikes no matter what. 

As mentioned above, Peloton recently cut the price of the original bike by another 20% (to $1,495) starting last week. This seems to validate the argument that demand is sluggish for new bikes. 

Perhaps these massive losses will have Peloton thinking twice about its future hardware roadmap, and instead convince them to beef up its digital, social, community, and data efforts as outlined here. 

My Personal Peloton Journey

The first thing I did after signing a lease in DC last year, after 7 months of bouncing around, was to place an order for a Peloton bike. 8-10 weeks later, I had my bike. COVID was in full force, the gyms were closed, I was starting to gain the COVID fifteen, and so I rode that thing.

Perhaps because I had interviewed with Peloton for a product role early in 2020, I was in the mindset of thinking about it as a product manager. And so the more I rode, the more curious I became about Peloton the business. 

Before looking at a single financial statement, I had the sense that Peloton was under-delivering on its potential. I wanted the excitement to carry on beyond the 30 minutes on the bike instead of just ending there. With millions of fervent bike riders, this felt possible.  

It’s not an exaggeration to say these questions are responsible for the launch of The Flywheel.

My own personal use of my Peloton has ebbed and flowed almost in direct proportion to the severity of the COVID restrictions in my area. When gyms are closed (or masks are required), I use the Peloton more, but when I can go to the gym I much prefer to be around people. 

I now wonder to what extent this is the higher-level, more straightforward story of Peloton, and in all likelihood an entire set of companies: COVID tricked them into believing it had a grander business than it really did, and it led them astray. 

The story of 2022 will be how or if these companies can correct course. 

One Year of Flywheels

It’s been a wild year! That first email went to 6 people, including myself. 

Today I’m sending the 20th Flywheel to over 4,100 of you. And this, despite essentially dropping off the face of the earth since April, with just the one measly article since then. I’m truly blown away by how far this has come, and what I’m left with is a strong sense of opportunity. 

I’ve been open about my struggles to publish consistently since going full time on my startup, Swapstack. Despite the opportunity that The Flywheel presents personally and professionally, it’s been difficult to prioritize it. 

In terms of content, I’m somewhat torn which of the following directions to take with The Flywheel:

• Focus on public company write ups (like Peloton above, or DoorDash), with a focus on financial statement analysis. 

• Focus on startup/small company write ups + The Podcast. Most of my very popular articles have been these ones (see On Deck and Bubble)
  
  One interesting angle here is an opportunity to invest in early stage startups who want my help telling their Flywheel story, and hopefully I’ll have the chance to bring these opportunities directly to you.

• Same as the previous bullet, but with a focus on climate tech startups. 

• Follow the same companies over time, much like I’ve done with Peloton. 

These aren’t necessarily mutually exclusive. So, over the next few months I’ll be experimenting with each of these areas. Perhaps a clear winner will emerge; perhaps not. Either way, I know that for this to be a sustainable, long-term endeavor for me, I need to be flexible and follow the ideas that are most interesting and fun for me to write.

Meantime, if you have a strong sense of stuff you’d like to read from me, feel free to reply to this email and tell me!

And with that, let’s have a quick look back at some notable articles:

Superlatives

Most Read Issue

This one wasn’t particularly close. Coming in at over 12,000 views—more than 2,000 higher than 2nd place—is Million Dollar Newsletter, a look into Packy McCormick and his newsletter Not Boring’s rise to prominence. Turns out having someone with a massive following have a vested interest to share your article helps quite a bit! Beyond that, I think the creator economy/

My Favorite Issue to Write

They are all my babies, but Stitch Fix’s Long Thread was my favorite article to write. It was the first time I dove deep into quarterly and annual statements, and was able to draw unintuitive insights from them. That post was super fun to research and write, and it was also the first one that semi-blew up. 

After this one, I started to feel like this whole Flywheel thing could be legit.

Least Favorite Issue to Write

Probably Death and Turbotaxes. Although I was fired up about the subject, it just didn’t make a ton of sense as a Flywheel piece. I struggled to figure out why I was writing the piece, and what I was trying to communicate. It’s not surprising to me at all that it was my worst performing piece thus far!

That’s it for today’s edition of The Flywheel. Thanks a ton to Tanya and the Foster community for helping out with this one. Let me know what you thought of this piece by clicking one of the links below👇🏼.

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With my startup Swapstack demanding more and more of my time, I’ve had less and less time for The Flywheel. I’m incredibly thankful to you all for your support, and for being enthusiastic readers when I do manage to find time to publish, like today! 

For the last several years, I’ve felt a steady, dull drumbeat of dread about climate change. It’s always there, but most of the time it’s in the background. Then—every so often—something batshit crazy happens, like the temperature reaching 107 in Seattle or the ocean lighting on fire or you learning about the parts of the US that will become uninhabitable during our lifetime (all examples from the past week or two), and it comes rushing forward. 

The panic quickly makes room for guilt and anger. Guilt about the areas of my life where I am personally responsible; guilt for spending my time working on nonsense when I could have been doing something more productive. 

The anger is typically directed at the many, many parts of society that have obstructed, denied, and generally acted in self interested, short-term focused ways when what’s needed is cooperation, acceptance, love, and a collective attitude. 

I begin to approach acceptance and resignation. After all, if simply masking up during COVID was too much of a hit to personal freedom, why should we expect people to accept far greater sacrifices in the near future? 

But before I get there, I take a sharp left turn towards optimism. 

Why? The topic of today’s post has a lot to do with it.

Jason Jacobs of My Climate Journey has been learning in public about the climate situation for over two years now. He’s published over 200 episodes of the My Climate Journey podcast, where he interviews experts on various domains of the climate world, runs a community of over 1,500 passionate, dedicated folks from all domains looking to maximize their impact, and has recently started investing in climate tech startups out of his new fund. 

As I was preparing to leave Amazon (the first time) I was eager to have an impact on the effort to curb climate change. That’s when I first encountered Jason’s podcast. What struck me most was that he wasn’t that different from me: he was also a tech guy (albeit seemingly far more successful up to that point in his career) with no real background in climate. The main difference was that he walked the walk. 

I had the honor of chatting with Jason for this piece—you can check out our conversation on Spotify, Apple Podcasts, or wherever else you download podcasts!

Many people like me get stuck—not just in climate work but in any new endeavor—during the planning phase. Thinking, plotting, optimizing. Our instinct is to take the absolute perfect step in the precisely correct direction. This is of course mostly impossible when you know close to nothing about a field. It’s far better, if more difficult, to take an approach like Jason’s. 

In lieu of deciding where to take specific action, he simply set out to learn, and trusted that eventually he’ll have an impact. Luckily, he found that people were eager to teach!

What started as an exploration of various climate related topics organically turned into an emerging organization that can’t be easily categorized and has a unique and powerful flywheel that is propelling the company to new heights every day. 

Before we get into My Climate Journey’s past, present, and future, let’s set some context on the current climate situation. 

Major caveat here: I am extremely not an expert on this topic. I’m just presenting some very high level, basic information that—to my knowledge—is considered indisputable. If you want much more thoroughly researched information on climate (with a specific bent on the business and economic impacts), some of my favorite reads are Climate and Money by my friend Owen Woolcock, and Climate Tech VC.

Climate Change 101

Climate science is pretty complex. There are countless factors and systems and models in play. But the central idea of climate change can also be summarized with some relatively simple language: the amount of greenhouse gases that are emitted and enter the atmosphere (inputs) directly impacts the degree of warming (outputs), leading to a variety of impacts. Let’s look at each of these three:

Inputs

The primary input to climate change is emissions of greenhouse gases (GHG). Carbon is typically used as a shorthand for this because over 70% of global GHG emissions are carbon dioxide (and over 80% in the US).

When too much carbon is burned and enters the atmosphere, it can have a heating effect on the planet. The carbon creates a greenhouse effect (hence the term ‘greenhouse gases’), which means it prevents heat from escaping the earth’s surface as it might normally. 

As of 2019, the main contributors to carbon emissions in the US were the combustion of fossil fuels for purposes of transportation (35%), electricity generation (31%), and ‘industry’ (16%), which is a catch-all term for emissions that take place at factories that produce the various things we consume every day (source).

Another important input to climate change is the degradation of natural resources, like forests, that serve to remove carbon dioxide from the atmosphere. 

So more carbon burned + less carbon removed = a lot more carbon in the atmosphere. How much more? This much more:

Atmospheric carbon is measured in a parts per million (ppm) metric. As far back as the models are able to go (dating back at least 800,000 years), atmospheric carbon oscillated between 180 ppm and 300 ppm. Atmospheric carbon has been on a steady uphill climb ever since industrialization, and in the 1950s, the carbon level shot through that historic ceiling. In 2016, we passed 400 ppm for the first time, and we’ve shown no real signs of slowing down yet (source).

Zooming in on just the past 60 years or so, we can more clearly see the upwards trend (source). Reportedly, carbon emissions are on such a tear that Tiger tried to give it a term sheet.

There is some good news: according to the Global Carbon Project, we are indeed starting to slow down our rate of new emissions added to the atmosphere (even adjusting away the impact of the COVID slowdown). It’s a step in the right direction, but even emitting a bit less than the prior year still means we’re emitting a ton of stuff into the atmosphere. 

Outputs

The direct result of this historic rise in atmospheric carbon is increasing surface temperatures. If you’ve paid any attention in recent years, you’ve surely noticed the increase in ‘hottest month/day recorded’ alerts popping up on your Twitter feeds.

 “According to the 2020 Global Climate Report from NOAA National Centers for Environmental Information, every month of 2020 except December was in the top four warmest on record for that month”, says climate.gov’s recent report on global temperatures. 

In another crazy stat, NASA states that 19 of the warmest years ever (or at least since record keeping began in 1880) have occurred since 2000.

NOAA publishes a monthly climate change report, and in its most recently published one (May 2021), it shows monthly temperature variations above the 20th century average: 

Despite some noise and random variation, the trend is clear: things are getting hotter pretty fast. 

The only question remaining is what trajectory we’re on. This fantastic 2017 report by the Yale School for the Environment talks about various possible scenarios for the future. Regardless of what happens in the future, a certain amount of warming is already locked in because carbon stays in the atmosphere for a very long time. But beyond what we’ve already emitted, the rest is up to us.

The chart below visualizes various scenarios based on emissions levels, and what that translates to in terms of degrees of warming. The scary red line at the top represents what might happen if emissions grow in an unchecked manner; the blue line at the bottom shows a “best case scenario” of sorts, if we are able to achieve close to zero net emissions by later this century.

This illustrates that although the problem is already here, the future is still in our hands. 

Impact

Climate Change (capitalized to allude to the big hairy issue of climate change as discussed by policy and otherwise serious people, as opposed to the general scientific and factual concept) is typically discussed in Celsius degrees of expected warming relative to a historic benchmark. 

One thing that always struck me as odd is that the variations seemed really small: 1.5°C has been discussed as management, 2.0°C as crisis, and 2.5°C as completely catastrophic. I never totally understood how a half a degree (or even one degree) could make such a huge difference. 

Then I learned that these temperatures are global temperatures across an entire year. Below is a great graph that illustrates how even a small increase in average temperatures wildly increases the maximum temperatures we expect to see (source): 

With more hot and extreme hot weather, a lot of bad stuff happens. Aside from an increase in deadly heat waves, sea levels will rise, hurricanes will become more intense, and our ability to reliably grow crops will change (among many others). As this happens, more places on earth will become uninhabitable, leading to mass migration challenges (something we’re not particularly good at as a global community). 

So while the eventually outcome of this story is still in our hands, the stakes couldn’t be higher.

I share this context not to scare anyone; rather, I think writing this does a few important things: (1) it helps me set a baseline of understanding for myself and readers; (2) writing this helps me process something with which I often struggle to come to terms, and most importantly, (3) it sets the stage for how My Climate Journey fits in to all of this.

How to Fight Climate Change

Here’s how to fight climate change in 3 easy steps. 

Just kidding.

This is not an issue where 1 or 2 things need to go right in order for us to solve it. Rather, there are dozens or hundreds of changes that need to be made in order for us to properly tackle the problem. 

One of the best resources I’ve discovered as I started to explore this topic is Project Drawdown, which published a super thorough and detailed book in 2017 exploring a framework for tackling climate change. At the time I first read it, I didn’t completely understand most of anything I read in there. To be honest, if I read it now I still wouldn’t grok much of it. 

What I took away instead is how multi-faceted a problem this is. In this table of solutions, you can find the very specific potential each of over 100 potential solutions has to reduce emissions. 

What this tells me is that:

1. It’s going to take a massive, global, collective effort across dozens of industries.

2. We’re going to need governments, the private sector, and us as individuals all to do our part. Nobody gets a pass here.

3. Doing something is a lot better than doing nothing; that said,

4. Doing small somethings needs to lead to bigger somethings. I was at Costco recently—the land of waste—and noticed they served their soft drinks with compostable straws. This is a good example of something being better than nothing but also not nearly sufficient.

It seems to me that there are two broad ways to “do something” about climate change: (1) you can choose one of the topics on the solutions table and find a job, start a company, or change your lifestyle in a way that’s aligned to what’s needed there; or (2) you can help unlock #1 for other people. 

My Climate Journey is the ultimate unlock for people looking to find their swimlane. 

My Climate Journey

The first thing you’ll notice when you meet Jason Jacobs is his high energy and infectious optimism. When I think about climate change, my mind immediately goes towards pessimism; I hear optimistic people, and I wonder whether optimism is warranted. Not Jason. 

When we talked, I asked him whether climate optimism is warranted, and he effectively dismissed the question (as respectfully as possible) as something only people who aren’t working on the problem worry about. His attitude is that if you are busy doing something about it and leaving it all out on the field, you don’t have as much room for anxiety about the problem. 

And when it comes to people “doing something” about the problem, few are more inspiring than Jason. 

Jason’s previous experience was as an entrepreneur: he started RunKeeper, one of the first run-tracking apps, and sold it to ASICS in 2016. As he was exploring his next move, the seminal Special Report on Global Warming of 1.5 °C came out, basically saying that we’ve officially run out of time. This freaked tons of people out, including Jason Jacobs, and he decided to make climate change the focus of his next chapter.

At first, he went into exploration mode. He started reading papers and articles to wrap his head around the issues. When he had a question or wanted to double click on something, he would email the author of a paper; to his surprise, people not only responded but they were enthusiastically excited to chat with a beginner. 

Eventually he started publishing notes from these conversations in an email newsletter. Over time, people started asking if they could listen to the conversations he was having. Thus the My Climate Journey podcast was born. In each episode, Jason interviews one climate expert in a specific domain, and basically asks questions as a beginner does. 

After a while, the podcast attracted a community of listeners who organized events and crowdsourced ideas for the podcast. The community grew into a paid Slack community over 1,800 people deep. I personally joined in summer 2020 after quitting Amazon the 2nd time, this time much more determined to make progress on meaningful problems. 

Despite my massive imposter syndrome, I managed to chat with some incredible people working on the fight against climate change through the MCJ community, including investors, founders, and scientists. Beyond just my own experience, hundreds of people have successfully been hired, found cofounders, sourced investments, and otherwise paired with like minded collaborators via the community. 

One happy accident of the bustling community was the front row view Jason and his growing team had for the best, emerging climate-related startups. This resulted in the MCJ Collective, which launched in October 2020 and is now onto its 3rd fund.

The Flywheel

In a first for The Flywheel, there is no hand drawn flywheel for this post. That’s because when I first connected with Jason earlier this year, he sent me the above graphic depicting the MCJ flywheel. He insists that the structure of MCJ was not premeditated but rather a series of organic steps that he simply paid attention to. Either way, this flywheel describes where MCJ is now and how it may continue to grow in the future:

Content -> Community 

The podcast (and potentially other content channels in the future) is the top of the funnel for MCJ. I, like probably most other community members, heard about the community from the podcast itself. MCJ is one of the top climate podcasts out there and as interest in the issue continues to grow, so will MCJ’s listenership.

Community -> Capital

The community is an organic, untamed beast full of energy. As founders, investors, and industry experts come together in the MCJ community, the result is dealflow, new company formation, and investor sourcing. 

Capital/Community -> Content

Both capital and community flow back to make the content better:

Capital

As MCJ started investing in startups, a new podcast series was born: the Climate Tech Startup Series, where Jason deep dives one company to highlight their story and amplify their reach. 

Community

Before every episode, Jason crowdsources questions from the community. Furthermore, Jason sources interview subjects from the community as well. As the community grows, Jason’s ability to deliver high quality content more easily will continue to improve. 

The Future

Your guess is as good as mine about the future of climate change. But I find people like Jason Jacobs and organizations like MCJ to be extremely inspiring, because it proves that you don’t need to be a deep climate expert to make a big dent in the problem.

MCJ is going to continue to expand and grow in unpredictable ways, but they have a fair shot at becoming:

• The best evergreen resource for learning how one can get involved in the climate battle;

• The best community for people actively exploring or working on the issue; and,

• A leading VC firm focused on climate tech startups

They are deploying $10 million per year into Climate Tech startups with a portfolio of nearly 30 companies already, and it would not surprise me to see both of those numbers 10x in the next few years.

No one person is going to solve climate change; it’s going to take a collective. It’s going to take a community. And my money is on MCJ to be one of the best, most influential communities as we look ahead to the future. 

If this piece has gotten you fired up to get involved, I recommend the following resources:

My Climate Journey

This article gave an overview, and I highly recommend going deeper. The podcast is a fantastic resource to start learning, and if you are motivated to go deeper, I highly suggest joining the community. 

Another great way to have impact is to invest in companies so they can have impact. If that sounds interesting to you, check out MCJ Collective, the rolling fund described above.

On Deck Climate Tech Fellowship

If/when you decide to take the full plunge into climate work, the On Deck Climate Tech fellowship is a fantastic way to jump with both feet into the pond. The program is equally good for climate experts and business/tech folks, with a general philosophy that each side needs the other for the best ideas to come to fruition. 

The 2nd cohort just kicked off this week (and I’m in it!), while applications for subsequent cohorts are already open on a rolling basis. Candice and her team are building a world class experience for people who are serious about committing their time to this battle. 

That’s it for today’s edition of The Flywheel. Thanks a ton to the Foster community for helping out with this one. Let me know what you thought of this piece by clicking one of the links below👇🏼.

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Today’s piece is a specifically US oriented piece about a very American ritual: Tax Day. For the ~25% of you who live outside the US, I know you’re laughing at us, but do you have to do it so loudly? Onto the article..

