M&A, Before and After: What Founders Need to Know

Martin Casado, Blake Kim, and Zoran Basich

Welcome to the a16z podcast. Today we’re talking about the mindsets and frameworks founders should know about when navigating the mergers and acquisitions or M&A process, both before and after – including how to think about the pricing dynamics, factors that go into the decision-making process, and what to expect from the integration once the deal is done.

A16z editorial partner Zoran Basich recently talked to two a16z experts here to give us their big-picture view of the most important things to know – for founders seeking to acquire companies and how they might think about it, or those considering selling a company, or just those deciding to merge with an acquirer.

Blake Kim is a partner on our Enterprise Network team and a former investment banker who works with companies on strategic partnerships; he also recently co-wrote a post on Future outlining all the different exit options and considerations for companies. And general partner Martin Casado discusses common M&A issues and shares his experiences both as observer and participant – including the challenges of integration, which he saw from the inside with Nicira, which he cofounded and was acquired by VMware for $1.26 billion in 2012, and where he remained for years to lead its networking and security business unit.

As a reminder, none of the following should be taken as investment advice. Please see a16z.com/disclosures for more important information.

They start the discussion by outlining the frameworks for understanding M&A dynamics, including the “kingmaking dynamic” and the difference between “selling your company” and “getting acquired.”

  • Martin Casado is a general partner at a16z where he invests in enterprise companies. Prior, he was cofounder and CTO of Nicira (acquired by VMware) and is the creator of the software defined networking movement.

  • Blake Kim is Enterprise Lead in a16z's Capital Network Group, advising companies on capital raising, M&A, and public markets. He has worked at Bear Stearns, Lehman Brothers and Thomas Weisel Partners/Stifel.

  • Zoran Basich is an editor at a16z & Future, focusing on crypto and corporate development/ finance. Previously he covered venture capital and the startup ecosystem at the Wall Street Journal and Dow Jones, and was the banking editor at NerdWallet.

How ‘Hyperscalers’ are Innovating — and Competing — in the Data Center

Nick McKeown, Martin Casado, and Zoran Basich

Innovation in the data center has been constrained by the traditional model of suppliers providing fixed-function chips that limit how much the biggest data center operators can differentiate. But programmable chips have emerged that allow these companies to not only increase performance, but innovate throughout the pipeline, from operating system to networking interface to user application.

This is a major trend among “hyperscalers,” which are some of the world’s most well known companies running massive data centers with tens of thousands of servers. We’re talking about companies like Amazon, Facebook, Microsoft, Google, Apple, Alibaba, Tencent.

To talk about the trends in data centers and how software may be “eating the world of the data center,” we talked this summer to two experts. Martin Casado is an a16z general partner focused on enterprise investing. Before that he was a pioneer in the software-defined networking movement and the cofounder of Nicira, which was acquired by VMWare. (Martin has written frequently on infrastructure and data-center issues and has appeared on many a16z podcasts on these topics.)

He’s joined by Nick McKeown, a Stanford professor of computer science who has founded multiple companies (and was Martin’s cofounder at Nicira) and has worked with hyperscalers to innovate within their data centers. After this podcast was recorded, Nick was appointed Senior Vice President and General Manager of a new Intel organization, the Network and Edge Group. The podcast begins with Nick, talking about the sheer scale of data-center traffic. 

  • Nick McKeown

  • Martin Casado is a general partner at a16z where he invests in enterprise companies. Prior, he was cofounder and CTO of Nicira (acquired by VMware) and is the creator of the software defined networking movement.

  • Zoran Basich is an editor at a16z & Future, focusing on crypto and corporate development/ finance. Previously he covered venture capital and the startup ecosystem at the Wall Street Journal and Dow Jones, and was the banking editor at NerdWallet.

Kickstarting Network Effects

Paul Davison, Alexis Ohanian, Andrew Chen, and Das Rush

Network effects can be found powering almost every major technology company, from messaging apps and workplace collaboration tools, like Slack and Zoom, to marketplaces, like Airbnb and Instacart to even the internet itself. In this podcast, we look at the role of network effects creator-driven social platforms, with Alexis Ohanian, cofounder from Reddit, Paul Davison, cofounder from Clubhouse, and a16z general partner Andrew Chen, whose new book, “The Cold Start Problem: How to Start and Scale Network Effects” comes out this week (see coldstart.com for more). We cover: how do you cold start and get your first creators? How does your relationship to creators change as you scale? And how is web3 changing the incentives and dynamics around network effects?


  • What are network effects? [1:32]
  • How do you cold start and get your first users? [2:33]
  • Atomic networks and why minimum viable community is more important than minimum viable product [6:36]
  • How do you curate your network and set norms? [8:42]
  • Faking users: good idea, bad idea? [13:13]
  • What is flintstoning? [14:26]
  • How does the relationship to creators change as you scale? [17:07]
  • Building for the professional creator class [22:52]
  • How is web3 changing incentives? [25:12]
  • Paul Davison Paul is the cofounder of Clubhouse

  • Alexis Ohanian Alexis was a cofounder of Reddit and is now a business dad and an investor and mentor to entrepreneurs.

  • Andrew Chen is a GP at a16z in consumer technology. Prior to that, he led Rider Growth at Uber. He has written for a decade on metrics & growth on his blog/newsletter, and is the author of The Cold Start Problem.

  • Das Rush

‘Play-to-Earn’ Gaming and How Work is Evolving in Web3

Arianna Simpson, Gabby Dizon, Jeffrey Zirlin, and Zoran Basich

In today’s episode we’re talking about an emerging model of gaming called play to earn, in which players can make actual money based on how much time and effort they put into a game. Play to earn is also part of broader trends — the changing relationship between players and platforms, new incentives for participants in blockchain-based networks, and the new internet era that is coming to be known as a web3.

The top play-to-earn game is called Axie Infinity, operated by a Vietnam-based company called Sky Mavis. Players of the game acquire unique digital pets called Axies, and battle other teams of Axies. These NFT Axies can be created and sold using the game’s in-game currency, SLP, which can be traded for traditional currency.

Think of it as Pokemon on the blockchain, with a social network built-in, and an actual economy, and even companies built around the game that help players onboard and loan them money to get started playing. The game has made more than $3 billion in total sales since launching in March 2018, with much of its early growth in the Philippines.

(As a reminder, none of the following should be taken as investment advice, please see a16z.com/disclosures for more important information.)

Our guests today are Jeff Zirlin, the cofounder of Sky Mavis; Gabby Dizon, the cofounder of Yield Guild Games, a play-to-earn-gaming guild that gives players the resources to start playing; and a16z crypto general partner Arianna Simpson.

They talk to a16z’s Zoran Basich about the larger tech trends that enabled the emergence of play to earn, why and where it caught on first, and the role of community, as well as the challenges, which include onboarding and scalability, and the economic sustainability of this model.

Transcript below:

Axie and the beginnings of play-to-earn

Jeff: This is something that took almost four years to marinate. So, a lot of the original Axie community members and founders were from the CryptoKitty community, where we saw that the production of new NFTs had to be related in some ways to actual work and effort. This would basically prevent hyperinflation. So in the first iteration of the Axie battle system, we had experience points and these experience points could be used to breed Axies. We then had the idea and a lot of our players were requesting that these experience points be tradable tokens. And so, we tokenized them.

And then we saw that our players had actually created a liquidity pool on Uniswap, which is a decentralized exchange for these tokens. We then realized that, hey, you can actually calculate an expected hourly wage for playing Axie because there’s guaranteed liquidity in this pool.

So, I think that was really the moment that we saw the potential for it. We put out a post in January of 2020 where we saw that there was this intersection of NFTs and DeFi that was creating something that we then dubbed play-to-earn, and I think that might be the first time that that terminology was used, at least the first time where it was used in a non-speculative way

Zoran: One key thing to note here is that people have to pay a significant amount of money to get started – they have to download crypto wallets and buy three Axies, which can cost upwards of $1,000, with prices fluctuating. So Gabby, you saw this from the ground in the Philiipines — what did you see in this economic model?

