Q3 2022 Quarterly Review
Scrubs, MacGyvering Drones, Vietnam, and Investing Bullshit
Hi 👋 - It seems like each year goes by faster. I can’t believe it’s already the fourth quarter. Below are a few favorite reads and listens from the past few months. As always, thanks for reading.
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Podcast: Trina Spear: Billion Dollar Scrubs, Invest like the Best
A decade of cheap capital and the allure of Amazon-sized outcomes inspired lots of bad behavior: get big, fast; burn, baby, burn; tech’s country club perks; Gopuff. FIGS has a different playbook. The company, which designs and sells technical apparel for healthcare professionals (think: Lululemon meets Grey's Anatomy) grew slowly, deliberately, and without raising gobs of capital. Today, it’s growing at a healthy double-digit clip, is profitable, and generates free cash flow, something few DTC companies can claim. FIGS prides itself on being scrappy (revenue per employee is a key metric). This conversation with co-founder and CEO Trina Spear offers an alternative to the hyper-growth VC playbook as well as insight on the difference between a stock and a business, product versus metrics, the dangers of outsourcing, and how patiently building a business gives it room to maneuver and helps avoid competition. With the sentiment pendulum swinging from growth to profitability and capital becoming dearer, more entrepreneurs will need to follow this playbook.
Sometimes people try to hit it out of the gate. You're not going to build anything great if you don't really invest that time up front and build a real business the right way. Why have we been able to spend so little on marketing? It's because we actually spent that time understanding this community and connecting with them organically. We earn our customers, we don't pay for them. When you're just throwing digital marketing dollars, when you're just trying to get to a sales goal year one, because your VCs are saying, we need to hit this and then hit that, you destroy the long term trajectory of the business. The longer it takes to get to the top, the longer it is for people to come after you to take you down. For us it was this trajectory of really leading up to very fast, scalable growth, but doing it the right way and intentionally.
Article: From the Workshop to the War: Creative Use of Drones Lifts Ukraine, The New York Times
To paraphrase Einstein, not everything that counts can be counted. While on paper the Russian army is a colossus, Ukraine’s performance highlights the importance of intangibles like morale, resourcefulness, experimentation, and strategic thinking. Though difficult to quantify, these attributes play a meaningful role in determining outcomes. For example, Ukrainian soldiers are using 3D printers, Play-Doh, and hacksaws to MacGyver off-the-shelf consumer drones into military service. These drones drop bombs, perform reconnaissance, and spot artillery targets. Drones designed to drop water balloons now drop grenades. In contrast to Ukrainian’s scrappy innovation, Russia is dull and lumbering:
Drones are a significant bright spot for the Ukrainian army. Russia has an effective observation drone, the Orlan-10, used to direct artillery fire at Ukrainian targets, but no effective, long-range strike drone akin to the Bayraktar — a notable shortcoming for a major military power. Russian troops also fly consumer drones but have fewer of them, Ukrainian soldiers say. The Russian army instead leans on blunt force, deploying legacy heavy weaponry like artillery and tanks, and has been less nimble in adapting consumer technology to the battlefield.
There’s a parallel here to the podcast above with Trina Spear, who admires scrappy companies and detests lazy companies, which1:
Outsource too much. They look where everybody is. They go to the competitive market, not to the place where nobody is. They overhire. They have five times as many people as they need to actually build a business the right way. They look for shortcuts on the product. Funding Facebook and Google all day or Meta and Google all day is not the right way to build a brand.
Culture is something that doesn’t fit neatly in an Excel model, but it matters on the battlefield and in business.
Small adaptations to tactics, designs of the explosive, flight patterns and launch and retrieval have all improved over the past five months, according to a commander in an Azov unit that flies drones.
“There’s a boom in experimentation,” said the commander, who used the nickname Botsman. With the risk of drones buzzing over their positions at any time, he said, Russian soldiers “cannot eat and cannot sleep. The stress leads them to make mistakes.”
One of the larger workshops in Kyiv, called Dronarnia, takes orders online from military officers seeking customized drones, some large enough to drop 18-pound bombs. The group is financed by crowdsourced donations. Other workshops have raffled off kitchenware to raise money.
Book: The Quiet American, Graham Greene
The war in Ukraine got me interested in learning about instances when a smaller nation successfully fought off a larger, more powerful country. Going down this rabbit hole brought me to Greene’s book, which is set in 1950s Vietnam as the French were on their way out and the Americans on the way in. The novel details the relationship between Thomas Fowler, an aging and cynical English reporter covering the French war in Vietnam, and Alden Pyle, a young, idealistic American hoping to bring democracy to the country. Between the battles – both kinetic and philosophical – there’s also a love triangle with a young Vietnamese woman named Phuong. The book foreshadows the difficulties the US would later face, based on the experience of the French, and highlights the risks of unadulterated idealism. It’s an excellent novel; even more so if you like military history. (If you’re interested in how the US became involved in Vietnam – and aren’t deterred by a hefty book – Fredrik Logevall’s Embers of War is a solid history of the period.)
Suddenly I was angry; I was tired of the whole pack of them with their private stores of Coca-Cola and their portable hospitals and their too wide cars and their not quite latest guns. I said, ‘Yes. They killed him because he was too innocent to live. He was young and ignorant and silly and he got involved. He had no more of a notion than any of you what the whole affair’s about, and you gave him money and York Harding’s books on the East and said, “Go ahead. Win the East for Democracy.” He never saw anything he hadn’t heard in a lecture-hall, and his writers and his lecturers made a fool of him.
Article: On Bullshit in Investing, Benn Eifert
From overoptimism to downright fraud, the investing industry is ridden with bullshit. According to Benn Eifert, managing partner at QVR Advisors, a hedge fund, the problem is inherent in the nature of investing products:
Most consumer goods – apples, hotel rooms, laptop computers – are tangible objects or services that you can see, taste, feel, or experience, so you can judge how much they are worth to you. Investments represent claims about some future probability distribution of monetary outcomes which are not literally verifiable. The best an investor can do is form a reasonable judgment about the uncertainty around those claims, based on historical evidence and details about the mechanics of how those claimed outcomes are generated.
Risk is most acute in tech. Because it’s hard to distinguish between innovation and make-believe, deceptive, fraudulent, and over-optimistic investments disproportionately involve new technologies:
New technologies are characterized by their uncertainty of success. This requires selling potential investors a narrative about future possibilities as opposed to visible cash flows. That is natural! By definition any novel disruptive technology lacks a track record. Investors who avoid innovative technologies altogether because of this ambiguity ignore the inevitability of change. However, this inherently ambiguous futurism also lends itself to bad behavior.
Many companies set out to disrupt or democratize large markets. Few actually do.
Never trust a “democratizing X” investment pitch: they’re looking for new marks.
Most Popular on Below the Line in Q3 2022
Missfresh Expires, a look at the downfall of a Chinese instant grocery delivery business, scored a hat trick with the most views, signups, and shares in the third quarter. Thanks for sharing! Slimming Down – Part 1, a recap of second quarter e-commerce trends, came in second for views and signups. (For completeness, here’s Slimming Down – Part 2.) Antisocial Media, a look at algorithmic content distribution and Meta’s response to TikTok, was the second most shared piece.
Past quarterly reviews: Q2 2022, Q1 2022, Q4 2021, Q3 2021, Q2 2021, and Q1 2021.
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Invest Like the Best, Trina Spear: Billion Dollar Scrubs, September 20, 2022.