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#2 - the winning narrative: finance bros vs tech bros

Digital Culture
#2 - the winning narrative: finance bros vs tech bros
By George Henry • Issue #1 • View online

Pro tip: this post is better experienced while listening to this song (thank you Suzanne for the suggestion).
A cultural rivalry has historically opposed the East Coast to the West Coast in the US. The most famous one opposed East Coast-West Coast hip hop. Hip hop originally emerged on the East Coast in the 1970s but with the rise of NWA in the late 80s, LA gangsta rap exploded and the most influential artists started to emerge from the West Coast.
Technology has brought a new rivalry between the two coasts. You now often see “finance bros” (East Coast) arguing with “tech bros” (West Coast) about the iconic companies of our time.  Their favourite subject of dispute is the performance and valuation of technology companies. The battlefield is not rhymes or award ceremonies but happens mostly on Twitter and via blog posts. For the finance bros, the valuation of certain technology companies is impossible to justify or understand based on their current numbers. For the tech bros, you shouldn’t bet against software and a visionary founder. This is a caricature of course but it illustrates the rivalry over the past twenty years between the finance industry in places like NYC and the technology leaders in Silicon Valley for business supremacy.
A good illustration is Uber. In June 2014, Uber’s round of funding gave it a (private) market value of $17Bn. Aswath Damodaran, a well-respected corporate finance professor at NYU Stern with a popular blog “Musing on Markets”, published a post dismissing this valuation as unjustifiable and claiming that according to his estimates (and DCF model), the business couldn’t be worth more than $6Bn. Bill Gurley from legendary venture capital firm Benchmark, who led the series A in Uber, replied with an equally famous blog post: “How to miss by a mile - an alternative look at Uber’s valuation”. Now Uber is expected to go public in 2019 at a valuation that could reach $100Bn.
Another obvious candidate to illustrate this rivalry is… Tesla. After a tumultuous year fighting shorts sellers and production deadlines (and the SEC), Elon Musk and Tesla announced better than expected results last October delivering a profit that many thought would never come.
TicToc by Bloomberg