If you’re anything like me, this is approximately what your annual tax journey feels like:

• Late February, the looming tax deadline enters my consciousness, and I wonder why our taxes are so complicated. I get preemptively anxious about the entire process. I think to myself: I should do my taxes early this year. 

• In March, I recall the Planet Money episode I loved about how TurboTax has opposed making our tax code simpler for decades, and get angry at TurboTax and its parent company Intuit. I vow not to use TurboTax this year.

• In early April, I research alternatives, and I remember that one, truly awful year I tried H&R Block. I forget why I was reluctant to use TurboTax.

• On April 14th, knowing I left it too late, I just go for it on TurboTax. I’m greeted with “welcome back, Jacob, for your 7th year with TurboTax”. 

• Before the process starts I calibrate: is this a refund year or an extra tax year? Either way, $129 seems like a fair price to be done with taxes within the next few hours. 

• Do I need audit defense? I probably need audit defense. Another $40. 

• Submitted! Feeling a weird mix of relief and..is that pride? Patriotism? Weird. OK, that could have been worse. TurboTax? Pretty slick product.

• Forget it ever happened…until next year.

I’ve been in this cycle for the past 10 years, give or take. But this year, I have The Flywheel, and I fully intend to use it. 

In today’s piece we’re going deep on taxes. Sounds fun, doesn’t it? We’re going to look at how Intuit took the US taxpayer hostage, how it has entrenched the system so that the status quo remains in its favor, and what a potential solution might look like. By the end of this, my goal is that we’ll all be rage-doing our taxes together. 

To understand what this is all about, we need to go back almost two decades and give some deep context on a public-private initiative that is at the center of the individual tax-debate in the United States: Free File.

Free, Free, Free, Free, Free

Our story begins back at the turn of the century. And by that I mean the turn of the millennium, when the government was starting to ponder how it might digitize its services. Think dotcom boom, the internet becoming as a thing, and new possibilities emerging.

Before the internet, people had to mail their tax returns to the government. Imagine the current process plus mail. Yeesh. So in 2002, the Office of Management and Budget (OMB) under the Bush administration tasked the IRS with creating a free, automated, and digital filing system that would help the tens of millions of Americans whose taxes are considered straightforward (i.e. income mostly from W-2 paychecks, and no itemized deductions) file for free. 

Thing is, the tax prep industry was a big business. Remember those physical boxes of TurboTax on the shelves at every Best Buy, Office Depot, and Walgreens? And Intuit, parent company of TurboTax, had a leadership position in the market. But suddenly a potential new competitor emerged that could bring down the entire business: the US government.

Conveniently, the IRS commissioner at the time became concerned that this digital overhaul was too difficult for a puny federal agency like the IRS. But the federal government was still interested in providing a way for Americans—especially lower income Americans—to file their taxes. 

Intuit seized upon this opportunity with a suggestion: in a noncompete that even the most aggressive FAANG lawyers would call daring, the IRS agreed to never compete with Intuit (and the rest of the interest) directly with its own tax prep software, and in exchange the industry would offer free tax services to poor Americans, under an consortium that is now known as the Free File Alliance.

Intuit’s biggest threat—that the government would provide a basic service to its citizens for free, as other countries do—was neutralized, at least for now. 

It’s notable in all the articles I’ve read that it just assumes that tax filing should be free for people with income below a certain level. I still haven’t found a good answer to why it shouldn’t be free for everyone. If you have any ideas about this, let me know!

Not so “Free File” Participation

A partnership in which free tax filing services are offered to those who need it most seems like a great idea. Let’s look a bit deeper at how it’s going. 

For its part, Intuit thinks it’s working great: “Free File has been a successful program and partnership that’s benefited millions of taxpayers.”

They also market the crap out of it. Have you ever seen one of the hundreds of ‘Free, free, free, free, free’ commercials that have polluted our airwaves over the last few decades?

I guess it must really be free to file one’s taxes on TurboTax! 

Yet, most estimates show that only about 3% of Americans who are eligible to file for free end up doing so, and that over $1B is wasted by these—our poorest citizens—as a result. 

Let’s recap: Intuit said ‘don’t worry about creating tax prep software for your citizens, we got it, and by the way here’s a contractual obligation not to compete with us’, the IRS agreed, and now only 3% of eligible people are taking advantage of the offering. What’s going on here? 

Turns out, Intuit was a bit sneaky: they agreed to offer the service, but they were under no obligation to promote the service in any direct way. In fact, they went further. They deliberately hid the free filing service and instead pointed users toward its paid ones. 

But the commercial said “free” at least 20 times! Next you’ll tell me that 15 minutes actually can’t save me 15% or more?

The problem goes back to the beginning of Free File: in the agreement, the government dictated the eligibility rules only. In other words, they said ‘anybody making less than $X must be able to file for free on one of your sites’, but they otherwise left the implementation details up to private industry. The companies were free to encourage or discourage participation as they wished. And as companies who make money when people pay to use tax prep software, the incentive was clearly to discourage it.

Let’s look at two very deliberate tactics Intuit has employed to keep participation in Free File so low: (1) Dark Patterns, and (2) search result suppression.

Dark Patterns

I talked about Dark Patterns in my Robinhood piece, so I won’t go into much depth here. But Dark Patterns are powerful. In general, people are usually browsing sites and completing tasks on their computers with something less than 100% of their focus and attention. App designers have a lot of power to guide users via subtle suggestions towards whatever they decide is important.

Tax reform crusader ProPublica detailed some of the dark patterns built by TurboTax in its attempts to funnel free-file eligible taxpayers to their paid products. 

We started the process by creating the profile of a TaskRabbit house cleaner who took in $29,000. We entered extensive personal information. TurboTax asked us to click through more than a dozen questions and prompts about our finances...then we tried with a second scenario. We went back to TurboTax.com and clicked on “FREE Guaranteed.” This time, we went through the process as a Walgreens cashier without health insurance, entering personal information and giving the company lots of sensitive data.

In both cases—SORRY—not eligible for free tax filing with TurboTax. “It turns out that if you start the process from TurboTax.com, it’s impossible to find the truly free version.” I’ll reiterate: it is physically not possible to start on TurboTax’s home page and complete your taxes for free.

The article goes into more details, but the definition of a dark pattern is when an experience is deliberately set up to steer users away from what they actually want to do, and towards what the company wants them to do.

Is this deliberate? Is this just poor UX? Evidence seems to be that it’s deliberate. ProPublica got some quotes from former employees, that “dark patterns are something that are spoken of with pride and encouraged in design all hands”. Intuit in general invests heavily in UX (see ‘software’ section, below), so it seems unlikely that these were accidents.

If you’re not convinced yet, let’s look at the next set of facts:

Search Result Suppression

ProPublica continued its hard hitting series of investigative, Intuit journalism (if you’re wondering whether Intuit ever got angry about this series of articles, the answer is yes) by describing how Intuit injected code specifically to suppress its actually free service from Google search results. 

The code in question, which can be found in a file called robots.txt or in an HTML tag, has to be actively added to a site, as Intuit has done. It is typically used on pages that designers want to hide from the open internet, such as those that are for internal use only. Without that code, Google and other search engines default to adding a site to their search results.

“Robots.txt is a big ‘No, don’t go any further’ sign on the web,” Spool said.

The code on TurboTax’s Free File site says “noindex,nofollow” — instructions for it not to show up in search results.

The IRS eventually had to actually update the language of the Free File agreement in 2020 (18 years after the program started) to explicitly prohibit this type of behavior. I wasn’t able to find anything about repercussions faced by anyone involved.

ProPublica’s scathing history of this story summarizes the situation well: “Since Free File’s launch, Intuit has done everything it could to limit the program’s reach while making sure the government stuck to its end of the deal.”

How does Intuit’s active work to suppress usage of its truly free products feed into a flywheel? Let’s dive into it:

Intuit’s Dastardly Flywheel

Intuit makes billions of dollars each year by funneling people who would otherwise file for free into one of its paid services. It then turns around and uses that cash to entrench the existing system that allows them to earn said cash in the first place. Let’s take a deeper look:

Suppress Usage of Free

We’ve already talked about this at length, but it bears repeating: Intuit has a unique set of incentives when it comes to their business. They’ve entered into an agreement with the IRS to offer free tax filing and in exchange the IRS will not build and distribute its own free tax filing software.

The agreement doesn’t really define the word offer, though—at least it didn’t at first. The IRS seems to have relied on the good will of private industry. In reality, incentives tend to beat good will most of the time, and Intuit’s incentive couldn’t be more clear: limit the proportion of the population who files their taxes for free. 

Revenue

Intuit’s TurboTax revenue in 2020 was $3.2B (representing 42% of total revenue). We saw estimates above that Americans who were eligible to file for free still ended up paying an aggregate of over $1B for tax preparation services. 

We don’t know what portion of TurboTax’s revenue can be attributed to sneaky tactics that funnel free-eligible Americans to paying products, but it’s probably not negligible.

This massive influx of cash has juiced the stock price..

..and it has also allowed Intuit to build a pretty clever flywheel that entrenches it as the winner of this crazy game.

Free, free, free

First, Intuit spends a lot of money on marketing. In 2020, that figure was just north of $2B, or 26% of revenue. 

This leads to massive awareness for the vague idea that filing taxes could be free on TurboTax—just at the right time of year—but the reality tends not to match up as we’ve seen.

Software

Another key to Intuit’s success—to their credit—is they’ve built some pretty fantastic software. Their tax prep stuff really is good. It auto-imports all my accounts, it carries over everything it knows about me year over year, and it makes the process about as simple as it can be. 

They’ve managed to make completing one’s taxes almost (almost) fun, and it’s been well documented. Their product development is so good, that it makes people almost (almost) not question why it needs to exist in the first place. 

Lobbying

Finally, Intuit has a big lobbying machine that fights every possible threat to the status quo of tax filing.

I’ll admit that lobbying is not a topic I understand well. For one thing, I don’t totally understand why it’s allowed. For instance, there is this quote from Intuit that “like many other companies, Intuit actively participates in the political process”, and I know this is meant to be breezed over, but I truly don’t get why this is such a fact of life in the US. 

The other thing I don’t get about lobbying is why it’s so effective. When you look at the details of lobbying, it more often than not tends to amount to a lot of small contributions–$3,000 here, $800 there—and yet the impact seems to be far larger.

Despite my lack of understanding, the simple fact is that lobbying is a part of our process and it is effective. Intuit is one company who uses it to its full effect. In fact, Intuit lays out an annual strategy each year to combat government ‘encroachment’—in other words, stopping the government from simplifying the tax code and offering better services to its citizens. 

The Planet Money episode discusses one specific example of a successful test in California of a return-free filing system—I highly recommend listening to it. In addition to more formal lobbying, Intuit has also implemented nefarious grassroots campaigns to get various minority groups to become anti-return free advocates. 

There’s one more salient fact worth mentioning about Intuit’s success influencing policy: there appears to be a revolving door between the IRS and the tax prep industry executive ranks. Intuit’s recent Chief Tax Officer used to be a director at the IRS. About a decade ago, the IRS hired the former CEO of H&R Block to be its deputy commissioner. 

A cursory LinkedIn search shows 22 people who used to work at the IRS and now work at Intuit and 10 people in the vice versa situation. 

I’m not sharing this to out anyone or even to call Intuit out as an egregious offender. I’m pretty sure this is all relatively standard practice in the US.

But I do think it’s worth pointing out as a case study, because if we’re thinking about things from first-principles, it’s not clear that the system as is makes any sense.

Bye Bye, Tax Returns

If we’re sufficiently fired up at this point and wondering ‘what’s the solution to this problem?’, fear not. A visionary leader described in detail a very reasonable alternative to our current system:

“We envision a system where more than half of us would not even have to fill out a return. We call it the return-free system, and it would be totally voluntary. If you decided to participate, you would automatically receive your refund or a letter explaining any additional tax you owe. Should you disagree with this figure, you would be free to fill out your taxes using the regular form.”

Pop quiz time: which politician do you reckon said this quote, and when?

While you’re pondering, some more facts: it was estimated in 2016 that Americans spend 2.6 billion hours and $98 billion doing their individual taxes each year. Just to be clear, that’s doing taxes, not actually paying taxes. There are approximately 143 million taxpayers in the US, and so this averages out to about 18 hours and $600 per person. 

Back to our pop quiz: who is the visionary leader who imagines a bold future where this burden is lifted from our shoulders?

Any last guesses..?

That’s right, it was the Gipper himself, conservative legend Ronald Reagan, all the way back in 1985:

Modern day politicians like Elizabeth Warren are still beating the drum, proposing bill after bill to remedy the situation:

“Taxpayers waste too many hours and hundreds of dollars on tax preparation each year, which disproportionately burdens low-income and minority taxpayers," Senator Warren stated. "This bill will require the IRS to offer easy, free, online tax-filing for all taxpayers. This is a simple idea with a long history of support from both Republicans and Democrats, and it's time to make it a reality.”

Return free filing has broad appeal for a few obvious reasons:

The IRS is already doing this work

When you submit your tax return, the IRS checks it against its own records and can automatically trigger a notice that you under- or over-paid your taxes (I learned this the hard way a few years ago). 

How does that work? From VOX:

The actual work of doing your taxes mostly involves rifling through various IRS forms you get in the mail. There are W-2s listing your wages, 1099s showing miscellaneous income like from one-off gigs, etc. To fill out your 1040, you gather all these together and copy the numbers in them onto the 1040 form. The main advantage of TurboTax is that it can import these forms automatically and spare you this step.

But here's the thing about the forms: The IRS gets them too. When Vox Media sent me a W-2 telling me how much it paid me in 2017, it also sent an identical one to the IRS. When my bank sent me a 1099 telling me how much interest I earned on my savings account in 2017, it also sent one to the IRS. If I'm not itemizing deductions (like 70 percent of taxpayers), the IRS has all the information it needs to calculate my taxes, send me a filled-out return, and let me either send it in or do my taxes by hand if I prefer.

If the IRS is already calculating how much tax you owe, then why should we be spending all this time and effort to duplicate that work?

Most other countries operate this way

I highly recommend a Planet Money episode from 2017 that first got me thinking about this topic. In the intro, there is a memorable interview with an Australian couple who don’t even know when their tax day is. As an American, it’s unfathomable that someone wouldn’t know that April 15th is tax day. 

But this is the reality in pretty much every other advanced country (at least 36, to be more precise), where they have a system where the central tax agency prepares tax filings for taxpayers. 

In general it seems rather obvious that the US has a suboptimal system that lags behind the rest of the world. The problem is clear and the solution is straightforward.

This is the power of a flywheel when used for evil—just as a flywheel can create totally new, amazing companies and systems and establish them as leaders for decades, it can also be used to establish and cement nefarious advantages as well.

Devil’s Advocate

I make a best faith effort not to look at things as black and white. In this case, while it feels pretty obvious to me that the situation is suboptimal and that there are bad actors involved, I wanted to understand if there were any good arguments against something like return-free filing, the consensus common sense alternative to our existing mess of a system. 

I found three common arguments:

1: Conflict of Interest

If the entity which is enforcing your taxes is also the one calculating them, isn’t that a conflict of interest? As an Intuit spokesman has said: “we empower our customers to take control of their financial lives, which includes being in charge of their own tax preparation,” he said, adding that a “government-run pre-filled tax preparation system that makes the tax collector (who is also the investigator, auditor and enforcer) the tax preparer is fraught with conflicts of interest.”

There are a lot of problems with this argument, but I’ll list four:

• The IRS already is calculating everyone’s taxes—in fact, that’s how they decide if you did it correctly or not. 

• Many other countries already do exactly this and there aren’t any real complaints. 

• Having for-profit companies dictate our tax policy seems to be a much more obvious conflict of interest.

• It can be opt out: nobody would require anyone to use a return free system. 

2: Sneaky Tax Increase

As discussed in Planet Money, tax policy influencer Grover Norquist (he of the famous pledge that has somehow ensnared hundreds of our politicians for years) has tended to side with industry, under the argument that if there is a return-free system, the IRS will manage to sneak in some additional taxes. Furthermore, it will disadvantage our poorest and least educated citizens who will be least likely to fight back. 

This argument might hold some water, but the fact of the matter is that Intuit already levying a de facto tax on the American public; I’d rather roll the dice that the American government would tax us according to its own laws, rather than whatever law a clearly conflicted for-profit company is advocating for.

3: A ‘teachable’ moment

This one really got me. Intuit and politicians it has lobbied have made the case that it’s important for tax day to be a burdensome event so that we can all have a ‘financial checkup’ once a year. Intuit’s own ‘tax & financial center’ put it well:

Preparing our taxes is our own financial checkup and a way to become more informed and empowered to take positive actions to ensure financial wellness. It’s a time to ask the tough questions that can make or break our budget or change the course of our lives. Are there job training or educational opportunities that can help grow my career and income? Am I contributing all I can and should for retirement? Should I open an education savings account for my children?

Funny, I must have missed those questions while I was filling out my taxes last year. 

These arguments are all at-best very weak. It seems clear to me that the only actual argument isn’t being stated explicitly: that if the US were to adopt a return-free system, Intuit would go out of business.

Future Outlook

There’s been a lot happening in this space over the past couple of years. A new bill—the Taxpayer First Act—was passed in 2019, and Intuit was lobbying hard to ensure it included a clause that would cement the Free File Agreement (which today is just a memorandum of understanding) into permanent law:

“Political donations and lobbying surely have something to do with this, as Intuit and H&R Block spent a combined $6.6 million last year on lobbying. But apparently it wasn’t enough — not for now anyway.”

The clause got killed, and the drama rolls on. 

More recently, the FTC opened an investigation into Intuit’s practices. The IRS appears to have been too conflicted, inept, or otherwise unable to reign in Intuit’s influence, but maybe the FTC can show up. 

Intuit, for its part, isn’t pleased with how much work the government is asking it to do:

The new FTC request “is incredibly burdensome” with “broad document demands,” wrote Intuit’s lawyers, from the firm WilmerHale. “And notwithstanding the new and unanticipated stresses of work in the COVID-19 environment, the staff seeks investigational hearings with at least eight different Intuit employees, and the CID includes a sixteen-topic corporate hearing notice that will require at least five Intuit employees to testify over several days.”

Hm..sounds like a lot of paperwork. Better get started early this year!

