Episode 42: Will the AI Bubble Burst, Warby Parker's Struggles, Why Start-Up Valuations Don't Matter, Greed isn't Good and How do you Choose Where to Work?
The guys go deep into AI, does Warby Parker's DTC model stack up, why founders shouldn't obsess over their valuation, the death of Ivan Boesky, and when to leave your corporate job for a startup?
The Contrarians’ stream of consciousness
The colour t-shirt with the second highest heat absorptive capacity is dark green (the highest is black, in case you don’t know how heat works).
People consistently underestimate the impact radio has and the effectiveness of audio advertising. Tune into 3AW to hear Adam’s voice on their series of Luxury Escapes advertorials.
Dining out is now a lose-lose-lose, according to Adam and Adir. The food is expensive and the venue isn’t making money, yet somehow two people can have an $85 lunch (in Adir’s recent scenario) and still be in a packed venue.
Adam’s experience running Living Corporate, which (lawfully) subleased apartments, and the feeling of physically going to the bank to shut the account was quite emotional (Adir: “I'm a very sentimental person, I'm not even sure I would have been able to do what you did.”)
Ivan Boesky, an American stock trader known for his prominent role in an insider trading scandal in the 80s and who famously coined the phrase “greed is good”, died this week.
Softbank-backed Oyo, the once high-flying Indian budget hotel chain, has withdrawn its IPO application from the Securities and Exchange Board of India (SEBI) for the second time in a fresh blow to its already diminished ambitions (“they would put that brand on these dodgy rooming houses and there was all sort of stuff going on”).
Random Adir musing: “Nothing with the word public in front of it is better than something with the word private.”
Why startup valuations don’t matter
Adir shared an Airtree infographic of companies exceeding $100m valuation by the year which they did on LinkedIn this week (see post here).
Adir: “Not to disparage these startups, but a $100 million valuation in the private market is heavily dependent on the nature of the way that money was invested and the rights that shareholders have. So it can't be compared to a $100 million public market valuation where everybody is presumably sitting in common stock. No valuation is real unless somebody is putting cash into their pocket.”
Is a $100M valuation the best metric to measure the success of various companies? Should it be revenue, profit, how quickly you make your first $10M, or exits above $100M?
Adir believes valuation is a vanity metric for startups and it sends the wrong message to founders. “I just think it creates a situation where founders are focused on the wrong signals, and the signal should be ‘How do I find an investor to come into the business that's ideally going to help me grow?’ And when times are tough, which they always are, they're going to be supportive and not try and get rid of me. Worry less about the valuation and more about ‘if this thing gets to where I'm hoping it will get to, how do I retain enough equity to make some real money and enough power to retain some real control?’”
Hindsight is 20/20 for Warby Parker’s vision
The sunglasses industry is dominated by Italian eyewear conglomerate, Luxottica, who own a spec-tacular amount of glasses brands, like Ra-Ban, Oakley, OPSM, Sunglass Hut and a dozen others.
Warby Parker, who have bred replicas in Australia like Oscar Wylee and Bailey Nelson, have had their eyes on disrupting this market when starting as the first eyewear online only retailer in 2010.
With a gross margin of 56% (“that’s too low for a direct-to-consumer business”), negative net profit, they recently announced 13% growth. But, they do have 5% of free cash margin and 39% of revenue is flowing through to operating cash flow.
Adir on building a brand as a discounter: “there are only really two benefits of brand, in my view: one of them is pricing power and one is to reduce CAC. They should be getting a benefit on reduce CAC, but they're not. So it's a bit hard for me to understand what their brand is actually doing.”
Is AI a bubble?
Nvidia, the dominant supplier of AI hardware and software, is now the third most valuable business in the world by market capitilsation, bringing in US $26B in revenue last quarter - up from $7B the same time last year, and $0.7B 12 months before that. It’s grown an incredible 8x in 18 months.
Adir’s views:
“It’s actually barely plausible”.
“Really what we're talking about is generative AI because other AI has been around for a long time. Machine learning, neural networks, computer vision have been around a long time, so this boom is being driven by the euphoria around generative AI”.
“I think large language models should be illegal because they are using copyrighted material from all over”.
“I don't think that this is going to generate the quantum of additional commercial activity that's going to justify this additional value creation in the market. But I don't think there's an imminent collapse in it either”.
Adam makes the argument that 40% of its revenue is coming from the (other) big four companies. Which means:
They have a lot of money on their balance sheets and don’t want to pay it all out in dividends.
They can’t buy what they want to because the acquisitions get blocked.
They need to make bets for the future without ruining their P&L because that will send the stock price down.
Listener question: how do you pivot from corporate to startup life?
One thing that helped Adir decide to change from medicine to business was his love for the weekends - “when Monday morning rolled around I was like, I have to do this again. And I thought, I need to try and find a life where my Monday morning feels as good as my Sunday”.
Adam was a lawyer but insists the legal profession’s contribution to society is low - “I'm not positive on law at all. Lots of friends are lawyers, and I was one, but I think 98% of what you do as a lawyer isn't adding value to society. And especially when you look at corporate lawyers”.
Adam says the ability to have a safety net makes you more willing to lay into it full bore and that a side hustle doesn't work. His goal at 24 was to match his $50K salary with $50K of revenue as quickly as possible, while doing a lot less work and in a more tax effective way.
Another question is that someone is working at a corporate, and they don’t want to start their own company, but they want to work at a startup. How do they decide where to work?
“There are some people that should go to startups that have 10 people for and there are some people that should only go to startups that have 50 people and have been funded”.
Some advice:
Sacrifice as much salary as you can in favour of equity.
If you’re interviewing at a company with less than 50 people and you’re not meeting with the CEO or a founder, you shouldn’t join that startup.
Ask yourself: How can I feel confident that this business is not going to run out of money?
If joining a startup or scaleup, don’t take a remote role - be somewhere where you can go in and be around the people and the environment.
Five (AI) other stories worth following:
Google’s newly unveiled ‘AI Overviews’ search feature is under fire following an outpouring of bizarre and inaccurate responses that have gone viral across social media. The overviews have provided false and misleading information, such as recommending glue as a pizza topping, suggesting eating rocks, and more.
Canva just introduced new AI features to its creative platform, including text-to-graphic capabilities, an AI-powered photo editor, video editing upgrades, and more. Canva’s original disruption of the design industry came by making it simple for anyone to create — and the pairing with AI is a match made in heaven.
Elon Musk’s xAI is reportedly planning to build a massive supercomputer containing 100,000 GPUs dubbed a ‘gigafactory of compute’, aiming to accelerate the development of its Grok AI chatbot. Greater compute power is the key to unlocking more capable AI, and the amount of chips, energy, and money pouring into these clusters is going up fast.
Out of 100 major companies, Nvidia ranked highest in an Axios-Harris poll that asked Americans which firms have the best reputation. OpenAI, Microsoft, Alphabet, and other tech companies that prioritise AI also earned high ratings for trust.
OpenAI said it would release former employees from non-disparagement agreements that had prevented them from criticising the company following a wave of backlash.
