Latest / 1 to 100 / E24: Is the Shopify Gold Rush Over?

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E24: Is the Shopify Gold Rush Over? · 1 to 100

0:00
Why do you think people are moving away from ECOM?
0:02
What are you hearing? Yeah, I've, I've had like 4
0:08
different founders who are like visiting SF, who are like
0:11
broadly in the ECOM SAS space tell me that they're yeah,
0:16
they're building to move outside of ECOM.
0:19
So, and then like the unsurprising things are also
0:22
asking for like fundraising advice.
0:24
But the, yeah, the part about it that's scary is that they're all
0:30
saying that they're trying to move outside of Ecom and it is
0:34
correlated to fundraising. So I, I, I did you guys hear
0:39
this podcast with like Tomer and Sean and Robin and Taylor?
0:47
Did you hear this? I saw it.
0:49
They got PO1 right? Yeah, yeah, yeah, yeah, yeah.
0:54
I think that the scary observation that they had, which
0:58
is probably correct is that to build a venture scale outcome in
1:03
E com is like tremendously difficult and like close to
1:08
impossible on on Shopify alone. And so given those two
1:15
observations, I think a bunch of venture funded founders in the E
1:19
com SAS space, or at least the ones that I have been chatting
1:24
with are intentionally seeking to leave e-commerce basically.
1:29
So, so like I think like not only are they correct, but the
1:32
people who are building for the space are actively looking to
1:35
depart it, which is just to be clear, that's like very bad news
1:39
for everybody involved, especially for the E com brand
1:42
founders, because basically what it means is that they're not
1:44
getting invested into right? Like the building of tools for
1:48
you is the downstreaming of investment, just like how we,
1:55
like you and I benefit from the investment going into the AI
2:00
companies because then we use those tools and they provide
2:03
leverage to our business. So I, I feel like part of this
2:08
is potentially what happened in the e-commerce space with SAS is
2:15
that people started solving problems that potentially didn't
2:17
need to be solved or they were solving problems in which didn't
2:22
have like that interesting of like an impact on these
2:27
businesses, right? Like if you look at like the
2:29
Shopify app ecosystem and then you think about like the success
2:32
of an e-commerce store, the fundamentals matter so much more
2:37
than like anything else. And in a way, like the
2:40
incremental lift is like usually an anomaly of like a lot of
2:46
tools, right? Like it's just like the
2:48
companies that have the best brand and the best people behind
2:51
them and the best distribution and the best product essentially
2:56
win. And like there's not many like
2:58
widgets that make a thing that wouldn't have won win or even
3:02
the ones that are winning like win, you know, drastically more.
3:07
And then and then the other pieces that inherently like I,
3:11
I, I had this thought like the other day actually where I was
3:14
like, I was thinking back to like old school Kickstarters,
3:17
physical product Kickstarters that were like e-commerce focus.
3:21
And what was like the thing on every single one of those like
3:26
PD FS that they would like design in the Kickstarter page.
3:29
It was like, we're cutting out the middle man.
3:31
Like instead of buying your razors from Gillette, that goes
3:35
to CVS, that goes to you. We're cutting out the middle
3:38
man. And those businesses had like
3:41
interesting, sort of like like unit economics because of that.
3:46
But for, but then what we found was like for these businesses to
3:49
scale, the middleman just became meta in Google.
3:53
And so inherently like these have morphed into like very
3:57
nonprofitable businesses for, for for most people, especially
4:01
in the scale up space. And so you have like a situation
4:04
where these businesses are heavily just reliant on product
4:07
and distribution. And then the thing that actually
4:10
exists on your website in many cases doesn't make that much of
4:16
an impact. And so like the better reviews
4:19
app and like the better fit, like if these are like
4:21
incremental small minute upgrades to a EBITDA malt, like
4:28
to an EBITDA base that is inherently going to be small
4:31
already. So it's like, and then you're
4:33
talking about like venture outcomes and like what pricing
4:35
needs to be for SAS for that. It's like it doesn't like make
4:39
that much sense. Core things like Clavio, which
4:44
is like we send emails to all of your customers.
4:48
And like when you send emails to those customers, we make a lot
4:50
of, they make a lot of money. Getting like 10% more reviews
4:55
has like a small impact, you know what I'm saying?
4:57
And that's kind of just like, I think.
5:01
Yeah, I think that I think that the question it would invoke
5:04
Zach, I'm curious how you would frame This is why do people go
5:10
back to Clavio over the like 100 other ways you can send e-mail.
5:16
So by the way, like let's just assume it must be true.
5:19
Like let's take for granted e-mail is a must have thing to
5:24
run an e-commerce business, right.
5:26
So it's like if you have any form of like repeat in your
5:31
purchase mechanism or anything like that, you will send emails.
5:35
Like you don't, maybe you don't have to send emails if you're
5:37
like a one shot sale. So like, for example, TikTok
5:41
shop, if somebody buys from your TikTok shop and you have a
5:44
product that's designed to sell through TikTok shop, maybe you
5:47
don't care. I'm not saying that it's true,
5:49
but I'm like trying to create a toy example.
5:52
But let's just say for most businesses, you must send a
5:54
reminder somehow. So you've got to like send an
5:56
e-mail. I think the natural question it
5:58
begets, if you're correct, is why does everyone choose Clavio?
6:03
So why not choose the cheaper option?
6:06
I think there's a good few things like 1 like for how much
6:10
for like a really growing like well operated store, the amount
6:13
that you pay Clavio is it still pales in comparison to the
6:17
amount of money that it's like generating, which I don't think
6:20
exists for a lot of other sort of like software tools that
6:23
aren't as important as e-mail. And So what I'm saying is like
6:26
the these businesses are built on like a few very important
6:30
pillars and Clavio is that one. And like their timing was really
6:34
good. And I mean, like, I also think
6:35
like, OK, it's extract strategically.
6:37
Why do I think Clavio's like like succeeded over a long
6:39
period of time? Like a bit anecdotally, it's
6:41
like, wow, their agency partner program was like incredible.