Gabby: So I’ve been in the game industry for almost 20 years and actually joined the Axie community in late 2018 as a player. And what I saw last year is that people from my home country in the Philippines had started discovering and playing Axie as a way to kind of escape the economic hardship of the lockdown. And these were people who weren’t crypto enthusiasts. These were regular people that were stuck at home that had no jobs.

So, came upon the idea of a guild as a way to scale the efforts to introduce people to the world of play-to-earn and provide Axies via a scholarship program that would provide access to people around the world, not just from the Philippines, but across Southeast Asia, in India, in Latin America, and other countries to be able to play the game and earn money from it without having to afford the assets upfront.

And what we do is that we kind of act as a player collective where we invest in a lot of these assets and then form the communities around these different games where people can participate into these networks so that it’s not anymore a hurdle to get into a game like Axie Infinity because I can’t afford three Axies.

The conditions for growth — the Philippines and beyond

Zoran: You touched on the growth in places like the Philippines. What were the conditions that enabled that? Why did that spark catch there? And what does that tell us about building communities in the future?

Jeff: I think that there are a couple of unique things related to the Philippines. The Philippines loves mobile games. There’s relatively high crypto literacy. It’s a very communal culture where information and trends can spread very quickly. Filipinos have traditionally been early adopters to many social networks and platforms like Facebook. With the Philippines specifically, I think there were a lot of really special circumstances that basically allowed it to break out ahead of the rest of the world, but I do think that it’s only around nine months ahead of the rest of the emerging market economies

How play-to-earn reflects broader web3 trends

Zoran: So if this model indeed spreads and continues to grow, that suggests there’s something bigger going on here – what is that, what transition are we actually seeing?

Arianna: We think that the people creating the value should be participating in the upside. And that’s really the core belief at the center of what’s happening with web3. People are earning their livelihood on Axie, and so having the ability to not have all the value retained by the platform, but actually, pass it back to the community, the creators, the people who, again, are really responsible for building the value is, I think, an unstoppable movement

Jeff: One of the frameworks that we can think about is, like, okay, who are the middlemen that are getting removed? And how is the value that was being extracted by those middlemen shared with the actual users and stakeholders of the platform? So with Axie, I think what’s happened is that the app stores and the game publishers have been removed from the equation. They traditionally take 50%-plus of the revenue that’s generated by a game. We’ve removed them. We don’t use them. And we’re sharing that value with the people who are actually driving traction for our network, which is the community.

How sustainable is it?

Zoran: Okay, people are paying to get in and they are interacting with their characters, and they’re competing, and they’re earning rewards. But help me understand the sustainability of that. How do you think about the underlying economic model here?

Jeff: So one of the ways to look at it is right now, Axie is a little bit of a growth-dependent economy, just like any emerging market nation. It is a little bit dependent on capital inflows. But long term, it’s really important for us to have players that are in the economy spending because they think that the game is really fun or that they see ways to trade, like, money for power or respect. And the more Axie becomes like a real social network, a nation, the more opportunities for those types of value exchanges to arise. And we have framed Axie as a social network as well as a game since the early days. And this is becoming more and more true as, you know, we’ve done things like max out our Discord.

Zoran: What are the key factors to making play-to-earn sustainable? Like, how do you think about potential ceilings on capital inflows and participation?

Arianna: In many ways, these economies are going to be similar to real-world economies. They’re very complex and I think continuing to manage the capital and token supply and all of the dynamics within these metaverses is going to be a real challenge.

One of the key things in my mind is making sure that there continue to be different groups of players who are participating for different reasons and deriving different kinds of value. So, people might be there purely because they enjoy playing the game or because they get a lot of personal fulfillment out of coaching others. In many cases, it might be financial. There are a number of different reasons why people might want to be playing the game and engaging in the community. But as long as the players who are putting in additional capital derive other kinds of enjoyment from it, that’s fine. And that’s actually not at all dissimilar to the real-world economy. I might be wealthier and I might pay someone to do something I don’t want to do and somebody might, in exchange, pay me to do something they don’t want to do.

And so as long as there continues to be a robust ecosystem of participants who are there for a variety of reasons, I think that really drives things forward.

Zoran: What is the balance between people who are trading within the economy versus taking money out of the economy, like, you know, transferring it to fiat, because people are paying their bills, right? And so they have a decision to make about how much to kind of put back into the system versus take out. What are the trends there? And how does that affect the business model?

Jeff: In terms of the capital flows, we see that there are far more funds that are being deposited into our ecosystems than withdrawn. Only 4% of Axies are for sale on the marketplace. So, I think this shows the emotional connection and the fact that people don’t just see this about money. It’s also something that is giving them access to new opportunities, social networks, and is a lot of fun

So, right now, I think, it’s easier to balance the economy when we’re growing really quickly and.the animal spirits are active. Long term it will be about continuing to make sure that the community is insanely fun to be a part of and the game is insanely fun to play.

The role of community

Zoran: But what is it that keep people feeling as though they’re part of a community? There is some bigger, evangelizing feeling here than just, “Yeah, I’m gonna make a few bucks.” Right?

Jeff: Sure. I think it boils down to this shared economic alignment, but also cultural alignment. This community has been around since before NFTs were popular and, you know, what everyone in the world was interested in. Right? So, this exploration, I think that’s part of the DNA of the community. And as new entrants come in, they learn about this and they actually have some of the ideals transferred into them as they join. So, I think that’s been really important. And the community is amazing at the education and the onboarding. Eighty percent of our users are coming from referrals.

Arianna: I think it just demonstrates the enthusiasm that people have for what’s happening, both in physical space, by the way — the meetups have incredible attendance, people are really organizing themselves on the ground — but also, of course, in the digital realm, so in Axie itself, in the Discord, in the Substacks, etc. So, there’s just a stickiness that comes from people feeling like this community is theirs and they are benefiting from being members of it rather than, you know, having someone extracting value from them.

Zoran: But it seems like there’s kind of a paradox here, right? Because one of the things about legacy systems, whether it’s financial systems or gaming, is that they’re very sticky. It’s hard to move your account from one bank to another or you can’t move your in-game goods from one game to another. And crypto has kind of changed that and it’s made it much more portable. Isn’t it easy for some other game to pop up that is just as appealing and the characters are just as cute and your community might migrate over there?

Jeff: What we’ve built is not just the gaming community, it is, in many ways, a nation where people have shared cultural values, there’s overlaps and entertainment, there’s even this lingo or jargon similar to language. We have this very deep economy. So, I think it is much harder with this type of network to uproot a community and transplant them into a new universe where they don’t have a stake in it. We’re seeing people in the real world form Axie communities where you know all the people in your town or your city who plays Axie Infinity. And it has network effects, right? The more people that own Axie tokens, the more people that own Axies, the more people that own land within the universe, the deeper entrenched these economic and social relationships get with each other.

Gabby: Yeah. One of the hallmarks of the shift between web2 to web3 is that the communities are opt-in and they’re incentive-aligned by shared economic ownership, by the kind of traits that lead people to share the same affiliation, the same tribe around maybe certain assets or certain game universe. People stay here because they choose to be here, and they help build the culture of a tribe. There’s a shared economic incentive, there’s a cultural incentive. But if people want to quit that network and leave and join another network, no one is preventing them to do so.

Zoran: So speaking of user choices and user behavior, how is that changing? Because YGG is funding players, bringing them into the game, helping them get started, you’ve got a close-up view of this – is there a pattern of behavior, or different modes of participation that are evolving?

Gabby: We see ourselves as a necessary layer to bring people from the real world into the metaverse, especially for those that can’t afford it. But once they’re there and have an income, we actually encourage them to turn people from gamers to investors.

So, the first few cycles of people are earning money via SLP. They sell it for fiat, put food on the table, pay their bills. What we see is that when they’re a few cycles in and they have some excess income, many of them for the first time in their lives, the behavioral patterns actually change. People have more of an investor mindset. And now they think about, “Do I buy Axies for myself and graduate from this program so that the next person can benefit from the Axies that I was using? Do I buy Axies for my family members so that they can start earning money too? Do I buy my first piece of land in Axie Infinity and become a virtual landowner?” And so on and so forth.