📈 The company is profitable, with a net income of $312 million
📈 Reporting a free cash flow of $881 million
📈 Shares up 6% in post-market trading
Many fans celebrated the achievement on Twitter and claimed game over for the “short thesis”. Others are still doubling down on their short bet. This funny tweet from Saku commenting the Tesla numbers perfectly illustrates the sub-culture that opposes finance to tech on twitter.
My goal here is not to comment on these specific companies and justify a long or short thesis. In each case, there are many variables to consider. The disagreement about the valuation of fast-growing companies certainly goes beyond cultural and geographical differences (I’m sure a lot of people on the West Coast are also sceptical about Tesla). I think what’s interesting here is the challenge of pricing these disruptive companies and the fight for the dominant narrative.
If you go back to the Uber example, at the heart of the disagreement was the TAM (“Total Addressable Market”). The NYC finance professor was looking at Uber as a taxi business trying to gain market share, the silicon valley VC saw a company that could directly challenge car ownership.
Companies are traditionally valued by taking future cash flows and discounting them. Future cash flows are based on future growth. The valuation of most disruptive tech companies implies massive growth that can be hard to visualise or believe. A lot depends on the market you’re looking at. That’s usually where the narrative opportunity lies and where the finance vs tech clash usually happens. In a world that generally celebrated and admired the rise of technology companies (until 2018 that is), visionary founders have had the opportunity to influence the valuation of their companies even when they are public by driving the perspective on how to think about their current and future markets. Tech people can get really creative when it comes to thinking about markets, for the better… or the worse sometimes.
In the early-stage venture capital business, we try to identify uniquely talented founders and try to see what they see. It’s a visualisation exercise. You look at the world in motion and think “what if?”. There is usually little data to make your decision. At a more mature stage, companies have more data to show and there are all sorts of financial methods to value them. The financial narrative starts to challenge the technological one. When numbers meet code, words can help to reconcile the two by helping people understand where the company will go in the future. The best founders continue to help you “see the invisible” way beyond the VC stage.
Let’s take a few examples:
  • I have already mentioned Tesla and Elon Musk. Musk is a fascinating and divisive figure but the success of both Tesla and SpaceX is based on his incredible ability to craft a powerful narrative around his companies (obviously coupled with incredible engineering work).
  • Amazon: for years, most financial analysts struggled to understand how an online book store would ever make money. Jeff Bezos is famous for not letting financial pundits and public market expectations drive the narrative for how his company should be valued. He always focused on the long term. If you read the book “The Everything Store”, you would know that Bezos had a grand vision from day 0 (already reflected in the name he picked for the company). He did not only want to build the largest online retailer but he wanted to build a technology company. This drive pushed him and the company to launch AWS. It was impossible to predict that Amazon was going to get into the cloud infrastructure business but those who believed in the “invisible” (and bought the stock) were immensely rewarded.
  • A few weeks ago, SAP announced they were acquiring the SaaS company Qualtrics for $8Bn, a reported 20x multiple on their revenues. Prior to the acquisition, the startup had been preparing a listing on Nasdaq at a potential $4.5Bn valuation. The deal was obviously described by financial analysts as massively expensive and dilutive for SAP. Bryce Roberts, a VC, wrote a great thread on twitter offering an interesting perspective on Qualtrics’ journey and what might have led SAP to pay such a hefty price tag. In short, a new narrative allowed them to position the business as the creator and de facto leader of a new software category. From SAP’s perspective, they bought growth (the holy word in public markets) in a new category.
Bryce Roberts
Until 2017 Qualtrics was a survey company. They built software that helped professors, initially, then companies, to survey customers, students, anyone on any topic.
Bryce Roberts
Then, they shifted their narrative.
Bryce Roberts
Category creation and definition is far too underutilized as a startup super power. The results for Qualtrics are undeniable and equally available to others willing to put in the work to stand apart.
  • Stripe: last summer, the SF-based payments company founded by 2 young Irish brothers announced a new round of private funding valuing the company at $20Bn. A couple of weeks before that, Adyen, a European competitor based in Amsterdam, went public at a $8Bn market cap in what was a defining moment for the whole European technology industry. While Adyen shares quickly soared by 90%, it never reached Stripe’s valuation. I don’t know Stripe numbers but I would bet they are behind Adyen so their valuation is most likely at an incredible premium and would drive many finance bros crazy. The tech faction is probably less surprised. Stripe is one of the most loved brands by developers. Since the start, the two Collison brothers have done a fantastic job at sharing their vision of the world and the reason why Stripe exists. Their mission is simple: increase the “GDP of the internet economy”. You don’t know everything they will do but you guess that these guys will push the boundaries and won’t stop where they are… and if past success is any indicator, do you really want to bet against them? Their recent initiatives like Stripe Atlas have started to give an indication of the scale of their ambition. Brace yourself finance bros.
  • Last example is Bitcoin: a digital gold setting new standards in terms of transparency, immutability and privacy for the tech bros. A financial scam with no intrinsic value compared to a “real” commodity like gold for the finance bros (this latter argument can be quickly killed but as promised I won’t do this here :) ). Who knows where Bitcoin’s price will be in a couple of years but it is likely that, despite the current bear market, crypto has “crossed the chasm” as an asset class because enough people have bought into its narrative (more on that in a future letter).
As tech has started to impact every industry, its influence on business strategy increased and challenged the dominance of the financial industry. The great tech entrepreneurs of our time have become cultural icons. Our parents dreamed of becoming rockstars, our generation is dreaming of becoming tech founders. This means that founders enjoy a massive level of attention, many people carefully listened to what they say. If they can craft a powerful narrative to their employees, investors and customers, it benefits their companies and can be reflected in their valuations. A great and well articulated story inspires private and public market investors and helps them think differently. They are sometimes willing to pay a premium for the invisible. At least, that was certainly the case until 2018. The leading voices in tech were mostly welcomed with excitement and optimism but I feel that last year might have marked the start of a shift. The technology discourse is today welcomed with more scepticism and challenge. Now the “policy bros” are trying to regain control of the public narrative of technology companies which could impact whether investors believe they will actually be able to execute on their vision.
As 2019 is announcing itself as the year of some of the most anticipated tech IPOs (rumoured: Airbnb, Lyft, Pinterest, Slack, Uber) it will be interesting to watch the founders of these companies and their bankers position their businesses to investors. Expect intense “tweet storms” and lengthy blog posts dissecting s-1 and other IPO prospectus. Tech and Finance bros will be busy in 2019.
Thank you to my wife Isabelle and my partner Mish for commenting on the drafts of this letter.
In the next letter, I’ll talk about the blurring lines between collecting, consuming and investing.

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George Henry

We live in digital times. A monthly essay mixing serious thoughts and more trivial observations.

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