That’s it for today’s edition of The Flywheel. Thanks a ton to Tanya for helping out with this one. Let me know what you thought of this piece by clicking one of the links below👇🏼.

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The last few weeks have been a roller coaster for me. I was in a major car accident (things are fine! Just shaken up), and my startup (Swapstack) started getting some great traction. Suffice it to say, my publishing schedule became a bit irregular over the past month or so. Thanks for your patience, and I look forward to getting back to a more regular schedule in the coming weeks and months! Onto the article.

Million Dollar Newsletter

A tweet from this past weekend caught my eye:

I had already planned to write an article about the recent creator craze, centered around Packy McCormick, author of the Not Boring newsletter, as a case study. This tweet, though, sets up the story better than I could have in my own words. Cheers, Packy, for tweeting the perfect setup for this piece without realizing it!

The tweet is perfect because it summarizes the key takeaways from Packy’s story (which I’ll tell later in this piece!), and in turn the broader creator thing happening right now:

1. Successful creators can make a lot of money,

2. They can have fun while doing it; and,

3. They almost, almost, can’t believe they get paid to do this.

We’ll take a deeper look into Packy’s recipe for success, but first let’s give some context on the “Creator Economy” movement, which has been the subject of some major buzz recently.

The Creator Economy

In recent years we’ve witnessed the rise of platforms that enable anyone to publish and monetize content online. In contrast to the pre-internet era, when gatekeepers like newspapers, music labels, movie studios, book publishers, and magazine editors determined who would and could become famous, this new ‘creator’ era has shifted that power to the scrolling thumbs of the crowd.  

Regardless of the format, it is now easier than ever for enterprising folks to build an independent, online career. As Li Jin, one of the most prominent voices in this new economy, put it in her seminal piece on the Passion Economy: “Users can now build audiences at scale and turn their passions into livelihoods, whether that’s playing video games or producing video content. This has huge implications for entrepreneurship and what we’ll think of as a “job” in the future.”

Why? Probably a lot of reasons, but the main being that decade-long shifts in technology and society have led us here. Of course the internet is a core piece of it: as different business models have waxed and waned over the last two decades online, new methods of monetizing one’s own talents have emerged. In parallel, the idea of being ‘fulfilled’ in life has become mainstream over the past several decades. Getting paid is no longer enough; we strive for more in our daily lives than mere sustenance. 

COVID came along in 2020 (remember?!) and poured rocket fuel on these long-brewing trends. Suddenly, with lives and careers upended, priorities revisited, and time at home in abundance, more people than ever tried their hands at the whole creator thing. 

You might be wondering what, exactly, is a creator, as I did when I encountered the topic. The term is used loosely to describe anyone who publishes content online; and yet the term conjures up something far rarer, an artisanal quality that by definition isn’t accessible to everyone. When I hear the word creator I think of highly creative people like Lin Manuel Miranda, not someone who sends a few links in an email newsletter every week or so.

I was pleased to finally discover a definition that made sense to me, by Hugo Amsellem, in his excellent summary of the broader Creator Economy: “In a previous article, I argued that a creator isn't someone who creates but an individual who scales without permission. They are to the individual what startups are to the organization.” In other words, people who in eras past would have needed to go through a gatekeeper first. 

This economy that’s sprouting up around them is in full force these days. As Packy conveniently wrote in a recent, super meta piece on this topic entitled Power to the Person:

The Passion Economy just keeps picking up momentum, and it’s reaching a fever pitch. While TikTok, YouTube, and Instagram keep exploding, new entrants are joining the party with breathtaking speed. In the past month alone:

• Clubhouse raised its Series B at a $1 billion valuation and announced plans to let creators monetize directly from the audience through tips, tickets, or subscriptions.

• Creator finance platform Stir raised its Series A at $100 million (a16z led both Clubhouse and Stir).

• Substack announced that there are over 500,000 paid subscriptions on the platform, and that the top ten writers collectively make over $15 million.

• Twitter acquired newsletter platform Revue.

• YouTuber David Dobrik launched his photo app, Dispo, and it went so viral so quickly that it’s in talks to raise at its own $100 million valuation. (Read Divinations on Dispo).

• LinkedIn (LinkedIn!!) is building a service called Marketplaces to compete with Fiverr and Upwork to connect freelancers and hirers.

• Li unveiled her own $13 million early stage venture fund, Atelier Ventures, to invest in the Passion Economy (and instead of announcing in a major publication, she dropped the news in an interview in Lenny’s Newsletter).

• That’s just the past month, and the list goes on.

There’s a vibrant movement of people all over the world shifting their careers, lives, and mindsets towards the Creator Economy, which may be as much an attitude as anything else. Those adopting this attitude are certain they are a product for which someone will pay, and I think observers are right that this will have profound effects on what we think of as a ‘career’ in the coming decades. More and more, people coming of age will believe (rightly or not) they may not need to go work a regular job for a regular company. 

In many ways, I’ve been on this journey myself—quitting Amazon and starting The Flywheel and Swapstack (a direct result of my work on the newsletter) has been a shift towards the Creator Economy mindset. 

The Multi-SKU Creator

Hunter Walk coined the term ‘The Multi-SKU Creator’, arguing that most creators won’t make 100% of their income from just one source. Using Casey Newton, author of Platformer, as an example, Walk writes: 

“His beachhead may very well be a paid newsletter (it’s very good by the way) but the newsletter is just one SKU. Maybe the SKU he cares most about. Maybe even the SKU that makes him the most money. But it doesn’t have to be the only SKU. There could be a podcast SKU. A speaking fee SKU. A book deal SKU. A consulting SKU. A guest columnist SKU. And so on. And if he does several of these over the next few years, it won’t be about the success or failure of Substack (for him) but a mix of creative, economic and lifestyle goals.”

I think Walk is absolutely right about this, but it made me wonder how a creator should select which SKUs to offer in the marketplace. If I have a Substack newsletter, should I launch a podcast? Should I make a YouTube channel? 

Creators have taken a wide array of approaches. Lenny Rachitsky started with a paid newsletter, added a community on top of it, and is now starting to offer paid courses. Mario Gabriele of The Generalist started with a series of free publications, added a community on top, and only recently has shifted to a paid subscription model. Mario’s approach has been unique because he’s leaned heavily on collaborations with other creators to publish an astonishing volume of highly diverse publications under The Generalist umbrella, which is well described in his recent interview with Alex Danco.

And this is just for writers. Just one other example to illustrate the point from TikTok land:

I might be biased, but I believe that creators would be well served to consider their portfolio of SKUs as a flywheel. 

• Step 1: figure out what the core of your engine is based on your business model. 

• Step 2: add SKUs that (1) are uniquely made better by your core activity (writing/TikToking, etc), and (2) that in turn feed back into that core activity and make it better/easier/more compelling over time.

One of my favorite examples of a creator treating their SKUs like a flywheel is Packy McCormick of the Not Boring newsletter.

I chatted with Packy for this piece—you can check out our conversation on Spotify, Apple Podcasts, or wherever else you download podcasts!

Packy has been on absolute fire since he rebranded his newsletter to Not Boring in March 2020. Take a look at his subscriber growth since he basically went full-time on this thing (note: this screenshot is a couple of weeks old; Not Boring is now up to over 36,000 as of last publish):

For context, here’s the graph for The Flywheel, which is generally considered to be a pretty successful newsletter in its own right:

It’s one thing to have a curve that looks like western slope of Mount Kilimanjaro; to sustain it for 10 months and counting is quite another. 

Let’s dig in to Not Boring and the Packy McCormick flywheel:

Not Boring

What is it

Not Boring is a twice-weekly newsletter and angel investing syndicate run by Packy McCormick. The newsletter started sometime in 2019 under a different name (Per my last Email), and in 2020 Packy rebranded it to Not Boring. That’s when the fun began. It took a few months for Not Boring to find its voice; during that time, Packy experimented with different concepts like relating business concepts to those from pop culture. My favorite from this period was Packy’s essay about Hamilton and the potential for Disney to expand into education.

Towards late summer 2020, Not Boring’s essays got a little bit more serious, a little bit longer, and a little bit weedsier. Packy stopped worrying about what he thought would work, and instead started following his gut. In the process, Not Boring took off. I’ve already shown the subscriber graph, but it bears repeating. The Disney piece was sent to 5,000 people in July. His latest article about Jack Dorsey was sent to over 36,000 people. His readership has increased 620%+ in 8 months. If a startup had that kind of traction, it would be raising a unicorn round right now.

Not Boring has a few components:

• Monday articles: these are Packy’s patented deep dives. Intended to be broadly appealing, Monday pieces might be 7,000 words about the metaverse, or about why FAAMG stocks are undervalued. These pieces have huge shareability, and indeed get shared quite a bit.

• Thursday articles: these are reserved for a rotating selection of ‘alternative’ pieces, that fall into one of 2 categories: (1) investment memos on syndicate companies (more on this below), or (2) sponsored deep dives, in which a company pays up to $20,000 for Packy to break down its business and share it with 36,000+ smart readers.

• Investing syndicate: Packy launched the ‘Not Boring Syndicate’ through AngelList to enable his readers to invest alongside him in companies. We’ll dive into this in the flywheel section below, but Packy cleverly marries his content with his investments to gain advantages on both. 

• Packy’s twitter account: though not formally part of Not Boring, Packy leverages his twitter account (with an equally steep follower count growth curve) to great effect. He’s funny and entertaining—or, not boring—and nice, all at the same time. 

It’s worth noting that Not Boring is an extension of Packy’s personality. True to its name, the newsletter is indeed not boring. It stands out in the world of business analysis by virtue of its tone, vocabulary, self-deprecating nature, and informality. 

The Business Model

Not Boring has bucked the trend of subscription everything and instead is designed to be supported by ads. In an ironic twist, Substack—ostensibly Not Boring’s publisher—will receive exactly $0 from Packy’s work so long as he resists the temptation to turn on the paywall.

Packy sells ads, primarily focused on SaaS companies, with roughly the following rate card:

• Monday ad slot: $5,000 a pop

• Thursday ad slot: $3,000 a pop

• Sponsored deep dive: anywhere from $10,000-$20,000 for a full article dedicated to your company.

These are premium rates, and yet (at least according to Packy), no advertiser has yet regretted shelling out for a slot at the top of Not Boring. 

Let’s do some math: if Packy earns $5,000 every Monday, and $3,000 or $15,000 every other Thursday, alternating, then he averages $14,000 per week, just from selling ads in his free newsletter. 

As his subscriber count grows, so too will his rates, and we haven’t even discussed the upside he’s generating via his syndicate. This, folks, is how you build a million dollar newsletter, with even greater long-term upside. 

The Flywheel

I wanted to write about Packy not only because he’s an inspiration to other newsletter writers like myself, but also because his portfolio of offerings weave together beautifully. 

Packy is a better investor because of his writing, and he’s a better writer because of his investing. You can’t make up a better flywheel even if you tried:

The Monday Piece

The core of Packy’s flywheel is the Monday piece. These pieces are the crown jewel in Packy’s empire, the battery pack in his Tesla; these pieces are (rightly) shared en masse, and they fuel his obscene subscriber growth. 

Audience Growth

As Packy’s keeps churning out hit after hit on Mondays, his audience doesn’t stop growing. Packy’s really transparent about all this, and he starts every article with something like this:

Look familiar? Please notice that he added 2,105 subscribers from last week to this week. 🤯 , indeed.

As the audience grows, a few things happen:

1. Founders turn to Packy to tell their story

2. Sponsors want to work with Packy

Founders

As Packy put it in our podcast conversation, he gets access to deals he has no business being in, simply because he will share the story with over 30,000 people. It doesn’t hurt that he lays bare his thought process over many thousands of words, presumably building credibility as a thinker along the way. 

When founders approach Packy and they decide to work together, the result is a Thursday memo. In these pieces, Packy walks through how one might think through the prospect of investing in company X. 

These memos are similar in spirit to sponsored deep dives; they are a deep look at a company, its industry, and its outlook. Sponsors see this and think to themselves..I might want one of those about me.

Sponsors

Audience growth leads to sponsor demand. More Thursday deep dives leads to more sponsor demand. More sponsored deep dives lead to more founder memo demand. 

The kicker to all of this—what completes the flywheel—is how the Thursday memos and sponsored deep dives actually make the Monday pieces better. As a reminder, the Monday pieces are about topics that are in the zeitgeist, about big, famous, public companies. It’s hard to come up with something fresh to say about Amazon or Robinhood when everyone is writing about those same companies.

Packy’s Thursday work gives him an edge. He gets an inside look at how startups are approaching those very same industries. When he wrote about Robinhood, Packy had the benefit of his investment in Composer, access to its founders, and the memo he wrote about them. 

The Creator Middle Class

We’ve looked at the playbook that outliers like Packy are writing,, but what does this suggest for the rest of us?

One flavor of popular creator economy analysis centers around the creator “middle class”. This typically refers to the idea that, sure, people like Packy might be able to have outsized success, but generally speaking creator platforms report that the top [insert small number] percent of creators account for [insert large number] percent of revenue. What happens to the rest of the creators who aren’t at the very top?

Li Jin cited a stat in a piece she wrote for her former firm a16z, that “according to a study of nine digital platforms (including Etsy, YouTube, and Twitch), 17 million Americans earned nearly $7 billion in income from their independent creations in 2017.” Her point was that the creator economy is growing, but if you do the math, that’s an average of $411 per creator. 

Li is one of the thought leaders in this space—she recently left a16z to launch her own fund focused on creator economy companies—and she wrote the canonical piece about the creator middle class, and how platforms ought to think about enabling it.

I understand why platforms may want to establish a creator middle class—it’s not great for any platform to have its earnings concentrated in too few hands. Just ask Vine. Far better to sell the dream that anyone can make a living as a creator.

But what about from society’s perspective? Do we want everyone to be chasing a career as a creator? According to a creator economy rundown by VC firm Signal Fire, “more American kids want to be a YouTube star (29%) than an astronaut (11%) when they grow up.” Maybe this is fine, maybe it’s not. 

Yes, it’s true that anyone can become a creator, but I think the lesson from cases like Packy is that not just anyone can turn it into a successful career. It reminds me of how my mom—a successful real estate broker—talks about how many millions of people get their real estate agent licenses. As she says, “anyone can get a real estate license. Not everyone can do something real with it.” 

Like in real estate, it takes a combination of talent, personality, damn hard work, and flywheel-esque strategy that is extremely hard to pull off. Packy’s making it look easy, but he’s more talented than even he will admit. Is this a realistic standard—a realistic dream—to sell to everyone? 

Check out my conversation with Packy McCormick about all things Not Boring:

On Spotify

On Apple Podcasts

That’s it for today’s edition of The Flywheel. Thanks a ton to Tanya and Jake for helping out with this one. Let me know what you thought of this piece by clicking one of the links below👇🏼.

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If you liked this article, smash that like button and share with a friend! Let me know your take on Twitter here.

To read more about the Creator Economy and Packy's story, check out the full Flywheel piece about Packy and Not Boring here.

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Hi friends! There is no article today; instead, I wanted to share with you the extremely cool opportunity I had to meet Miami’s Mayor and Twitter phenom Francis Suarez.

Suarez has been all over tech Twitter recently recruiting tech and VC talent to Miami, and I couldn’t resist getting in on the fun.

I knew there was a slight chance the mayor would reply with a 40 Year Old Virgin GIF, but I was still pretty surprised to see it actually happen.

I grew up in South Florida and was already planning a road trip and lengthy stay at my parents’, and so the mayor’s reply set the stage:

Finally on February 3rd I met Mayor Suarez face to face in his office in Coconut Grove. We chatted about Miami’s flywheels, inequality, climate change, and how recruiting new tech talent to party in the city where the heat is on plays into all of the above.

We had about 20 minutes to talk, and I recorded the audio on my iPhone, but I hope you enjoy my conversation with Francis Suarez.

Listen on Spotify 🦻🏻

Listen on Apple Podcasts 🍎

Listen on Google Podcasts 🕵🏻‍♂️

Listen on Stitcher 🧵

A few other items..

Feedback Wanted

I have several article ideas and fantastic interviews lined up for the next 1-2 months, but beyond that the slate is clear. A couple of asks:

1. Feedback: I opened up a Substack thread where I’d really love your feedback on what you would like to see in upcoming Flywheel posts. You can also find me on Twitter or email me (a reply to this will do!) if you’d prefer.

   Feed Backy the Feedback Monster

2. Interview guests: if there is anyone you think I should be talking to about their company flywheels, send them my way! I’m looking to fill up the interview schedule for Q2 2021 and beyond and would love any suggestions or introductions you guys have.

Suggested Reading

A couple of newsletters I’ve been enjoying lately:

1. Climate and Money is written by my good friend and fellow Liverpool die-hard Owen Woolcock. Owen has done a lot of different things in his life—he’s been a diplomat, Googler, and even an Aussie-rules football physio—and combines his varied set of experiences with his current one as a researcher at Harvard to examine some very fundamental questions about climate change and the economy.

2. Brands Mean a Lot is a once-a-week commentary on the ways branding impacts our lives written by Jared Holst. Each week, he explores contradictions within the way politics, products, and pop-culture are branded for us, offering his take on what's really being said. Take a look at his recent post about how GoodRx, the prescription discount company, is anything but.

One More Thing

The Flywheel is supported by Juno.

One of the best things I did after I graduated business school was refinance my government loans with a private company. The lower rates allowed me to finish paying the loans way faster than I would have otherwise been able to, which I think has been a huge factor in my ability to quit Amazon and pursue serendipity on the internet.

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Juno is free for borrowers—they get paid by lenders when a member refinances, and they share a portion of that fee with the member in the form of a cash back bonus (up to $1,000). And if you use my link and refinance a loan, they’ll share a portion of the fee with The Flywheel as well!

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That’s it for this edition of The Flywheel. We’ll be back with a regular schedule of posts two weeks from today.

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🎧  In case you missed it last time, I launched a podcast! In fact, you can listen to my sweet, sultry voice reading this article if you prefer listening over reading. 

In the coming months I’ll be adding interviews with Packy McCormick, Jason Jacobs, Courtland Allen, and many more in addition to audio versions of my essays. Subscribe on Spotify, Apple, Google, Stitcher or pretty much anywhere else—if it’s missing from somewhere you use, let me know! 

Onto the article. 