Scalability challenges and Ronin

Zoran: Jeff, you mentioned CryptoKitties earlier. That’s the most prominent example before this of a game that really reached some level of mainstream success. And it kind of brought down Ethereum for a while, right? So in terms of growth and scalability, what are the challenges?

Jeff: In our ecosystem we have a lot of small, kind of low-value transactions that are really key to our user base in the emerging markets. And these were things that were basically priced out on Ethereum, where on Ethereum they might be $5 to $15 and obviously we’ve been in a bull market and that’s also coincided with rising gas costs on Ethereum as well. We were at the mercy where the success of the Ethereum ecosystem and all these DeFi applications was actually strangling out our growth, right? It was pricing our users out. We were in a situation where we really needed to migrate the majority of our transactions onto our own infrastructure.

It’s really this April with the launch of Ronin, which is our Ethereum sidechain, where we added that key piece to the equation, which allowed for our growth. We were around 38,000 daily active users in April before the launch of Ronin. And we just hit 2.4 million daily active users.

Zoran: What exactly did Ronin, this sidechain, do for you — what did it unlock?

Jeff: It allowed for the proliferation of the scholarship model, because there are a lot of transactions that are involved in running a scholarship program. So, breeding Axies, sending Axies to different accounts so that they can be distributed to scholars, claiming in-game rewards, these are all transactions on a blockchain that on Ethereum would cost a lot and, oftentimes, take a while, whereas on Ronin, these have all become very cheap, free up until now, and much faster.

That’s why we call Ronin Ronin. Right? Ronin is the samurai without a master. This was all about taking our destiny into our own hands where we could be the ones that determined our growth path rather than having to be a taker of market conditions and gas prices on Ethereum.

Arianna: I think that just really tells a critical story. If they hadn’t done that, I think the game would have obviously continued to grow, but been capped in the way that it was before. And so once there was that infrastructure put in place, there was an incredible unlock, which is really visible from the chart.

Onboarding into the game

Zoran: And so the other challenge too is onboarding, in terms of the steps required to start playing the game. You have to download multiple wallets and you have to, obviously, pay some money. And on the one hand, that shows how appealing the game is for people that they are willing to take these steps. But on the other hand, you want it to become easier.

Jeff: It is still incredibly difficult to get started with Axie. So, a lot of our development roadmap is aimed at reducing these barriers, specifically, for example, right now, if you are interested in Axie and you want to play, you then have to figure out which Axies you actually want to buy. This might involve doing a lot of research on the internet, maybe watching YouTube tutorials. And you’re basically buying characters for a game that you’ve never played before.

We will be releasing an upgraded battle system. And one of the features of that will be kind of this demo tutorial where everyone will be able to download Axie, get a free team of starter Axies, learn about the game, figure out if they actually love the gameplay, love the community before they have to make any economic decisions. So, we think that that’s going to be a really important stage between awareness and activation.

There are also payment on-ramp and off-ramp frictions that we can work with partners on to also improve that onboarding experience.

Gabby: And, you know, That’s where the community steps in. And what I love about it is that you’re replacing the middlemen such as Facebook and Google with community-based structures that onboard people into games like Axie, teach them how to play the game, how to earn money, how to use crypto, onboard the wallet. And for me, it’s like web2 reduced people into statistics that it’s just about daily active users. And with web3, with this community-based acquisition growth returning them back into individuals, again, individuals who are like creating content, learning how to play, people who are earning money, and we see all of these stories of people whose lives were profoundly changed by earning money And I think that’s really significant.

Play-to-earn and the future of work

Zoran: The idea of work is really important here. I mean, so far, it’s players, and people funding those players. But when you squint your eyes a little bit into the future, what kinds of new jobs do you foresee, whether it’s specific jobs or categories of jobs?

Jeff: There are many different archetypes of Axie players, right? There are the competitive battlers. There are the collectors. There are the scholarship managers, as well as the scholars who are, you know, primarily kind of farming tokens and selling them within the ecosystem. There are just people who are Axie holders, there are the content creators and the educators. And many players see themselves as more than one.

I think what we’ll see, within at least the Axie ecosystem, is that the different types of gamers will start to correlate or map to different professions, right? So, there might be someone who specializes in, you know, creating consumables, like a potion maker. Might be like, I don’t know, the version of a pharmacist. You’ll have your gladiator which might be, like, similar to, your athlete. So, we’re starting to see the rise of the competitive Axie players who are able to live off of, you know, winning tournaments and climbing the leaderboard.

I think that we’ll also see politicians arise in the Axie universe — people who are leading committees, for example, and thinking about the best use of funds, that might be the treasury, that might be the ecosystem, that might be, like, putting forth governance proposals. It might be creating requests for funding for different initiatives. You might have people who are focused on accumulating or harvesting certain materials. And that might be like the version of a farmhand. Right? So, someone who’s going on to Axie land, for example, and harvesting resources. I think that’s, like, an archetype that we’ve seen in the past, but I think has never really truly broken out and I think it’s had its breakout moment with Axie and the rise of YGG and similar institutions.

Zoran: We’re hearing a lot about web3 and the metaverse, and other buzzy phrases, all kind of revolving around this idea of more and more of our lives being lived online, in increasingly deep ways. Some of these trends we’re talking about with play-to-earn, do they go beyond games, or even jobs, and just become part of how we live?

Gabby: Yeah. This intersection between crypto and the creator economy, it’s actually one of the things that excites me the most about the future of work and where people are going in the metaverse. So, when you see these games in virtual worlds, I think it will not be just in games like what we’re seeing now. There will be virtual worlds where people can be, for example, going to the bank, interacting with a DeFi application, and doing what we just think of as work but they’re doing this in these virtual worlds that may look like games, but they’re actually just the interface for doing this type of work in the virtual world. So, I think more and more the blending of work and play will come together and we’ll be using crypto as a means to exchange value, but they may not necessarily be games as we know them today.

Gaming as a pathway to crypto adoption

Zoran: And I wonder what you think about crypto adoption overall —there’s still a fair amount of skepticism by a lot of people. What does play-to-earn and gaming, in general, mean for crypto adoption?

Arianna: Gaming is going to be a key way in which the next hundreds of millions of users onboard into crypto because, historically, you know, it hasn’t been easy to get involved and the barrier to entry is pretty high, the technical hurdles are fairly high. And it can be a little bit scary. There’s real money at stake. And what games offer is a much friendlier, more approachable onboard. You have these cute digital pets. You can go on and meet other players. We’ve talked about a real sense of community. And so it’s just a much more approachable way to start playing around in the space. And so we see that players might come in through a game and then, you know, once they have a wallet, start to experiment with other web3 products and experiences, and really expand outward from there.

Zoran: And how much of the crypto will end up being under the hood in the future? Will people kind of be transacting and not even thinking about it as crypto, but, you know, buying things with credit cards? Tell me how you think about that.

Jeff: What we need to do as product developers is to make sure that our user base and our prospective users really understand what the benefits of our products are, right? The benefits are derivations of blockchain technology, I don’t think they need to understand, like, how blockchain actually creates these benefits. So, I think when they see a fun, cute game where they can actually earn real value, I think that’s good. That’s sufficient. And I think that’s a strong enough pull. I think that learning how to use blockchain, I think these are more emergent benefits that they might get. Once they get involved, you know, they might kind of fall down the rabbit hole. We love seeing our user base go through that process as well. But I think in terms of the awareness phase, the benefits should be crystal clear. Even though the onboarding is difficult, people and organizations are onboarding by hand the next generation of blockchain users.

Zoran: Arianna, Jeff, Gabby, thank you so much for being with us today.

Gabby: Thank you.

Jeff: Thanks for having us.

Arianna: Thanks, Zoran.

