Where there is mystery, there is margin
💡JC's Newsletter #72
Dear friends,
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In JC’s Newsletter, I share the articles, documentaries and books that I enjoyed the most in the last week, including a must-read.
Let’s talk about this together on LinkedIn or on Twitter. Enjoy!
💡Must-read
👉 Where there is mystery, there is margin (Ryan Petersen)
Experts in teams:
Is there an ideal ratio of insiders with domain knowledge to first principles outsiders just approaching the problem with fresh eyes?
I don't know if there's an ideal ratio, there's certainly an equilibrium that you want to maintain, and I think what we go for is like 20%. I think you want to have 5 or max, 10 person teams. And so you want at least one person on that team to know how it's done so you at least know what the reality is today, but not two or three because they'll team up and convince everybody and be the loudest voice in the room and you'll do it that way.
I really like this ratio of expertise to remain very innovative while not missing obvious points.
Emergent properties:
I try to remind our team like focusing on the cost of labor and on a transaction, it's a bit like when the telegraph was invented, looking at the labor costs that resulted from horseback riders. For sure, you saved a lot of labor, you improved your message transit time. That's not really what's so special about the telegraph, even though it's incredibly powerful. What happens with the telegraph is you get this emergent property. Once the network has everybody connected, all of a sudden you unleash this insane amount of potential for new types of messaging experiences.
We are creating emergent properties with our instant vision of healthcare and reimbursement. It will be very interesting to see what behaviors we create.
Another example is, today we run 5 warehouses around the world and we have another 15 that run our software. And that's my preferred model. Two things that we got from running the warehouses ourselves, first was learning. We were in there learning what's off for these warehouses need to run.
By running it ourselves, we were able to save 3 days off of transit time on a LCL, less than container load shipment. And then we built software and now we have third parties running that software, and I'm hoping not to run a lot of warehouses.
Very interesting position on building it for yourself to know what to build for others :)
I think that's what set Flexport apart, is that we didn't see ourselves as this software company that is just going to build these protocols and everyone's going to follow suit, I think we build it and they will come is not true. Instead, we saw ourselves as a customer company. We're here to solve customer problems. Let's go, whatever solution is required. And if that means calling truckers, we called truckers for a couple of years until we built software for the truckers to onboard them.
It is so important to be scrappy, and even it seems non scalable!
It's probably that, it's that willingness to go out and get your hands dirty and not be so ivory tower, you've got all the answers here, but more across multidisciplinary thinking, more people from tech willing to go out and do sales and have those customer conversations and those vendor conversations.
We are pushing for engineers going to the field more and more often at Alan.
My approach to entrepreneurship, let's try a lot of stuff. I've tried so many failed businesses that you will never hear about because they were just stupid ideas, but who knows, some stupid ideas really take off, and the world is much more irrational than you think, the logical thinkers are really overrated. You need people who are willing to try crazy stuff because the logical idea, everyone else already thought of, it's already exposed, whereas the illogical, irrational one, a startup customs brokerage, that is highly regulated. Pretty irrational.
I think that's something we do well at Flexport is let's try things, let's experiment, let's have like 1,000 flowers bloom and then see which ones are actually good and going to grow into tall trees and then pour water on those. But the hard part is killing the experiments that aren't working.
How can you accept testing more BIG and BOLD ideas that seem a bit irrational?
If you don't build processes for the kill part and the select part, what are we actually going to do, you will end up with everybody running in every direction and no alignment in your organization.
I also think that entrepreneurs underrate capital allocation and how important it is to not waste money and to really think about every dollar of cash, you have a lot of choices of what to do with it. I think the ticket to getting them all aligned is probably in equity and retained earnings, is like lower your salary, give you more equity, use that cash to reinvest and compound and generate wealth.
It is super important to combine the creativity above with the ability to kill more ideas. We still need to improve on that.
First, you've got to get product-market fit. And once you do, you really need to figure out what's the balance between short and long-term thinking. Someone who's really good at this is Elon Musk, where he calls his shot and says, "We're going to Mars. And this year we're going to do this, next year that, next year that, and eventually we're going to go into the galaxy and explore." That's long-term thinking, but with really good sequencing.