6:43
Like they're when I was running my agency, I was like making 5
6:46
grand or something a month on just like affiliate like
6:49
referral. Like so it's like you have and
6:52
like most brands aren't running their own e-mail like in house.
6:55
So it's like built by the agency.
6:56
So it's like, OK, you have like a certain critical mass of like
6:58
all the best agencies are using Clavio.
7:00
So it's like, oh, like, so it's like, I think it's one of these
7:02
just like, and like Clavio hasn't really dropped the ball
7:06
that hard. Like they've had hiccups along
7:09
the way, but they've never dropped the ball incredibly hard
7:11
on product. It's always been good outside of
7:14
like a few like really public outages and things like that.
7:16
But that exists like everywhere. And then the other thing is
7:21
because it's one of these core pillars, you can't have it go
7:23
down on Black Friday when you're sending an e-mail to 5 million
7:26
people. You can't have it go down
7:28
because it's like it's game time, it's the Super Bowl, and
7:32
like everything needs to work. And so I think people are just
7:35
like, OK with that because they know, like Clayview bill equals
7:38
revenue. But I don't think that the same
7:41
feeling exists for most of the Shopifyers.
7:44
Yeah, I can. Agree.
7:45
I like what you said Rashad about pillars.
7:48
You know brands need to send reminders.
7:50
One of those ways that they send reminders is with e-mail, but
7:52
they also send it with SMS and push notifications.
7:55
They have an app or they want to send push notifications to
7:57
Chrome browsers, to browsers in general.
8:01
Pretty much none of the other is provide all of those.
8:04
Postscript is just SMS. Yopo dropped out.
8:07
There's ominous end. I guess they actually have
8:10
market share. There's male temp, they have
8:12
some market share as well. There's a lot of focus on on
8:15
play Go, but there are other players in the space.
8:19
But yeah, you have a question then.
8:21
Yeah. Then what's the incentive to
8:26
build? Venture backed staying in the
8:31
Shopify ecosystem, no. No, no, So just let's just say
8:34
those dynamics are true, like what you just described.
8:37
So let's let's assume that that's true.
8:39
And it's like I, I, I don't have a good way necessarily to like
8:44
debate that, right? Like that's a pretty, that's a
8:47
pretty reasonable view. And so if you were to take that
8:52
view and you are someone who can like take investment dollars,
8:58
whether your own time or through raising capital or whatever it
9:01
may be and apply it somewhere, why would you choose to apply it
9:05
into this ecosystem? Well, so I think that depends on
9:08
so like if you were like a kid coming out of like school and
9:13
you're didn't have any market expertise and you were going to
9:17
go and try to find a problem to solve and you haven't
9:19
experienced things and you don't have like critical knowledge
9:23
through experience in a specific industry.
9:25
Like obviously don't choose e-commerce because like the
9:29
world is so large and like your brain is so green and like
9:33
there's definitely better higher leverage industries.
9:36
However, for example, in my case, because of my background,
9:40
I had concentrated knowledge in one specific area and I had a
9:43
problem that I personally wanted to solve, but I didn't need to
9:46
seek the problem. Problem found me.
9:48
And then it becomes a useful thing and it plays out over the
9:52
what, 4 years old, like almost this month, right?
9:55
And it's like if I took this last four years and worked in a
9:59
different industry, like could I have potentially made something
10:03
larger? Maybe.
10:05
But then also I would have to say that I'm giving up all of
10:08
like the kind of head start that I had to start it, which made
10:12
the success likelihood higher from day one.
10:17
So it's like, I don't think that was that much.
10:20
Like you have to if you really love it, right?
10:22
Like if you obsess about this stuff and you're like, I really
10:25
love making Shopify stores more money, then that's the reason to
10:28
do it. But I wouldn't say that there's
10:29
like dynamics in the ecosystem that are like pointing directly
10:33
at this. I think you're the best person
10:35
to answer this though, Rashad. I can't say that Play who is
10:41
going to be the main player forever, but people are
10:44
investing in for Mart to improve the state of e-commerce for
10:48
brands. Why are they doing that?
10:53
I'm a good fundraiser, I guess is the TLDR. But you know, I, I
11:03
first of all, I don't disagree with Zach.
11:05
Like I I think that actually the problem, but I, I don't know
11:10
that you and I would agree on the underlying reasons why.
11:13
And maybe, and maybe that's why there's a distinction.
11:15
So like I agree that especially for the Shopify ecosystem, the
11:22
propensity to pay because these businesses are so unprofitable,
11:26
you said something really critical there during the scale
11:29
up phase. So like call it 5 to $100
11:33
million of revenue of GMV for an E com brand.
11:37
You're so unprofitable and your cash conversion cycle is so
11:40
painful that like the incremental dollar that you
11:44
spend really gets scrutinized. I think that that's true for
11:49
sure. And and, and basically like all
11:53
of your investment as a brand during that phase goes into like
11:58
only the critical infrastructure things, which is like your ads,
12:03
your, your ability to accept payments, your three PL. and the
12:09
addition of new products to take you from like 10 to 100 because
12:12
an inventory almost exactly an inventory.
12:15
Yeah, exactly, Yeah, inventories was screws the cash conversion
12:18
cycle. Exactly.
12:19
Yeah. And so like, and so until
12:22
basically like that window, there's some like actually Zach,
12:27
I want I'm and I promise Jack, I'll answer the question.
12:29
But like Zach, I'm curious for your and actually, yeah, Jack,
12:34
your econ dude, I don't know why I keep forgetting you had an
12:36
econ business, but when you were under 5 in GMV, was the cash
12:42
conversion cycle that painful? We never passed 5 million in
12:46
GMV, my business. Was the was the cash conversion
12:49
cycle painful at low scale? No, we had digital products.
12:53
It was incredible. OK.
12:55
And Zach, what about you? So we had 50% of our business
13:01
was like stuff that we held inventory for and 50% of the
13:03
business was things that were like print on demand, like a lot
13:07
of art and things like that. And so the class conversion
13:09
cycle on print on demand was like really well.
13:11
So it wasn't that painful, but I will say like I wasn't running
13:15
like I was running that business as like a Piggy Bank as well.