  • Arianna Simpson is a general partner at a16z crypto. Prior to joining, Arianna founded Autonomous Partners, an investment fund focused on cryptocurrencies and digital assets.

  • Gabby Dizon is the cofounder of Yield Guild Games, a play-to-earn gaming guild. He is an 18 year veteran of the game industry and has been in the blockchain game and NFT space since early 2018.

  • Jeffrey Zirlin is the cofounder of Sky Mavis, where he spearheads the growth of products through messaging, community empowerment, and incentive design.

  • Zoran Basich is an editor at a16z & Future, focusing on crypto and corporate development/ finance. Previously he covered venture capital and the startup ecosystem at the Wall Street Journal and Dow Jones, and was the banking editor at NerdWallet.

Crypto Security and the New Web3 Mindsets for Users

Eddy Lazzarin and Zoran Basich

Today’s episode is all about crypto security — that is, the new mindsets and the new strategies for storing crypto assets safely while also allowing holders control and access. 

(As a reminder, none of the following should be taken as investment advice, please see a16z.com/disclosures for more important information.) 

We’ve covered security trends more broadly a ton in our content, which you can find at a16z.com/security, as well as crypto-related trends including NFTs, and the creator and ownership economies.

But as more people enter crypto lately — thanks to the boom in NFTs, decentralized finance, and much more — we share specific best practices and options for securing crypto as well as discussing how it all fits this next evolution of the internet: web3.

Our expert today is a16z crypto data scientist Eddy Lazzarin, who joins host Zoran Basich. He covers practical approaches ranging from passwords to crypto wallets and what users can do; the evolution of crypto briefly; and the big picture mindset shifts involved here as well.

  • Eddy Lazzarin is head of engineering at a16z crypto. Prior to that Eddy was a software engineer at Netflix working on data ingestion systems, and data engineer at Facebook working on growth analytics for Messenger.

  • Zoran Basich is an editor at a16z & Future, focusing on crypto and corporate development/ finance. Previously he covered venture capital and the startup ecosystem at the Wall Street Journal and Dow Jones, and was the banking editor at NerdWallet.

Cloud Wars & Company Wars: Play Nice, But Win

Michael Dell, Marc Andreessen, Martin Casado, and Sonal Chokshi

    There are lots of challenges in being public while trying to innovate, and limits to being a private company as well; but it’s rare to see a company go public then private then back to public again. As is the case with Dell Technologies, one of the largest tech companies — which went private 2012-2013 and then also pulled off one of the most epic mergers of all time with Dell + EMC + VMWare 2015-2016 (and which we wrote about here at the time).

    Is there a method to the madness? How does one not just start, but keep, and transform, their company and business? Especially as it adapts to broader, underlying tech platform shifts. Michael Dell shares all this in his upcoming new book, Play Nice But Win: A CEO’s Journey from Founder to Leader… he also, tellingly, may be one of the longest-standing founder-CEOs (37 years so far).

    Because this is really a story about innovation, who decides, who judges, who does it, and where: In the markets, in public, in private; in the both the big picture and the inner detailed workings of a business beyond “cells in a spreadsheet”; and even in fighting — or harnessing! — narratives, whether it’s the demise-of-PC or cloud wars 1.0 /2.0… And where trends like the cost paradox of cloud, and “end of cloud” edge computing, among others like AI & ML, also come in. In this special book-launch episode of the a16z Podcast with Marc Andreessen, Martin Casado, and Sonal Chokshi debate the Cloud Wars to the Company Wars (along with some behind-scenes stories and even some star wars) with Michael Dell… and whether you can really play nice to win.


    image: Dell EMC World 2016/ Dell Inc.

    • Michael Dell

    • Marc Andreessen is a cofounder and general partner at a16z. Marc co-created the highly influential Mosaic internet browser and cofounded Netscape.

    • Martin Casado is a general partner at a16z where he invests in enterprise companies. Prior, he was cofounder and CTO of Nicira (acquired by VMware) and is the creator of the software defined networking movement.

    • Sonal Chokshi is the editor in chief as well as podcast network showrunner. Prior to joining a16z 2014 to build the editorial operation, Sonal was a senior editor at WIRED, and before that in content at Xerox PARC.

    Uncontrolled Spread: Science, Policy, Institutions, Infrastructure

    Scott Gottlieb, Vineeta Agarwala, Marc Andreessen, and Vijay Pande

      There’s no question technology played a huge role in the recent/current pandemic, including especially in the plug-and-play engineering and incredibly fast development behind the mRNA vaccines… But is there an even bigger role for the private sector, not just government, to play (and partner) when it comes to key infrastructure for future such emergencies, and even beyond?

      Especially given how faulty the translation of institutional science to policy and public health measures turned out to be — for instance, with “6 feet” of social distancing, or with fomite (vs. aerosol) transmission of COVID. And why are we still talking about the same, not specific, vaccine booster for the Delta variant? What can we learn about real-world evidence, other clinical trial approaches, and progressive (vs. binary) EUA approvals when it comes to public health emergencies? Are capabilities like genomic surveillance and mapping strains — which require layers of technology, real time — sitting in the right places?

      In this special book-launch episode of the a16z Podcast, former FDA commissioner Dr. Scott Gottlieb — author of the upcoming new book, Uncontrolled Spread: Why COVID-19 Crushed Us, and How We Can Defeat the Next Pandemic — shares insights on the above, and revealing stories from behind the scenes. Do we need a new entity to manage public health through a national security lens, and is the government capable? Gottlieb debates this and other probing questions from a16z co-founder Marc Andreessen (who famously wrote “It’s time to build“); a16z bio general partner Vineeta Agarwala MD, Phd (who has spoken about the trials of clinical trials, practiced medicine during the pandemic, and more); and founding a16z bio general partner Vijay Pande PhD (who, among other things, founded the distributed computing project Folding@Home which pivoted to COVID proteins).

      One thing’s for sure — with this COVID crisis, we’re at an inflection point between old and new technology — whether it’s in how we make vaccines, or how we apply the fields of synthetic biology and genetic epidemiology in public health response. So now’s the time to look both backward, and forward, to really change things…

      • Scott Gottlieb served as the 23rd Commissioner of the U.S. Food and Drug Administration (FDA) from 2017-2019; is a resident fellow at the American Enterprise Institute, partner at NEA, and serves on several boards.

      • Vineeta Agarwala MD, PhD is a general partner at a16z investing in bio and healthcare technology. She is also a practicing physician and adjunct clinical faculty member at Stanford.

      • Marc Andreessen is a cofounder and general partner at a16z. Marc co-created the highly influential Mosaic internet browser and cofounded Netscape.

      • Vijay Pande is a general partner at a16z where he invests in biopharma and healthcare. Prior, he was a distinguished professor at Stanford. He is also the founder of Folding@Home Distributed Computing Project.

      The Creator Economy — NFTs and Beyond

      Kevin Chou, Jesse Walden, and Chris Dixon

      In today’s episode of the a16z Podcast, we’re talking about the Creator Economy, and how NFTs (but not just NFTs!) are making it possible for artists, musicians, videogamers, game developers, and writers to create entirely new markets to make money from their work and engage with their fans.

      Part of this emerging picture is social tokens, which share a crypto foundation with NFTs, but unlike NFTs (which are non-fungible tokens, in which each token is unique), social tokens are typically fungible, meaning each token has the same value. (Listen to our explainer episode “All About NFTs” with Sonal Chokshi, Jesse Walden, and Linda Xie, or see our curated NFT Canon for much more info on NFTs!)

      This hallway-style chat features a16z General Partner and crypto investor Chris Dixon, talking with Kevin Chou, who founded Kabam, and is the founder of Rally, an open network on Ethereum where creators can launch social tokens; and Jesse Walden, the founder of Mediachain, a music attribution protocol that was acquired by Spotify; he’s now the founder of crypto venture fund Variant.

      They’ll talk about how musicians, artists, and writers can think about NFTs and social tokens as well, and how those different types of assets can interact to create models that haven’t existed before.

