davemoon

[davemoon]

[davemoon]

Tariff Tantrum

In June 1931, Ohio Senator Simeon Fess took the stage at the Willard Hotel in Washington DC. President Hoover was running for reelection, and Assistant Secretary Snyder hoped to rile up the convention of Young Republicans. Senator Fess exclaimed from the podium, "When the American people realize what President Hoover has done for them in the present emergency, he will not only be unanimously renominated, but he will be overwhelmingly re-elected."

It was one year into the passage of the 1930 Tariff Act – the so called, Smoot-Hawley tariffs.

Smoot-Hawley was the bright idea of a Republican leadership that was trying to shore up support among farmers. American agriculture had developed into an export-oriented machine through investments in fields, machinery and manpower that filled the gap made by the destruction of Europe during World War One. As Europe began to rebuild, European agriculture recovered and began to undercut American farmers in their own market. President Hoover campaigned in 1928 to help farmers with tariffs. The legislation that ultimately passed in June 1930, however, would require him to make a far broader commitment, across industries. Senator Pat Harrison called the final product a “mixture of log-rolling, boycotting and swapping that is shameful to remember.”

More than a thousand university professors petitioned against the Smoot Hawley tariffs, and according to Newton Baker, it was only through his “sudden and violent conversion,” that President Hoover put the bill into law. Trading partners responded with “beggar thy neighbor” escalations, and growing tariffs, across markets, quickly choked off international trade. 

Eight months into the Smoot-Hawley regime, the New York Times invited an economist to review and compare trading figures over comparable periods, before and after. In the first eight months, exports and imports, total US trade, had declined 34.7%. World trade, between 1929 and 1934, would ultimately collapse by 66%.

Today, the Trump administration has threatened, applied, removed, threatened again and, again, stayed dramatic, across the board tariffs with various United States’ trading partners, but the messages are eerily evocative of the 1930s. 

Just as in 1930, we are enveloped in magical thinking and told prosperity is just around the corner. On March 5th, Scott Bessent, speaking at the Economic Club of New York, offered, “Could you have a tariff policy that finances income tax cuts and real income increases for the bottom fifty percent. I think that would be pretty great.” Trump refused to rule out a recession but asked the American people to bear with him because “There is a period of transition because what we’re doing is very big.”

Similarly, Republican Senator James Watson of Indiana, denounced Henry Ford on the Senate floor in 1930, as ”the most selfish person in the world“ for his opposition to the tariffs. Watson predicted the tariffs would ”change the whole course of American industry and in a year put us back again at the pinnacle and apex of our previous prosperity." Two years later, Watson would lose his Senate seat in a landslide.

Ford had been to congress to ask for an exemption because the automotive industry had become so reliant on international markets. American auto exports dominated foreign markets and favorable trade finance had facilitated its rapid expansion. Ford had grown to a peak capacity of five million vehicles in 1929, and he feared the export market would dry up as a result of the tariffs. Following Ford’s protests on the Senate floor, Ford manufacturing capacity dropped to just over one million in 1932. American autos are also asking for an exemption because the manufacturing supply chain is itself cross-border and would incur multiple tariffs as parts and vehicles are completed across the far-flung North American supply chain. 

Today Republicans brook no resistance or deviations from party leadership within their ranks. To do so would invite a primary challenge or, as many have privately said, the possibility of harassment or worse from the MAGA-faithful. Meanwhile, Ohio Senator Fess, speaking at the rally for the Young Republicans in 1931, said, "There must be in our party no insurgency which refuses to abide by the party leadership." Not a single Republican would step out of line, then or today.

Just as Smoot Hawley was conceived as a sop to the American farmers who had found themselves overextended, Trump also sees the tariff program as a boon for farmers. He cheered, during the State of the Union, “our farmers are going to have a field day right now. So to our farmers, have a lot of fun.” Hoover’s farmers fared poorly with the Smoot Hawley tariffs. Trump’s 2018 tariffs forced him to bail out American farmers with over $60b in relief payments through the end of his term as hard-won international trading relationships slipped from the grasp of American farmers. The relief payments were equivalent to almost all of the funds paid by American consumers for the tariffs themselves. Neither period helped the farmers.

Magical thinking would not be complete without being warned of the price of prosperity. We may not understand it, but rest assured, we must endure pain before the golden age. Bessent assured Larry Kudlow at the Economic Club of New York, “This administration is about Main Street,” but the American dream requires new economic policies, and those may be painful. Says Trump, “We’re bringing wealth back to America. That’s a big thing. … It takes a little time, but I think it should be great for us.” Or, as in this Truth Social Post, “THIS WILL BE THE GOLDEN AGE OF AMERICA! WILL THERE BE SOME PAIN? YES, MAYBE (AND MAYBE NOT!)” Acknowledging the likelihood of inflation as the tariffs kick in, Bessent said, “Access to cheap goods is not the essence of the American dream.” A little inflation shouldn’t bother us as the tariffs and Trump’s policies kick in.

Congressional Republican leaders have, meanwhile, taken their cue from the Executive branch. Tariffs aren’t a tax or an engine for inflation. They are a symbol of patriotism, and Americans should take pride in supporting them. Kansas Senator Roger Marshall said, "What I would just ask people is to be patriots…There is a price to pay for our freedom and for our safety and security, and these tariffs are one small piece of it." Oklahoma Senator Markwayne Mullin, knows his constituents will rise to the occasion: “Does it hurt our finances? Does it hurt our communities? Yes. But we understand that we need to get America back on track.” The ever insightful Tommy Tuberville: “there’s gonna be a little bit of pain with this.” To paraphrase Senator Fess, when today’s American people realize what President Trump and the Republican Congress have done for them, who could expect anything less than their being not only unanimously renominated, but overwhelmingly re-elected.

One seeming bright spot is today’s balance of trade. The US balance of trade is nearly opposite that of the US then. We are a net importer and maintain vast trade deficits. It’s actually a similar position to post-war Europe, which imported US autos and steel and manufactured goods and had only just begun to challenge US agricultural exports. They, like the US, relied on trade deficits, and those trade deficits helped them recover from World War One, and American producers and manufacturers delighted in having access to the market. Did Smoot Hawley leave Europe unscathed? 

No. In fact, the economic downturn that it exacerbated accompanied a rise in authoritarian, fascist, national socialist, and totalitarian leaders on the continent. Indeed, the United States, at the time, seemed to begin to believe the same. It would seem that no matter who starts the trade war, it invites retaliation and ends poorly for everyone.

[davemoon]

Ideas from Peter Thiel’s Breakfast Table

Until this week it was never quite clear to a considerable body of intelligent citizens why a sufficient plurality of voters in the United States would flock to a reality television star whose casual relationship with the truth would frame a day of riot, rapine, and insurgency at the Capitol as a flower-wielding gathering for peace and love. Undoubtedly the primal cause of their affinity is the threat of the Distributed Idea Suppression Complex (DISC).

Such a cause was revealed earlier this month in the salmon-tinged pages of the Financial Times. It was a fine article, even if the tastes of the FT, debauched by the pedestrian concerns of business and finance, may have underplayed the writer’s careful allusions and air of worry and triumph. War, apparently, is everywhere. It is a war between the Internet and an “ancien regime,” and the Internet has won by the measure of Americans’ distrust in the DISC – “media organisations, bureaucracies, universities and government-funded NGOs that traditionally delimited public conversation.” These “pre-internet custodians of secrets” have hidden the truth from us, and it is for this sin that they are at war.

When noted entrepreneur, Peter Thiel, published his piece, the internet could be forgiven for not having risen at once and as one to say, “Finally!” No, Thiel assures us, it is only the beginning. The election of Donald Trump, as Thiel explains, will bring an apocalypse in the old sense of the word – the Greek form, apokálypsis. The apokálypsis is an unveiling, and his apokálypsis is the unveiling of truths that have been held from the people by the DISC. Only in this unveiling can we begin the process of reconciliation for the crimes perpetrated by DISC. In this way, the United States, with Trump, has reached the moment for truth and reconciliation, and through this, there will be forgiveness.

And the unveiling has only just begun. Thiel writes, “DISC has lost control of the narrative.” Some sixty-five percent of Americans have their doubts about Lee Harvey Oswald’s riflery and indulge in more elaborate explanations of the assassination of John F Kennedy, preferring the company of the mafia, Fidel Castro, and the CIA. Nearly half of Americans have unwrapped the explanation of Jeffrey Epstein’s death to find no evidence of suicide. Meanwhile, Thiel lays out questions about Covid as piles of fraud, threats and startling terms of art: wasted tax dollars, bioweapons, gain of function research – questions that only Anthony Fauci and the “National Institutes of Health apparatchiks” could answer. And how could Brazil ban X without the backing of the US? 

Who shot JFK? Who killed Epstein? Covid was a US funded bioweapon program? The US secretly controls Brazil? These are the most pressing and injurious secrets of the ancien regime, according to Thiel, and the government and institutions of DISC must dedicate their resources to releasing them. They must release, stand by for further requests, and release more information – an endless process of discovery in the interest of reconciliation. In a word, it is the role of the government and institutions that comprise DISC to indulge conspiracy theories.

Thiel’s vision for truth and reconciliation is a grand spectacle. Indeed, Thiel is an entrepreneur in the old sense, from its earliest applications – one who “gets up” entertainments. Thiel’s vision casts the government and the institutions of DISC as the reluctant stars in a carnival of conspiracy theories that would entertain the public and dominate their attention. The demands for reports, records, testimony, data would enlarge and spread to consume every resource in an effort to deliver the truth about who shot JFK, and who knows how far back it goes or how far it reaches. There must be more unveiling.