[Disclosure: I started buying Twilio stock last year as I learned more about the company in preparation for this piece. I now hold a modest position in the company]

Undifferentiated, Heavy Lifting

Imagine you’re the parent of an extremely active toddler, like my 2-year-old nephew Abe. Between your job and the ‘times’ (play, bath, nap, bed), you also need to find time to keep your family well-fed and the house in working order. You could spend 2 hours a week at the grocery store, and another two cleaning every corner of the house. But that time has to come from somewhere, and—SHOCKER—your kid doesn’t care where the groceries come from. 

Alternatively—assuming you can afford it—you can schedule recurring grocery deliveries from any number of sources and even hire a cleaning person to tidy up your house. Voila! In 5 minutes you just saved 4 hours. This is a real-life example of undifferentiated heavy lifting (UHL), a term that describes a certain type of business. 

I first encountered this concept while working at Amazon, and its origins go back at least as far as the creation of AWS in 2006. With AWS, Amazon builds software where “each area is a career unto itself, doing poorly in an area will cause the entrepreneur to fail, and yet doing a competent job at each one is simply the price of admission”. In other words, the lifting is very heavy, but it doesn’t contribute to one’s differentiation.

Millions of parents opt for grocery delivery and cleaning services because what your kids really care about is the facetime they get with you, exhausted though you may be. But the UHL analogy to parenthood doesn’t map perfectly from the way it’s applied in the business world because it doesn’t incorporate fixed costs. 

Parents are actually just trading one variable cost for another, typically higher one. If they want to do their grocery shop in person one time, they easily can.

Companies who provide UHL—or at least the extremely successful ones like AWS—are valuable precisely because of the fixed costs associated with their service. Amazon invests many billions of dollars developing the infrastructure to sell to its AWS customers. If a customer decided—just this once—to buy and set up its own servers, it would be so much more expensive and less convenient than doing it through AWS, that the example itself doesn’t even make sense.

The Heavy Lifters

There’s a class of company that provides UHL that pretty much every company in the world needs. In a sense these companies are the fundamental utilities of the internet. 

Every company needs the ability to store, query, and access data (including their apps/sites and customer data), but increasingly few are willing to manage the infrastructure that it requires (not to mention the inefficiencies of paying for stuff even when you’re not using it) the way AWS does. 

Every company needs to receive payments, and many need to disburse them—few are able to invest in establishing relationships and ensuring compliance with regulatory authorities and banks all over the world the way Stripe has. 

Every company needs to communicate with customers over phone, text and email, but few are able to integrate with every telecom company in the world to make sure a phone call works anywhere a customer might live, the way Twilio has.

And even if they were able to, they shouldn’t, because their customers don’t really care.

These fixed-cost based UHL providers are especially valuable not only because they do the things others don’t want to, but also because they become increasingly hard to compete with over time. As they grow, they have a series of connected flywheels that increase the amount of lifting they can do for customers over time. 

These companies charge a small fee every time their service is used; turns out even a tiny fee adds up when a service is used trillions of times. AWS went from zero to $40B in revenue in ~15 years, and Stripe (which is still private) is rumored to be raising at a $100B valuation. But even at huge revenue amounts, profitability can be a challenge for UHL providers because of their unique mix of fixed and variable costs. 

Today’s piece is all about the one that gets the least airtime, at least of these three—my personal favorite—Twilio. We’ll explore Twilio’s background, its flywheel, and its long path to profitability. 

What is Twilio (hint: you already use it)

Twilio provides undifferentiated heavy lifting (UHL) around customer communication. Its roots are in telephony: Twilio’s early products allowed its customers—software developers at other companies— to place phone calls and send text messages with a simple API call. 

Twilio is possibly the company that people interact with the most without knowing they exist (apparently this was true even in 2014). In fact I can almost guarantee that each of you has used Twilio many times, even if you don’t realize it. When you receive a text to authenticate your account on basically any app, that’s probably Twilio. When Doordash texts you saying your order is downstairs? Twilio. 

Twilio was started by Jeff Lawson, who was an early Product Manager at AWS and a multiple-time startup founder before that. He realized that nearly every company—including his own—struggles to figure out how to call customers in a reliable way, and that there may be an opportunity to provide a different flavor of UHL than what AWS was setting out to. 

Twilio took off almost immediately, and it’s not hard to understand why. Before, if a company wanted to call or text its customers, they’d have to either hire humans to do it manually, or spend several years and many millions of dollars to set up the infrastructure to do so programmatically. With Twilio, any developer at any company can fire off a text for about 3/4 of a penny by adding code like the following into its workflow:

client.messages
 .create({
    body: 'This is the ship that made the Kessel Run in fourteen parsecs?',
    from: '+15017122661',
    to: '+15558675310'
  })

Twilio is part of a much broader trend towards application programming interfaces (APIs) that I won’t go too deep into in this piece, though suffice it to say that I’m big on the API train. In just a few lines of code, any developer in the world can execute previously unthinkably complex operations, accessing the collective development work of Amazon, Stripe, Twilio, and many, many others. Twilio’s own CEO, Jeff Lawson, recently published a book that goes into more detail on the history of the API economy that I loved!

As Lawson writes in Ask Your Developer, “Writing software that could interact with the telecom system turned out to be an insanely difficult challenge”, and it proved to be a challenge a ton of companies were willing to pay to avoid. 

As the world has shifted towards heavier and heavier mobile use, demand for Twilio’s products has only increased. Today Twilio boasts a market cap of nearly $60B (or 1.2 Pelotons) and has been growing its revenue YoY between 40% and 80% every quarter since it went public in 2016. Annual revenue topped $1B for the first time in 2019:

Twilio is growing both by acquiring new customers and by growing the amount existing customers spend. Customer net dollar retention—meaning the total spend by a specific customer compared YoY— has been above 130% almost every quarter since going public.

Twilio has several complementary flywheels that lead to more customers and—even more crucially given the business model—more usage from existing customers.

The Flywheel

I collaborated with Max Olson, Head of Product at Mashgin and author of Future Blind, on the Twilio flywheel—hence the beautiful drawing! Max has done a lot of thinking in public about flywheels in general and I’m excited to work with him on this and future pieces. He recently wrote a great piece exploring the idea of Tech Stacks in general that touches on Twilio as well that you should all check out. 

Brand

Although enterprise software companies are not typically known for their brands, Twilio is one of the exceptions. The more it's used, the harder it is for developers to think of anything else for this need. 

From a 2018 Twilio investment thesis from Heller House: “It is hard to overstate the energy and developer enthusiasm at Twilio’s developer conference this year; there is no other company doing anything close to what Twilio is doing in communications APIs. As Twilio grows and innovates into higher level APIs, and as its Super Network becomes more reliable and cost-effective, it’s possible that Twilio reaches a tipping point and captures so much developer mindshare and brand awareness, it gets to the point where “you can’t get fired for using Twilio.””

Switching Costs

Once Twilio is integrated into a codebase, it's costly (in terms of money, time, and trust) to switch to another provider. And we’ve already discussed how costly it would be for a company to build its own solution from scratch.

There’s a famous story about Twilio and Uber. Back in 2017, Uber was starting to get serious about becoming a public company, and it realized it was spending around $60 million per year on Twilio. With its new CFO, Uber decided to reduce its spend on Twilio and build its own communication stack in-house. When this was announced, Twilio’s stock took a beating temporarily but since then has taken steps to be less reliant on its biggest customers. 

Uber is the exception that proves the rule: if a customer needs to get to $60m in spend before they even consider switching away from you (and I’d love to hear if Uber would want a redo on that decision!), then you’re probably going to be retaining pretty much all of your customers. 

Economies of Scale

Twilio delivers such a massive quantity of text messages and other communications that its scale gives it enormous bargaining power. It can also spread its fixed infrastructure costs over more volume, leading to cheaper prices and potentially higher gross margins. We’ll dive into Twilio’s margin in the following section, but it’s interesting to note that Twilio appears to be using its scale economies to pass low prices on to customers. Fitting, given CEO Jeff Lawson’s Amazon roots. 

Cornered Resource

With so many customers using Twilio's core API, they have a unique insight into what it's being used for — in the form of data, product experience, and access to early adopters. This learning then leads to the creation (or purchase) of new products focused on these use cases higher up in the stack. We’ll see some examples of this later. 

A very Gross Margin

People are fairly bullish in general on Twilio, and the move in its stock price over the past ~12 months reflects that bullishness. 

But one major knock against the company (maybe the only one) is profitability. Twilio is not now and never has been particularly close to turning a profit.

To put Twilio’s gross margin into context, take a look at gross margin compared to some other well-known SaaS companies:

The Telecom Tax

Twilio’s gross margin is in the low-ish 50s, lower than these other companies, in most cases by quite a bit. And it makes sense: while these other companies are more-or-less pure software companies, Twilio has some “hard” costs to contend with. After all, when a text or phone call gets placed, there’s an actual, physical telephone line involved, and an entire telecom industry that maintains it. 

Twilio doesn’t break out what portion of its cost-of-revenue goes to telecoms, but it gives us a hint. In its most recent quarter, the 10-Q states: “In the three months ended September 30, 2020, cost of revenue increased by $80.2 million, or 59%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a $67.9 million increase in network service providers’ costs and a $8.9 million increase in cloud infrastructure fees, both to support the growth in usage of our products.”

In other words, cost-of-revenue went up by $80M, and $76M of that went to the telecoms and AWS. 

So Twilio keeps a smaller portion of its revenue compared to ‘pure software’ peers, and it also isn’t shy about pouring everything it keeps net of fees (and then some) on new product development. When Twilio filed to go public in 2016, Ben Thompson summarized Twilio’s financial picture as follows:

“Twilio isn’t quite a typical SaaS company: while the costs of revenue for a SaaS company are typically fixed, and thus benefit from leverage as the customer base grows, Twilio’s costs are mostly variable thanks to the payments it must make to telecom providers that actually implement Twilio’s services. To that end Twilio’s cost of revenue increased 80% last year, and 60% the year before; the company is gaining some leverage, but not much, and never will. Meanwhile, R&D — the other place to gain leverage — grew by 95% last year, which was even more than revenue.” In other words, Twilio doesn’t spend less per dollar earned over time, and it only increases the extent to which it invests in new products. 

The story has more or less stayed the same over the past 4 years. 

Path to Profitability

What might lead Twilio to profitability? In any given short term period, Twilio could mess around with pricing: for example, they could slightly increase prices (or not pass on savings to customers), or invest less in R&D. But given everything we know about Twilio’s history, that seems unlikely. 

The long-term answer is much more likely to be about expanding margin by adding product offerings beyond the core Twilio products—read, those that require relatively large payments to telecom providers—towards more ‘pure software’ ones. Twilio is already doing this in two categories:

Margin Expansion by Acquisition

In 2019, Twilio acquired SendGrid, a leading, API-based email provider. There have rarely been more obvious acquisitions than this one. Twilio’s mission is to make it easy for its customers to communicate with its own end-customers. Adding the ability for them to do so via email is a no-brainer. Maybe as important, email is less expensive than phone-based services. SendGrid gross margin was in the mid-to-high 70s shortly before the acquisition.

In 2020, Twilio made a more ambitious acquisition, this time of Segment, a customer data platform. Segment allows companies to better understand its customer data by stitching together inputs and outputs in a series of clever ways (I’d be irresponsible if I didn’t link out to Justin Gage’s primer on Segment—it’s an excellent piece, if you’d like to dive deeper). Companies today collect data from many sources, and send them to many destinations. Segment helps them standardize the data and combine it in a way that facilitates a more holistic understanding of customer behavior.

Twilio’s products (pre-Segment) have all been about outbound communication from companies to their customers. If a company wants to send a text or an email, there’s really no better way than to use Twilio. But the logic that determines when or why to send that text? Totally up to the company. Twilio waits to be put to work, and then executes its task faithfully. 

Segment adds what Rob Litterst of Good Better Best calls the Yin to Twilio’s Yang:  

"Put simply, the acquisition of Segment opens up a bigger-picture strategy for Twilio, allowing them to offer customers the dream of a holistic platform that can help them both understand and engage with their customers."

With Segment, Twilio can now offer its customers the ability not just to faithfully execute tasks, but to inform them. 

Acquisitions like SendGrid and Segment aren’t only about margin expansion, but you can bet that they were part of the calculus. Others are surely coming: Ben Thompson and others have speculated that an advertising acquisition would be a logical next step, as it would allow Twilio customers to traverse the entire customer journey (acquisition -> conversion -> understanding -> engagement) using only Twilio products, and any synergies the company could cook up accordingly.

Margin Expansion by Innovation

In addition to M&A, Twilio also has an incredible opportunity to package up the behaviors it observes from customers into new products. The best example of this so far is Twilio Flex: a product for call centers. In just a few lines of code, any company can spin up a call center. 

From Twilio’s Master Plan, again: “Twilio noticed that many customers were using its lower-level building blocks to build call centers. Why not do more of the heavy lifting on their behalf? This year, Twilio launched Flex, its call center API.”

It’s interesting to note that customers were already using Twilio to build virtual call centers. Twilio decided that they could enable a better customer experience if they offered the service directly. 

Twilio has also been launching an increasing number of ‘Solutions’, which are combinations of their existing APIs that represent common use cases. From Twilio’s 2019 10-K: “as we observe what use cases are most common, and the workflows our customers find most challenging, we create Solutions to bring these learnings to a broader audience. While developers can build a broad range of applications on our platform, certain use cases are more common.”

There’s some well-known product advice that goes something like “watch what unexpected behaviors users perform with your product—it often will surprise you”; Twilio is a great example of this in practice.

Closing Thoughts

I asked Twitter for the best bear case for Twilio. I didn’t get a ton of responses, and I’m going to choose to interpret that as ‘there aren’t a lot of bear cases for Twilio’. The responses I did get seemed to echo that sentiment:

The truth is that in my view, Twilio is in a rare category of company: they provide a product that almost every company in the world needs, and are on a path to realizing wider margins over time. On top of that, the stuff they do is just plain hard, and generally not worth it to developers to figure out on their own. And—though I haven’t talked much about competition in this piece—Twilio’s first-mover head start actually is a real advantage in this case as the flywheel demonstrates, in particular with the significant fixed costs involved with getting started in this space. 

Like its utility brethren, Twilio is on the path to being part of the no-brainer stack on top of which to build a company. While the financial profile of such a company might look different than others in the short term, the long-term vision is the key here. And even though Twilio has become a hot stock recently, analyzing its short term financial results in the context of that vision misses the forest for the trees.

That’s it for today’s edition of The Flywheel. Thanks a ton to Tanya, Max, and Mom for helping out with this one. Let me know what you thought of this piece by clicking one of the links below👇🏼.

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As part of this article I interviewed Bubble CEO Emmanuel Straschnov, and have published it as the first ever The Flywheel Podcast episode. You can listen to the episode on Spotify, Apple Podcasts, Pocket Casts, or Captivate (more coming soon). Please send me your feedback! You can do so by replying to this email or leaving a comment. 

Coding is Hard

Learning to code is hard. 

One must choose a language, scrounge for or buy resources, figure out which tools to download, find and set up a coding environment, identify projects they want to build, figure out how to deploy those projects, and—perhaps above all—get really, really good at Googling. 

‘Everyone should learn how to code’ became one of the rallying cries of the early- and mid-2010s. Barack Obama himself got in on the fun. 

In response came a wave of entrepreneurs offering coding bootcamps, promising that in 3 months they’ll teach you to code and land you a 6-figure job, all for the low price of ~$15,000. 

But learning how to code is hard. Coding bootcamps came under fire from the beginning, hit with lawsuits and complaints that the curriculum wasn’t preparing students for the workforce as promised, and that the price was therefore exorbitant. Perhaps it’s not surprising that Lambda School, the first coding bootcamp to show venture-scale promise, has an entirely different model (9 months vs. 3, income-share-agreement vs. pay up front) designed to better align incentives. And even Lambda School has not been without its own controversies. 

Learning to code is hard, and apparently teaching it in 3 months is hard too. 

Enter No Code

Coding has only become more important over the past decade, but the emphasis on coding bootcamps has abated.

There’s a new wave of companies betting that the next wave of ‘everyone will code’ will have a different flavor. In this version of the story, the ambition is generalized: ‘everyone will create software, with or without code’. In other words, one need not be a software engineer or even know how to code in order to create applications of value for themselves, their companies, or their customers. These companies are behind the emerging era of ‘no code’, an ecosystem of software that aims to bring this vision to life. 

People are using no-code tools to build everything from personal apps for their friends and family, to internal tools at large enterprise companies, and even to launch and scale startups. 

This nascent ecosystem seems to be thriving: while it’s hard to find industry data on adoption of no-code tools, partially because the definition can be tenuous, the VCs are certainly paying attention. Two darlings of the movement have raised big VC rounds over the past 18 months: Airtable raised a $185M series D in 2020 and Webflow raised a $72M series A in 2019. Another darling, Zapier, having mostly gone the bootstrapped route, is profitable with over $50M annual recurring revenue (this figure was estimated as of 2018, and so the true number could be 2-5x this). 

But there’s one company that seems to have flown under the radar: Bubble. 

Bubble was founded in 2012, and took almost 7 years to reach the point that the founder considers its real ‘minimum viable product’. That hints at the product’s complexity. In 2019, after reaching the MVP, Bubble raised a seed round of ~$6M. 

Compared to the other companies mentioned above, Bubble is not as polished, and has a much steeper learning curve. And given its funding history, has taken a lower profile compared to its peers. But Bubble is creating the programming language of the future—a visual programming language—and might just  represent the future of ‘everyone will learn how to code’ far more than any other so-called ‘no-code’ tool. 

We’ll get deeper into Bubble, its flywheel, and why I am so excited about its potential, but first a bit more background on no-code.

I chatted with Bubble CEO Emmanuel Straschnov for this piece and published it as a podcast episode! Click here to listen.

The Code Bundle

In a sense, one could say that ‘coding’ is a bundle of the following:

1. Structured logic: computer programs do exactly what the code commands, in the order that it commands it. Logic therefore reigns supreme, and coding rewards those who can solve puzzles using the most concise and logically elegant solutions possible.

2. Syntax: like with spoken languages, code syntax depends on the language chosen. For a simple example, the logic of these two code snippets is exactly the same. The syntax is not. 