We edit our plan year after year.
Operational Planning 1 and 2, they do it twice a year, where they have teams write down what they're going to do for the next...actually they do like a five-year plan, but then update it every six months.
Every team writes their charter. Every single team to document, here's what we're going to do, how it aligns to the company vision and mission, here's the other teams that we depend on, here are the risks that we think we're going to face, here's the talent that we're going to need along the way.
Very connected to Amazon OP1 and OP2, and long-term ownership.
🏯 Building a company
In addition to selected articles, I share one of Alan's leadership principles every week - the same one that I share internally and with our investors every Wednesday.
👉 Alan and Alaners learn new skills (Healthy Business)
At Alan, we push to learn those competencies internally or externally because they are important in our path to achieve the objectives of our long-term thinking.
We acquire new competencies and exercise new muscles, never mind how uncomfortable and awkward-feeling those first steps might be. (For example: we cover books purchase)
👉Engineering Management - Process (Yishan Wong)
Only allow processes to be implemented which are specifically desired and put into place by those who will be directly involved in using it.
Managers will need to suppress their natural fear that things are too chaotic or out of control due to the lack of visibility into details. They should focus on leading by setting accurate and informative context and goals, facillitating the natural organization that results from collaboration between technology workers.
For example, the broadcasting of team status and project updates is a useful function to help inform others in the department or company of what's going on. This is a process that can be done entirely by managers.
The key is that here, we have a process that benefits managers wherein the cost is also borne by them, thus allowing them to optimize the process for their own mutual benefits. It doesn't (and shouldn't) need to involve anyone else.
Interesting take on how to remove most reporting
The harmless suggestion to write down "the steps we go through to do X" is taken up (where X might be "launch a product" or "take an idea from conception to delivery" or "request a new desk"), and the process is described in a document and posted onto (perhaps) an intranet page. [...] Another new person happens to ask them, and they in turn are referred to the document. This cycle repeats merely a couple of times, and the document itself becomes viewed as the authority on how something is done. The original ad-hoc process (which was adaptable, organic, and worked well because its informality allowed people to perceive it as flexible) has been replaced in the minds of most of the current people (newer people always outnumber old-timers in a hyper-growth company) by the document, which is now viewed as a overly-precise specification of Steps You Take to Do X.
Very good suggestion on the “how we do things”, and maybe put big disclaimers on the fact that it should not be followed as the truth but as indications?
👉 Should you stop giving your money to paid marketing? (Twitter)
🗞In the news
📱Technology
👉 How Stripe became Silicon Valley’s most prized asset (Financial Times)
One of Stripe’s key competitive advantages is doing more with less. It has about 3,000 staff, a third less than Facebook had in 2012 when it went public at a similar valuation.
Stripe recorded about $2bn in gross revenues in the third quarter of last year, according to one person who has seen the numbers. Those revenues translated to more than $120m in earnings before interest, taxes, depreciation and amortisation, this person said.
There are two aspects to Stripe’s business model that got investors excited. One is the fundamental infrastructure of payments processing, for which Stripe typically takes a fee of roughly 2.9 per cent of each transaction — or 1.9 per cent in Europe, where card fees are typically lower. Stripe’s is not the cheapest rate available but key to its appeal is speed and simplicity of integration, especially for the small businesses and start-ups upon whom it built its business.
👉Identify verifications (Platformers)
The dating app Tinder began allowing any user to verify their identities. Upon request, Tinder sends the user a picture of a model performing specific poses. Users take selfies in the poses shown and submit them to Tinder; photos are reviewed by its community team.
“We rolled out a scalable solution for verification because we believe that trust matters when it comes to introducing new people,” a Tinder spokesman told me today, when I asked the company how it was going. “And that level of trust helps our members make more connections: people who verify their profiles receive more likes on average compared to those that don’t.”
👉Fearing Spotify?, Apple’s Earnings, Margins and Chips (Stratechery)
As far as margin is concerned, the M1 chip, while certainly expensive relative to any other chip Apple has made, is equally certainly cheaper than buying a chip from Intel. My estimate is about $50 cheaper for the MacBook Air, which translates into an extra 500 basis points of margin. That certainly qualifies as a “cost savings”!