Steve Bannon had a more modest phrase for Thiel’s so-called truth and reconciliation – “the way to deal with them is to flood the zone with shit.”

The survivors of this war between the internet and the ancien regime only hope to inspire the author with a love of something more appealing than swimming in Steve Bannon’s pool.

[davemoon]

May Day 1975 - The Day the SEC Invented Discount Brokerages

This is a picture of the New York Stock Exchange in 1975. That’s when the SEC abolished fixed trading commissions and invented discount brokerages.

The SEC abolished fixed brokerage commissions on May 1st – ending a 183 year old practice of exchange-mandated commission rates. The market would set the commissions, not the exchange. Rates dropped from $200 or more to as low as $30. 

Merrill Lynch approached the Exchange soon-after with a proposal. Merrill was the nation’s largest stockbroker whose clients would often trade in so-called odd-lots, which comprise fewer than 100 shares. Usually, these would pass through floor specialists, who would bundle them in round lots of and execute them on behalf of Merrill Lynch clients. Merrill wanted to execute odd-lot trades between their own clients – off the board.

The price for an exchange seat dropped in one month from $125k to $65k on the news of Merrill’s plan. Carlisle DeCoppett, a one hundred year old specialist in odd lot trading, finished the year, begging to be taken over by the NYSE.

May 1st, 1975 came to be called May Day. It was the culmination of a revolution in the securities industry that began in 1961. Over almost fifteen years, the SEC introduced more disclosure; pressured the NASD into developing the NASDAQ; navigated the “paperwork crisis” of the late 1960s, when the brokerages realized that they had failed to invest in the staff or the automation to keep up with rising trading volumes; and had Don Regan, the CEO of Merrill Lynch, thank them for explaining how the over-the-counter market worked.

[davemoon]

Taking Control of Cloud Spending

UBS shared a lesson in understatement last week when analyst Karl Keirstead wrote, “Customer efforts to optimize/trim their cloud spend are well beyond any historical norm.” One could almost hear the frenzied IT staff yanking blue cables out of servers and powering down the racks. Amazon and Microsoft all fell 2% on the warning, and Google dropped 1.4%.

With tech layoffs coming in at more than 330,000 since early 2022 and about 168,000 job losses just this year, cloud spending is an obvious and looming target, but it’s also a hard target. It sometimes feels like what Wanamaker said about advertising: half of it is wasted, we just don’t know which half.

Brian Schechter at Primary VC brought together many sides of the cloud landscape for a panel on how cloud spending has developed and how to introduce accountability and controls. Here are a few select insights from the panel.

Party on, Cloud. According to Zachary Smith, Head of Edge Infrastructure at Equinix, “One of the biggest problems we see with Equinix’s customers is … they’re not in the business of metering and chargeback. They rely on a point of sale that people effectively put in once every three years to grab as much infrastructure as they can.”

Tail of the Dog. Dataminr Director of Engineering, Nitin Pillai warned that minimizing infrastructure costs can be more like the tail wagging the dog. “It's not just about infrastructure savings…Developers are also not going to be spending their hard-earned time managing infrastructure. They're busy writing code that makes your product and earns you money.”

Ask Me Anything, Please. Sometimes organizations owe their overbuying to a lack of controls. How about asking first? Pillai shared, “Because we don't have the right controls built into the engineering systems, people can just go and provision infra they want. After they're done, they don't really go and deprovision them. It's just sitting there. It's good for AWS, but it’s costing us a ton of money.” Pillai has saved hundreds of thousands just inventorying idle resources and turning them off.

Moar Services. Datadog Product Manager, Kayla Taylor has been helping with both price and resource optimization, which can help identify and decommission idle resources. For example, “we have a bunch of monitoring data systems. Most of what we're doing is telling our customers, ‘Hey, let's surface orphaned resources in a central experience where we can see particular EBS volumes that have been unattached for seven days,’ and we then address or delete them as needed.”

Bottomline – The move to the cloud led to massive, up-front purchases and probable over-builds. Don’t want to weigh your developers down with managing infrastructure when they should be writing code that makes you money, but it can’t hurt to introduce controls around spinning up and winding down services, so you know what’s operational or just idle and bleeding money. Make people ask first, and remind them to turn off the lights. There are tools such as Datadog to help manage this.

That said, it’s not an easy task, and you can see it in Wall Street expectations. UBS sees the problems lasting throughout 2023, suggesting a deep faith in companies' ability to reign in costs, but many analysts expect the slumping growth rates to bottom by midyear and begin improving through the second half. Maybe those costs are here to stay.

Read more, here

[davemoon]

SVB - Goin’ to the Chapel?

That was fast.

I thought for sure that we would get a tough day followed by a shotgun marriage over the weekend.

The FDIC has to appreciate how acute the working capital problem is for the vast network of early stage businesses throughout the country. Something like 75% of venture backed CFOs that I surveyed used SVB. Putting SVB into a protracted and uncertain receivership will severely damage the VC and startup ecosystem. So, what to do?

Though the equity is toast, the assets are largely there and in the form of marketable, performing MBS, Treasuries, etc. SVB just bought the wrong end of the curve to pay for higher checking account rates. When rates went up, the balance sheet shrank. Combine that with declining deposits based on depressed VC-funding conditions and -- presto.

If the FDIC sold these immediately, that would mark some $91b of assets designated as "hold-to-maturity" to market. This feels like a tough move. The year-end market value of those securities was $76.b, a $16.3b gap. They only had ~$16b in shareholder equity as of their last filing, and that was before realizing a $1.8b loss as of Wednesday's sale of $21b of securities. Then there's also the matter of the remaining $121b in assets.

It feels like there are two options, here.

The obvious choice would be to bless a union via shotgun of SVB and a much larger bank that can hold those securities until maturity. It's the Bear Stearns, circa 2008 playbook.

But here's the hiccup. The FDIC reported in February that US banks held unrealized losses of so-called available-for-sale and held-to-maturity securities that totaled $620b as of December 31. The figure amounted $8b at the end of 2021. Bank of America, alone, reported that it's held-to-maturity assets of $630b+ were worth closer to $524b as of year-end -- a $109b difference.

Bank of America isn't enmeshed in the same trends as SVB, but they do seem to have a similar duration problem. And let's not forget, when JPMorgan bought Bear Stearns, Jamie Dimon observed, "We were not buying a house—we were buying a house on fire." SVB is NOT Bear Stearns. But how ready are BofA or any of the other big banks to add to their interest-rate risk, on the long side of the curve?

Which brings us to door number two. Hypothetically, the FDIC could hold those assets to maturity and pay the bad bank par value or a haircut on par value. Naturally, this entails all kinds of moral hazard, but presumably, the equity and management have paid that. The question is, should the depositors who were looking at 2.3% at SVB vs a fraction of that at BofA also pay.

Either way, SVB estimated that at the end of 2022, it was holding $151.5b in excess of the FDIC insurance limit. That's a lot of payrolls.

[davemoon]

Nixon, inflation, and the high price of bad analogies

Oil shock. Prices on the rise. A menace in Russia. The US coming off of one war and supporting the under-dog in another. “The ingredients of the 1970s are already in place,” said Niall Ferguson at the Ambrosetti Forum in Italy the other week. Says, Niall:

Why shouldn’t it be as bad as the 1970s? I’m going to go out on a limb: Let’s consider the possibility that the 2020s could actually be worse than the 1970s.

But how reliable is this habit of ours of shopping around for historical analogies? Yes, these historical antecedents are important. A strong memory and understanding of the Great Depression helped Bernanke navigate 2008, but there was one thing the Great Recession was not – the Great Depression.

Yes, it’s tempting to envision Niall in bell-bottoms and a satin shirt, but maybe we should start to fill in some of the details between the headlines about inflation, market crashes and malaise in the seventies, so we can better understand where we might be going. It’s a story about America, a Federal Reserve compromised by a corrupt president, price controls and supply shocks, and it’s far more subtle than Niall’s gloss for the rapturous conference circuit.

Niall’s reference begins with the onset of a recession in November 1973 and lasted through March of 1975. The Dow had peaked in January at just over 1000 and declined twenty percent through mid-December before rallying to close the year, but the pain had only just begun. The market would grind lower to just about 590 in December of 1974. Meanwhile, the unemployment-rate low of 4.6% would almost double to 8.8% at the end of the recession. It sounds familiar, but there were also important differences.

The US economy in the 1970s was initially tipped off balance by a cozy and political relationship between Federal Reserve Chairman Arthur Burns and President Nixon. A mild recession had knocked 0.6% off of US GDP during the eleven months through November 1970. Rising unemployment on the tail end of the Eisenhower administration had derailed Nixon’s 1960 presidential campaign, so the administration was focused on reaching full employment in advance of the 1972 election, and Burns was his willing accomplice. Prior to his confirmation in 1969, Nixon chuckled to Burns, “I know there’s the myth of the autonomous Fed” before warning Burns to maintain “appearances” around his “friendship with the President,” so he shouldn’t call Nixon directly. According to Burton Abrams, writing for the Journal of Economic Perspectives, “Richard Nixon demanded and Arthur Burns supplied an expansionary monetary policy and a growing economy in the run-up to the 1972 election.” At one point, Nixon warned Burns, “this will be the last Conservative administration in Washington," apparently raising the possibility for him that Nixon might lose the election. The monetary stimulus supplied by Burns “helped to boost the economy in time for the 1972 election, helping to deliver Nixon’s landslide victory.” His friendship paid off.