13:19
Like it was like I was just turn trying to turn like a buck into
13:23
a buck $30.40 like on a total 30 day rolling basis and like.
13:30
And you can do that sub 5 million, right?
13:32
You can do that sub 5 million and then where like all of the
13:34
pain came and the reason why I left was just like there was
13:38
this moment where it was like you actually have to like this
13:39
business to go to the next level.
13:41
And I fucking hate the product. I hate like I like it was like
13:45
this is horrible. Dude, this is my big.
13:49
Yeah. So now I'll finally answer your
13:52
effing question and I'm not trying to dance around it, but
13:55
like, this is my thing that I finally realized.
14:00
I finally, and I don't know how it, I've been building this
14:03
business for almost 4 years now and I realized it like four
14:08
months ago. OK, So like I'm clearly an
14:10
idiot, right? But I realized it after I raised
14:13
money, thank God, which is that like between the five to $100
14:18
million range, the cash dynamics and the economics of these
14:23
businesses are really hard. It's like really hard.
14:27
And so actually the market has this very weird barbell where
14:32
under 5 million, like it's people who are kind of running
14:36
it on the side just to like produce cash and they're kind of
14:39
happy. And like a lot of them are like
14:41
weekend warriors and, and like, and like we, we all have friends
14:46
in that bucket. And so it's like, you kind of
14:48
realize like actually wait a second, like these people are
14:51
kind of like happy. And it's like, if you can like
14:53
do something that is high ROI for them, they're like, as long
14:56
as it's not like a ton of effort, they'll like do it.
14:58
And then they're also happy, you know what I mean?
15:00
Like they're kind of like stay happy between 5 and 100.
15:04
Like man, these people are stressed.
15:07
Like, I don't know a brand operator in that range who is
15:11
not stressed, OK. And correctly so because the
15:15
business is so hard. And so I have like tons of
15:17
respect for all of the, and we have like lots of customers in
15:20
this range, but it's like I have tons of respects respect for
15:23
these people, but like I now much more deeply understand like
15:27
what what their business feels like.
15:30
And then you go to like north of 200 or like the billion to $5
15:33
billion range. And now we're talking about like
15:36
a totally different set of dynamics where it's like there
15:41
are digital transformation projects, there are air
15:42
transformation projects. Like there's, there's like real
15:45
work that you do to like move the needle on these large
15:48
enterprises. That is a very high value
15:52
because it's like so hard to get things like sort of like moving
15:56
at that scale. And that's, that's the main
16:00
thing that I realized Jack to, to, to answer your question.
16:03
And so like I arrived at the same place that if you were to
16:07
listen to this podcast, that and we'll, and we'll be talking to
16:10
Tomer soon. But I arrived at the exact same
16:12
place that I think Tomer, it seems like arrived at, which is
16:17
actually there is a lot of work to do.
16:19
It's just you're never going to build a very big company serve
16:24
it. And now I'm really curious what
16:26
PJ would say to this statement, but you're it's very hard to
16:29
build a very big company in the like 5 to $100 million range
16:35
serving the five to $100 million customer, Zach, for the exact
16:39
reasons that you described. Now, I also think it's true that
16:44
E com, the most beautiful thing about E com is the signal, which
16:49
is why meta loves E com because you click on an ad and you click
16:55
on the purchase button and you get data and data drives the
17:00
Internet like, and and I think people truly underestimate that
17:05
ads and e-commerce are basically the reason the Internet works.
17:11
And that is like lost in so much of this like discussion, because
17:15
if we didn't have that dynamic, like the the way we interact
17:20
with the Internet would not be the same because all of these
17:22
services would not be for like free, You know what I mean?
17:25
Like everything would change. And that part of the dynamic is
17:33
the part Jack that actually keeps me like loving this part
17:38
of the the ecosystem is like, yes, I'm going like it is my job
17:43
to build a very big business, but why am I like roughly in
17:47
this space? It is because like there is a
17:51
very valuable thing that gets produced in the immediateness of
17:54
the data feedback loop that comes out of e-commerce that can
17:57
then benefit a much larger variety of of businesses.
18:01
And that's that's how I think about it.
18:03
And that's like like without over sharing, but that is how we
18:08
think about what is the end impact of of Firmat, right,
18:12
because we power all of the consumer experiences and so we
18:14
have all of the consumer data. That's interesting.
18:23
It's interesting that point of signal as well and then the flow
18:26
of funds. I'd love to hear what you guys
18:29
think about competition and how competition might be squeezing
18:33
out a lot of the players in e-commerce that maybe shouldn't
18:37
exist. Maybe some of them are operating
18:39
at very tight margins right now because they have to spend quite
18:41
a lot on advertising. But really they would be dead
18:43
otherwise because they're just better players in the space.
18:46
But the market demand is so large that they get to survive
18:49
being mediocre and not actually being very exceptional at all,
18:53
right, but getting enough customers.
18:57
You mean they're SAS companies servicing e-commerce getting
18:59
squeezed or e-commerce brands themselves?
19:01
I think maybe both. Yeah, maybe.
19:03
You know, you mentioned this earlier about problems that
19:05
don't need to be solved, right? Somebody is solving a problem
19:08
that doesn't need to be solved. But there's enough people,
19:11
there's enough demand. Maybe I should?
19:12
Clarify that statement. There's problems that can be
19:15
solved and if they can be solved at their venture dollars, they
19:18
should be solved at venture dollars.
19:21
And so potentially there's problems that are being solved,
19:22
the venture dollars that shouldn't have been solved,
19:24
venture dollars, I would consider our business to be one
19:27
of them. There's a really interesting
19:30
thing that's happening for me right now, and I might eat my
19:33
words on this, but our venture backed competitors are not
19:41
seemingly doing that well and they're not putting the venture
19:45
dollars to work in a way that is like sustaining or building it
19:54
that big of a business. There's some people that are
19:58
getting kind of like gobbled up and then thrown out.
20:03
There's some that are like trying to figure out how to make
20:05
these like unit economics work for the amount that they've
20:07
raised. And all of the dilution that the
20:10
founders have, you know, seen and the speed that they've moved
20:13
out has led to like a bunch of shrapnel around around them in
20:16
which they have to like, kind of tiptoe around.