      Chris starts off the discussion by talking about the emergence of crypto tokens, and a look at how videogames and gamers were early to the idea of community engagement and digital assets, and how that model is beginning to spread outward.

      Show Notes

      • The growth of NFTs from gaming tokens [1:20] and how they might be used in the real world [6:31]
      • Issues of portability and security [11:56] and the fractionalization of NFTs [16:16]
      • How NFTs and fungible tokens may affect music creators, including relating with fans and ownership rights [19:46]
      • Impact of NFTs on writers and how digital tokens could be used to fund new ventures [23:49]
      • Social tokens and NFTs as part of the same economy [26:27]
      • The role of big tech platforms [28:16]


      Expansion of NFTs and gaming tokens

      Chris: We’ve all…all three of us and our friends have talked about this stuff for years. I think we’re starting, this year, to see what you can kind of call app layer mainstream kind of crypto token things happening.

      And so, that, of course, is a lot of people have heard about or, you know, originally, I think it starts with NFTs, so non-fungible tokens. But Kevin, you’re working on, is sort of the fungible token counterpart to that, which are tokens that would be associated with communities on the internet. I kind of think of it as analogous to how modern video gaming works, where you have, a game like Fortnite, and the most progressive games. The game themselves are free, but you have in-game currency. In the case of Fortnite it’s called V-Bucks. And then you use that currency for various things, including for buying digital goods, like, in the case of Fortnite skins, and emotes, and things, which, you know, in the web world, the V-Bucks would correspond to social tokens, and the virtual goods to NFTs, right?

      And so I think what I believe is sort of happening now is that video games, which are the most advanced in thinking about how to engage people in social software, and in a way that both goes viral and spreads on the internet, but also makes them money. Those ideas that have been developed over the last 10 years in the gaming world are now propagating out to the rest of the internet, in the open internet. And that, of course, is going to have some similarities, including a lot of design overlap, I think, but also differences, in the sense that these crypto blockchain concepts exist on the open internet and not within silos.

      That’s where I feel like we are. And I think the first bit of the kind of sunlight has broken through in the NFTs and people are starting to see it, but there’s a whole bunch more hopefully coming in the near future.

      Kevin, maybe you could describe how you think that might evolve over the next year or two.

      Kevin: The gaming world is a little bit unique because we created these online communities that had a deeply integrated, set of social interactions and communication tools.

      And so, you know, before there was social media, there were these games that these nerds like me kind of hung out in, and we developed our friends and communities, and, played these games. And we cared about what our mounts looked like, we cared about what our skin looked like, and how we appeared to the rest of the community that we developed relationships with. And, you know, today, you don’t need a game for that. You don’t need a World of Warcraft, or EverQuest, or something like that.

      Now you have Twitter, you’ve got Facebook, you’ve got Snapchat, you’ve got TikTok. The game is not just in the game anymore, it’s happening across all of social media. It’s happening across forums, and Reddits. I mean, it’s happening everywhere.

      And if we could build at the blockchain layer, how do we then take that and propagate it all across the internet, and not just have these things be in games?

      Chris: Yeah. I mean, Jesse, you have a long background in music. So, like, the video game industry, I think, is something on the order of $150 billion, with a B, per year in revenue. And I believe the music industry is something more like 20, and for the most part it’s not really grown with the internet. And why isn’t a musician, with a community on YouTube, or Twitch, or some other place, just kind of an MMO. Instead of shooting other cartoon characters, you’re listening to music and talking to people. You know, and why can’t they take advantage of all the same monetization and engagement technologies that the gaming world has developed? Certainly, there’s no lack of passion for music, you know. People are just as passionate in those environments, arguably, more so than in games.

      Jesse: Yeah, well the sort of recorded music industry hasn’t grown all that much in the internet age, one thing that’s interesting is, like, the live music industry has grown. People are definitely engaged with musicians.

      Chris: Well, but what they’re doing is, that’s the virtual…they’re monetizing the complement, right? So they’re using the internet as the free part, and the offline is the premium, right? To analogize, to, like, productivity software and freemium models. But there’s no reason they couldn’t have a scarce resource on the digital side as well, right?

      Jesse: And I think that’s what’s been missing today, is that, you know, music became free with the advent of mp3s and piracy. And then Spotify, sort of, you know, won by making accessibility super convenient. But with that, you also sort of demolish the value in the sort of scarce creative work that artists are producing. And I think NFTs have reintroduced, you know, the concept of scarcity to the digital realm, and sort of given fans a new way to patronize creators, express their support, route financial value to things that they want to see in the world. And from there, there’s all kinds of interesting things you can do with them, and communities can build around them, and start to get more into social tokens and the like.

      So, one analogy I think is useful when thinking about social tokens and music is, you know, artists had fan clubs, right? And if you bought a membership into a fan club, you got maybe access to the artist’s meet-and-greet, you know, backstage or something like that. But, you know, we haven’t had a digital equivalent of that today. And I think social tokens might be it. You’re becoming a member of an artist or creator’s sort of community by owning their token. And that probably gets you access to all kinds of new cool experiences.

      In crypto world, a lot of people talk about how early they bought Bitcoin, right? It’s sort of a signal of, like, you know, how O.G. you are or how deep you are in the space. And I think that same behavior definitely exists in, you know, certainly with indie music fans being early to a band or whatever. Now you can prove it and profit from it, which is cool.

      Real-world applications

      Chris: So, Kevin, what does this mean in practice? Can you just kind of walk through what the user interaction is? When will people encounter this? And what will their experience be?

      Kevin: Yeah. I think there’s a few different dimensions So one is how easy is it for the average fan, not the crypto audience but the fan, to figure out how to earn, or buy, or trade either an NFT or a social token. And there’s a lot of different approaches there. There’s very crypto-native type of approaches, where everything has to be on chain. It’s got to be held in a non-custodial wallet, etc., to be considered real. And on the other side of it, what we’re trying to experiment with is how do we make that onramp experience for the average fan pretty simple. Vertically integrate as many different things as possible, have the first time crypto experience for the average fan be something that they would expect from another internet service. Some other approaches like what Zora and others have expressed as kind of putting up a big enough barrier so that the fans will have to figure it out.

      So there’s all sorts of different approaches, and there’s no right or wrong answer. And different young musicians or celebrities will figure out what’s best for their fan community and do that.

      The second dimension is, once you own this thing, how do you actually use it? So it’s great if I have an NFT in my wallet. Okay, maybe I can show people a link to my MetaMask wallet, and people can look at the NFTs that I have in there. But how do I actually show this thing to the rest of the community that cares about it.

      And so there’s a lot of work in terms of just status and reputation, and being able to show off different things. But I think, even more importantly, is how do you actually potentially use these NFTs. There is no doubt in my mind that five years from now, maybe even sooner, your backstage pass will literally be an NFT. Somebody will stop you at the velvet rope, they’ll scan your QR code that shows that you indeed own the NFT.

      Chris: An NFT, will it just be like  a digital equivalent of a backstage pass? I find one of the interesting things about NFTs is that it can be multipurpose. Like, it could be both a beautiful picture and a backstage pass, and an investment opportunity, right?

      Kevin: There’s nothing that says that an NFT can only have one use case, right? Certainly, you’re talking about a financial or economic dimension of the NFT having value of whatever the community or the fan gives it, or what the next highest fan would pay for it. But then you can use it as a backstage pass after the event, right? It’s not like the NFT disappears. I mean, you could certainly configure it that way, if you’re a musician, and say, “Hey, once you use the NFT, it burns.” You could certainly do that. But in this particular case of a backstage pass, what probably makes more sense is that you still own it as a fan. And a year from now, five years from now, it’s proof that I went to this event and I was a fan from five years ago when the band was still undiscovered, or whatever it was. So the NFT could be a collectible.