Nixon loosed another disruption on the US economy in the run-up to the 1972 election – price controls. He announced his New Economic Plan, Executive order 11615, with the words, “The time has come for decisive action-action that will break the vicious circle of spiraling prices and costs. I am today ordering a freeze on all prices and wages throughout the United States.” Just days before, Treasury Secretary John Connally had assured him: “To the average person in this country this wage and price freeze – to him means you mean business.” These would remain in place through the election and into 1973, and it worked. Abrams writes, “with wage and price controls restraining both prices and inflationary expectations, [Burns] believed that monetary stimulus could return the economy to full employment with little inflationary cost.” The cost of Nixon’s Plan, however, would soon emerge, as the author’s table of inflation rates matched with the effective term of the price controls illustrates.

Nixon had undermined each of the dual mandates of the Fed for political ends. Price and wage controls provided the illusion of stable prices, and political pressure from Nixon, himself, encouraged Burns to maintain loose economic policy. Through the levers Nixon could control, he captured the election but according to Abrams, “the excessive aggregate demand stimulation prior to the election created serious problems for the economy that took nearly a decade to resolve.” But it was the levers he could not control that shocked a weakened financial system such that the relaxation of price controls quickly yielded to nearly 10% inflation in 1973 and almost 12% inflation in 1974.

Two supply shocks hit the US in 1972. The first to hit came to be known as the Great Grain Robbery. It was followed by the Arab Oil Embargo.

The Great Grain Robbery happened over the course of the summer of 1972. Soviet grain crops had failed, and the state was anxious to replace them. USDA Secretary Earl Butz didn’t realize the scale of their shortfall and inadvertently allowed the subsidized purchase of close to 20 million metric tons of grain through brokers – fully 25% of the US harvest coupled with a $300m subsidy from the USDA. The New York Times would later report, “Moscow's negotiators worked so cagily that the competing grain dealers here — the Cooks, Cargills and others were apparently unaware that there were several negotiations underway simultaneously.” Wheat prices soared by more than two-thirds, to $2.50 per bushel by the end of 1972 and pushed $6 by the end of 1973.

Producers were caught in a desperate situation. The reliable equation of converting grain into protein for the market was breaking down. According to Daniel Yergin and Joseph Stanislaw, by June of 1973, “Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.” George Schultz would remark, "At least we have now convinced everyone else of the rightness of our original position that wage-price controls are not the answer."

The Arab Oil Embargo arrived in October of 1973. In retaliation for US support of Israel in the Yom Kippur war, the Arab members of OPEC halted oil shipments to the US and decreased production overall. The price of oil quadrupled and reached a plateau at which it would remain until tripling again at the onset of the Iranian Revolution 1979. Speaking before Congress in 1974, Burns explains how fragile the US economy had become: “In the middle of 1973, wholesale prices of industrial commodities were already rising at an annual rate of more than 10 per cent; our industrial plant was operating at virtually full capacity; and many major industrial materials were in extremely short supply” (Burns, 1974).

The US economy had been acculturated to plentiful supplies of inexpensive oil with stable pricing. During Burns’ testimony, he mentions autos: “Some sectors that depend heavily on a plentiful supply of inexpensive fuel – such as the automobile industry – have had to contend with sharp declines in sales and considerable idle capacity.” Yes, cars in the 1970’s were notoriously inefficient, with average ratings of twelve miles per a gallon in 1970 (DOT), but overall, the US economy was more energy intensive than it is now, so the oil shock in 1973 and then in 1979 was substantially more disruptive.

Energy intensity helps us think about how vulnerable the overall economy to increases in energy prices. Sure, if gas prices go up, people expect to see fewer motorists on the thruway, but how about fewer hours at the factory or less fertilizer going into the ground? A less energy intensive economy is more efficient, so it can do more with less energy and is more resilient to energy price fluctuations. One way of assessing this is through analyzing energy consumption in BTUs per real dollar of GDP. In 1970, the US economy required nearly fourteen thousand BTUs per chained 2012 US dollar – an inflation adjusted index. Today, we’re close to five thousand. Sure, prices have gone up, but they won’t have nearly the same impact as what we saw in the 1970s. It’s the difference between a thunderstorm and a hurricane.

But if one thing is for certain, we know how to make things worse. In November of 1973, Nixon signed the Emergency Petroleum Allocation Act which introduced a new regime of price controls in the oil market [more]. Refineries would be eligible to buy oil at three rates – a discounted price for “Old oil,” based on wells drilled before 1973, a substantially higher price for “New oil,” and the market rate for imports. The expectation was that the Act could rely on continuous production of existing wells and incentivize the production from new wells. Naturally, that wasn’t the case. Instead, producers of “Old oil” had an incentive to keep it in the ground, which lowered production. Shortages in 1974 would lead to rationing based on odd and even license plates. Odd dates corresponded with odd license plates and vice-versa, with a free-for-all on the 31st of the month, just to even things out. Ford would try to dismantle the price controls, but it wasn’t until later that the Carter administration began to phase them out.

Niall’s right, in some ways. We have inflation. There is an energy shock and the lingering supply chain shock from the pandemic is real, but this is not the 1970s. Nixon cajoled Fed Chairman Burns into lowering interest-rates to drive full employment while he signed an executive order that introduced price-controls to hide inflation. It helped him win reelection, but it undermined US economic policy. When the Great Grain Robbery and the Arab Oil Embargo struck, the US economy was already fragile and overheating. The impact was devastating.

Inflation is here, but the conditions are different. Farmers aren’t drowning their chickens, and there’s no such thing as “Old oil” and “New oil.” The US economy is far less sensitive to price fluctuations in the energy markets, and we have a Federal Reserve Chairman who is more concerned with sound monetary policy than his friendship with the president. Don't worry, there are still plenty of ways to screw it up, though – the policy failures of team Truss and resulting crisis in Gilts and LDI based strategies are certainly trying.

[davemoon]

Economic Hurricanes

With Jamie Dimon auditioning for the weather channel, calling for hurricanes, it’s no wonder companies are looking for the keys to the bunker. Memories of the Nasdaq, circa 2000 or the entire market, circa 2008, might make you a bit more frenetic. Who can forget Sequoia’s “RIP Good Times” presentation? There’s no doubt that our current combination of inflation, rising interest rates, and a war in Ukraine are wreaking havoc on our economy, but these factors are also distinct from 2000 and 2008. It’s worth looking at 2000 – for starters.

Today’s landscape of tech companies faces a different crisis than that of 2000. The Nasdaq companies that had fueled the “irrational exuberance” to 2000 were over-represented by capital goods and the likes of pets.com, not services. Dell, Microsoft, Intel, Cisco, Ciena –to name a few– sold boxes, shrink-wrapped software, chips, and more boxes. The Internet wave that had driven more computing and connectivity was largely fueled by financing capital goods. If there was recurring revenue, it comprised a small percentage of the business. 

As the telecom industry began to collapse in 2000, the vulnerability of capital goods driven growth became apparent. The industry was awash in network capacity. Tightening by the Fed had raised interest rates to a high of 6.5% in July of 2000, and CapEx budgets were declining across the board. PSINet filed for bankruptcy on June 1st and was quickly followed by 360 Networks. Later Worldcom would implode and would become the largest US bankruptcy case to date, at $107b.

The market stopped buying boxes, shrinkwrap and chips. But because the market had been based on capital goods, the customers could continue to use them. The networks stayed lit. Microsoft Office kept working. Office PCs continued to work. At the time, when I was at GLG, we were running surveys of CIOs on the expected life of laptops and desktops. The surveys reported a steady increase in the expected lifespan. Not only were enterprises not buying more PCs, for example, they were keeping them for longer. 

While the high-flying optical equipment vendor Ciena struggled to stay afloat, their customers continued to use their multiplexers. Wrote one commenter on Lightreading, a trade journal, “The worse news is that when these companies go out of business, the equipment they bought will be sold for pennies on the dollar to the few remaining industry titans, putting a severe crimp in the plans of equipment manufacturers to sell boxes.” Even if the equipment needed to be replaced, there were spares in the gray market.

Today’s SAAS and cloud services were a whisper in our ears at that point. Some people talked about Application Service Providers (ASPs), but they were still thought of as just a toy. Today, software, more often than not, is a service and that service sits in the cloud with just about everything else your company might need to keep track of. 

Unlike shrinkwrap, boxes and chips, a CIO can’t extend the life of a service or buy a replacement on the gray market. It’s either on, or it’s off. This is a much, much better position to be in than that of the capital goods oriented growth market leading into 2000. It doesn’t solve everything. Customers of SAAS and cloud businesses could go out of business entirely. But the revenue for enterprise software and cloud services is generally higher quality and more durable than the revenue that drove much of the capital goods driven growth going into 2000.

This isn’t to say that we can or should ignore inflation, the supply chain crisis, the Russian invasion of Ukraine, COVID, or the prospective steady rise of interest rates. These are all critical factors that will reorganize our economy in new and perhaps distressing ways. These uncertainties will no doubt put pressure on companies to demonstrate long-term solvency and even, perhaps, produce profits (!!). But there’s something comforting to knowing that tech and its contribution to growth is a little better situated than 2000.

[davemoon]

Burrow - Making Everyone Comfortable but the Competition

“Does anyone know what JAND is?” Stephen Kuhl and Kabeer Chopra were in Ethan Mollick’s entrepreneurship class at Wharton in 2016 and had no idea what JAND was or what could possibly be contained in the powerpoint professor Mollick was waving in front of the class. It happened to be the initial pitch for Warby Parker, a leader among direct-to-consumer brands -- something they would come to know quite a lot about, soon enough. Stephen and Kabeer’s class project would snowball into a ride through Ycombinator and on to become the rapidly emerging direct-to -consumer sofa business -- Burrow.

Sofas are a huge pain. If you want something fast, it’s going to be cheap and flimsy, and you’re going to spend the weekend with an allen wrench, wood dowels, and an instruction manual that may as well be in Swedish. If you want something nice, it’s going to take forever to ship, let alone the difficulty of getting it through the door, in the room, and settled on the floor.