20:20
And in a way, like I've never been more confident in my desire
20:26
to bootstrap because of like the current like climate that we
20:29
seem seem to be in. And I don't know, some of this
20:35
might be like rose colored glasses could be like growing
20:37
really fucking well in like the last 90 days.
20:43
But it seemed like all of the signal that used to tell me that
20:47
I might be doing the wrong thing has dissipated.
20:49
And then there's increased signal that I'm doing like the
20:52
right thing. And I still don't know exactly
20:58
what I would do if I, like, raised like $75 million.
21:02
But I'm also just might not be sharp enough to figure that out.
21:09
I've yeah, I have lots of things that I can respond to there.
21:15
Should we start with the competition side?
21:19
I think competition is only like multiplied by the amount of
21:26
money you raise. Like you're sorry.
21:28
The effectiveness of your competitor has nothing to do
21:31
with whether or not they raise money and their end state
21:34
outcome gets pulled forward because they have raised money.
21:38
And so actually whether or not you raise money, it's like
21:41
really doesn't change how good of an operator you are.
21:45
And and like of actually a good example of this is I did this
21:48
exercise recently, which is going to be only interesting to
21:53
you guys and like to none of our listeners almost certainly.
21:57
But I like looked at every round we raised who was on my
22:02
competitor slide because you know how like you put together
22:05
this stupid competitor slide where you're always on the top
22:07
right or whatever. And like 100% of those companies
22:11
died, right? Like every time I put one or, or
22:15
like I looked at the slides that people would show me, I like, I
22:21
appeared on their slide like overtime.
22:24
And all of those people are dead.
22:25
Like they don't exist anymore, basically.
22:28
And they already, and many of them raised more than me, right?
22:30
Because they like, they were able to raise in 2021 where you
22:35
could raise like a $20 million a off of like no revenue and like
22:39
just a good story. And we were a little bit later
22:42
and there was, there were so many different companies that
22:45
people would ask me like, oh, but what about this and what
22:47
about that? And by the way, that's happening
22:49
today too. There's like all of these like
22:51
agenda commerce companies that people like, oh, what about
22:53
this, what about that? And I'm like, I've been through
22:56
like 4 cycles of people because like every year there's some
22:59
like new crop that emerges unlike everybody else dies,
23:04
right. And so I'm just not sure, Zach,
23:08
that the raising or not raising of funding has anything to do
23:12
with whether or not you build a good business.
23:13
I think either you build a business or you don't build a
23:15
business well. You it makes a difference
23:18
because like there's more reasons that you can die when
23:24
you put like the venture sort of like when you touch that like
23:28
forbidden stone type thing like. I think you just pull it
23:33
forward. You mean?
23:35
You mean it would have? It would have failed anyway, and
23:37
then. Correct.
23:38
Correct. Correct.
23:40
Correct. OK.
23:42
But that doesn't take into account shifting like market
23:45
dynamics and like the ability for a business.
23:47
So like, one thing that I've kind of been thinking about a
23:50
lot lately is if you just don't die, it increases like the
23:58
likelihood of like long term success.
24:01
And like like very much believe. And I don't mean, but what I
24:04
mean don't die. I mean like continuously
24:06
building like a solid business because like the product that
24:12
you launch with isn't the product that you exit with in
24:14
most cases. And so like you're, you're like,
24:21
if you just avoid all of the land mines and like you keep
24:26
building, like eventually like you're in like a really, really
24:30
solid spot and like you start to take advantage.
24:34
I think you're. Compounding.
24:37
Yeah, dude, you are like super. Either under estimating what it
24:42
means to avoid land mines or overestimating everybody else's
24:46
capability. I don't know which one of those
24:48
two it is like the, the statement that you're making
24:54
that is highly nuanced is the fact that you're just
24:59
continuously building a good product and like not doing
25:03
things that will kill your business.
25:05
And, and all I'm suggesting is that capital, all it does is
25:11
accelerate the rate at which something would have otherwise
25:13
happened anyway. And so the operator who chooses
25:16
to invest the capital into those like other things or into those
25:21
other domains is the one who is like seeing the landmine and
25:25
running towards. But that's like on an individual
25:28
thesis. So what I'm saying is that if
25:30
you survive, you can form more thesis over time.
25:36
I understand that, but the act of surviving is active.
25:41
It's not. Passive I didn't say it was
25:43
passive but I but I'm meaning I'm meaning like.
25:48
And that active work that you're doing is actually the
25:51
distinction. So let's just say like you have
26:06
like a like a one year old business at like $1,000,000 fare
26:12
or and then you have like a three-year old business at
26:16
$1,000,000 ARR and at that moment they're growing at the
26:19
same rate. I would argue that the business
26:22
that is 3 years old that is growing at the same rate now
26:27
than the $1,000,000 that's one year old has a higher likelihood
26:31
of making right decisions. And I think that the $1,000,000
26:36
of ARR in most cases on the three-year old business is
26:38
stickier than on the one year business.
26:40
Totally right. That's kind of what I'm saying.
26:44
Yeah, Yeah, dude, sorry. We're agreeing.
26:46
We're I am agreeing that if you last longer than you are likely
26:53
to build a Better Business. I'm simply suggesting that that
27:00
is empirically true because of the fact that the operator is
27:04
better. It is not true because you have
27:08
lasted that time and, and, and that operator being better would
27:13
be better or worse. Not based on like they're just a
27:18
good operator and the good opera.
27:21
Sorry, let me say, let me say 2 differently.
27:24
You said the words. If I raised 75,000,000, I would
27:26
not know what to do with it. What I would say back to you is
27:32
that is precisely the point. Precisely the point is that you
27:36
would not go and spend it on a bunch of things in order to run
27:38
into a bunch of land mines. Yeah, yeah, yeah, yeah, yeah.
27:43
And, and so and so like all of these other companies now, I
27:48
think, I think that leads to like a totally different point,
27:51
which is like, what kinds of people raise money?