      A lot of what’s happened in the gaming realm, for example, is creating sets and creating different ways that you can compose different items together. So in the MMO world, one of the primary mechanics that have evolved is taking, you’ve got to get this leather strap, you’ve got to get this gem, you’ve got to get this catalyst, and you’ve got to go get this ticket. And you put all of them together and it gives you this new thing, right? And so what happens if you own a track from the musician, what happens if you then combine that with one of the backstage passes that show you’ve been to an event? And then you combine that with something else that shows that you bought a vinyl or equity.

      So we’re going to see all sorts of different ways you could create NFTs. You can use them, you can then as a creator say, hey, if you go collect a bunch of these other things, you can then forge a new type of thing that you only get by being a true fan of mine.

      Portability and security issues

      Jesse: I think the key thing that, Chris and Kevin, you’re both touching on is that these assets are programmable, right? And you can sort of compose them into all kinds of new use cases, and they’re also portable, and that’s because you own them in the same way you own Bitcoin. It’s yours, you can choose to park it somewhere like Coinbase or you can take it with you to another platform. And so, because they’re both programmable and portable, you can take your assets and bring them into all kinds of new experiences that developers build, that give them different utility. Like, it can be a fan club backstage access pass, but a third party developer can add some additional functionality to an NFT or social token that makes it useful in another context for a different purpose.

      Chris: I think when people start to really get a tangible feel for it, it will make a big difference. So, right now, if you’re buying a piece of art on Foundation or something, or you’re buying a basketball moment on Top Shot, you basically can use it in that context. But because they’re blockchain objects that are portable, third parties will start creating experiences around them. I think you’ll very soon see companies that get funded, that let you do games, and social experiences, and other things with all of these assets.

      And kind of the broader thing is you’re inverting the polarity. The earlier web was built around applications. The next, the web3, will be built around these user-controlled objects, as primary and then the applications come secondary, and serve them.

      Kevin: We’re talking about Flow and NBA Top Shots just absolutely exploding. And then we have OpenSea, and Zora, and a few others on Ethereum, and then there’s emerging some of these Layer 2 NFT, you know, sort of like purpose-built Layer 2s for NFTs and a few other things. And I wonder about this portability and kind of what you guys see as how portability evolves over the next year or two, as this fragmentation of the Layer 1 and Layer 2, things fragment more and more.

      Jesse: So, for social tokens, I think there’s going to be a lot more interoperability because they’re fungible tokens, they’re sort of easier to port around, and it’s okay that they sort of fragment across the universe of various blockchains. NFTs, I struggle a little bit more to reason about because one thing that makes an NFT valuable is the fact that it’s unique, it’s scarce, and therefore its provenance is an important attribute that people look at. And so, I do wonder if there’ll be more of a sort of power-law winner to the place where you want to originate an NFT. It may not be the case that all NFTs originate on this sort of canonical…

      Chris: But couldn’t you have trustless bridges across blockchains that preserve provenance?

      Jesse: Yeah. And I think that’s ultimately the solution. So, I believe in a world where literally every piece of media enters its existence as an NFT. Like, every photo you take on your iPhone, you know, every game asset is created as an NFT. And it probably doesn’t make sense to put all those very, very long tail of media assets on something like Ethereum, which is very expensive because it has a lot of security. Like, you probably put that on a side chain. But then I think as these assets take on social value and start to command more market value, they might migrate to the chain that offers the highest security, right? So, if you have a multimillion-dollar LeBron, you might not want that riding on some side chain, you might want that on Flow itself. And similarly, a photo that starts as inconsequential but becomes very important will maybe migrate to Ethereum for security.

      Chris: I guess the way I think of it is you’d have different blockchains with different tradeoffs. So, right now, Ethereum, of the non-Bitcoin programmable blockchains, is clearly the highest security blockchain. But you pay for it. You pay to do stuff per transaction for gas fees. So you could imagine a world where the actual activity is happening on Rally, or Flow, or something else. But then as it appreciates, you put it in the “vault” on Ethereum.

      I’d also say, I think that a lot of people will frame this as either or, Ethereum versus Flow. If you look at every computing resource in history — so, internet bandwidth, you know, PC, CPU power, just go through them all — demand outstripped supply by 10x. And, right now, you could imagine a world where tomorrow, you snap your fingers, Ethereum has sharding, proof of stake, all the good stuff, Optimism launches, you know, all the other Layer 2 launches. And then application developers would come up with some new clever stuff, and you’d very quickly be back up to not $10 gas fees, but $5 gas fees.

      I mean, look, you just pay all the above. You pay inherent overhead for a blockchain, right? The game theoretic consensus mechanism just makes it slower than in a traditional centralized system. I think the specifics, as you raised, Jesse, like, you know, how do you preserve provenance across chain is really interesting. I think there’s a lot of entrepreneurial opportunity for abstraction layer. So, like, a stripe for minting NFTs seems like a no brainer idea. Like, stripe for NFTs, whatever you want to…for minting and read write, and it abstracts away the underlying blockchain, you know, taking care of the metadata properly. There’s a whole bunch. We need more entrepreneurs because there’s so many great living fruit ideas.

      Jesse: Maybe we could talk about interesting intersections between NFTs and social tokens, So an author minted a blog post as an NFT on Mirror. And they also crowdfunded the creation of that blog post, which is sort of like a longform piece. And they said, “Look, if you want to see me write this investigative piece, back me to do it.” And the way that that crowdfunding happened was through crypto. And what the crowdfunders got was not just the piece, out there on the internet, but also ownership in the piece itself. Meaning, they were able to get fractional ownership of the NFT.

      And that was in the form of a fungible token called the Essay token. And what’s really cool is that Essay token then became a social token for this author, in that he started using it for gated access to a Discord. And he started layering on all kinds of other utility, where if you had this token, you could talk to him about his next piece, for example. So that’s one interesting example where the social token is sort of a derivative of the NFT. And then, as we talked about already, there’s all this sort of, like, additional utility programmed onto it. And I wonder if you’ve seen people doing stuff maybe the other way around or different configurations.

      Fractionalization of NFTs

      Kevin: Yeah. You know, I think it’s really funny. We start with fungible tokens, Bitcoin, Ethereum, etc., and then we create NFTs as a new building block. And then of course, then we take the non-fungible token and we fractionalize it and make the fractions fungible. It’s a funny world.

      I think we come up with some of these weirdnesses, especially here in the United States, because of the regulatory gray areas. And so I think, if you can sort of wave a magic wand and say, hey, like, there’s clear boundaries, and let’s just say we can talk about all the things we want to take about about, utility and so forth, without triggering any other things. I think a lot of people would start with fungible tokens. It’s just a lot easier to think about how do you create a community around something that’s more fungible and can be easily exchanged.

      Chris: I don’t totally agree, Kevin. I think it kind of depends on the community. I think there’s a lot of people. I think we all come from technical financial backgrounds. I just find people like that just kind of have a natural affinity for fungible tokens. I think a lot of the world isn’t like that. I think a lot of the NFT appeal is just that, it’s a picture. It’s a movie. It’s accessible.

      And it’s interesting, and it touches on culture and not just numbers.

      Kevin: I totally agree with you. I’m certainly not suggesting that fungible tokens are greater in any way than non-fungible tokens. I’m specifically talking about once you take a non-fungible token, and you fractionalize it into a fungible mechanism, I think once you start going into that …

      Chris: But the counterargument is Crypto Punks. That’s a great way to organize a community. And so it’s 10,000 punks, they look different. But it gives it this character. I think for a lot of people, that kind of metaphor is a better way to organize 10,000 people than 10,000, you know, indistinguishable, boring … it’s YouTube vs. Excel or something.

      Kevin: Each one of those are unique and different, right? And the characteristics and traits of them really matter. Those Crypto Punks are not fungible in my mind, right? Each of them are unique pieces of art.

      Chris: For sure, they’re not fungible, but they create a community of 10,000 people that feel an affinity for one another. You’re either in the punk community or you’re not. I was pushing back on your point that it’s because of regulatory constraints and things that people tilt towards NFTs. I think there’s a bunch of reasons.