   Javascript for-loop:

   let a = [‘foo’, ‘bar’, ‘baz’]
   
   for (i in a) {
     console.log(a[i]);
   }

   Python for-loop:

   a = ['foo', 'bar', 'baz']
   for i in a:
      print(i)

3. Tooling: search for ‘best IDE’ and you’ll see that there are millions of tooling choices developers need to make when embarking on their code journey. This is part of the learning curve for new developers as well. Even if you have learned the logic and syntax required, you still must find a place to write, test, debug, and deploy your code. This can be surprisingly difficult for the uninitiated.

There are other components: for example, Git (the version control paradigm that underpins GitHub) is a complex topic that is certainly required for anyone coding professionally, but these are the core components that are relevant to the discussion of code vs. no-code. 

No Code is a Misnomer

The term no-code is a misnomer. For one thing, even tools like those I mentioned above rely on knowledge previously reserved for ‘coders’. To use Airtable, Webflow, and Zapier effectively, one must have some knowledge of database design, CSS, and APIs, respectively. 

Furthermore, most, if not all, of these tools allow users to extend their functionality with code. Bubble, for instance, allows users to define custom APIs that unlock the long-tail of use cases that Bubble doesn’t support out of the box. 

But the real reason I think ‘no-code’ is a misnomer goes back to the coding bundle I described above. In the bundle, syntax and tools are merely conduits to express logic. No-code tools similarly allow users to express logic unencumbered by the need to struggle with syntax or tooling. Under the hood, computers don’t understand text code at all, they respond to currents that flip switches to either be on or off.  We invented programs called compilers that translate the human code into machine-readable code. Whether the logic is expressed via text or through visual representations is not actually that important given that context. 

Text code, no-code, any apps we use, these are all abstractions of various types. In fact everything in computers is an abstraction. An abstraction is a way to understand and/or interact with an idea without needing to understand all of the details. If I run a simple addition program on my computer using code, I don’t need to understand the inner workings of the circuits that handle the computation. As soon as people moved away from programming computers with punch cards the long project of abstracting away the low-level details began.

The task of making computers easier to control is the history of computers. And the haters saying 'that's not real' have also been there every step of the way . A look back at the history of software development sheds some light: when Grace Hopper created the first ever compiler in 1952 that could handle text that was not mathematical notation, she faced pushback: “I had a running compiler, and nobody would touch it because, they carefully told me, computers could only do arithmetic; they could not do programs.”

The idea that code is” stuff you type in” is actually an artificial boundary we've placed, and it appears that the boundary may be starting to fade away. 

All of this matters because logic is the truly fun and invigorating part of coding. No-code tools lower the barrier to creating software not because they are easier than coding, but because they allow users to focus on the most stimulating and intellectually rewarding part, and outsource the annoying stuff to behind the scenes. 

But not all no-code tools are created equal. There are many, very useful applications for tools like Webflow and Airtable. But it’s Bubble that I see as having the potential to represent the next leap for writing software. Bubble is not just creating a tool that can be used to build any kind of application, but they are also building a true programming language. It just so happens to be visual. 

Bubble: Visual Programming

I first started paying close attention to the current wave of ‘no-code’ after listening to an excellent IndieHackers podcast episode with Ben Tossell of Makerpad and Sahil Lavingia of Gumroad, but my history of tinkering with stuff goes back farther. 

One of my most formative career experiences was in my first (and only) year as an Associate at KPMG, when I automated a bunch of super manual work using VBA Scripts and Excel, saving hundreds of hours and providing me interview fodder for years. In my next job at a hedge fund, I built our entire trading business using Excel and Bloomberg’s built-in API. 

About two years ago, I caught the ‘everyone should code’ bug, and have spent hundreds of hours learning everything from Machine Learning to React. But despite my admittedly raw skills, when I wanted to quickly launch a project shortly after COVID hit in March, I experimented with no-code tools rather than carrying on with code. Eventually I discovered Bubble, a ‘visual programming’ tool, and haven’t turned back since. 

Bubble is a comprehensive web application development product. I have been referring to it as a ‘full stack’ no-code tool, because it contains everything one needs to build and launch a web-based project. Using the visual drag-and-drop editor, one may design the visual elements of each page; using the workflow tab, a user can define actions for every element on the page (or workflows to run in the background based on any number of logical conditions), and a fully-featured, built-in database. 

Anything that can’t be done through the hundreds of built-in tools Bubble offers out of the box can likely be done with one of the community created plug-ins. These are custom behaviors that anyone using Bubble can define and then release for public use. And if one discovers some behavior that cannot be done with the existing plug-ins, Bubble offers an API connector that allows users to write code—yes code!—to connect to any API in the world. 

Take my experience for example: while building my product, I discovered that some Stripe payment-based functionality that I wanted to enable wasn’t supported by existing Bubble tools. I wrote a custom API for it, and decided to offer it on the plug-in marketplace. I checked a few months later, and over 400 Bubble apps were using my plug-in. 

After years learning how to code, it hit me that Bubble is just another step in the evolution of software development. It’s not a no-code tool, but rather a new programming language, that has the potential to unlock the magical feeling of writing software to millions of new people. Folks who may not want the traditional code bundle for any reason could find both the intellectual stimulation and the usefully applicable skills of a software engineer in a tool like Bubble. 

The Bubble Flywheel

Bubble’s flywheel starts with use-cases: these are the features that are available in the app. For a simple example, a built-in feature in the Bubble workflow editor is ‘sign a user up’. A user can create a button, and easily define the action ‘sign a user up’ upon button click. If the app’s user clicks that button, a new user will be created and added to the app database.  

This is but one of hundreds (maybe thousands) of built-in use cases that come standard in Bubble. Because of the open-endedness and complexity, there’s a pretty steep learning curve. The Bubble onboarding walks users through 10 (!) distinct ‘app-building exercises’ before entrusting users with access to its first blank app. Emmanuel and team are actually proud of the learning curve; they believe it’s a reflection of the power of their platform that users need to invest some solid learning time to get going.

The learning curve contributes to the rich community element: Bubble’s forums are heavily used by Bubblers who share best practices, use cases, and offer support to one another. And there’s a symbiotic relationship between the community and the marketplace. 

When you can’t figure something out in Bubble, you turn to the forums first. Often, you’ll discover that what you’re attempting can be done with a 3rd-party plugin, and that the author of the plugin has a forum thread on your use case. If not, you might create your own plug-in, post about it on the community, and hope the next user who struggles with that use case will find you. 

Here’s the example I mentioned of the plug-in I created, and the users who have adopted (or attempted to). 

Everyone should learn how to Bubble

One thing that is often lost in the debate on whether people should learn how to code is that there are typically two very distinct and different reasons someone might turn to code.

First is for practical reasons: there’s a specific project that needs to be built, a specific problem that needs to be solved, etc. The decision then becomes what tool is best for the job. For people who don’t already know how to code, learning to code to launch a very specific project is likely going to be too slow. No-code fills the gap here pretty elegantly.

The other reason is for general learning, and to gain skills that might come in use sometime in the future. For this, coding is a wonderful endeavor. Given time (and usually some money), the idea of spending several months or years learning how to code is really compelling to young and old students. 

This is where I think Bubble has the opportunity to really shine. The fact that it tickles a similar part of the brain as learning traditional coding languages means that it can actually become something people learn before they need it. 

Techcrunch lays out the case that today’s children who are growing up on Minecraft and Roblox are going to become the no-code generation: “Take the popularity of platforms like Roblox and Minecraft. Easily derided as just a generation’s obsession with gaming, both platforms teach kids how to build entire worlds using their devices. Even better, as kids push the frontiers of the toolsets offered by these games, they are inspired to build their own tools.” 

As this generation of kids grows up, many will find their way to a CS major and a software engineering career; but many more will have the aptitude for it, the interest in it, but not pursue it for one reason or another. The no-code tools that are more analogous to programming languages may represent the perfect stand-ins for these millions of would-be developers.

In this sphere, nobody is even close to Bubble.

Today’s edition of The Flywheel was brought to you by No Code MBA:

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That’s it for this edition of The Flywheel. Thanks so much for reading. A huge thanks to Tanya, Kushaan, and John for helping out with this one.

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If you liked this article, smash that like button and share with a friend! Let me know your take on Twitter here.

I also wrote about the broader no-code movement and how Bubble fits in in The Flywheel newsletter. You can read that article here.

The end of the year is a great time to reflect. In this post we have two flavors of reflection: we’ll reflect on some of the companies I wrote about earlier in the year, looking at their more recent developments and how my arguments have aged as a result. 

But first, some more personal reflections about The Flywheel itself:

Reflections on The Flywheel

Tl;dr, I plan to take The Flywheel to the next level in 2021 and I could use your help. Please take 5 minutes to fill out this survey!

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This time last year I had recently left my job at Amazon, moved to Washington, DC, and was trying to figure out what I wanted to do next. 

On paper the story is more or less the same today. I am once again unemployed after, once again, leaving Amazon.

But life doesn’t happen on paper, and in reality my life has transformed a ton in 2020. The Flywheel has been a huge part of that transformation.

I won’t get into all the details here. If you’d like to learn more about my personal story, feel free to check out a recent interview I did on the Joseph Wells Podcast. Instead I want to briefly talk about where we’ve been and what’s next with The Flywheel.

The Flywheel in 2020

The Flywheel has been one of the most pleasant surprises in my life. I published the first piece on August 25th when my list had 6 emails on it (including my own). Writing was something I had thought about doing for a while, and publishing it was more about proving to myself that I wasn’t totally full of crap than anything else. The response has totally blown me away.

Since then, I published 7 more deep-dive articles plus 1 interview transcript, working up to a once-every-two-weeks cadence. My email list has grown to nearly 2,400 (and my twitter following to almost 1,300, all from basically 0), all with strong engagement (open rates exceed 55% almost every time—I’m told this is good for email).

Even more exciting are the less quantifiable things that have happened. I’ve met dozens of smart, kind, humble people who are becoming collaborators, clients, and friends. It’s given me the opportunity to rekindle connections with old friends, too. I didn’t start The Flywheel to become a professional writer per se; rather, I wanted to leverage the serendipity of the internet. On that measure, it’s been a smashing success, and now it has me thinking differently about my future.

The Flywheel in 2021

As I look to the future, I think of two main priorities for The Flywheel in the upcoming year:

Priority 1: Find the right balance of cadence, topics, and format

Thus far, The Flywheel has primarily been a series of long-form, company deep dives. While growth has been tremendous, I have found that momentum dips between my fortnightly publish dates. I want to publish more frequently, but am leery of committing to doing a full deep dive every week. 

So the goal is to publish more without burning out. To that end, I plan to get a bit more experimental in the first half of 2021. I have a few great interviews lined up, and am in the early stages of exploring some new collaborations as well. I have ideas for new formats (more interviews, guest posts, more ‘company X revisited’, etc), and I’ll rely on your feedback as I try new things out. 

Priority 2: Get serious about monetization.

I didn’t set out to make money from The Flywheel, but it does take a lot of work, and I don’t currently have another source of income. I’d love to spend more time writing more thoughtful deep dives—even if it isn’t a full time thing just yet—and financial support would enable me to do so.

Newsletter writers broadly have two options when it comes to monetization: paywall or ads. I am not particularly drawn to the paywall model, because I think it changes the expectations around the whole thing. I don’t want to say that I will never go that route, but it almost certainly won’t be in 2021. 

That leaves me with ads. Yes, the ad-based model of internet media has essentially broken the world, but my sense is that there’s a tasteful way to do it. My plan is to promote products I either use personally or otherwise have a personal connection to. I plan to also start offering companies the opportunity to pay to be featured in a full deep dive article about their flywheel. My pledge to you is that I will always be honest about anything I promote and how I’m getting paid. 

If you know any companies who might be a good fit for sponsorship, just reply to this post or send them this intake form. 

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I’m sharing because I want to be transparent, but also because I could really use your help on these fronts. I put together a 5 minute survey that will allow me to collect reader data and feedback. The feedback will be used to help accomplish priority #1, and the data will allow me to better attract advertisers for priority #2. 

If you’ve enjoyed The Flywheel, please take a few minutes and tell me about it here:

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Onto the end of year update!

Reflections on Previous Flywheel Companies

Every public company is required to disclose certain standard metrics, like revenue, cost of goods sold, net income, in its quarterly and annual documents. Most public companies also elect to define non-standard metrics: KPIs they might use internally as signals of progress. These secondary metrics are business drivers that are leading indicators to the more standard metrics like revenue and profit. For example, Peloton reports its number of Connected Fitness Subscribers every quarter. They don’t have to, but they do. 

One of my favorite things to track is the way companies discuss these metrics over time. I find it intriguing because in some boardroom at some point in time, there’s some multi-dimensional chess being played. When a company decides to include an internal metric for the first time, they’re signing up for Wall Street’s scrutiny of said metric. They better be pretty confident that they want to continue reporting that metric indefinitely, because the absence of that metric—or a rewording of how they describe it—next time will raise eyebrows.

And so it is that we revisit two companies whose Flywheel writeups centered heavily around secondary metrics. 

Peloton’s COVID Quarters

If you haven’t yet read The Flywheel #1: Peloton’s Food Network Opportunity, feel free to check it out for full context before diving into this update.

My earlier Peloton piece was published on August 25th, about two weeks before the company reported the results of its first full COVID quarter (from March-June, AKA its fiscal Q4). It has since also released its July-September (Q1 2021) earnings. 

As expected, results from these two quarters were massive. In both quarters, revenue was up around 200% YoY, and the company achieved profitability for the first time. 

In addition to these results, the company also had a major product launch: the Bike+, which features better speakers and a screen that now turns 90 degrees to the side. I suppose the theory was bike owners would be more likely to utilize the full suite of workouts available on the platform if the screen could turn even a little bit. 

From an investor perspective the Bike+ is notable because of its price: it’s an increase of about $200 from the original bike price, and demand hasn’t seemed to slow one bit. It’s a good sign that Peloton can increase the price with almost no impact to demand. 

Naturally, PTON the stock has been one of the year’s darlings on Wall Street. When I wrote the original piece the stock was already up over 100% YTD. Since then it’s only gone up another 200% or so. 

But there are causes for concern that are worth keeping an eye on as we head into 2021: (1) profitability has arrived but it might not be sustainable, (2) reliance on hardware, and (3) engagement question marks.

Profitability

As mentioned, Peloton experienced its first ever profitable quarter and then repeated the feat. Perhaps it’s not surprising that given everything going on with COVID that one of the hottest companies out there would find a way to spin up a profit. 

What is a little surprising—and a little concerning—is that profitability has seemingly come as a direct result of the company’s reduction in operating expenses (OPEX) spend, rather than some change in the product’s unit economics. Peloton’s OPEX primarily comes from sales & marketing and general & administrative. Both have been cut by about 50% relative to revenues compared to the previous year. 

Meanwhile, gross margin (i.e. the profit left after the direct cost of the bike or tread has been accounted for) has remained basically flat, around 40%, or even down (-6% YoY in the most recent quarter). I think partly this validates my claim in the original article that the standalone digital subscription is really not contributing much to the company’s bottom line. Digital revenues have a much higher margin than hardware, but subscriptions as a percent of total revenue are actually 30% lower than they were in the previous year. 

It reminds me a bit of DoorDash’s S-1, which I wrote about: if Peloton is only profitable because it slashed marketing spend during COVID, then that leaves the obvious question of what comes next. Not only are in-person alternatives going to become available, but the competition is also heating up. 

Hardware

That leads us to hardware. In the original piece I argued that Peloton needs to reduce its reliance on producing hardware hits and shift its focus to building social and other network effects and investing in its talent. In other words, it needs to build unique advantages that will allow it to sustain for decades. 

We’ve seen no signs that they’re listening to me. Instead, they’re doubling down on hardware. We mentioned the Bike+, but Peloton also announced a new, cheaper treadmill (supporting my speculation that treadmill v1 was a flop). 

Furthermore, Peloton announced a deal to acquire Precor, a company whose name you might recognize if you’ve ever worked out at a hotel gym. Peloton is acquiring Precor’s production capability and relationships with corporate customers. Peloton has a short term problem fulfilling customer demand, and Precor won’t solve that. The deal is only expected to contribute to fulfilling end customer demand at the end of 2021. It also won’t help it become the type of fitness platform it dreams of being. 

Back to competition: with Apple Fitness+ recently launched, and Lululemon ramping up its plans for Mirror, the competitive landscape is only getting tighter for Peloton. When CEO John Foley isn’t drinking water like a serial killer or jogging in his bathroom, I hope he’s thinking about more than just hardware when he worries about his user engagement. 

Speaking of which.. 

Engagement

Now we get to Peloton’s secondary metrics. In my original post, I mentioned Peloton’s ‘Monthly Workouts per Connected Subscriber’ metric, and how the fact that it was improving over time suggested the existence of a flywheel. I’ve updated the graph I showed there to include the two quarters since:

At first glance, this looks encouraging. YoY ‘monthly workouts’ continues to rise, and quickly. But it also raises some questions.

What’s actually going on here? Did people really work out 2x more in Q1 this year than they did last year? Or is Peloton seeing a larger share of multi-user households given the pandemic (the wording seems to suggest that this number is computed based on households, not users)? 

Maybe there’s a timing question: if new users are more engaged, then the fact that there have been a ton of new users might inflate the average. In that case, perhaps a cohort view would be more appropriate. 

That’s the thing with secondary metrics: sometimes they raise more questions than they answer. And the story Peloton is trying to sell us—that people are engaging more with Peloton as time goes on—hinges entirely on the answers to these questions.

The company is surely capable of producing this analysis on a per-user basis, or with a cohort view, and has chosen not to for some reason. It’s entirely plausible that there’s some unspoken stuff hidden inside of this metric, and that Peloton just doesn’t want us to probe too deeply. 

We’re already starting to see signs of both potential softness in engagement and Peloton’s manipulation of the storyline: if we look at the change between Q4 (March-June) and Q1 (July-September), we actually see a decrease of about 4 workouts per month. 

Peloton explains the decline as normal. In its Q1 2021 shareholder letter, the company writes: “reflecting typical seasonality, Member engagement eased modestly from Q4 FY 2020, but remained well above year-ago levels”. Reflecting typical seasonality? Really?

The previous ‘season’ saw a decline of 2.5% from Q4 to Q1. This time around, the decline was 16%. I don’t know why engagement declined this year, but there’s no apparent basis to call it typical or seasonal.