27:55
And what is the game that an investor is playing by investing
28:00
into companies where like you're investing into people who are
28:05
going to operate at extremely high velocity and you're kind of
28:09
expecting that a subset of them are just going to run into
28:13
landmines very fast and will just blow up.
28:16
But a subset of them because they end up happening to be good
28:21
operators or because of luck, which and either one actually
28:25
does not matter which one of those is true.
28:28
As long as they're operating at very high velocity, you will get
28:30
your return profile in time to actually return back to your
28:33
LP's. And so from the investor
28:35
standpoint is also totally rational to like make those
28:39
investments. Yeah, but you're but yes, you're
28:43
correct that you're like your VC backed competitors will die
28:48
faster than your non VC backed competitors, but they will both
28:52
die. Yeah, yeah.
28:56
Isn't that wild, I? Think there's something
29:01
interesting that's about phrasing, not increasing
29:05
competition and pulling forward your end state, putting aside,
29:09
you know, CapEx activities, time to market, speed of execution,
29:12
access to talent, those funds when you raise our incentive, we
29:17
talked about customers and the market producing signal with
29:20
their purchases and their activity.
29:25
And you asked, you know, what's the incentive to build in E com?
29:30
To what extent does the flow of funds create that incentive to
29:33
build one industry and stepmother?
29:39
Yeah, most of it. Most of it.
29:41
That, that, that, that is like, yeah, that is the job of
29:44
capitalism, right? Of of like the funds to flow to
29:48
the place where you want to create an incentive to build.
29:51
So and you're saying or not that like you've been experiencing
29:55
like a lot of VC backed software companies in the e-commerce
29:58
space now looking for like off ramps sooner than they should
30:03
and like do you? And so you're saying there's
30:05
like some fear around that. You think it's because you think
30:07
it's going to change the flow of capital into the space when that
30:11
cycle sort of like ends? Oh, that's a good question.
30:15
I'm not sure. I'm not sure if I'm going to
30:25
answer your question, but I'm going to share totally.
30:27
I'm going to share an observation that may be related
30:30
and then we can like try to figure out the answer together.
30:33
There's a completely unrelated SAS business.
30:36
So they do like developer tools, OK, who has similarly
30:40
experienced that their SMB market and their large
30:44
enterprise market are the fastest growing and their mid
30:47
market is hollowing out. Now I am like, I'm like trying
30:53
to think given all of these observations and given the
30:59
companies that are growing the fastest, so like these AI
31:03
companies and things like that, where is their revenue coming
31:07
from? And their revenue is also
31:10
bimodal. It's like the VSMBS or the
31:13
extremely large enterprises who are spending a lot.
31:17
And that kind of makes me wonder like, Oh my God, like what is
31:20
happening to the mid market in America period, which has an
31:27
outsized impact in E com because Shopify is over represented in
31:32
that bucket. But I'm not sure actually that
31:34
this is an ecom phenomenon, which is an even scarier.
31:39
I mean, like, look, I don't want, by the way, I don't want
31:41
any of this to be true, right? But, but, but I think what may
31:44
be happening and there's like, and like the, the sort of
31:50
optimistic way of viewing this is like, Oh my God, like this
31:54
current wave of AI is giving superpowers to like the smallest
31:59
businesses because there are peep, there are individuals or
32:03
two people who can now do things that they could never do before.
32:06
And like the biggest evidence of that is like Lovables and, and
32:10
like these types of companies where it's like, dude, like
32:14
there's like roughly half a billion dollars a year right now
32:18
being spent by individuals who think that they can like build a
32:22
business. OK, that is a fucking insane
32:26
number when you say it like that.
32:30
And then there's another bucket, which is the largest enterprises
32:33
trying to improve efficiency. So like when you look at
32:36
Shopify, Clavio, all these companies that are like crushing
32:40
it, they have grown their top line revenue.
32:44
Like this is the, the whole Jason Lemkin thing.
32:46
You remember what he was sharing with us?
32:47
Like revenue grew 91% / 3 years while the employee base went
32:52
down 30%. And so the impact of AI on the
32:57
largest businesses is also very powerful.
33:00
And so I think we're just in a tech cycle where actually the
33:04
middle doesn't know is not seeing the benefit that the
33:09
sides are. And in fact, the middle is
33:12
struggling for lots of different reasons, including they don't
33:16
have as good cash conversion cycles because they're not just
33:19
like weekend warriors and like they don't have the efficiencies
33:24
of a large business. And so there's like this big
33:26
miggle in middle bucket, no matter what type of business you
33:29
are, that's like having a very hard time.
33:32
And, and in in the SAS world, like the, the more I reflect on
33:37
this, it's like even crazier. Like think about like intercom
33:41
air table, like all these companies, OK, They're like a
33:43
couple $100 million ARR businesses roughly.
33:46
And like we would call them mid market SAS businesses, right?
33:51
Dude they are completely reinventing themselves as AI
33:56
business is another measuring the growth rate of their AI
33:59
business. They don't even measure the the
34:03
like growth rate of the existing business because they're
34:05
realizing they need to reinvent themselves do.
34:07
You think it could be one of these situations where like,
34:11
there's this book Crossing the Chasm, right?
34:13
And just talking about businesses, kind of like
34:15
transforming. It's like when you're crossing
34:20
the chasm with like solid ground, the steps in front of
34:24
you are look a lot like the steps behind you, but they go
34:26
they they, they increasingly become different over time.
34:30
But if you're crossing the chasm during a time of like shaky
34:33
ground and a ton of uncertainty, it's actually more like Lily
34:36
pads rather than stairs. And in which like you kind of
34:40
need to like fully step off of the first step before you can
34:44
get on to the other step, rather than like a, a normal like
34:47
staircase. You can like walk up 1 by 1.
34:49
Whereas like this you kind of need to be like hopping.
34:50
I think that could be like kind of just like what's happening
34:53
like in the world. It's like you have these
34:54
businesses with like a lot of product market fit.
34:58
But to get to what will be the next version, it actually is
35:02
like leaps rather than steps, which like then you can argue
35:06
that like, oh, like these are now some, maybe some of the
35:08
highest risk businesses kind of. Dude, I think I mean, do you see
35:15
evidence to the contrary? No, and then I also think like,
35:21
I mean, I was listening to a podcast the other day.