It was no different for founders Stephen and Kabeer. Kabeer went to West Elm and found a sofa he liked for twelve-hundred dollars, but it would take twelve weeks to arrive. If he picked something that was in stock, they could deliver it for two-hundred and fifty dollars in two weeks.  Fortunately, he lived next door, so he went back to his apartment, retrieved a dolly and wheeled it back himself. Meanwhile, Stephen spent six-hundred dollars and the greater part of the weekend learning Swedish.

Burrow was born out of Stephen and Kabeer’s frustration with exactly these problems. No one sold a sofa that was comfortable, stylish, easily shipped, high-quality, and available, quickly. The market, as they saw it, was broken.

The founders went to Ycombinator the summer of 2016 and started taking preorders. They developed a novel, modular design that incorporated premium materials and finishes but wouldn’t require an expensive logistics and trucking system to get a monolithic sofa to the curb, up the stairs and to the floor. The design would culminate in a sofa that achieved the same quality standards as Crate & Barrel, but could be shipped in pieces that could be assembled quickly and intuitively. By the second half of 2016, they had more than one thousand preorders. It turns out, the customer shared their frustrations.

But there was a problem. No one wanted to work with them. Stephen and Kabeer wanted to make sofas, merchandise them online, and ship them in a week. There were more than one-thousand people who agreed with them, and they were expecting their sofas by October 2016. The big manufacturers in North Carolina and throughout the South practically laughed them out of the room. They were built for large volumes, long lead times, and traditional designs. The prospect of retooling a manufacturing line to accommodate a thousand orders seemed more like a favor than a business proposition. By some fluke, they had a Wharton connection whose family friend owned a manufacturer in Mexico.

Delays meant Burrow wouldn’t be able to meet their fall delivery deadline. They couldn’t deliver until December, at the earliest. It was bad news, and Stephen and Kabeer were worried they would disappoint their customers, so they decided to reach out to them. They called and emailed everyone who had preordered the sofas, so they could explain the situation. Thinking it was just some big, faceless manufacturer, they were surprised to speak with Stephen or hear from Kabeer and learn that it was just the two of them at the helm, raising the sails, cleaning the decks, and steering the ship. Some took their money back; others were grateful for the consideration and encouraged them to sail on.

And they were sailing with a strong tail-wind. Millennials account for over forty-percent of all furniture spending. They expect fast and free shipping and online shopping. One-third of people in their twenties move every year, according to Burrow’s research. Online furniture shopping is only 15% of the $111b furniture industry, but it’s growing at 20% a year. Demand for Burrow wasn’t a fluke. It was exactly where the market was heading.

By April 2017 Burrow was delivering sofas within a week. They rapidly outgrew the Mexican manufacturing partner in mid-2017. It was time to go back to the manufacturers who had rejected them before. Stephen set out for a few weeks on the road with the Mississippi Development Authority. It turns out that the legacy of the Russian immigrant, Morris Futorian, had set the stage for a strong, sophisticated furniture manufacturing base in Mississippi, and the Development Authority was more than happy to share it with Stephen.

The so-called University of Futorian comprised the many generations of entrepreneurs and craftsmen who emerged from Futorian’s workshops and factory in New Albany, Mississippi. Morris Futorian moved from Chicago in September 1948 with a vision to reinvent furniture manufacturing --an industry dominated by individual craftsmen-- along the lines of Ford-style assembly-line manufacturing. He named the factory the Futorian - Stratford Furniture Company, after the street he lived on in Chicago and trained members of the depressed local farm community to fill out the lines. The efficiencies he introduced to furniture manufacturing would lead to high quality output with faster production and lower prices -- it was fitting that Burrow’s innovations would find their way to production through Futorian’s legacy.

Burrow moved manufacturing to Mississippi in the summer of 2017. Stephen had found a facility in Tupelo that had been recently acquired by a former corporate executive at Target. The husband and wife team were eager to take on the flourishing brand and put their factory to work. It was exactly what Burrow needed, but it wouldn’t be their last manufacturing partner. As luck would have it, growth continued to spike, and they rapidly outstripped the capacity of the Tupelo facility. Indeed, customer demand grew so quickly that the Burrow team had to step in and lend a hand with manufacturing operations to ensure the consistent production of an escalating number of sofas.

When Burrow shifted manufacturing again, this time to North Carolina, they were met with a much warmer welcome. Manufacturers were starting to understand the power and the scale Burrow, it’s ecommerce-driven model, and the innovative, modular construction brought to the furniture industry.

Wayfair goes to manufacturers, asks what they’re making, and puts it in their marketplace. Article goes to manufacturers, asks what they’re making and puts their brand on it. Burrow turned furniture sales on its head. Stephen and Kabeer went to manufacturers with a design and a juggernaut of demand. They focused on simplicity of construction, speed of manufacture, ease of shipping, and the ability to put a high-quality sofa in the living room of every one of their customers within a week.

The Burrow sofa materials and quality are on par with a premium brand. The cost of goods is essentially equivalent, but traditional brands have to ship a fully assembled sofa to a distribution center and then, once again, to the customer, through a specialized trucking company. Many of these costs are bundled into the sticker price. Burrow’s patented modular assembly and locking mechanism means they can just ship it via UPS -- a much faster, cheaper option. Burrow can sell an equivalent or better quality product $500-700 cheaper than Crate & Barrel. Moreover, because of the efficiencies entailed by the Burrow design, they can build and deliver faster, so they also have negative working capital.

Behind the sofa, however, stands the team and the culture that Stephen has developed. Seasoned, strong candidates from big, successful brands are drawn to Burrow. The team includes the former SVP of Marketing from Design Within Reach, the former SVP of Product Design for Fab, and Creative Lead from B-Reel.

Burrow closed 2018 with twenty-nine employees and having booked five times their first-year revenue of 2017. In the first two years, they booked more than $20m in revenue for just one style of sofa. They have already introduced ottomans and chaises, and they recently launched leather and corner-sectional sofa sofas. Pillows and throws have become a key add-on item for their customer community, and these will be followed by tables and rugs. Their market-success has also led to a growing list of accolades and awards: the Time Magazine 50 Best Inventions of 2018; the Fast Company 10 Most Innovative Retail Brands in the World; the 2018 Good Design Award; among others. Burrow now competes with the strongest brands in the world.

It’s been a remarkable rise for Burrow through Stephen’s leadership. He continues to attract the most prestigious job candidates and has now reached thirty-seven employees, with an additional ten part-timers at their first retail showroom, Burrow House, in Soho. The core business continues its strong growth and has benefited from the expansion of product categories, distribution channels, and new markets. The successful launch of Burrow house in NYC brought in-store retail into the fold, but it also led to a doubling in online ecommerce conversions in New York. Expect new stores in Chicago and Washington DC soon. Even now, Stephen and the team reach out to every customer after a year, just to see how they like the sofas. No one expects it. Everyone loves it. Thanks to Burrow, we’re not stuck with long lead-times and indecipherable instructions any time we consider a sofa.

[davemoon]

Sinking into the Casper Mattress Story

The cofounders had been meeting at a co-working space for a while. They were thinking through business ideas, but they always kept coming back to mattresses. Philip Krim, Casper’s cofounder and CEO, had started an ecommerce business while he was at UT. The mattress category was surprisingly successful. He always had his eye on it, and it looked like he was going to be able to convince his four cofounders to consider it.

Buying a mattress is a terrible experience. The brands are staid and unloved. The process seems designed to lure you into a showroom with a commissioned salesperson who is trained to extract as much money from you as possible. You walk out with a five-thousand-dollar mattress that you qualified by laying on it for five minutes after it’s been abused in a showroom by countless other customers.

Tempurpedic was the last innovation in the mattress industry, and it’s decades old. The first cracks in the market predicated on choosing spring-counts, foam content, and myriad other qualifiers for the variety of mattresses pitched by mattress showrooms appeared when hotels started selling their own branded mattresses. Unlike the showroom experience, hotels stock one mattress. It’s designed to be comfortable for everyone. Why couldn’t a mattress company do that? There was a void in the landscape.

In March 2014, they raised a small seed round of $1.6 m to begin tackling the idea in earnest. They spent the first nine months doing research and development. The product had to provide a universal improvement in sleep quality. One of Philip’s cofounders, Jeff Chapin, was an industrial designer at IDEO. He brought his deep experience with the materials, the problems, and the packaging to sleep. It needed to be the best, to fold in a box, and provide a high degree of value per consumer dollar.

For a business that was virtual at its core, they thought a lot about the customer experience. The customer experience – the customer journey – would be central to Casper. They saw the whole customer experience as a brand-building opportunity. They thought about unboxing. What does the mattress do as it expands? How does the customer experience it? They wanted to personalize the brand. They wanted to make buying a mattress enjoyable and rewarding – through the process and the product. The answer started with the patented combination of latex and memory foam with iconic a white top with a grey side-panel.

What Philip and the team didn’t expect was, though designing a mattress for a good night’s sleep was hard, getting a manufacturer online was going to be at least as difficult.

The mattress industry hides fat margins and a cycle of private equity buyouts, recaps, and bankruptcies. Simmons Serta and Tempur Sealy control most of the manufacturing and have been largely protected from low-cost imports by virtue of just how colossally inconvenient and expensive it is to freight them in from Asia.

The remaining manufacturers often operated under the scrutiny or discretion of the controlling duopoly. For Casper, it meant that they had to fight to even get a manufacturer. Most manufacturers wouldn’t talk to them. The initial volumes were either deemed too small or they were too colored by the perspectives of the incumbents.