This is the danger of secondary metrics. Once you start reporting them, you kind of have to keep reporting them, even when they don’t make you look good. And if you try to use BS to explain them away, they’re easily caught by The Flywheel’s BS detectors. 

I don’t know whether Peloton is deliberately misleading us, or well-intentioned but delusional. But it’s one of those two, and neither is good news for the company moving forward.

Stitch Fix’s Short Squeeze

My Stitch Fix article was the first and only nakedly bullish piece I’ve written so far (aside from my piece on On Deck, a private company). In it I argued that the company was under-appreciated, and that it was in the process of establishing a flywheel that—with enough patience—would reward shareholders mightily. 

On December 7th, Stitch Fix reported its Q1 2021 earnings, and the stock shot up 40% the same day. Since then, it’s only continued its ascent, gaining another 40% or so for a total increase of almost 100% since my article.

It was hard not to gloat, and I got a bunch of ‘thank you’ texts from friends who bought SFIX after my piece came out.

But the truth is: it caught me off guard. My argument was that patience would be required for anyone believing in Stitch Fix, and yet here we were with the type of stock move that suggests the future arrived early.

Did I miss something in the analysis that made the company a slam dunk in the short term?

In its quarterly letter, Stitch Fix talked about the secondary metrics I mentioned in the article, and of course its primary metrics as well. Let’s recap:

Secondary Metrics

My Stitch Fix thesis focused heavily on the Fix success rate. Specifically, the fact that Fix success was increasing over time, I argued, was a proof point that the company’s data science machine was working. Moreover, I argued it will enable Stitch Fix to pour gasoline on the customer acquisition bonfire once it reaches a critical threshold of First Fix Success, i.e. the percentage of items kept by customers in their first interaction with the company.

Both of these secondary metrics are featured prominently in the latest quarterly report. First Fix Success (i.e. the percentage of first Fix’s that sold at least 1 item) approached 80%, the highest level in about 5 years—although SFIX doesn’t actually report this metric every quarter, so we have to take their word for it.

Re: overall success rate, the company states that it reached record highs in Q1 as well, without explicitly reporting a figure. 

Remember, companies aren’t obligated to report secondary metrics consistently. That’s what makes them secondary.

Stitch Fix doesn’t always report the numbers, and when it does it does so using different language. I am inclined to believe that withholding information is an admission of softness in that information. But we just saw with Peloton that reporting information consistently can lead to issues as well.

Damned if you do. 

Primary Metrics

For Stitch Fix, Q1 2020 represented a rebound from the COVID beating it took earlier this year. Revenue growth returned to double digits, and profitability rebounded to positive once again. All signs are that it has not only survived COVID, but that its long-term, data science backed march is back on track.

Is the bounce merited?

These results are nice, but they are aligned with my analysis—that Stitch Fix is a solid long-term bet—moreso than the idea that Stitch Fix hit an unexpected home run during this most recent quarter.

So what gives? Why would a stock pop 100% in 3 weeks on such a steady result?

The answer: short squeeze. It’s the only explanation that makes sense. Stitch Fix was until recently a favorite among short sellers (i.e. folks betting the price would go down). From Barron’s: “more than 37% of Stitch Fix shares available to trade are sold short—the average for a stock in the S&P 500 is closer to 2%”.

When Stitch Fix earnings showed the company’s resilience, short sellers freaked out and attempted to cover their positions. The only way to do that is to buy shares, which bid up the price of the stock.

Is it the most satisfying explanation? Maybe not. But we’ll take it.

The Flywheel is not explicitly an investing newsletter, nor do I advise anyone to buy or sell based on my articles. But I still believe Stitch Fix is a solid long term investment. This quarterly earnings only bolstered that opinion. And as happy as I was with the recent move, it is not a reflection of my argument coming to fruition about a decade early, but rather just a bunch of the haters shifting over to the good side.

That’s it for The Flywheel in 2020. Thanks so much for everything. If you’re reading but haven’t subscribed, you can do so using the button below. And let me know what you thought of this piece on Twitter.

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Today I’m excited to bring to you a Flywheel first: a special collaborative article. I co-wrote this piece with Sid Jha, a writer and friend who publishes a wonderful weekly blog called Sunday Snapshots every, you guessed it, Sunday. It’s well worth a read and—if you’re so inclined—a subscribe.

When lululemon acquired Mirror this past summer, the joke was that now lululemon customers finally have an overpriced mirror to go with their overpriced leggings. 

lululemon (yes, with a lowercase ‘l’) has become the go-to brand for much more than just yoga pants. Outerwear, work-pants, and of course, workout clothes of all types, for both men and women. And now the company is acquiring futuristic home workout tech companies. 

But it was not at all obvious that this is where the brand was heading, even as recently as late 2018. In fact, around 2014-15, the company was starting to stall out, its stock price was on life support, and its CEO was being ousted for fat-shaming women who didn’t quite fit into lulu’s overly tight customer segmentation.

If someone had told me then that my dad would be wearing lululemon every day, I’d have imagined a late-middle-life crisis involving yoga retreats in Bali. 

Since 2018, the company has been on a tear. It’s not often talked about as a turnaround story, but that’s exactly what it is.

In 2018 lululemon’s revenue growth rate exceeded 20% for the first time since 2012, and its market cap as a percentage of Nike’s market cap (a metric we invented) went from 8% in the middle of 2017 to 26% today. The chart below shows us the rise and fall and rise again of lululemon over the past ~10 years. 

In this piece we’ll explore how and why lululemon was able to achieve the success it’s enjoying today, and what the Mirror acquisition suggests about the future of the company.

The Power of Three

Unlike many other stocks that have done well in 2020, lululemon is hardly an internet-first brand. In fact, it is even older than one of the two writers of this piece. And while there’s no doubt people are wearing their home-clothes more frequently these days, the lululemon recovery predates COVID. Below is a chart of its stock price performance between 2014 and January of 2020:

So what’s behind the comeback? 

Management will say it’s about the “Power of Three,” its 5 year plan that was “unveiled” in 2019:

1. Product Innovation: Double the size of its men’s revenues by 2023. In addition, its plans call for continued expansion in the women’s and accessories businesses, in particular by offering more sizes for women of all shapes.

2. Omni guest experiences: The Company expects to more than double its digital revenues by 2023.

3. Market expansion: The Company plans to quadruple its international revenues by 2023. The Company’s recent success in its international markets demonstrates that the “sweatlife” translates across cultures and geographies and presents considerable growth potential for the brand.

One cannot find a statement by a lululemon exec since 2019 that fails to mention the Power of Three. Much like the “Conjoined Triangles of Success” by the fictional Jack Barker, the Power of Three appears at first glance to be mind numbing, corporate jargon at its most boring. 

Product innovation, omni-guest experience, and market expansion could be the growth pillars for almost any company in the world. If your corporate strategy looks like you copied and pasted it from Googling ‘best corporate strategies,’ it’s not a great look. But there’s something unexpected beneath the surface.

Omni-guest and market expansion are important to lululemon, but we think they’re not as interesting as the real key here: product innovation. Usually when a large brand talks about product innovation, they are referring to new colors of existing products, or new flavors of toothpaste. But in this case, lululemon is referring to a completely new customer segment: men.

lululemon’s ability to shift towards men (21% of sales were from men in 2019, up from about 0% in 2015) is the real key to understanding lululemon the brand, and provides a big clue towards the unstated rationale behind the Mirror acquisition. 

lululemon’s brand flywheel

In order to understand how lululemon was able to go from being the yoga pants brand to a brand that men of all ages turn to for work pants, we need to go back and understand what kind of brand lululemon built to start with. 

lulu the brand

The original image of lululemon is something as simple as workout or yoga clothes. 

Their incredible growth story has come from expanding beyond their core customer of yoga studio-going suburban moms to everyone from Jake’s dad who swears by his ABC pants to Sid’s girl friends who would not be caught dead in the gym without their black, red, and white tote bag covered with chic lettering.

It seems counter-intuitive. A young professional does not want to be associated with the suburban mom. And the suburban mom does not want to be associated with the young professional. But they both want to be associated with lululemon.

How is it possible? Classic business wisdom tells you something along the lines of “you need to have a coherent brand strategy” or “you cannot be everything to everyone.”

But somehow, lululemon really is a different thing for different people. It’s an incoherent brand. They are equally the go-to for women’s bras as they are for men’s slacks. 

They’ve done it by deemphasizing athletic performance and focusing on fit, comfort, and aesthetics. 

Let’s compare lululemon with Nike once more. Nike spends over $6B a year on athlete endorsements. The message with Nike is clear: if you want to hit a tennis ball like Serena, kick a ball like Cristiano, or Be Like Mike, you need to wear Nike. 

lululemon is different. Their corporate ambassador’s page includes mainly yoga teachers, but also musicians, meditation teachers, kayakers, and other generally cool, chilled out people. To the extent they do have representatives from popular sports leagues, it’s people like Chandler Parsons, an NBA player who hasn’t been a starter in the league since 2016. Hardly someone who’s athletic achievements little kids everywhere want to emulate.

And it’s not like this different positioning came at the expense of pricing power. Au contraire! Anyone who has shopped at lululemon has likely marveled at how the company has normalized spending $98 on yoga pants, $128 on casual pants, and $148 on hoodies. Compared to Nike, lululemon has enjoyed stronger gross margins (a good proxy for pricing power, especially for companies who sell physical products) for years:

lululemon’s flywheel

Every great brand communicates something very clear to customers: I will satisfy this need for you. lululemon deliberately positions itself as an amorphous product: you can feel great wearing its clothing, whatever that means to you. The need it satisfies is highly personal to each and every customer. 

In a piece about flywheelsThe Flywheel has referenced before, Max Olson describes a type of flywheel he calls the Brand Habit flywheel. In this flywheel, customers associate a brand with a specific value proposition based on the need it solves (with an assist from sticky marketing). As this association strengthens, customers increasingly stop searching elsewhere for a different solution and therefore purchase more frequently from that brand. In turn, this cements the association between the brand and the value proposition, like how people view Amazon and online shopping, Google and search, etc. 

The story is no different for lululemon and women’s yoga pants. lululemon created the category of yoga wear, and used a powerful combination of community marketing and functional, technical excellence to establish a dominant position in that market. It didn’t take long before of course you buy your yoga pants from lulu. This caused people to do more yoga, which caused more people to buy from lulu. As more customers purchased from lulu, they could invest more and push the boundaries of athletic wear, inventing new fabrics and styles that met the customer needs even more effectively. 

What’s unique about lululemon that other powerful brands, say, Coke couldn’t achieve, is that they were able to expand to adjacent and increasingly unrelated products without hiccup, and without changing the brand. It’s not unusual that lululemon attempted to go after men. It is unusual that lululemon went after men under the lululemon brand, with lululemon stores, and without sacrificing its core lululemon business. The name is lululemon for pete’s sake!

They did this by being unspecific about the job-to-be-done of lululemon. The brand wasn’t ever about being the most technically sound yoga pants, but rather about being the most comfortable pants for anyone. With that positioning, it makes sense that the company was able to shift its target customer without hiccup. 

Let’s revisit the Power of Three corporate strategy: when lululemon talks about product innovation, they mainly are talking about men. We’ve shown why they have been able to appeal to men so successfully. But the Power of Three takes the company to 2023. What happens next? This is where the Mirror acquisition fits in. 

lulu x Mirror

After lululemon acquired Mirror in late June, the reactions fell into one of two camps. 

Camp 1: lulu’s weak attempt to become Peloton

This camp believed that the acquisition was merely a reflection of the times, a desperate attempt (and heavy overpay) by lululemon to capture its share of the sharp shift to at-home workouts spurred by COVID, perhaps even a lashing out at Peloton. 

There are a couple of problems with this narrative: first, Mirror’s previous valuation was $300 million, in a Series B that closed one year prior to the lululemon acquisition. Even without a COVID bump, a 60% increase in valuation from one round to the next is not outrageous. With the COVID bump, one could argue that lululemon actually underpaid. 

The other, more glaring, problem is that lululemon invested in Mirror shortly after that series B round in 2019. Clearly, lululemon had its eye on Mirror even before COVID.

The final nail in the coffin for this camp is that lululemon had, before Mirror, never acquired another company. It’s hard to believe that an experienced executive team would pull the trigger on its first ever acquisition essentially as a freak out in reaction to COVID. 

Camp 2: lululemon + Mirror > sum of their parts (AKA synergies)

This camp believes that the acquisition was a wise move by lululemon, but for all the sort of obvious reasons we might imagine—the classic ‘synergies’ that are salivated over in any notable acquisition. This camp suggests that Mirror can achieve a much higher ceiling as part of lululemon than it ever could on its own. For one example, Mirror can leverage lulu’s stores as “free” distribution, an option previously unavailable to it.  

For its part, lululemon gets to vertically integrate and enter into a deeper relationship with its customers. After all, if customers are buying lululemon to work out, why shouldn’t lululemon see a cut of that workout revenue? As CEO Calvin McDonald said after the deal closed, ““We will have a place in the home, there’s a huge advantage for our brand.” There are ample opportunities for lululemon to convert its regular customers to Mirror customers and vice versa. 

Noted brand expert Web Smith laid out the case for this camp on Twitter:

I don’t necessarily disagree with this interpretation: the opportunities will be numerous and interesting. For instance, whereas before lululemon could host a yoga class in-store, now they could host a Mirror class in-store, and convert some of those customers to a recurring revenue subscription. 

But this analysis misses the point to a large extent. First, the sheer number of Mirrors that lululemon would need to sell in order for this to have a large impact seems unrealistic. Mirror is estimated to bring in $100-150M in revenue in 2020. Using some back of the envelope math that you can check out here, we can estimate that Mirror has somewhere between 50-100K customers. Even if lululemon sees a $100 lift in spend (on average) from those customers, the $7-10M revenue bump is too small to be felt by a $4B revenue company like lululemon. Even if Mirror could 10x in the next 5 years, 70M-100M is just not a needle mover.

If we can do this type of math, so can the CEO of lululemon. This is why we believe there’s more to the story than meets the eye. And it wasn’t until we learned about Whitespace that we developed our own theory as to why lululemon would acquire Mirror.

Whitespace

In 2018 Fast Company wrote a detailed article about lululemon’s secretive product development lab, known internally as Whitespace. It’s one of the only—and certainly the most in-depth—write ups about Whitespace out there. Whitespace is a high-tech laboratory set in a basement in Vancouver, lululemon’s HQ. 

The central thesis behind Whitespace, and by extension lululemon’s product development, is that each individual moves differently, and therefore has unique apparel needs. Chief scientist Chantelle Murnaghan said, ““It turns out that the way that each person moves is entirely unique to them. It’s like a fingerprint.”

From the FastCo article: “The brand would create bras for high-impact sports, like running, and then include more compression in bras for larger-busted women, who experience more breast movement. But when lululemon carried out its own research, it found that two women with a 36C bra size experienced different breast motion as they moved.” 

This type of insight led to the ‘Like Nothing Bra’, which took 4 years to develop: “the Whitespace team discovered that female consumers were searching for a bra that felt like being naked, but that still provided support during exercise. There was nothing within its current line that was specifically designed to create this sensation“.

If lululemon can understand these individualistic needs at a physiological and psychological level, goes the theory, it can invent new products with new fabrics that nobody else can, and stay ahead of the curve. It could even transform itself from a yoga pants brand for slim women, to one that men love for business casual pants.

A Whitespace in every home

In the Whitespace lab, lululemon has a special treadmill on which test subjects can walk or run on. Using cameras and sensors, the team is able to identify the specific fingerprint of the subject’s motion, and determine their unique needs. lululemon at one point was preparing to bring the Whitespace treadmill experience in-store, which in theory would enable employees to make better recommendations. 

This is why we believe lululemon really acquired Mirror: to accelerate their plans for Whitespace by putting a version of it in customers’ homes. Yes, there will be cross-selling opportunities and other synergies, but the aggregate dataset is the real prize here. lululemon will be able to see how people move in the tens or hundreds of thousands, and be able to close the loop on how (or if) the apparel they wear influences that movement. 

It’s unclear to me—and probably to lululemon—specifically what that might look like, but that’s part of the point. It’s a data collection play, and you cannot presuppose what the data might tell you. 

If this is all true, then the Mirror acquisition is the polar opposite of a short-term reaction to COVID, or an attempt to keep up with Peloton. Sure, maybe the base case argument for this acquisition is that lululemon will breakeven on the synergies we described above. 

But the bull case is one nobody is talking about. The bull case is that Mirror is the gateway to the next big product innovation unlock after the menswear opportunity starts to slow down. Even if there’s only a 20% chance that the Mirror data play bears such fruit, if it leads them to its next frontier, it will have been $500M well spent.

That’s it for this edition of The Flywheel. Thanks so much for reading. A huge thanks to Tanya, and Tom for helping out with this one.

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Today I have a special shoutout: thank you to my very talented sister Jana Arbogast who helped me with the new branding you will have hopefully enjoyed.

If you liked this post, please click like and share with your friends! Onto the article.

Among the fun byproducts of writing The Flywheel is that people now send me flywheels. When someone sees a flywheel, has a question about a flywheel, or even just spins around inadvertently, I tend to hear about it.

There is one flywheel that—in the words of the outgoing President—‘many people’ have been sending me lately. The self-published DoorDash flywheel:

This graphic was included near the top of DoorDash’s recent S-1 filing (the document that companies are required to publish when they intend to go public). 

Given the rising prominence of DoorDash in our COVID-adjusted lives and the importance it has placed on its own flywheel, we’re going to do the first ever The Flywheel Flywheel Teardown, DoorDash edition. Order some dumplings and get comfortable, we’re diving in. 

DoorDash’s Pitch to Investors

DoorDash is one of several companies that has filed to go public in the past month or so. In one form or another, many of these recent S-1 companies are attempting to strike while the iron is hot after a COVID boom. Notable examples include Airbnb, Wish, and Affirm (about whom I am writing in an upcoming S-1 Club report). 

But perhaps none is demonstrating more opportunism than DoorDash, the food delivery company that is seeking to double its valuation to ~$30B when it hits the public market in the coming days, up from $16B just this past June. 

DoorDash is intent on convincing investors that it is more than just a COVID story. The pitch is as follows: 

1. We’re in a market leadership position today;

2. Overall market penetration is still low, even in the US; and,

3. We have a powerful flywheel that will help us extend our lead in the market, drive more penetration, and do all of this profitably.

This pitch is the clear story at the top of the S-1. 