Apple significantly increased margin by going vertical and it was very hard.
🏥 Healthcare
👉 2021 Healthcare Predictions (Bessemer Venture Partners)
Several large companies have been built out of the exchanges, including our own portfolio company, Bright Health, which raised a $500 million Series E last fall and now serves over 500,000 consumers in more than 50 markets.
Interesting benchmark in terms of size. Bright is now filing for IPO (more to come soon)
The COVID-19 pandemic, however, has reminded us of the immense need for accessible and rapid diagnostics. Further innovation in diagnostic testing will be required to support the plethora of remote and at-home care models that are emerging.
Private companies, such as Everlywell and LetsGetChecked, raised large private rounds this past year, too, further validating the direct-to-consumer testing category.
What direct-to-consumer testing enables us?
As telemedicine infrastructure becomes commoditized, specialty-focused virtual care has evolved with the help of specialty-specific remote monitoring, at-home diagnostics, pharmacy, and labs capabilities.
Is telemedicine going to be totally commoditizied?
Throughout 2021, we anticipate continued investment in virtual care, with an emphasis on:
Companies that deliver strong “hybrid care,” facilitating effective transitions between best-in-class virtual care experiences and in-person visits.
Vertically-focused businesses that deliver solutions targeting specific specialties, patient populations, and/or indications.
For example, Hinge Health is a coach-led, digital therapy platform for self-insured employers and health plans that provide care for more than 124 million U.S. adults living with musculoskeletal (MSK) disorders
Our strategy with AlanBaby (vertically-focused). Insurance and the health & well-being companion is ‘hybrid care’.
The newer, second wave of digital health companies is emerging with consumer-centered strategies, including both B2B2C and B2C go-to-market motions.
APAPs, which include nurse practitioners and physician assistants, are the foot soldiers of the healthcare system who, along with other ancillary providers like physical therapists, nutritionists, pharmacists, health coaches, etc., are growing in importance in terms of care provision in our country. Over the last few years, we’ve seen several companies emerge that empower Advanced Practice and Ancillary Providers (APAPs) to practice at the “top of their license”, often performing tasks previously under the purview of physicians.
Many businesses are leveraging APAPs to not only drive cost efficiencies, but also to play to the strengths of various practitioners who are uniquely trained to address key gaps in care.
Pharmacists are considered one of the most overtrained and under-utilized resources in healthcare, despite the fact that they can prescribe medications in 43 states, manage chronic diseases, and administer vaccines.
Along this thesis, we recently invested in Aspen RxHealth, a tech-enabled marketplace that connects pharmacists with patients to provide clinical services on behalf of health plans, at-risk providers, and biopharma companies.
Of course, there are many services that only doctors can perform, and we cannot underscore this point enough. Companies will continue to think creatively about ways to leverage MD expertise and capabilities at scale including one-to-many models (e.g. Groups) and intelligent and hierarchical escalation of care.
In-house workflow tools that supercharge clinician productivity, and telemedicine infrastructure companies like Wheel and Truepill.
A renewed focus on underserved patient populations.
A new cohort of companies is on the rise — companies that serve the unique needs of LGBTQ+ people, people of color, people living with housing-instability, and immigrants to name a few.
The LGBTQ community is a great case study — for instance, our portfolio company, FOLX Health, is building a virtual primary care clinic in the cloud for people who identify as LGBTQ. Their initial products will include hormone replacement therapy for transgender patients as well as sexual health and wellness products and services.
If you know people wanting to build for those communities. Ping me.
Collective Medical Technologies: Still, there remains a massive opportunity for improvement in interoperability across electronic record access, record location, clinical view, and ultimately, the downstream impact on care.
Interesting take on interoperability on how to get there.
💚 Alan
👉 New discovery and signup flow for self-serve companies (alan.com)
The sign-up flow of small companies joining Alan has been improved. Try it out!
👉🇫🇷 “Contrôlés par la CNIL” (Alan Blog)