Casper, from the start would change how manufacturers work with a mattress brand. Typically, a Simmons Serta, for example, will request a large production run, warehouse their inventory, in a region, and merchandise it at local showrooms. Casper, on the other hand, maintains a just in time inventory process that essentially asks manufacturers to make mattresses to order for customers. Rather than warehousing the finished product, they ship it directly to customers via UPS from the factory. It’s far more capital efficient and keeps them customer focused.

Casper started selling on April 22nd, 2014. With three new hires, they had grown to eight people, all sitting in a small office on Bond Street in Noho. Casper did $1m of sales in the first twenty-eight days. They weren’t just selling to friends and family. Something else had happened. Something big.

They needed to get ahead of the supply chain. Early on, they were always running out of product and posting delays. The supply chain in the first 12-18 months was a big challenge. They have IT infrastructure supporting just-in-time ordering and deliveries now, but it wasn’t always so reliable or easy. Philip and the team, however, turned it into an opportunity. They over-communicated with customers, learned about who they were, and established the foundation for long-term relationships. While the traditional mattress buying experience was derelict and disappointing, Casper would further separate themselves through service. They introduced the 100-day trial.

Customers began posting the unboxing videos Philip and the team had speculated about. The videos became part of the virality of the Casper sale that the team didn’t expect, and they were rapidly becoming the fastest growing consumer business ever.

The flipside of growth, however, was scale. They needed to grow headcount. They needed more money. Casper raised a Series A in August  2014 and brought in new investors, such as NEA and Silas Capital. They used part of the capital to expand into Canada. In June 2015, they raised from IVP and Pritzker. They closed 2015 –just over eighteen months into production—with $100m in sales. Nonetheless, Philip found time to get married in October, along the way.

By the end of 2015, Casper had dramatically grown its customer base. Unlike a traditional mattress company or retailer, Casper knows their customers. Not only did they sell and ship them a mattress, with no retailer intermediary, they focused on establishing a long-term relationship. It starts with saying, thank you. For their first customers, Philip and his team went to the Strand and bought crates of leather-bound books. They brought them back to their office, wrote personal messages of thanks on the cover pages, and shipped them along with the mattress to each customer. A mattress and a Tale of Two Cities, perhaps.

If imitation is the greatest form of flattery, then Casper has many admirers. Not only has their innovation and success inspired copy-cats like Leesa, Karma, Lull, Tuft & Needle, Purple and many others, but the incumbent mattress brands have taken Casper’s lesson to heart. Tempur Sealy launched Cocoon, as a direct to consumer brand at the price scale of Casper. The incumbents, such as Tempur Sealy, however, must face a problem unique to their situation: channel conflict. Some 90% of their revenue derives from retail sales at higher price-points, so Cocoon can only succeed at the cost of their traditional retail channel as they turn individual $2.5k sales into $800 sales. It effectively begins to cannibalize their market.

The upstarts, on the other hand, have proven to be plucky competitors, nipping at their heels. While Consumer Reports rated the Casper mattress the number one foam mattress on the market for 2018, the field is now rife with players. The 2018 Wirecutter reviews work to provide a more balanced field of options and provide plenty of space for other manufacturers through a variety of categories: side-sleepers, rotators, back-sleepers, etc. Indeed, everyone has an opportunity to shine in their review.

But Casper has continued to set itself apart. Casper has responded through new products and their interplay with subtle and effective marketing strategies. They launched the dog mattress in August of 2016, which not only drove sales, it also drove an enormous rise in consumer generated content about Casper, mattresses, and their dogs. What started as a product launch became a free marketing campaign based on fan-media on social media. It was carefully tuned to drive fan-contributions and promotion to further entrench and spread the Casper brand.

Investments in content marketing to spur their fan community and consumer interest have led to Van Winkles and its latest evolution: Woolly, a wellness magazine, which focuses on wellness and comfort. They even launched a 1-800 number campaign that encouraged people to call in for ways in which they could fall asleep -- by listening to forest sounds, waves, or a monotone voice, droning on. Now, Casper  has opened more than 20 retail stores across North America that reimagine the sleep shopping experience. All of this has kept the community talking about Casper and what it will do next.

These investments and market adoption have led to strong indirect channels through merchandising relationships. In May of 2017, they announced a retail partnership relationship with Target, through which they would be the key mattress provider for all Target stores. Meanwhile, they partnered with American Airlines in which they became the branded lay-flat-bed provider, as of mid-2017.

The team and team dynamic that Philip has developed, has been key. Seasoned, strong candidates from big, successful brands are drawn to Casper. The team includes executives fro Kate Spade, Apple, Google, Uber. He’s also introduced a sleep lab in San Francisco that counts more than fifty  researchers and engineers focused on advances in sleep science and technology in the interest of product innovations. Of the more than 350  that work at Casper, nearly none have turned over. He attributes much of this to his and his team’s deep commitment to the underlying mission – to deliver everyone a good night’s sleep. It’s simple and seems obvious, but it’s exactly the kind of rallying cry that binds the team together, focuses everyone on the market, and separates Casper from its competitors. Casper is a compelling place to make a career bet -- a place that competes with the strongest brands in the world.

The mission-driven approach to Casper informs every aspect of the business. Philip shifted the business to a B-Corp, so he could score themselves and their suppliers on their social impact. He continues to be a key contributor, supporter and partner to Charity Water, and he takes the time to make additional, spontaneous contributions, such as donating mattresses to firehouses in NYC.

Casper entered 2016 with more than 100 employees, a $200m revenue goal, and the prospect of market launches in Europe alongside their third anniversary. By the end of 2016 , they had met their goal, counted more than 200 people on the team, and were planning for even more growth through global expansion into new markets. And 2018 promises more of the same.

It’s been a remarkable rise for Casper through Philip’s leadership. He continues to attract the most prestigious job candidates. The core business continues to grow and has benefited from the expansion of product categories, distribution channels, and new markets. And he continues to press his team on the core mission and responsibility of the business - sleep, for all. Thanks to Casper, we’ve come more than a long way from uncomfortable showrooms with aggressive salespeople in bad suits.

[davemoon]

Pulling Back the Covers on Boll & Branch

Scott Tannen had promised himself and his family some time off. He had recently sold his online gaming business to Publishers Clearing House when tragedy had struck. He was in the middle of the transition, and his mother was diagnosed with pancreatic cancer. She passed away just as he wound down his commitment to PCH, and he felt blessed to have had just a little more time with her. Scott didn’t think he was going to head into the business world again.

But he couldn’t stay away. In the summer of 2012, Scott was making private investments and started to take a closer look at social impact investing -- companies like Toms. The urge toward entrepreneurship started to rekindle inside him. It was at the same time that his wife, Missy, was searching for bed sheets for their remodeled master suite. Scott spent four hours researching the options his wife gave him and concluded they were going to start a linens business.

It turns out buying bed sheets is a miserable, opaque, and conflicted experience. Some 60% of consumers can’t name a brand. They name a retail store, instead. Conceits like thread-count are just that -- meaningless. In fact, higher thread-count sheets can actually result in heavier, rougher sheets. Once you start to peel away the layers of complexity and counterparties in the cultivation, spinning, weaving, cutting, sewing, and shipping of the sheets, it will make you never want to buy sheets again.

Scott picked one brand to put under the microscope. He spent a month picking apart its supply chain, so he could find the actual fields from which the cotton came. They touted a unique, luxurious high-thread-count weave of fine Egyptian Cotton, made in Italy. It turns out, it was anything but the case. The Egyptian Cotton was grown and spun in China. The thread was then sent to Bangladesh and woven into sheets, and the final stitching was applied in Italy. So much for high thread-count, Egyptian Cotton sheets, made in Italy.

The linens industry has been dominated by concentrated suppliers with no transparency and shaky claims, but these belied the social cost of the supply chain. The disaster at Rana Plaza in Bangladesh would shine a bright light on the manifold human cost of the textiles business. More than 100 people died and scores more were injured in Dhaka as the overloaded building collapsed. But as he looked closer, he found the disaster to be commonplace. Traditional cotton farmers in India have a life expectancy of 35 years. They live in grinding, dangerous conditions, unable to make a living wage and soaked in poisonous chemicals. The Egyptian Cotton sheets, made in Italy, were the source of pervasive misery.

Scott had found the social impact angle. He and his wife, Missy Tannen, would found Boll & Branch as a luxury linens business with a focus on fair trade and providing a safe, living wage for everyone in the supply chain. Scott took the helm as CEO, and Missy took charge of all product development and specifications. He teamed with Chetna, a farming cooperative in India that negotiates for living wages for small-holders. He worked with a third-party manufacturer in India to bring those practices to the factory floor. Every sheet, pillowcase and linen would be of the highest quality and could be directly traced back to the field and factory where it originated. When the summer of 2013 came around, he wired his life savings to the manufacturer in the hopes that his first round of sheets would arrive in January 2014.

Through careful planning, execution and innovation, Boll & Branch reinvented the linens supply chain. Investing in quality, transparency, and relieving the social cost of linens not only led to the highest quality product, it led to strong unit economics. More transparency not only counterbalanced the dubious marketing of thread-count and other claims, it actually corresponded with important changes to the supply chain. Boll and Branch came out of the gate with strong economics and winning on quality.

But there were still so many questions. Would people change their behavior and buy sheets online, from an unestablished retailer with no brand advantage? Would they pay premium prices for those sheets - more than $200 a set? Would Missy & Scott’s disdain for established marks of quality, such as Egyptian Cotton and high thread-counts backfire on them? Or would Missy’s meticulous product designs, distinctive aesthetic, and exacting standards come through and reach an audience of consumers so fatigued with the miserable, opaque and conflicted experience of buying sheets from established brands?