Market Leadership

DoorDash suggests that it’s gone from about one-sixth of the delivery market to one-half in 2.5 years. Notably, it has taken market share from GrubHub and ‘other’, which might be Amazon’s no-longer-existant Amazon Restaurants. 

Low Delivery Penetration

DoorDash stresses that while it may have 50% market share, there’s plenty of room to run; after all, the addressable market for food delivery is pretty much all restaurant spend, or at least that which occurs ‘off premise’. From the S-1: 

While we are the category leader, U.S. consumers on our platform in September 2020 represented less than six percent of the U.S. population as of September 30, 2020, and we believe we are in the early phases of broad market adoption. 

In 2019, we generated gross order value on our Marketplace, or Marketplace GOV, of $8.0 billion. In the same period, $302.6 billion was spent off-premise at restaurants and other consumer foodservices in the United States.

Our Marketplace GOV in 2019 represented less than three percent of this off-premise spend, highlighting the large addressable opportunity ahead of us in the food vertical alone.

The Flywheel

No one will contest that food delivery is a large market opportunity. The more interesting debate is around DoorDash’s flywheel, because it is the tool it wants to use to convince investors that it has a unique opportunity in this space not only to continue to grow, but to do so profitably. 

Profitability and Food Delivery

The question around food delivery companies has always been about profitability. Even as recently as March 2020 (incidentally right before COVID) the dominant narrative was that there just isn’t enough money to go around on a per-transaction basis. This NY Magazine piece does a good job explaining the problem:

I think the missing element for profitability is different: productivity. The hope with a lot of business models that bring app intermediation to a preexisting element of the economy like ride services or food delivery is that technology will make workers more productive. You can see instances where this is obviously true: a Peloton instructor who teaches a class to tens of thousands of people is more productive than a SoulCycle instructor who can only teach about 60 people at a time. But with a lot of apps, the promised boost to productivity never materializes. The worker still has to render personal service to one customer at a time, and the app doesn’t do much to reduce the worker’s downtime or help him or her complete the task faster.

If productivity and consumer willingness-to-pay aren’t increasing, then these firms must lose money—subsidized by massive VC rounds led by companies like Softbank—with the hopes that down the road...well, it was never clear what the long-term plan was. Perhaps it was to raise prices, but that’s always difficult in a competitive environment. 

If this sounds familiar that’s because it is. It’s a tale as old as venture capital. This narrative was also one of the main undertones of the Uber-Lyft wars. 

There has been exactly one quarter in DoorDash’s life that it has been profitable overall. But worse than that, it wasn’t until 2020 that it was net positive even on a contribution-profit—or per-transaction—basis. Contribution margin (i.e. the portion of an order’s value that flows to DoorDash) was below zero until Q1 2020. It was losing money on every order.

What’s changed in 2020 is that consumer willingness-to-pay has increased. In normal times, DoorDash, Uber (and others) would try to out-compete one another by offering progressively generous promotions. Since COVID, however, customers have been willing to tolerate larger delivery fees, higher menu markups, and—crucially—an absence of promotions. 

The elimination of promotions was in large part responsible for the 2020 shift to contribution-profit positive. We can see this in DoorDash’s Sales & Marketing (S&M) Expense (largely promotions and discounts) as a percentage of Revenue figures, which decreased dramatically in 2020. 

We can estimate what the impact would have been to contribution margin if S&M had stayed steady at the late 2019 level of 50%, a generous assumption considering that was already a large decline from earlier in 2019: 

This would still show solid improvement, but it’s far from the story DoorDash is trying to tell. And that’s assuming that sales and marketing stays at the most DoorDash friendly pre-COVID level. If it went back to early 2019 levels, we would have an even more bearish picture.

Ever wonder where I get my public company data for these great looking charts? I use HyperCharts, a service that aggregates data for top public companies and presents them in a series of easy to consume charts. HyperCharts is great if you want to stay on top of the companies you’re analyzing or investing in. They’ve even added in all the new S-1 data from hot companies like Airbnb, Affirm, and yes, DoorDash.

If you use my link and eventually purchase a premium subscription, HyperCharts will share a portion of that revenue with me. It’s the best way to get information to inform your investing, and a fantastic way to support The Flywheel.

Why the Flywheel Matters

This is where the flywheel fits in. DoorDash wants to convince you that it has managed to flip the script—that it has unlocked the secret to delivering food profitably. That the bump it has seen in 2020 is sustainable. And it’s the flywheel, it says, that is responsible. Let’s take a deeper look.

Challenging DoorDash’s Flywheel

Let’s take another look at the flywheel image from DoorDash’s S-1:

DoorDash includes three unique but connected flywheels that are all related in some way to this question of profitability:

1. Network Effects

2. Economies of Scale

3. Brand

The argument appears to be that as DoorDash grows, (1) it establishes network effects that will make the platform stickier for both consumers and merchants, thereby providing pricing power to DoorDash. Additionally, (2) this will lead to greater economies of scale, i.e. ability to manage costs, and (3) an increasingly valuable brand that makes DoorDash the first company customers, merchants, and Dashers alike think about when they need to make decisions.

Let’s go through each piece:

Network Effects

Whether or not DoorDash has network effects depends on your definition of the term. The definition I prefer is similar to the one prominent VC firm a16z uses in its Network Effects presentation: “a network effect occurs when a product or a service becomes more valuable to its users as more people use it.” By that definition, you could argue that DoorDash has network effects, with the following blurb from the S-1 explaining why:

Local Network Effects: Our ability to attract more merchants, including local favorites and national brands, creates more selection in our Marketplace, driving more consumer engagement, and in turn, more sales for merchants on our platform. Our strong national merchant footprint enables us to launch new markets and quickly establish a critical mass of merchants and Dashers, driving strong consumer adoption.

But let’s look deeper. On the next slide, a16z says that network effects “create barriers to exit for existing users and barriers to entry for new companies (help build moats), protect software companies from competitors’ eating away at their margins, and can help create or tip winner-take-all markets”. 

These criteria are a bit more challenging. DoorDash has zero barriers to exit for consumers, and perhaps only slightly stronger ones for merchants. Are there barriers to entry for new participants? Sort of. Restaurants are not locked in to one delivery partner, so in theory a new partner who delivers value can sign up restaurants even if they are signed up for DoorDash (and others) already. In fact DoorDash itself has  proven this point by how ruthlessly it stole share from GrubHub. 

At best, I’ll call DoorDash’s network effect weak or indirect. Yes, merchants want to join platforms that more users are on, and users want to join the platform where the merchants are. But the intent of network effects is to demonstrate a strong strategic position, and I don’t believe we can conclude it has one from DoorDash’s network effect.

The indirectness of the network effect presents problems on both the merchant and consumer side. For merchants, it’s not clear if more orders actually lead to more merchants signing up. It is equally plausible that merchants sign up for DoorDash because they sign up for every reasonably large delivery company. For a merchant you don’t only want to be on the #1 delivery service, you want to be everywhere customers might look. 

For consumers, the network effects are even weaker. The classic example of a consumer network effect is a social site like Twitter, where the fact that other people are using it makes me want to use it, and as that grows it makes me more unlikely to churn. There is no such dynamic for DoorDash. All DoorDash can offer consumers is selection, but the selection is not unique. It takes almost zero effort to price compare between DoorDash and Uber Eats. 

Economies of Scale

From the S-1:

Economies of Scale: As more consumers join our local logistics platform and their engagement increases, our entire platform benefits from higher order volume, which means more revenue for local businesses and more opportunities for Dashers to work and increase their earnings. This, in turn, attracts Dashers to our local logistics platform, which allows for faster and more efficient fulfillment of orders for consumers.

DoorDash expects its unit economics to improve with more scale. More orders lead to more merchants lead to more dashers. The density of the network increases, which means delivery times will decrease, which will lead to more orders, and so forth.

Indeed, DoorDash could improve efficiencies. For example, the more data it collects, the less time it might have Dashers hanging out at restaurants waiting for food to be ready. There are a bunch of different ways it could shave a minute or two off delivery times.

The bigger opportunities to improve efficiency are those that improve capacity utilization, such as the following:

1. Batch orders together. Perhaps like UberPool, a customer might pay a little less to have their food arrive a little slower. In fact Uber already does this to some extent. The problem with this idea is that food needs to be delivered hot and quickly. There is a low upper-limit to how many food deliveries can be batched together before people get angry. 

2. Give Dashers a way to continue making money even when order volume is low (say, in between meal times). DoorDash is expanding into services like grocery, for example, to address this opportunity. The problem here is that it is at a disadvantage compared to competitors, in particular Uber which has an entire, separate business to which to shift drivers when UberEats volume is low. 

DoorDash wants us to believe that as it grows, its economics will become better than anyone else’s. Its economics may improve, but I don’t see any special advantage DoorDash has here. Perhaps if it merged with someone like, say, Lyft, it could be in the conversation with Uber on this topic. 

Brand

Again, from the S-1:

Increasing Brand Affinity: Both our local network effects and economies of scale lead to more merchants, consumers, and Dashers that utilize our local logistics platform. As we scale, we continue to invest in improving our offerings for merchants, selection, experience, and value for consumers, and earnings opportunities for Dashers. By improving the benefits of our local logistics platform for each of our three constituencies, our network continues to grow and we benefit from increased brand awareness and positive brand affinity. With increased brand affinity, we expect that we will enjoy lower acquisition costs for all three constituencies in the long term.

I could be convinced that DoorDash has strong, if indirect, network effects, and has the opportunity to improve its unit economics, at least to a point. But that DoorDash has strong and increasing brand affinity that will decrease acquisition costs and improve retention? Not so fast.

The truth is that not one of the three constituents cares much about DoorDash the brand.

Dashers don’t particularly care about DoorDash the brand. They will go to whomever is offering the best rates and the highest tips. It’s a transactional relationship, and drivers may even deliver for multiple apps at the same time.

Merchants don’t care about DoorDash the brand. In fact they are more likely to feel that delivery services are eating their lunch. I’d love to see data on the median number of delivery partners restaurants are signed up with. I am sure it’s closer to 5 than to 1. An admittedly unscientific casual survey of mine and Tanya’s 5 favorite DC takeout places show that 4/5 are available on both DoorDash and UberEats.

Consumers really don’t care about DoorDash the brand. DoorDash doesn’t provide the end product to customers, the restaurant does. They care a lot about the brand of said restaurant and the price they have to pay. They are happy to switch to another service if they can save a couple of bucks. That is not the hallmark of a strong brand. 

DoorDash wants us to believe that because of its brand, it will be able to charge merchants and consumers higher fees, and/or pay Dashers less. But in reality, DoorDash has limited ability to lock in any one of its three constituents. 

DoorDash has tried locking in consumers, for example, with a $10/month subscription called DashPass, and apparently it has 5 million users signed up so far. Unfortunately the S-1 doesn’t break out how many of these users are actually paying for it, versus it being provided for free by Chase Sapphire. 

From personal experience, even with my DashPass subscription, I price compare and ultimately order frequently from UberEats. 

COVID and Food Delivery

We’ve gone through the flywheel and why I am highly skeptical that DoorDash has built or could build unique advantages. But what about COVID? Maybe the shift I described above is here to stay?

After all, we’ve seen a similar story with Peloton and Zoom, where the world shifted to ‘at-home’ fitness and meetings and realized that it’s actually a pretty good stand-in for the real thing. In those cases, I believe the COVID bump is sustainable, and clearly the stock market agrees.

So why not DoorDash? The answer is simple: unlike with exercise or work, people haven’t suddenly shifted to delivery and realized, ‘you know what, this is just as good as eating at a restaurant”. In fact, it’s just the opposite. The moment it’s safe to do so, we’re going to see an unprecedented restaurant bonanza. 

When that happens, we’re likely to see the following: DoorDash, UberEats, and the others will resume their cutthroat price wars. Consumers will return to their deal surfing practices. DoorDash will be forced to once again spend 50%+ of its revenue on sales and marketing, and will therefore return to negative contribution margin territory. 

Final Thoughts

To DoorDash’s credit, it calls out the unsustainable nature of its super-high growth rates in 2020: “The circumstances that have accelerated the growth of our business stemming from the effects of the COVID-19 pandemic may not continue in the future, and we expect the growth rates in revenue, Total Orders, and Marketplace GOV to decline in future periods.” Indeed, DoorDash, they may not continue.

But what it doesn’t say is that it would never have filed an S-1 if not for COVID. Instead, it attempts to convince investors that it has figured out some trick to delivering food profitably, something that eluded them until this year: 

Our historical consumer cohorts demonstrate attractive and improving financial results because we have been able to retain and grow consumer demand while normalizing sales and marketing and promotions spend.

In other words, ‘we know we used to have to offer huge discounts to people to use our platform before, but that’s in the past now’.

I don’t think that it is. My sense is we will circle back to the narrative that this market—the one that Amazon decided to get out of after years of trying—is one that simply does not support venture-scale outcomes.

That’s it for this edition of The Flywheel. Thanks so much for reading. A huge thanks to Tanya, Mom, and Abe for helping out with this one.

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If you’re looking for something else to read this week, check out Visible Hands. I enjoyed their recent primer on carbon pledges and what it means for a company to make one.

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Hi everyone 👋🏻! This is the first of what I hope will be an ongoing series of founder interviews. Please reply to this email with your feedback! I’m relying on it.

If you know a founder who I should interview for The Flywheel (or are one yourself!) please let me know. Onto the interview.

An Interview with Erik Torenberg and David Booth

I sat down with On Deck CEO David Booth and chairman Erik Torenberg to discuss all thing On Deck. My questions are bolded, and their words are lightly edited for clarity. For more about On Deck, you can read my insights from earlier this week here.

On the Origins of On Deck

Tell me about the early days of On Deck and why you made the original pivot away from dinner parties towards an online community?

Erik Torenberg: The difference [between where On Deck was at the time and other cohort type models like universities or accelerators] is that they compound. On Deck, when it started, was kind of an events business, or events community. We would have events all over the world, but we didn't really see continuity, we didn't get stronger over time.

When you look at institutions like Stanford, or [startup accelerator] YCombinator (YC), they are very hard to disrupt. We think of these as ‘curation businesses’, because they are selecting who can participate.

I think people underestimate the moats that these types of businesses have. One of the reasons why universities are hard to disrupt is that the alumni have so much incentive for the credential to mean even more, and for the network to remain valuable. The more you pay forward, the more the network gets valuable, the more it's valuable to you, and so on.

On top of that, they are enormously hard to get off the ground. You need to either partner with existing mega brands, or find some novel approach that gets great people in the door. At first, people are sort of taking a brand hit by joining your thing instead of the more established path, so your approach needs to offer corresponding utility to make up for it. And for us, it was really a sort of in between phase of people’s careers, that was sort of our wedge. I wrote about this more in a Tweet thread:

On On Deck’s Expansion into New Horizontal Categories

Let’s talk about On Deck’s evolution from a one-program company to now nearly 10 different types of fellowships. These days you have a new fellowship launching every week it seems!

ET: One of the biggest lessons I learned from Product Hunt (editor’s note: Erik was employee #1 at PH) is if you expand into things that don't make the existing things stronger, or more precisely, are uniquely enabled because of your first category, then it's like you're building a new startup. And so we did products, like gaming products, or podcast products or books, and it wasn't the same audience. We weren't uniquely enabled by our existing business. They neither made the core offering better nor benefitted from our existing core audience. We were just building different startups. So that's why we're really precise here on what are things that are uniquely enabled by your existing fellowships, existing audience, and what makes it stronger.

David Booth: I think about supply and demand. Every program we launch should bootstrap supply for an existing program’s demand. We have founders in On Deck Founder Fellowship (ODF). Great, well what does a founder need? They need capital, they need distribution, etc, etc. Let’s start On Deck Angel Investor Fellowship (ODA) which is a supply of capital for the early demand of founders. And so on.

But it’s also two sided. What do angel investors want? They want to invest. And ODF founders are starting companies.

On Prestige vs. Scale in Curation Businesses

What lends ODF prestige today, since we haven’t yet seen that mega-unicorn come through?

DB: We accept less than 10% of people who apply, so if you get in it’s worth bragging about. That prestige has immediate value — it’s like a credential, helping fellows hire, fundraise, or explain why they quit their jobs (“I’m not unemployed, I’m on deck!).” There’s also utility in the education component — peer to peer knowledge sharing, expert-led sessions and cohort-wide resources.

However, prestige and education alone aren’t sufficient to satisfy the real reason many join On Deck. 

Many come in looking to find co-founders or early hires. The more people there are in the network, the more prospective co founders or hires, people to learn from, or support you along the way etc. So for On Deck, our balancing act is to carefully measure our expansion such that any drop in “prestige” associated with an increase in network size is offset by raw utility value. Take LinkedIn as an example, at the extreme end of the spectrum. Having a LinkedIn profile is not prestigious — but it’s incredibly useful. Anyone can do it. Everyone has it. Everyone has a profile and they use it to search and everything else.

ET: One is the utility of the program. Did you get value out of the program? Did you meet great people? Did you have a good experience? Two is who's done it. We have had for example a VPs of Product at places like Flexport and dozens of people who have been founders at big companies, saying, ‘ you know, this is worth paying $2,000’, and being really involved in the community.

DB: I realized that we're actually perhaps being a bit misleading holding out prestige as being so important, because think how many people join On Deck, and don't tell anyone. They deliberately don't want anyone to find out, because they don't want the boss to find out for example. And so why do those people join and pay $2,000? The only conclusion is utility, because it helps them figure out what to do next.

On the Business Model in the Future

I want to ask about scalability. As the community grows, there’s an upper limit to the number of members, at which point the community breaks, presumably. And today the business model is to charge the price of admission. So how do you think about scaling it, and will the business model sustain?

DB: if you look at a school like Harvard Business School, only about 1/3 of their revenue is from Tuition. Their largest revenue stream is HBS publishing. 

So one is I think we are by no means bound by tuition fees as the end of our model. But that said, I think it’s an incredible incentive alignment. People pay and then they want to get the value of it. And the act of getting value out of it creates value for everyone else. So yes, we will continue to charge tuition fees. But like other institutions, once our utility function rises past a certain point in the future, we will add additional products.

I’m glad you brought up incentives. I wanted to ask about it because one of the interesting things in education now is ISAs, and the story there is that it aligns the incentives perfectly between student and institution.