      I think one of the really interesting things that goes on with social tokens is that they’re multiple uses. So, you could want a token for your favorite band to get backstage access. You could want it to be able to buy NFTs, and make donations, and participate in the economic life of the community. Or completely different motive, you could want it because you see yourself as a modern day A&R person who is going to predict the next band and make money off it. And it’s the fact that the very same token has those multiple purposes is very important.

      Because then you have the possibility for the A&R folks, the people that find these early bands, to come in, they kind of bid up the price. That, in turn, in your model, funds the actual musician to make music, right? Which in turn feeds the fandom. So the investment kind of activity, and the fan activity, and the creator activity, have this really nice kind of triangular feedback loop. And it’s the very fact that they’re the same thing as opposed to the old school model where you have sort of the investor comes in, gives money to the musician, buys up copyrights, then sells a different thing to the fans, right? The fact that there’s the same kind of… You see what I’m saying?

      Kevin: That’s right.

      Chris: To me, that’s a very big difference from the old world, and a very powerful difference.

      Digital tokens and music creators

      Kevin: Yeah, We’ve always talked about the internet as kind of this disintermediating sort of mechanism. And I think crypto does it even more at the economic layer of things. And I think what we’re starting to see, we’ll stay on musicians for a little while, like, starting with Chance The Rapper, is probably like the most prominent example of an artist that just wants to own all of his own rights. And more and more are realizing that they get their power from their fans. And that the more that they’re just wholly focused on serving their fans, the more successful they become. And this weird layer of rights ownership, and labels, and publishers, that then distort that versus just how you get your fans to support you to create the music that you love.

      Chris: And then when the fans have skin in the game, the fans become evangelists. And instead of doing all these old school things, advertisements, and other sorts of things, promotions, and all the things they would do in the old days to promote various kinds of creations, now the fans become the promoters, right?

      Kevin: That’s right.

      Chris: Because they have skin in the game. And that’s one of the remarkable things about crypto. Tokens, over a trillion dollars in value, lots of successful companies, you know, exchanges and such, and no one ever spends money on paid marketing because it’s all just done through kind of skin in the game peer to peer marketing, right? So, now musicians can tap into that, musicians, creators can tap into that energy.

      Jesse: Yeah, it means that fans become part of the creative process to a degree. Not only do they have a willingness to pay for the creative work, but they’re also essentially investors in the work itself. And artists or creators that lean into that will find a whole new way to create stuff. Because they can do it as a community. And not just a community that’s communicating with one another, but a community that’s actually pooling resources with one another to achieve things together. So, it sort of blurs the line between creator and audience. So I think that’s a big opportunity that we haven’t seen a whole lot of yet, but is coming.

      Kevin: Yeah, I think 3LAU is sort of experimenting with this, where you sort of sold the first track on his next album as something that would give you creative direction on that track as well as original ownership of that track.

      The best thing about working with creatives, whether it’s a musician, or a visual artist, or a gaming streamer or entertainer, is that, these are naturally creative people that once they get their heads wrapped around how a tool or a cryptosystem works, I think we’re just seeing the very, very tip of the iceberg in terms of the use cases because the technical challenges there will get solved, the friction will get removed more and more, there’ll be a lot of different approaches to this. But I think the most exciting thing is getting these tools into the hands of creatives, that then try all these new ways to create that alignment and community with their fans, and disintermediate the folks that haven’t been aligned with serving that community.

      I think the coolest thing that’s happening, is that we’re creating kind of an integrated way that creators can very simply create all different types of NFTs and denominate it in their social token. And, you know, we just think that those are such natural parings, right? So, you know, today, with just social tokens, we see our artists do things, like, you have to hold X number of our tokens to get access to the trove of music that’s here, or to get access to an AMA event or a virtual concert that we’re putting on, or virtual hangout that we see some of our artists are doing.

      And when NFTs come out, it’ll just be much more simple to say, okay, you hold X number of tokens, you are part of the fan club, but to get access to this event, here’s the NFT that represents that event access.

      And then so there’s a lot more granular things you can do. We’re starting to see artists experiment with things like creating physical representations and then digital representations, and then linking the two things together through their NFTs and social tokens. We’re working with an artist that sells sneakers and other physical merchandise. And then they’re creating NFTs of those designs and owning the NFT. They are now starting to say, well, if you own the NFT, you could trade that NFT in for the physical. We’re starting to see more experimentations with how does the physical and the digital sort of coexist.

      And the beauty of all of this is that when you denominate it in the social token, there’s so many other different economic activities that can happen.

      NFTs based on writing

      Chris: We’ve talked a lot about music and video games. What about other… Jesse, you mentioned writing.

      Jesse: Yeah. The writing one is interesting because it sort of illustrates how this expands in all directions and eventually will touch all creative services. So, if you think about how big ideas come into the world, very often they come into the world through blog posts or writing. Think about, Elon Musk’s secret master plan for Tesla, right? Like, that’s sort of a canonical blog post. And certainly, someone might want to own that blog post as sort of a representation of all the value that Tesla is creating in the world. And it’s an investment in Tesla’s success that’s separate from Tesla’s stock price, potentially, right?

      Chris: Owning that blog post is sort of like owning a kind of signed copy of the blog post, so to speak. It’s the cryptographically guaranteed one. Maybe kind of analogous, you know, if, I don’t know, Thomas Edison had a…I don’t know if they have it, but his original notebook or something. You know, that type of artifact.

      Jesse: Right, exactly. So the idea here is like owning Elon Musk’s secret master plan as an NFT, could be valuable. Jack’s first tweet as an NFT is valuable. It represents the sort of inception of his huge network. You can imagine, in the future, that the next Elon Musk or the next Jack brings their big idea into the world as a blog post that is an NFT. And, you know, supporters of them as founders, or people who want to see that idea happen in the world, crowdfund to buy that NFT from the author. And potentially, that crowdfunding is actually used to finance the creation of that big idea. So, you know, what starts out looking like, oh, people are just buying essays, could actually disrupt the way that new creative things enter the world and they’re financed.

      Chris: I guess what we don’t know is, will the economics work? I guess, one counter argument would be, such an exceptional blog post could be worth a lot, but the average stuff won’t be. I guess the counter-counter argument is the average person doesn’t usually need that much money. It’s sort of the Substack effect. If you take a writer with a million Twitter followers, who is getting paid X amount per year, and they go on Substack, and they get 1,000 people who are really excited, they can make 10x per year. Even if it’s not all some famous artifact, if it’s enough to fund the writing, that could just be enough to transform that industry and the creative activities there.

      Jesse: Yeah, and I think… I mean, maybe an analogy is, you know, startup funding, right? Like, startups don’t raise many millions of dollars in their first round. They raise a little bit, just enough to hire the team and get going, right?

      Chris: Sort of staged NFT sales.

      Jesse: Yeah, yeah, exactly. Like, I think you just need… I think, to your point, you just need a little bit to get going, right, and to raise money to make the creative work you want to see. And then from there, if you can build a bigger audience around that, you can sort of move up the ladder and raise subsequent rounds of funding. And hopefully, as you perform better in the market, you’re able to double down and reinvest to keep doing that.

      Chris: And Kevin, your model, that would be both NFTs and also a writer can just sell their coins as well, right?

      Kevin: We think of tokens and NFTs all operating together in a singular economy. This is just something that certainly comes from the videogame industry, where you would expect that you go into a video game, just using the Fortnite example of, get the V-Bucks, the V-Bucks allow you to buy all sorts of different things in the game. And when we talk about things like backstage passes, or that essay, or something else, those things are best as an NFT.

      But then what do you do to transact with that NFT? What if you, as an artist, let’s say your first creative work sells for $10,000. Let’s say at that point, you create your social token, and you denominate your NFTs in your social token. Well, now you have a way for people to say, okay, great, that creative’s first work was worth $10,000. Their second work, the audience valued it at $20,000, and their third work was $30,000.