The Wall Street Journal caught wind of Boll and Branch in January 2014 and wrote up a piece on the company. What Scott and Missy thought was 18-months of inventory was actually only six hours of inventory and a five month waiting list. Scott and Missy had convinced shoppers to change their behavior and buy sheets online. They had beaten back established brands and retailers and established a fledgling, trusted, desirable brand of their own.

Fortunately, Scott’s direct relationship and close collaboration with the farmers and the manufacturers meant they were prepared and eager to respond. Boll & Branch actually consumes almost all of their capacity, so they must work closely, as though part of the same company, to make the appropriate investments in growth. Sheets would arrive and sell out, again and again, throughout 2014. Scott & Missy finished the year with a three month waiting list.

Boll & Branch and its partners, however, had invested throughout the year to scale up and support their growing popularity. They retooled the lines, retrained the workers and increased capacity from 180 sets a day to 900 sets a day. Meanwhile, the factory workers, many of whom Scott knows by name, were paid 50% more, on average, had health insurance for themselves, their family and their parents, and a bonus, per piece that they produce. Overtime is optional, and when they take it, the overtime rate is three times their wages. It’s more than a living wage, and the increased commitment from Boll & Branch was more than reciprocated on the factory floor. Nonetheless, they maintained their strong unit economics.

Steve Jobs famously said, if he were designing a dresser, he would make sure the back of the dresser looked perfect, as well. Scott takes these to heart as he leads and grows his team. To that end, he’s led a team founded on a mutual commitment to the Boll & Branch social mission. He spends his time ensuring each team member has what they need and the relationships, internal & external, to move the ball forward. He’s not afraid to roll up his sleeves and jump on customer service calls, and the team thrives on it – including the extended team in India.

Scott and Missy were ready for 2015. They made short work of the waitlist and decided it was finally time to advertise. Advertising unlocked surging demand. They crested $12m for the year -- their second year of production, with only five employees.

When 2016 rolled around, Scott decided it was time to be profitable. He had material advantages over the competition and an increasingly influential brand, but logistical costs had eaten into his profits throughout 2015. He expanded the team to 23 people over the course of the year, invested in logistics, changed his warehouses, and launched new product lines, including flannel sheets. He closed 2016 profitable with $30m in sales.

Scott & Missy entered 2017 with an eighteen-month pipeline of new product launches, designed, tooled, and underway, which they would begin launching starting that August. They invested more in cultivation, logistics and manufacturing. The result would dramatically increase capacity, improve unit economics, and do so while meeting their rigorous quality, social and environmental standards.

The social mission, however, does not end with Boll & Branch’s business practices. Scott & Missy focus their philanthropy on Not For Sale, a charity focused on human trafficking and slavery. Founded by David Batstone, who discovered that all of the servers at his local restaurant were in fact enslaved by the owner, the charity helps channel formerly trafficked individuals to opportunities that wouldn’t otherwise be available to them and can help them get on their feet. Scott & Missy have been deeply involved for the past seven years.

The innovations that drove Scott & Missy to integrate the supply chain, make every step transparent and rigorously tackle the social cost of linens manufacturing and merchandising are winning. They have a material competitive advantage, a rising brand, and surging demand. After a successful test of a 1,950 square foot physical store in 2017, Boll & Branch opened its flagship store in the Mall at Short Hills in September 2018. It’s been just shy of five years since Scott & Missy made the nerve-wracking decision to wire their life’s-savings to India in January 2014, and they’ve never slept better.

[davemoon]

The hedge fund disruption

Hedge funds went mainstream like a bankruptcy -- very slowly and then all at once.

The combination of growing macroeconomic pressure on pensions and the success of a charismatic early hedge fund adopter would help drive trillions of dollars into hedge funds at the start of the century. The transition would disrupt traditional institutional investing, redraw the map of acceptable investment strategies, and create an asset class with $3.2 trillion under management in 2017.

But today, they’re hardly the disruptive force they once were. Instead, they’re an ordinary part of a portfolio that is under increasing pressure to cut fees and justify its position among other investments.

Hedge funds were a tiny category up until the late nineties. There were around fifty-five-hundred hedge funds managing a total of more than $295 billion in 1997 according to an OECD report, citing data from Van Hedge Fund Advisors. Each fund averaged just under $54m in assets under management. The number of funds that had reached the more than $100 million in AUM, let alone $1b in AUM, was miniscule.

Many of the leading managers would routinely post outsized returns. George Soros’ Quantum Fund “broke the bank of England” in 1992 when, having bet most all of the fund against the pound, he watched as prevailing economic circumstances forced the bank to devalue the pound. Former Malaysian Prime Minister Mahathir Mohamad would go on to accuse George Soros of currency manipulation for similar outsize bets against and trading of the Ringgit during the Asian Financial Crisis of 1997. Meanwhile, Julian Robertson, who had started with $8m in 1980 had amassed $10.5b in 1997 and doubled to $22b in 1998.

Up until the mid-nineties, however, hedge funds had always existed in a kind of regulatory void, so they grew up in the confines of the portfolios of wealthy individuals. Many institutions wouldn’t consider them. But the success of a charismatic early hedge fund adopter would become a lodestar to institutional investors struggling with growing macroeconomic pressure. His example would set the stage for massive allocations to hedge funds.

David Swensen had begun to attract attention for his unorthodox approach to institutional investing. Swensen managed the Yale endowment, and under his guidance, it had set the pace for endowment performance. From 1985 to the year 2000, it grew ten-fold, from $1b to $10b. In the fiscal year 2000, alone, the endowment grew 41% to $10.1b and became the second largest endowment, next to Harvard. Swenson capped off this performance by publishing Pioneering Portfolio Management in the year 2000. The book would set the stage for a broad reconsideration of institutional investment strategies.

David Swensen’s exceptional returns shone a spotlight on the use of so-called alternative investments. His approach would reduce Yale’s market exposure through shifting the endowments investments toward alternatives: private equity, real assets and hedge funds. He argued that these so-called alternative investments were instrumental in “pushing back the efficient frontier.” The efficient frontier refers to Harry Markowitz’ statistical depiction of the trade-off between risk and return. Generally, the higher the return, the higher the risk. A good investment manager would only take as much risk as was warranted by the expected return - nothing more. But Swensen’s example suggested that including alternative assets would provide portfolios “higher returns for a given level of risk or with lower risk for a given level of return.” By embracing alternatives, Swensen argues, a manager could achieve higher possible returns without raising the level of risk.

Swensen wasn’t the only one talking about alternatives. Google Books Ngram Viewer provides the relative incidence rate of terms throughout Google’s collection of digitized books. The incidence rate of mentions of the bigram “Hedge Funds” spikes dramatically from the late nineties through 2008. The incidence rate of mentions of the bigram “Mutual Funds,” however, declines from the year 2000. The conversation in published books clearly begins to coalesce around alternatives, such as hedge funds.

Meanwhile, the macroeconomic picture had turned against many institutional investors. Pension funds, in particular, were struggling. They had historically maintained a bond-heavy portfolio, and the bond-oriented portfolio had provided sufficient returns to match the liabilities of their participants. The average rate for a ten-year US Treasury bond, however, peaked at 15% in 1981, and from the 1980s onward, interest rates would enter a long-term, secular down-trend. The ability of pension funds to generate sufficient returns to cover their participants would steadily decline over the years. During the recession in the early 1990’s, the Federal Funds Rate declined to 3%, which drove down interest rates for other sovereign, municipal, corporate, as well as consumer borrowing. Pension funds would either have to raise the level of contributions from their participants or take on more risk to generate increased returns.

No one wants to pay more into their pension funds, so pension funds started to carry more risk. They allocated more capital to equities through the 1990s and the strategy did quite well. The strong bull market in the 1990s more than compensated for the declining returns of the bond market. In fact, some argued that the strong performance warranted an increase in pension benefits. In 1999, California lawmakers reviewed the state’s pension system for government employees, known as CalPERS, and proposed increasing benefits on the strength of strong investment returns. CalPERS considered the proposal and projected that over the next eleven years, the increase in benefits would require no additional funding from the state and, by extension, tax payers. CalPERS was not alone. Other state pension funds followed suit.

New Jersey, under the leadership of Christine Todd Whitman, made two bold moves in an effort to lower taxes for the state. First, Whitman began by withholding state contributions to the pension system in 1995. Whitman used the so-called “savings” to balance the state budget. The net impact on pension contributions by the state put “the employer contributions to the pension system this year [1995] will be as much as 96 percent below the amounts contributed in the early 1990's”. The decline in employer contributions reflected a reduction of “nearly $1 billion a year.” Ominously, Richard C. Leone, a former New Jersey State Treasurer and then president of the Twentieth Century Fund remarked, “There is no question but that this is creating future debt. This is just another way of getting around the balanced-budget requirement, a kind of deficit spending. It is the sort of thing that comes back to haunt you.”

Whitman then took the highly unusual step of using leverage to invest in equities. New Jersey sold $2.75 billion of bonds paying 7.6% interest in 1997. The proceeds went directly into an investment program in the state pension fund named the Pension Security Plan. Whitman claimed returns from the program would save taxpayers $45 billion and, in so doing, would help finance the tax cuts her Republican administration wanted to pass.

The Pension Security Plan worked handsomely, at first. The first full year of investment returns at the NJ Division of Investment had an average rate of return on the pension assets of 22.7 percent, so the returns more than compensated for the cost of capital. Research written at the time by the Pension Research Council at the Wharton School of the University of Pennsylvania in the volume Pensions in the Public Sector attributed staggering performance to the fund’s increasing exposure to equities: “The State Investment Council and Division of Investments has generated remarkable returns on pension asset investment, since it began to invest more of the pension assets in equities." The Pension Security Plan, in part, owed its success to a levered bet on the equity markets.