DB: What I dislike about ISAs broadly is that it’s a very risky/expensive form of debt. If you think about debt, it has cost of capital, and the safer the borrower, the lower the cost of capital. And also the more rigid and secured the terms, the lower the cost, right? So a corporation can borrow at a cheaper rate than a family restaurant.

An ISA is debt, which is unsecured, inconsistent, and has unknowable revenue streams, usually extended to somebody who has a higher credit risk than can otherwise get debt. And so by the laws of finance, the return profile has to be far higher than if you get somebody who has the ability to pay cash for a service up front.

If you offer an ISA alongside a pay-up-front option, you're going to get incredible adverse selection selection baked into that. The only way we can make it work is if we say like $2,000 up front or $5,000 ISA. The people who will do that are going to be the least likely to be successful.

So I don’t think ISAs work where the alternative is paying cash, because the cash prices will have to be way cheaper. And I don’t think it works where there’s more of an intangible shift. For Lambda School it works because it shifts someone from a lower trajectory to a higher one very clearly. For On Deck, if someone joins having been an engineer at Stripe, it’s much less clear how much of their future trajectory On Deck is responsible for. They will always be a former engineer from Stripe.

Makes sense. The other option is instead of doing an ISA for earnings-power boost, you could take equity in companies?

DB: The number one reason people don't go to YC is they don't need to. In a lot of cases they are experienced second time founders, and capital is ubiquitous. YC is very expensive in terms of equity you give up, and taking equity on sub-market terms is itself a form of adverse selection. If what we want is the very best people to do On Deck, we don’t want to force anybody to give us equity or any other thing that will adversely cause them to self-select out.

ET: On equity, one challenge is that it lop-sides your organization. If you have equity in every company, you are much more incentivized to help the top 1 or 2 companies in your program than the rest. By orders of magnitude. So it’s not straightforward that it really aligns incentives for everyone.

And I reject the premise that we are less incentivized to care about people’s On Deck experience because the moat for us and every other curation business is alumni NPS. That’s all we have. It's a powerful moat when done well, but that's all we have, so we are thoroughly motivated to help fellows beyond their program. Unlike universities, we don't get gov't support. We rely solely on customer love to scale our business.

On the Hiring Flywheel

Last question about hiring from the community. I've seen you guys do this now a few different times. I think that's also a part of your flywheel, right? You bring all these cool people in, they have a great experience, they want to work for On Deck, and then you can take your pick of who to hire. How much of this is a happy accident and how much of this is deliberate?

ET: Very deliberate. At Product Hunt we also hired from within the community a lot. It’s always great to hire from the community, because they're more loyal to it, they just have more context on it, you've gotten time to work with them already. Anytime we prospectively want to hire somebody, we say go through this program, so we can sort of get to know each other a bit better.

In ODF, we saw that people were starting a writing channel, we saw that people were starting an angel investor’s channel. We looked at what people were asking for, and then we built specialized services for it. And then we can hire the person who started it and let them run with it.

Last comment from me: Erik had a great tweet about people taking chances on people in their careers. I feel like you guys just took a chance on me by having this conversation and giving me your blessing to write about On Deck. Thank you very much!

That’s it for this edition of The Flywheel. Thanks so much for reading. Please send your feedback on this new format and let me know who else I should talk to.

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Happy Diwali to anyone who celebrated over the weekend 🪔! If you liked this post, please click like and share with your friends! Onto the article.

It is an open secret that business school is not really school. Students may spend a dozen hours per week in class and toil to fulfill academic requirements over two years, but that’s not why they attend.

How do I know? Students at many top schools agree to something called Grade Nondisclosure, an honor code pact between students not to disclose their GPAs to anyone. This disincentivizes students from trying too hard at the whole school thing. Students would rather foster a spirit of cooperation than one of competition, and leave space for the real reasons they enrolled: to make friends and to get a job.

Another main reason people attend business school is for the credential that comes with the degree. The signal that ‘I was accepted into and graduated from X’. This credential is important not only to the students but also their employers. Consulting firms like McKinsey even require their young Associates attend business school only to return to the firm, credential in hand. 

This system worked for me. I graduated from NYU Stern in 2015 (my GPA was ⬛.⬛⬛) with an amazing network of close friends and a job at Amazon. 

Yet, even as a student, I found business school puzzling. 

The equation always seemed unbalanced: for ~$200,000, I get to play student for two years, and leave with a network, a job, and a credential. I also get a pass from my friends, family and self, who all view business school as a credible career option. What I did during those two years seems not to matter; the critical component is having been admitted.

Because of these dynamics, business school is often described as a two year vacation. 

Man, that’s an expensive vacation.

Disrupting Business School

Any would-be disruptor of business school would need to nail all three of its Jobs to be Done (JTBD): (1) the network, (2) the career opportunities, and (3) the credential. This challenger would have to do so for a fraction of the cost and with a sustainable business model. Seems like a tall order. 

Disrupting Incentives in Education

Incentives in traditional education are at best misaligned and at worst completely broken. Recent innovation in education has tended to focus on improving incentive structures and it’s easy to see why. A university charges tuition up front and gets to keep it whether or not the student succeeds (no matter that student’s definition of success).

Universities have only a weak interest in their students’ success. Yes, if a school completely stops supporting its students, it will see that reflected in the rankings and will also see a hit to their donations down the road. But those are both indirect and slow, taking years if not decades to materialize.

Attempts to re-align incentives in education have fallen into two main categories: income share agreements (ISAs) and equity investments. 

An ISA is a mechanism where a student attends a school for free (or cheap) and only pays the institution if they receive a job in the relevant field. Lambda School was a pioneer here, and has forced both startups and incumbents to adopt the model.

The other category is equity investments. The canonical example is Y Combinator but there are many others like it. These institutions invest in early stage startups, help them get off the ground, and earn a payback from any company who goes on to a successful exit. 

Neither of these models fully replace business school. In any ISA there’s an adverse selection issue, where only students who can’t afford to pay for school up front are attracted to that model. That may work for Lambda School, which takes people with low paying jobs and turns them into software engineers, but that’s not the target population for business school. On the equity investment side, the glaring issue is that it’s only relevant for people who want to start venture scale businesses. If we think back to our three JTBD, that’s not even on the list for most business school students. 

Disrupting Delivery of Education

I should also mention organizations like Coursera and edX, pioneers of the MOOC. Anyone can now learn anything from world class teachers without needing to enroll in a traditional program. As amazing as these organizations are, they too are not potential disruptors of business school because—as I explained above—education is at best a secondary concern for the MBA student.

Perhaps then, the opportunity to disrupt business school is not to change the incentive structure or delivery mechanism, but rather to simply deliver more value for a better price. 

In other words, good ol’ fashioned disruption. 

There’s one company that is on its way to cracking that code: On Deck. 

[Full disclosure: I have been attending programs at On Deck since early October. I was not paid for this article nor do I have a stake in the company’s success. I simply became fascinated by the company after joining the program and thought it would make an interesting case study].

What is On Deck?

On Deck is hard to define. Glance at their website and you’ll see programs for Founders, Angels, VCs, Writers, No-Code Creators, etc. 

If you read their recent fundraise announcement, you’ll see they’ve updated their mission statement three times over the past ~18 months. The current version reads “To build a modern education institution — a platform serving the many strands of identity of ambitious people who want to change the world”. 

A bit wordy, a bit lofty, a bit vague. 

On Deck began as an in-person series of events (mostly dinners) that brought tech talent together to plot their next career moves. This original format was wildly successful, with events taking place in over 20 cities around the world. But it quickly reached its scale limit. 

Founder Erik Torenberg and current CEO David Booth evolved On Deck into an online program. They called it the On Deck Founder Fellowship, or ODF, and oriented it towards people starting and building companies. On Deck takes no equity in the companies. Instead it charges an upfront fee (aka tuition) of about $2,000 per fellow. 

Unlike business school, there are no requirements. It’s a choose-your-own-adventure experience. On a typical day there might be 3-4 sessions one could attend. For example, On Deck might bring in a world-class startup lawyer to talk about common legal pitfalls arising during the early stages of business formation.

In between sessions, there’s an emphasis on meeting others in your cohort. Everyone is a potential cofounder, advisor, customer, employee, mentor, and friend. In just 7 weeks, I’ve met multiple potential cofounders for myself, a cofounder for my girlfriend, and dozens of smart, humble people. 

The community is of, by, and for the people. Fellows are encouraged to create Slack channels based on interest groups, organize community sessions where they teach everyone else, and host office hours. On Deck’s staff is there to tend the community garden in support of this organic creation: to quickly respond to feedback and to identify opportunities to better serve fellows.

On Deck’s Flywheels

The On Deck Founder Fellowship (ODF) has established a dynamic community and a flywheel that sustains it. But ODF is not the end of On Deck’s ambitions, it’s merely the beginning. 

The exciting part is the set of flywheels On Deck is building around ODF. In just the past two months they’ve added fellowships for writers, podcasters, VCs, angel investors, no-code builders, and early startup employees. 

Each new fellowship stems from observing behavior in ODF and asking the question ‘what are founders telling us they need?’ As CEO David Booth says, “each new fellowship bootstraps the supply to another fellowship’s demand”. 

On Deck is building a web of flywheels: each fellowship has its own flywheel(s) which connect to those of every other fellowship in one form or another. 

Let’s look at these flywheels in more detail before explaining why this poses a threat to the status quo business education industry.

Individual Fellowship Flywheel

Each fellowship has a flywheel with two components:

1. The building blocks of a strong community. We can call this the generic flywheel because it’s not unique to any one fellowship. Every fellowship—and in fact every successful community—shares these components.

2. The components that are unique to each fellowship. We’ll call this the specific flywheel, and every fellowship has its own, unique version of this. The specific flywheel feeds back to the generic flywheel and vice versa. 

The Generic Flywheel

There is no shortage of resources on how to build an effective community—I am not an expert on the topic. Below is a modified version of the community flywheel created by Nick DeWilde (who I met in the On Deck Writer Fellowship). I think it describes On Deck’s fellowships well: 

1. It starts with FOMO. This is the secret sauce of any community, but it's hard to manufacture. On Deck created FOMO by doing something unscalable (dinner parties) for years.

2. With FOMO you create a high volume of applications. 

3. High application volumes allow On Deck to remain selective even as enrollment grows.

4. Repeated interactions with a high-quality group lead to high alumni satisfaction. 

Since there’s no degree or diploma, there is no real way to coast through On Deck and leave with something valuable on the other side. People feel motivated to get their money’s worth. This results in a level of engagement and generosity that seems rather unusual.

Because On Deck has been transformational for many of its participants, fellows feel a need to refer friends so they can share in the halo effect of On Deck’s work. If I refer a friend, and my friend has a transformational experience, they’ll partially credit that transformation to me. 

The Specific Flywheel – ODF

As mentioned, every fellowship has its own specific flywheel. For the Founder Fellowship (ODF), it looks like this: 

1. As the generic flywheel spins and creates a highly engaged community, cofounders serendipitously meet and companies form.

2. As more companies form, On Deck is able to attract more perks and partnerships with important companies. Companies starting in On Deck today have access to perks offered by over 70 companies. These benefits, like AWS and Stripe credits or deferred legal fees, make it easier for companies to get off the ground.

3. As it becomes easier to get off the ground, it becomes more likely that there will be good outcomes coming from ODF companies.

4. With more good outcomes, more companies form. Fellows who were on the fence about starting a company might be encouraged by the success and decide to go for it. The overall talent pool only increases, making success even more likely as time goes on.

As the number of successful outcomes increases, prospective fellows will perceive their own likelihood of success to be higher. This increases FOMO, thereby linking the specific flywheel back to the generic flywheel. 

Multi-Fellowship Flywheel

This is the fun part. 

As the Founder Fellowship flywheel spins, new fellowships are spawned. By repeatedly asking the question “what do founders need next,” these ideas materialize into reality. 

What do founder’s need?

• They need to raise capital. On Deck launched the On Deck Angel Investor Fellowship (ODA) and the On Deck Venture Capital Fellowship (ODVC).

• They need to hire. On Deck launched the On Deck First 50 Hires Fellowship (OD50) and is planning other job-related fellowships. .

• They need cofounders and contributors who can help them build their MVPs. On Deck launched the On Deck No Code Fellowship (ODNC) so that nontechnical founders can get in on the action. 

• They need writers and podcasters who can help them refine their narrative and connect to their audience. On Deck launched the Writer Fellowship (ODW) and will be launching the Podcast Fellowship (ODP) soon.

• When the time comes, they need help scaling beyond the early days. On Deck is launching On Deck Scale (ODScale) to guide founders through that phase. 

And so on and so forth. 

Today the focal point is ODF. New fellowships are spawning in response to what founders need. But in the future, each new fellowship might become the center of its own set of opportunities. The result will be an evolving, multiplying process that cannot be fully predicted ahead of time. 

Today the question is ‘what do founders need?’ but tomorrow it will be ‘what do writers need’ or ‘what do angel investors need’. 

Or, as Jack Butcher tweeted:

On Deck vs MBA

I asserted above that to disrupt business school, a challenger would need to nail the three Jobs to be Done, all at a lower cost and with a better business model. Let’s take a look at why I believe On Deck can pull this off:

Jobs To Be Done

Network

The value of the business school network is high but replaceable. The value stems from putting a good group of people together for a shared experience across two years. Add in a dash of travel and a heaping spoonful of booze, and you’ve got yourself a strong network. 

People will always crave the social and networking opportunities created when a like-minded group is formed, bursting with potential friends, business partners, and love interests. 

Not only can On Deck reproduce this dynamic, they can exceed it. Like business school, On Deck puts people together for a shared experience. Today it’s online and the bonds are not as intense as they are in business school. In the future there will be in-person components aimed at strengthening those bonds. 

What differentiates the On Deck network from business school is that the bonds are formed around shared facets of identity, while business school bonds are built around a shared circumstance. In On Deck, writers are bonding with other writers, founders with founders. These characteristics don’t tend to change much. In contrast, business school bonds tend to be around shared circumstances, like ‘we both recruited for investment banking’, or ‘we both lived in New York at the same time’. These things tend to change much more frequently and the resulting ties to fray. 

Jobs

Many students attend business school to advance their careers. The pipeline of students from MBA programs to companies like Amazon and Google is well traversed. These companies effectively outsource the evaluation process to the business school admissions departments. 

Got into HBS? Good enough for us! 

On Deck’s focus isn’t as strongly on job placement today. But it’s coming. They just announced OD50, a program for people interested in jobs with early stage startups. In the future, I see no reason why they couldn’t launch ODCorporate, a program for folks who want jobs at places like Amazon and Google. 

If I was looking for startup jobs, I would have more faith that On Deck could deliver me those opportunities than a business school because On Deck has a vested interest in producing those companies and helping them find great employees. 

Credential

Last but not least, people attend business school for the credential that comes with the degree. Namely, the signal that ‘I was accepted into and graduated from X’. This is the biggest gap for On Deck in the comparison against business school. But the gap will shrink.

Byrne Hobart wrote a great piece on credentials and why universities deliver them ineffectively. He writes: 

“What Harvard really does is 1) tell 18-year-olds they have the Harvard Stamp of Approval, and then 2) Make them wait in line for four years to collect it.”

Hobart’s argument, then, is that there is a more effective way to deliver credentials. In Hobart’s case, he argues that Y Combinator is the organization that will crack the case, and he may be right. That said, there won’t only be one such organization because the addressable market for education is everyone on earth.

On Deck will find ways to do this. To summarize Erik’s personal blog post about peer-to-peer credentials, On Deck is facilitating thousands of serendipitous encounters between smart people, each of whom will be able to vouch for the best people to meet. On Deck’s ecosystem of fellowships will generate its own type of credential that will become increasingly powerful over time. 

Cost and Business Model

Cost

On Deck is 100% online today. They do not own real estate in a major city. They employ about 30 employees to serve the now thousands of fellows enrolling each year. Simply put, it’s an online business run by internet natives. Compared to this, business schools have a massive cost disadvantage.

This cost and structural advantage also means On Deck can iterate far faster on its offerings than business school can. Business schools are held back by their associations with universities, which impose upon them inefficiencies such as tenure and academic requirements. On Deck, unencumbered by such taxes, can move extremely quickly to add new types of value to its customers. 

Business Model

Business schools charge hefty tuition up front, and attempt to monetize in the future via donations. The problem is that most alumni hate donating money to their alma mater.

Anyone who—like me—screens phone calls from certain area codes for fear of being hit up yet again for a donation knows what I’m talking about. 

The reason is simple: the school provided value in the past, yet they’re asking for money today. 

For On Deck, the proposition looks different.

On Deck is aligned to what people need through different stages of their career. Fellows may attend ODF and then decide they want to try writing. After that, maybe the angel fellowship fits what they’re looking for. The median number of programs someone attends at a place like Harvard is 1. At On Deck it could be far higher. 

If they can achieve that, is there any reason they couldn’t start adding even more value added products on top of it? Maybe that’s continued access to events and lectures, the ability to pitch or be pitched by future On Deck companies, a better version of Lunchclub that ensures you continuously meet amazing, relevant people, or access to a network of On Deck retreats all over the world? The possibilities are endless.

For On Deck, the business model then looks like many more, lower dollar-amount interactions with customers over the course of their career. With value added products layered on top of fellowships, it wouldn’t surprise me to see them add on a subscription component as well. 

Instead of ‘pay up front and pray for donation’, it’s ‘pay a (relatively) small amount forever, or until we stop providing value’. Advantage, On Deck. 

The end of business school?

Is this the end of business school? I don’t think so, though my Twitter following is split.

It will be a long time before industry stops rewarding the credential of the top business schools. But disruption is coming, and not all business schools will survive. Already I have spoken with a handful of people who have decided that On Deck is a better mix of value/price for them than an MBA. As the value of On Deck increases, that will only accelerate.

Theories of disruption have long been the domain of business schools. Innovator’s Dilemma and Porter’s Five Forces, these are frameworks that business schools teach us to use throughout our own careers. It’s time for these schools to glance inward and prepare for an incoming threat of their own.

🚨🚨I sat down with On Deck’s CEO David Booth and Founder/Chairman Erik Torenberg to discuss their strategy and business model. I’ll be publishing excerpts from that conversation on Friday. Subscribe now so you don’t miss it.🚨🚨

That’s it for this edition of The Flywheel. Thanks so much for reading. A huge thanks to Tanya, Tom, Kushaan, and Alex for helping out with this one.

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