35:24
It was like a, it's called your mom's house.
35:27
It's a comedy podcast. And like, all of the ads were
35:33
like B to B sass. And I was like, this is like
35:37
fucking really interesting. Like, but like some of them like
35:40
B to BB to C like like Shopify, for example, or like, you know,
35:42
like, and I'm like, yeah, like there was probably spending a
35:45
bunch of a bunch of money on a bunch of stupid stuff, but like
35:47
this seemingly doesn't make much sense at all.
35:49
And but then I thought like, well, like, well, maybe like
35:52
these companies are really just focused on like these B to B
35:55
companies going downstream and like hopping over like the mid
35:58
market because yeah, like if you can add, you know, hundreds of
36:02
thousands of people on like a base Shopify plan is potentially
36:08
more impactful than grabbing like 1100, you know, $10 million
36:14
Shopify stores. Dude from Clavio's ask what you
36:21
guys know how many customers Clavio has?
36:25
They have 180,000 customers. And how many of those customers
36:29
pay Clavio more than 50 KA year? I'm going to say 10%. 10% so
36:37
like 16,000 yeah, it's like 3000 OK, So the, the, the like the
36:50
wonky thing here is, but it's like 20% of their revenue, OK.
36:57
And so there's like a massive barbell that is happening,
37:01
right? And yeah, I, I, I just don't
37:07
know, you know what I mean? Like you, you, you, you hear
37:09
data like this and you're like, the prize in the middle is just
37:20
not that big because those businesses are the ones that are
37:23
struggling. Like I think about Fermat, for
37:25
example, like we're like a OK customer probably to like
37:30
another because we, I don't know, we buy like tons of SAS,
37:34
right? Like SAS companies buy the most
37:35
SAS. And so because we're like in
37:38
what you would describe as the middle, right, we're not small,
37:42
We're not an enterprise. And I was like, yeah, man, like
37:47
we are probably a pretty shitty customer.
37:50
Like if I were to think about it, because I will at the like
37:55
flip of a dime if I decide to, I will like shift the strategy and
37:59
like churn like 20 SAS things at the same time, you know what I
38:04
mean? Like, and I will have like no,
38:07
no qualms about it, right? Because it's, I'm, I'm not at,
38:12
I'm not at like $500 million where I have like all of this
38:16
stuff that I'm like trying to optimize and like all, you know
38:19
what I mean? And I'm also not.
38:22
There's not as much downstream negative effects of that of that
38:24
decision, right? Like at a company with 15,000
38:29
employees, the downstream effects of switching is like,
38:31
oh, there's this isn't just going to be like switching.
38:33
This is going to be like a issue.
38:35
Like there's, there's and it's going to be an issue multiplied
38:37
by the number of people that were using this thing or you
38:40
know, so it's like you just like don't even experience as much
38:44
downside. Risk.
38:45
Exactly. Exactly.
38:48
Right. Yeah.
38:48
I wonder what those tools are that you churn 20 off.
38:52
Are they the incumbents that you've had for years?
38:55
Because they've served you really well, right?
38:57
They're really. Dude, we turned off of all this
39:00
is the thing. We're like a bad customer to
39:02
every and this was my big realization.
39:05
We're a bad customer to everyone like and that's and that's kind
39:09
of exactly my point. It's like a kind of doesn't
39:12
matter. Like you could be providing U.S.
39:14
sales tools, you could be providing US CS tools, you could
39:16
be providing US engineering tools, like, And so like, now
39:20
think about all of those companies, right?
39:22
So like those companies are like, oh, we're like sales SAS,
39:24
we're CS SAS, we are blah, blah, blah, blah, blah, blah, blah.
39:28
Like each of them, I am probably equally shitty to all of them,
39:35
but surely, I don't know, Zach, if you feel the same way, but
39:44
like, dude, I'll give you an example, OK?
39:45
Like our developer tools, Our developer tools, OK, we like six
39:50
months ago, 100% of the company was on Cursor, now zero because
39:55
everybody uses cloud code, OK, in sales, it was like whatever,
40:02
a year ago we were on Gong, now we're on Glyphic Customer
40:06
success. A year ago we were on God.
40:14
I don't even remember. Anyway, it doesn't matter now
40:17
we're on like some custom built software, right?
40:20
Like the list is endless, man, like every department.
40:24
And it's just because our evolution rate and and like we
40:27
just don't have any, Yeah. Like we don't hold anything dear
40:30
basically at our scale and our stage.
40:34
That's so interesting. In my mind there would be some
40:36
things that would get baked in. The CRM comes to to mind for me.
40:40
Like I'm not sure what you're using for CRM, but you you tend
40:42
to get married to your CRM, right?
40:45
I would imagine that the really there's like share business is.
40:52
I think this is the same thing, dude.
40:53
This is the same thing. It's like the total number of
40:55
those is tiny. It's like literally just
40:58
Salesforce and GCP. Those are the only two things
41:02
that I've held consistent. Like, literally.
41:05
From day one, even our the only thing that's held is GCP
41:10
intercom and intercom might be removed probably whenever annual
41:19
contract is done. But yeah, just GCP.
41:25
And these are huge. I mean, I, I wonder if that
41:27
middle of the pack is getting squeezed out.
41:29
Are you mentioned air table, you know, reinventing their product
41:33
around AI? Are they like, well, we're going
41:36
in One Direction, right? We're going up or we're going
41:38
down, right? I I wonder if the new market
41:42
entrants are he's sending people out.
41:46
He said that to this is, I mean, like, so I look, I don't know
41:50
what's in his head, OK, but at least what he said on Lenny's
41:53
podcast, which is like so astonishing to me and actually
41:56
kind of inspiring. Like I want to be clear, like I,
42:00
I'm like watching this and I'm like, God, I'm so happy to be
42:05
building a business right now because there has like this is
42:09
exciting, like these kinds of market dynamics.
42:11
You don't get them that often, right?