The expansion of benefits in California and the experiment in New Jersey both collided with a simple reality: markets go up and markets go down. The backslapping performance of the late-nineties turned quickly in the year 2000. From March, 2000, the Nasdaq would lose more than 70% of its value through the end of 2002. The S&P 500 would lose more than 35% of its value. California would have to increase its contribution to the pension system by a total of $18b over the next eleven years, from its 1999 projections. The so-called Pension Security Plan introduced by Christine Todd Whitman would ultimately not even cover the cost of capital, let alone finance the tax cuts. It earned less than 6% annually through 2009. The increased equity market exposure proved to be their undoing.

Pension funds, however, still needed returns. Bond yields only got worse when Federal Reserve Bank Chairman Alan Greenspan lowered the Federal Funds Rate to 1% in response to the equity bear markets, and the grinding decline in the equities market erased many of the gains from the nineties. Swensen’s Pioneering Portfolio Management seemed like it held the perfect solution. Alternatives would push back the efficient frontier, so managers could create “portfolios with higher returns for a given level of risk.” At that moment, it seemed that pension funds had no other option but alternative investments, and hedge funds were waiting with open arms.

The early 2000’s introduced a wave of allocations to hedge funds by pensions. Though not the first investments by pensions in hedge funds, allocations to hedge funds became far more widespread. CalPERS, for example, approved a revised investment plan in 1999 to include up to a 25% allocation of its public markets portfolio to hedge funds. CalPERS’ decision, if fully implemented at the time, would have entailed an investment of $11.25b into the nascent asset class. Remarking on the move, a spokesman said, “Hedge funds are not quite as risky as private equity funds, and we will steer clear of funds that use a lot of leverage to make bets on the market.” Hedge funds were still considered the frontier, but they were gaining broader and more enthusiastic acceptance.

Public pension plans would grow their allocations to alternative investments dramatically over the coming years. Over the ten years from 2001 to 2011, pension plan allocations would increase from 3.5% to 13.5%. These would reach 17.7% in 2016, according to data from Public Plans Data, a joint effort between the Center for Retirement Research at Boston College (CRR), the Center for State and Local Government Excellence (SLGE), and the National Association of State Retirement Administrators (NASRA). Much of the allocation to alternatives comprised allocations to hedge funds.

Hedge funds had their best year in a long time in 2017. The category was up 8.5%, according to HFR, and stock-pickers, in particular, did well. They were on average up 13.2%, and some outpaced the strong performance of the S&P 500. Outliers, such as Whale Rock Capital and Light Street Capital, were each up 36.2% and 38.6%, respectively. But investors have reservations. They pulled $70b out of the hedge funds in 2016 and barely changed their allocation in 2017. According to Don Steinbrugge, CEO of Agecroft Partners, in investment consultant, “The hedge fund industry remains oversaturated...We believe approximately 90 per cent of all hedge funds do not justify their fees . . . Some large managers are simply too large to maintain an edge.” They may have been up, but the S&P was up 19%, and the S&P doesn’t charge two-and-twenty.

The macro demands on pensions set the stage for a disruptive change in portfolio allocations, and David Swensen provided the playbook for allocating to hedge funds and alternatives, but today, it’s starting to feel like they may be too large to maintain an investment edge and too expensive to leave any returns over for their investors. That may be why hedge funds feel less like a disruptive force than an ordinary, if over-sold, component of a portfolio.

[davemoon]

What happened to hedge funds?

“There was a time when we were the disruptors.”

I was having lunch earlier this year with an old friend who had gotten in early with hedge funds, and he was stuck.

“We used to go into meetings with company management, elbow our way past sleepy mutual fund investors and ask the tough questions.”

The industry wasn’t as fun, successful or invigorating.

“They didn’t have a chance against us. We had the returns to prove it.”

The questions. The ability to go short. The leverage. They stomped on mutual fund returns in the late nineties and even early 2000’s. Now everyone in the hedge fund industry seemed to be fighting over the same scraps. Now there weren’t enough returns to go around.

When did hedge funds become so boring? Hedge funds used to be the disruptors. They were gunslingers and gamblers and, at bottom, insufferably successful investors.

The glory days of stepping off the trading floor at Goldman Sachs, hanging out a shingle for investors, and turning away money have passed. But they were real. Eton Park actually turned away “several hundred millions dollars” while raising $3.5b in one go, and investors were more than willing to accept onerous lock-ups for the privilege. Hedge funds were disrupting traditional institutional investment approaches and investors couldn’t allocate money to hedge funds fast enough.

I saw it first-hand. As part of the founding team at Gerson Lehrman Group, we were the beneficiaries of the macro shift to hedge funds and their insatiable research demands. When John Griffin of Blue Ridge Capital told Mark and Thomas to stop publishing reports and make a business out of connecting him to our authors, doctors and consultants, the expert network was born. We didn’t just have product-market fit. We had product-market-macro fit. The torrent of hedge fund growth channeled into a firehose of new clients, revenue and growth for the business.

But today, the largest pensions and investors are turning away from hedge funds. Calpers became one of the largest allocators to exit hedge funds in 2014. Interim CIO Ted Eliopoulos pulled $4b from 24 hedge funds and six funds of funds -- $700m from Och Ziff, alone. Eliopoulos blithely said, "Hedge funds are certainly a viable strategy for some." New York City Employees' Retirement System (NYCERS) would do the same in 2016, divesting the 2.8% of its $51b portfolio allocated to hedge funds: $1.45b. The Illinois State Board of Investment cut their hedge fund allocation by more than two-thirds: from 10% to 3% of the overall portfolio. The New Jersey Investment Council would cut its allocation to hedge funds, which stood at $9b, by 52% for the 2017 fiscal year.

Hedge funds went from the disruptors to just another mainline institution like the long-only mutual funds they had disrupted at the turn of the century.

The question today is, what will disrupt them?

[davemoon]

AI, ML & the Consulting Problem

Artificial intelligence and machine learning have fully transitioned from academic concepts, to venture capital investment trends to a suffix on the title of an executive in a large enterprise. Just like we ended up with heads of big data or data science, we’re now starting to see heads of AI and Machine Learning.

It’s not a problem. It just tells us where we are in the cycle -- early.

The technology is out of the labs. Watson showed us that, and Google’s AlphaGo took it a step further. These victories for Artificial Intelligence have unleashed a surge in investment. According to McKinsey, companies invested up to between $20-30b in AI initiatives in 2016, with 90% attributed to research and development and the balance for acquisitions. An additional $6-9b went to startups through venture capital and direct corporate investments.

Attaching machine learning and AI to the titles of executives plants a flag in the enterprise. They’re findable via LinkedIn. They’re the obvious choice for a keynote or a panel presentation. It’s a signalling function: “we’re a big company, and we care about new technology. Why don’t you come over and tell us about how you might be able to help.”

The title, however, misses one thing: the use case. What exactly does the Head of Machine Learning and AI do? Is there a head of excel? No. When an organization hires a Head of Machine Learning, they’re hiring a hammer and asking them to look for nails. It’s a decision to fund a technology in search of a problem -- a typical feature of the early stages of the technology adoption curve.

There’s nothing wrong with the approach, but it does have important consequences. Just as organizations are open to new technologies, the multitude of possible applications can be overwhelming. Therefore, the experience for an enterprise can feel like chasing butterflies. They’re everywhere, desirable, seemingly easy to catch but also just out of reach.

Enter the first phase of adoption: consulting. Consulting firms are ideally suited for searching conversations about business problems and the various technologies that could solve them. We saw the same effect with the wave of “big data” investing. Big data opportunities became engagements more akin to consulting and proofs of concept. Palantir is a case in point. This naturally favored well capitalized venture backed companies that had the credibility to and were willing to invest in consultative engagements and consulting companies that are organized as such.

What is the head of AI and Machine Learning looking for? In all likelihood, they’re looking for a proof of concept and are leaning heavily on consultants. It’s not a bad thing. It’s just a function of how early we are in the adoption of these technologies. But it is something that should keep entrepreneurs up late worrying about, for they can test and experiment longer than a founder has funding.

[davemoon]

The Marketplace for Fans & the Superfans that Power Crowdfunding

What happens when we think about Kickstarter and IndieGoGo as fan communities rather than just marketplaces? Funders and founders still congregate in an exchange of money for projects, but a simple qualification introduces us to the superfans who make crowdfunding unique and may stitch the whole thing together.

Crowdfunding sells the fan experience. Find a founder. Tap into their project. Pay into their vision. Interact. Follow their progress. Spread their story. But it's a speculative fan experience. Each project could generate fans, but they don't necessarily begin with fans. When you invest in something, you become a fan. If enough invest, it shows you were right.

Speculative fans are fans of crowdfunding, first, and the project's mission, second. Some of these fans rise to the level of superfans. They derive their superlative not from their expertise or project-specific enthusiasm, but the number and extent to which they back projects. It's not the fan; it's the size of their portfolio. They're the superfans of the creative process. They fund and follow creativity, and they're unique to the crowdfunding world.

Does crowdfunding work because of these superfans? What would happen of you took the model to a community based around an existing passion and expertise?

Most fan experiences are organized around an established practice or institution that already has fans. Football fans pursue live games, ESPN, NFL.com, Deadspin. Gadget fans end up on engadget. Comic book fans go to Comic-Con. These forums congregate and engage those with an existing passion.

The Twilight series sparked online forums, unbated enthusiasm, and the creative efforts of many. Some have gone so far as to write full-blown fan-fiction for the similarly obsessed, and one notable example made the leap to become a publishing phenomenon of its own: EL James' Fifty Shades of Grey.

But Kickstarter and IndieGoGo differ. They're speculative. The founders are generally obscure. The portals draw projects that may not otherwise be funded. They're organized around delivering a story to facilitate financing, and it's the financing itself that validates the fandom. These don't start with an existing passion. They start with a potential passion, and they market it.

No one expected the success Amanda Palmer would have on Kickstarter  The former member of the Dresden Dolls had worked with Ben Folds to produce an album, and it was a failure. She found it easier to sell t-shirts to her twitter-followers than make money from record sales. But Palmer raised almost $1.2 million dollars to produce and tour a new album from more than twenty-four thousand funders on Kickstarter.

Sticknfind started with a perhaps aggressive $70k goal on IndieGoGo. The Bluetooth sensor-set for finding your lost keys closed its fundraising with almost one million dollars in funding for the as yet commercially unavailable devices and app. 

Kickstarter frames the experience as a way to fund and follow creativity. But there's something more primitive at work. It's a contest. These projects passed a threshold on Kickstarter and IndieGoGo. They passed the threshold to validity and answered the question, were these projects fan-worthy? Yes, indeed, Detroit needs a sculpture of RoboCop.

A unique clique of individuals has emerged in the crowdfunding ecosystem -- the super-backers that Jeremy Schwartz's Backerbase is targeting. They regularly fund campaigns. Some have gone so far as to fund hundreds of them. They're real people, and they're not just employees of Kickstarter or IndieGoGo. Look at their profiles. They have funded everything from video games to hot-sauce to trail-maps. Kickstarter, IndieGoGo, and the rewards-based crowdfunding portals are uniquely suited to help these individuals browse and fund creativity.

Super-backers are among the phenomena that make crowdfunding sites unique. They're a response to the contest. They're hooked on the contest. Unlike a traditional fan site that congregates a passionate community through information, conversation, or a creative response to the focus of their passion, super-backers speculate. They pick and choose and flock to projects, so when the casual backer arrives, they can see they're not alone. They're perhaps the leaders whose presence tips casual visitors from browsers to funders.

If super-backers are critical and unique to crowdfunding portals, why are they treated no differently than any other user? Their portfolios of funded-projects would benefit from tools to better manage their relationships with founders and track their progress. What would happen if someone optimized the experience for them? Would they be drawn away from the current platforms? Would their unabated demand begin to draw projects away from the current platforms?

[davemoon]

Crowdfunding, Adverse Selection, and the Information Problem

Crowdfunding promises to redraw the geography of financing and shift its center from institutions toward individuals. The megabanks and institutional investors aren’t going away; they’re just going to have company. The role of individual investors will expand through crowdfunding platforms that promise to match pent up demand with private investment opportunities. The JOBS Act will do more than connect doctors in Ohio with businesses in Arizona. Crowdfunding platforms hope to tap more than just doctors and lawyers. Lifting the accredited investor limitation may extend their membership to plumbers and secretaries. And hundreds of crowdfunding platforms have announced their intention to match the retirement accounts of middle-American secretaries with the next hot internet start-up. Crowdfunding platforms would have one believe that the only missing piece of the equation is the rules. When they’re finally written in 2013, each can finalize the technical details of their platform, and investor money will flow like a river through opportunities all over America and the world. But they’re wrong. Markets are about much more than enabling transactions. They’re about the information and incentives that precipitate transactions. Crowdfunding markets are no different, but because of how they’ve been organized, they have two significant structural problems. First, adverse selection. Each listing of an investment opportunity begs the question - why do I get to see that? Is it because all the sophisticated investors passed? What’s the incentive to bring qualified opportunities to the platform? Second, information asymmetry. Once a deal is listed, will the investors have enough information to perform suitable due-diligence? The company may be uncomfortable disseminating confidential operating metrics and materials to potentially unlimited numbers of people. Smaller investments, such as those sourced through crowdfunding, warrant smaller research and due-diligence budgets. Can an investor afford to pay $10k toward due diligence when they are investing only $10k? Funders are likely to be be at a gross information disadvantage. While crowdfunding platforms are focused on the technical details, such as escrow, deal-listings, accounts and rule-making, little attention has been paid incentives and information -  the core structural problems of the market. The rules of the game are important, but participants must also have the conditions to play. The real conditions for equity crowdfunding’s success are based on solving for adverse selection and information asymmetry, and it can be accomplished with a lead investor model.

                                                                              ☸

The lead investor model starts with an investor, not the company. It would not allow just any company to list an investment opportunity. It would also not play a role in identifying target companies and promoting them on the platform under the guise of curation. Instead, it would ask existing, sophisticated investors to list deals to which they have committed, so market-participants could coinvest. Let’s say NewCo is raising $1m in financing. Typically, they will prepare materials and begin to approach investors. At that point, it’s too early to begin crowdfunding. Instead, NewCo will work through an iterative process of pitching and refining, pursuing and ultimately learning from investors. When the company finds an investor who is willing to lead, then it’s time to begin crowdfunding. The lead investor will list the financing opportunity on the platform. The lead investor will list the opportunity because the lead investor is the one who has done the due diligence. They’re the one who’s already investing. By having the lead investor list, rather than the company, it signals to the crowd that it’s not just any other deal. It’s been qualified by the due diligence and capital commitment of the lead investor. Having a lead investor remedies the structural information and incentive problems of the crowdfunding market. Rather than being in the dark on due diligence, coinvestors can consider the lead investor’s due diligence on the strength of their reputation. The lead investor’s check-size will warrant more resources for research and give them more access to management and documents. Rather than adverse selection, it’s positive selection. Lead investors contribute deals in which they’re investing, and the market-participants --the crowd-- can coinvest. Why, however, would a lead investor want to share a deal with other market-participants? They’ve invested time and money in deal-sourcing, due-diligence and negotiations to warrant and enable their investment. These efforts have distinct economic value and are exactly what will attract market-participants to coinvest with the lead. The lead investor has two reasons to distribute an investment opportunity through the platform. First, it will enhance their reputation and enable them to put more capital to work in an effort to support the success of their investment. Second, if they are putting outside capital to work on the strength of their ability to source, qualify and negotiate a financing, then they should be paid for it. The platform will attract lead investors because it will enhance their reputation and provide a performance-based fee for their efforts similar to carried interest.

                                                                              ☸

Crowdfunding will change the financing landscape. Even if its boundaries end with accredited investors, crowdfunding fundamentally changes the geography of investing by directing the capital of investors in one part of America to businesses in any other part of America. But it is not a matter of just setting up a platform. Crowdfunding needs to sort through the fundamental problems of incentives and information. It needs to solve for adverse selection and information asymmetry. Adopting the principles of a lead investor model will help crowdfunding platforms navigate and avoid these problems. And, in principle, the same may be said for rewards-oriented crowdfunding sites.

[davemoon]

Accountability in Crowdfunding - Transparency and Judgement

For all its breakthroughs, crowdfunding has realized a slow accumulation of hard truths. Things don’t always go so well. Production gets delayed. The project founders may not be prepared to handle a boisterous and demanding crowd. And then come the cries of fraud and failure. The excitement over seeing creative projects close millions of dollars of funding through Kickstarter and IndieGoGo has given way to the challenge of bringing those ideas to market and introduced the problem of, at times fumbling, execution. NPR raised the stakes and framed the challenge in terms of refunds and liabilities. If funders give money, are the creators legally liable? Do they need to provide refunds? To their credit, Kickstarter responded with a blog post - yes. Accountability is paramount to the funding process, but it’s a qualified yes. Though founders are legally obligated to provide refunds for any benefits promised and unfulfilled, “We hope that backers will consider using this provision only in cases where they feel that a creator has not made a good faith effort to complete the project and fulfill.” Accountability is important, but it’s accountability to a good-faith effort. No one wants to miss their production deadline, but it happens. To assess whether they were operating in good faith, founders need a communications channel with which to set expectations, and the market must exercise good judgement to assess failure or success. These two elements, crucially, are missing on the crowdfunding platforms. Founders don’t have the best communication channel to their funders. They’re limited to the project page, a comments section, and general email updates. None of these are particularly well suited to sketching out a timeline of tasks, dependencies and deliverables for their project. Indeed, the comments format is comically unsuitable, leaving a trail of missed connections and missing context. The still-open Auris bluetooth adapter for the Bose Sound Dock project comments are awash with unanswered compatibility questions and even a question regarding intellectual property and the underlying legality of the project. Unresponsiveness aside, the comments page could use an update. Rather than a continuous stream of messages, the comments page should provide a snapshot of the project’s current status and also tell the story of the project’s history. The experience could be taken still further and also provide a forum for founders to marshall the expertise of their funders for the success of the project. These kinds of changes could improve the satisfaction of the funders and success-rate of projects, while also providing the transparency to establish whether the founders were operating in good faith. Possible paths to take include the following.

Timeline - The comments page should include a timeline that details the project history and plan. The key features of the project history are milestones and founder-updates. The milestones for design projects, for example, could begin with the Kickstarter launch, followed by the successful funding, and then a series of concrete production goals, such as the steps that take the project from prototype to production. The presentation founder-updates should illustrate a regular communication with their funders on these goals.

Founder-Thread - Founder updates and messages are important. Why not list them on their own, rather than mixed in amongst the, at times, many other comments? Pebble has more than one hundred and seventy pages of comments. Give the funder a view that shows the founder’s comments. If anything stands out, they can zoom to that point in the conversation.

FAQs - The Hex Bright programmable flashlight has more than forty-four pages of comments. Shouldn’t salient questions receive their own thread? Couldn’t funders and founders tag questions and answers around specific issues?

Experts - Each fundraise not only collects money, it collects people. Those people have expertise and experience that could be invaluable in the development of the project. Let founders put a call out for expertise. Give funders a chance to contribute their expertise.