42:14
Like it's awesome that you get that we get to build in a time
42:18
like this. What how he said was like, you
42:22
know, we, we had, we grew up on PLG and then we had a time in
42:26
our company where we had like switch and we did enterprise
42:28
selling and this and that. And he literally says the words.
42:33
And now we have like switched back to PLG to like serve the
42:36
smallest companies to easily onboard them.
42:39
And if you go to Air Temples website now it looks like
42:41
Lovables, like if you go to airtable.com, it does not look
42:46
like Airtable used to look. There's literally a text box
42:49
that says like, what can I help you build today or something
42:52
like that? Total reinvention.
42:57
And they went, and you're exactly right, Jack.
42:59
They went straight back down to the smallest businesses or one
43:04
or like single individuals. I mean, like it is, it is like
43:14
an unbelievable time. It is an unbelievable time,
43:18
yeah. What do you think is the main
43:21
signal in terms of the flow of funds?
43:24
Is it consumer funds and what they're choosing to spend on?
43:26
When I say consumer, I don't just mean the, you know, the
43:30
average consumer, I mean like in general what the markets
43:32
actually buying or is it what people are investing into, like
43:38
what moves the market more? Wow, dude, that's such a hard
43:43
first of all, great question. I've no effing idea because this
43:47
is like are we demand constrained or supply
43:49
constrained in today's economy? I have like that is such an
43:52
effing good question, right? It's like you see a technology,
43:57
you pump all this capital in and all of a sudden you increase
44:00
supply, it changes the market in a completely different way.
44:03
It's so hard to know whether you're like, where are you on
44:06
like the demand supply movement? I mean, excellent question.
44:11
I've I've like literally not thought about it.
44:15
I, I'm not sure if I have like a good layer of the land.
44:20
This is just my like, you know, cursory glance what's going on.
44:26
But you know, it seems like there's lots of easy money
44:28
that's entering the market and capital's flowing into equities.
44:31
The stock market's up in dollar terms.
44:33
MNA is up right now because everybody's rich.
44:37
VC and P are up because they're chasing risk.
44:39
Well, M&A is up because of the administration change, right,
44:45
Right. Previously, like every fucking
44:47
meaningfully sized M&A was blocked and which then which
44:52
then removes 90% of the off ramp for startup and scale up sort of
44:58
like companies. And like, the moment that
45:01
floodgate opened, I just think that like, the markets in
45:04
general reacted like positively to it because they're like, oh,
45:07
the game board has reset to be fucking capitalism again.
45:13
Dude Zach I my Co founder yesterday told I don't know how
45:16
I didn't know this but the GDP print was at 3.3% growth in the
45:20
US as a three. Did you know this?
45:23
No. I don't know how this isn't
45:26
bigger news. That's a massive number.
45:30
It hasn't crossed 2IN in like decades.
45:35
So so Jack, I have no idea. OK, but but like and I don't
45:40
know how that the other number is.
45:41
Like if you were to get into like this is like right, Like
45:46
right now the S&P is like valued at like something like 26 or 27
45:50
times like earnings or something.
45:52
So it's like, that's also the highest it's been in like a very
45:55
long time. And like, I actually watched his
45:57
podcast with this guy and he was pretty much just saying that
46:00
like for all of history, whenever like the S&P was like
46:06
valued anything over 25 X earnings essentially was just
46:10
like followed up by like a very severe bear market kind of like
46:15
on the tail and that. But again, like things are
46:17
different. Things changed.
46:18
And then you have like the GDP growth.
46:20
But it's just like, I mean, at the end of the day, it's like if
46:22
any of us knew all this information and knew what to do
46:25
with it, we wouldn't be building companies, investing and fucking
46:28
living on a beach. So like.
46:33
Yeah, exactly. Yeah, yeah.
46:39
I, I don't know, man. I want to take the position of I
46:43
think we're gonna have a COVID era boom in e-commerce.
46:47
I think it's just gonna, I think everything's gonna go to the
46:49
moon. An E com, yeah.
46:51
An E com yeah, I think it's a very unpopular stance, but I
46:55
think that. You really are the happiest man
46:57
in E com you have just proven it.
47:00
I would definitely take the under on that.
47:05
The optimism. I'm curious.
47:06
No, I'm genuinely curious. I'm genuinely curious.
47:09
Yeah. Whereas with the optimism, I
47:13
think that no one is going to want dollars and everyone is
47:16
going to want to spend dollars as quickly as possible and as
47:20
much as possible. And I think a lot of people are
47:22
going to get a lot richer in dollar terms.
47:25
And they already are, right. You were just talking about the
47:27
S&P being up. That's for a reason, right?
47:30
There's a lot more dollars, right?
47:32
So it's, it's only a certain percentage of the population,
47:37
but I think that people are going to get richer, a lot
47:40
richer in dollar terms. Look, I, I, I hope you're right.
47:44
I hope you're right. Yeah.
47:47
It's like it is much harder for me to be cognizant or like for
47:51
me to be confident that those dollars flow into goods.
47:57
Yeah, I, I, I, I'm sure a lot of it goes into discretionary
48:02
goods, which is like what Shopify is basically.
48:05
It's like all discretionary goods.
48:06
But yeah, I have, I have. I have no idea.
48:11
Yeah, I'm not sure either, but I hope so.
48:15
I bet on luxury segment more than anything.
48:22
And then? Just think you bet on.
48:23
Luxury the same way we're talking about barbell because
48:26
barbell here. I'd bet on luxury and then I'd
48:28
bet on fucking dollar Emma. And like, I think the middle is
48:31
a bit miserable. I even just think about like my
48:35
own personal spending. It very much is like value and
48:40
free. And like this could be my
48:43
personality but I have 0 desire to get the middle thing.
48:51
Yeah, I, I, I have no idea my, my ability.
48:56
Yeah, up anytime somebody tries to predict something, I feel
49:00
like it's tough. It's tough.
49:05
That's why you get like, I refrain so much from predicting.
49:07
I'm just like, this is what I'm observing and it's like a crazy
49:12
field. And I'm just like, yeah, let's
49:18
just play the field, you know what I mean?
49:19
And then the score is what the score is so.
49:25
Yeah. I think, do you think that one
49:26
of the reasons we see so much pessimism though is that
49:29
businesses that were rather unexceptional to begin with are
49:33
dying? Like I don't think we're seeing
49:35
so many businesses that are really incredible businesses
49:38
serving their customers very well that are going out of
49:40
business. It's it tends to be the ones
49:42
that just weren't cut out for it or weren't cut out for it for as
49:46
long as they were in the game for right?
49:49
And maybe they just aged out. Maybe Newmarket entrance
49:52
squeezed them out and it was their time right to pass the
49:55
baton. No, I think most of the big name
49:58
stuff that we've seen has come from the markets being
50:02
optimistic. Casper Alper, fucking all that
50:07
shit. It's usually not the mark.
50:10
It's usually not like in a weird way, like it's not the it's not
50:15
like the product or the mark yet it was like they played with
50:19
fire and the fire got like way too big and they're like, holy
50:24
fuck, the tree that's above the fire is now on fire and like we
50:27
just got to go rather than just having it as well with bonfire.
50:32
I feel like that's I mean, but again, that could just be
50:34
because like the big ones are the ones we hear about
50:38
concentrated there. There's definitely a lot of
50:40
other mid sized businesses that just disappeared but and you
50:46
never. Hear.
50:46
Yeah, yeah, exactly. Yeah, yeah.
50:48
Because it just doesn't make good news.
50:50
So. So Rashab, does Fermat start to
50:55
serve non e-commerce customers? There is no chance that we do
51:00
not serve non E com at some point.
51:02
With 100% certainty we will serve non E com at some point.
51:07
And do you know what that first market will be?
51:13
Dude, I mean, like, yeah, like I'm, I'm yes.
51:20
And so and so and so like, yes, it's going to happen sooner than
51:23
later. And yeah, and, and, and this has
51:29
always been the like, but the point is this has always been
51:31
the plan. Like, and actually my point is
51:34
you don't raise this kind of money if your end state goal is
51:37
like, hey, I'm going to build because of what Zach said,
51:41
right? It's like nobody, like all of
51:44
everybody involved is like a smart individual, right?
51:47
And so it's like, of course, the end state goal is you got to be
51:51
able to build something that's like an Internet wide
51:54
opportunity. Otherwise, you're not plowing
51:57
this amount of capital into it, right?
52:01
It just doesn't make any sense to right.
52:02
It's, it's like, I mean, we can talk about like previous cycles
52:06
and things like that about how there was like a lot of
52:08
investment that happened that like there was just no way that
52:11
it was going to end up in a good spot.
52:13
But yeah, we, we, we have actually never raised in a peak
52:18
market, ironically, yeah. If I was Rishabh knowing limited
52:26
about his business and I wanted to pivot into one small sector,
52:31
that is a large sector, it would be financial services.
52:39
See, Zach, this is what I'm trying to tell you, man.
52:41
The avoiding of the land mines is not a passive sport.
52:48
No, I mean, I mean what Fermat does for.
52:51
Financial, I understand. OK, I understand.
52:54
Yeah, yeah, yeah. And what I'm trying to tell you
52:56
is. Like.
52:57
You saying that all you're doing is surviving over time is
53:01
incorrect. I didn't say that all I'm doing
53:04
is surviving over time. I'm just saying you're.
53:07
Giving that illusion, you're giving that illusion.
53:09
Yeah, Yeah, yeah. It has more.
53:11
It has more this the, the the side effect of that was more
53:19
positive of of that is more positive than what I once
53:23
prescribed to it. I was like, this actually has
53:25
value just being fucking solid business.
53:28
Yeah. Yeah, yeah, yeah.
53:30
And and what I would and I'm just like, I mean, let's just
53:33
use this toy example like right at the end over here.
53:36
But like you saying the words avoid the like, let's just
53:40
pretend in this context, like staying only an E com is the
53:44
landmine. And so you got to like avoid the
53:46
landmine and oh, dude, like consumer, obviously consumer
53:51
finance. And it's like, but that's not
53:55
obvious, dude. It's like because you know,
53:57
there's high LTV, it's because you know, they spend a lot on
53:59
CAC. And this is like actually my
54:01
point is the good operators know like what market dynamics are
54:08
happening everywhere and they can like make good moves and
54:11
make good suggestions. And they're like your Your
54:14
avoidance of the landmine is extremely thought out, even
54:18
though it is natural. I think you just like a large
54:23
hole in my, in my, the way I was thinking about who I am in like
54:27
a positive way, right? I think we do.
54:30
And like, Oh yeah, just don't do anything stupid.
54:33
But like to not do anything stupid, you have to do stuff
54:35
that's like at least not half retarded.
54:37
So it's like, which maybe is harder than I think or
54:40
something, but. Yeah.
54:43
I think it is much harder than you think because there's a lot
54:46
of information that goes into that decision that comes quote
54:49
UN quote, obviously, right? And there's a lot of context
54:54
there, right? It's like, yeah, we know that
54:57
people spend a lot of money on acquiring people for like
55:00
finance things, right? We know that like the credit
55:03
card, like rewards that you're getting or the sign up bonuses,
55:07
like it's because you spend all of this time in the acquisition
55:12
world that you're like, dude, obviously that's the place to
55:14
go. Or for lead Gen. you would be
55:16
like, dude, obviously you want to go to legal and insurance.
55:18
Like you would say these things and you would not think about
55:21
it, OK. And, and the problem is that
55:24
it's precisely because of the context and knowledge.
55:27
And so like my, my like to the listener, my only like hope is
55:31
that what they're hearing is like, yeah, you like you've got
55:36
to do the work. And yes, you have to be
55:39
strategic about how you play the field.
55:41
But like that, that is the difference between a good
55:43
operator and a not good operator.
55:46
Yeah, I think you guys were agreeing before because that
55:48
ties in perfectly with what Zach was saying about a business that
55:51
survived for three years at the same ARR as a business at one
55:55
year, right. It's because the operator.
55:57
All right. Yeah, totally.
56:00
This is a good note to end on. Sweet.
56:03
This was a fun one, man. All right, See you guys see.
56:06
You guys see you.