      The social tokens should then capture what the market thinks about the sort of total value of that economic output will look like over time. And so I think there’s really interesting economic forces between how you create your NFTs and what does that represent? And what does your social tokens represent? And how do they all work together in a singular sort of economy that you, as the creator, you control, you own 100%. And I think that’s a really powerful way to both give all forms of fans, and community members, and crypto members, kind of a way to participate in these economies. You may want to, you know, buy that NFT, because you’re a true fan and you just love it. You may want to buy that NFT because you’re an A&R and you want to speculate on what these things could potentially be worth in the future. Or you could just participate in the social token in all sorts of different ways. I think we’re going to be on the forefront of experimenting with how these things are intertwined, and all put into the control of the hands of a creative.

      The role of big tech platforms

      Chris: What do you guys think the role of the large tech platforms will be in this world?

      Kevin: Well, I’m pretty passionate about this. I’ve tried to build businesses in the past, certainly that have been at the mercy of some of these big tech platforms. I look at what Epic is doing right now, and I know, Jesse, you were at Spotify for a while. There are very public emerging battles between big tech and some of these traditionally more application-focused developers. And I love what this does to the world.

      As I was thinking about building a new company or building a new project, and thinking about building that on Ethereum was so liberating. Because I’ve been building on Apple, Google, Facebook platforms for a decade-plus, as a game developer. And there’s a ton of benefits and value that comes with it, but there’s a lot of headache too that comes with building on these other platforms, where the policies are changing all the time, the fees are changing, the rules are unclear. Maybe they the platform ends up competing with you in the case of music or some other categories. So it’s tough.

      This is why I’m so in love with crypto as a builder because building on Ethereum, I don’t need to worry that Ethereum is going to try to go public someday, they’re going to change the way that the rules work or the fee structure works, so that they can meet their numbers for the next quarter or whatever it is. There’s not even a company, there’s not a CEO that runs it. The idea that this thing is a permissionless blockchain that anybody can build on top of was such a game changer for me as a builder.

      And I think our approach to Rally was to do a lot of hard work so that we can make the same promises and commitments to the creatives that we work with. If we work with you to help you build your business and represent your brand, your fan audience, your community, through tokens, both fungible and non-fungible, you own this. You set the rules. You know, we do things at the protocol level to ensure that all people can participate equally and fairly with transparent rules, but we want to make sure that you, as the creative, you truly own this thing.

      Jesse: Yeah, what’s happening in crypto definitely flies in the face of the way big tech platforms work right now. I think another lens to look at it from is just a complete inversion of their business model. And that’s because, like, you know, traditional big social media platforms, they own all the content that users post on it. And that’s because somewhere along the way, in the terms of service, users agreed to upload content to the platform for the platform to monetize it as they see fit. So, to be clear, I’m not talking about traditional copyright, like, the creator still retains that. But you are transferring some rights to the platform to monetize content that you upload, however they want to do it.

      And with NFTs and with social tokens, the amazing new thing enabled by web3 and crypto, is that creators can just monetize directly. When you create an NFT, you’re sort of like uploading your work to the blockchain directly, and then developers can build on top of that content. In other words, the blockchain becomes this sort of universal library of media that any developer can build a social feed on top of or content feed on top of. But the creator retains ownership of their work and thus can monetize it without a third party taking a large cut. And so, these platforms traditionally have relied on being able to monetize creators’ work on their terms, and now creators get to set the terms and monetize directly.

      Kevin: And if you start with that kernel of the creators create the content and then developers build interesting metadata and usage around that content, that then becomes the social graph itself.

      So think about how, for big tech platforms that rely on marketing and advertising, yes, they create a simple platform for users to share, and create content, and build an audience and following, but it’s really a lot of the metadata around that content, who’s following you, who’s liked what in the past? I think what’s going to invert now, is, once you start with the content being on chain, who owns that content? Who’s owned it in the past? What are all the other metadata that’s associated with that? If you can see all of that, and that exists at the public blockchain layer, you then take it away from being this treasure trove that an advertising-based company can uniquely have as their advantage. And you open it up to the whole world anybody can look at that data. Anybody can look at that social graph and interest data, and then figure out how to build unique new applications and services on it.

      Jesse: Yeah, right now, on social media, everything is sort of in 2D, right? Like, you have an image and it’s just a rectangle on your screen. And then you have some metadata associated with it. But if I copy-paste that image and put it somewhere else, it loses all its connection to the creator, its history, what it’s about. And now all that metadata can live on chain, any developer can access it. So, as a result, you know, this image goes from being a two dimensional box, to taking on some Z-access, where you can peruse through its entire history online, and put all the context on display in new areas where that image is shared.

      Through that same channel that information is being surfaced, value can also flow. There’s this cool thing you can do with NFTs where you can impose royalties that flow back to the creator every time the asset changes hands. So that’s an example of, through the same channel, that information on who owned this thing in the past, well, value can also flow through that same channel.

      Chris: Awesome. Thank you, both Kevin and Jesse. Great talking to you.

      Kevin: Thanks for having us.

      Jesse: Yeah, thanks.

      • Kevin Chou

      • Jesse Walden is the founder and managing partner of Variant Fund, investing in crypto networks and founders. Previously, he was a partner at a16z Crypto and cofounder of Mediachain (acquired by Spotify).

      • Chris Dixon is a general partner at a16z, where he leads the crypto/ web3 funds. Previously, Chris was cofounder & CEO of startups SiteAdvisor and Hunch (acquired by eBay); and an early blogger at cdixon.org.

      All about NFTs

      Jesse Walden, Linda Xie, and Sonal Chokshi

      This episode is all about NFTs. It seems like nothing has caught on and spread into mainstream interest like NFTs, where one hears everything from “I’ve never seen anything like this before” to “is this like ICOs all over again” to “it’s just a jpg I don’t get it” to “but what about the energy use!”

      So, in this special deep-dive episode from the a16z Podcast network, we break down everything you need or want to know about NFTs — while cutting through the noise for what’s hype/ what’s real, as well as where are on the long arc (and sometimes seemingly sudden tipping point!) of innovation (apparently, Google trends data showed that interest in NFTs recently surpassed interest in cryptocurrency). Editor in chief Sonal Chokshi interviews friends of a16z crypto Linda Xie, co-founder of Scalar Capital and former Product Manager at Coinbase; and Jesse Walden, founder at Variant Fund and former co-founder of Mediachain Labs (which was acquired by Spotify, where he was then an R&D lead).

      This episode is posted on both the a16z Podcast show and 16 Minutes as one of our “2-3x explainer episodes” of topics that keep coming up over and over again in the news (past such episodes have covered everything from Section 230 and Tiktok to GPT-3 and the opioid crisis).

      Show Notes

      • What NFTs (non-fungible tokens) are — as well as the properties of crypto that enable them, just to set some big-picture context [2:07]
      • What forms they take, and what is and ISN’T an NFT — including where “social tokens” and the creator economy do and don’t come in [11:18]
      • Common myths and misconceptions — from ‘just a jpg’ to the frequent question of energy use & NFTs [18:23]
      • How they work — as well as the broader ecosystem around NFTs [29:35]
      • Discussion of different ecosystem players [35:08], including DAOs [44:02]
      • Various applications, now and next — touching briefly on how to think about NFTs, whether you’re an artist/creator, developer, or institution [49:32]


      Sonal: Hi, everyone. Welcome to the a16z Podcast network. I’m Sonal, and this episode is ALL about NFTs. And, as with our other special deep-dives, we cover everything you need or want to know about NFTs, while cutting through for what’s hype, what’s real, as well as where are on the long arc (and sometimes seemingly sudden tipping point!) of innovation.

      We start for the first 10 minutes by discussing what NFTs are and how crypto enables them, just to set some big-picture context. The next 10 minutes, we cover what forms they take and what is and ISN’T an NFT — including where “social tokens” and the creator economy do and don’t come in. Then for the next 10 minutes we cover common myths and misconceptions, from “just a jpg” to later going into the frequent question around energy use and NFTs. But about 30 mins in, we quickly share how they work, as well as the different players in the ecosystem.

      Throughout, we of course cover various applications, now and next. And finally we touch briefly on how to think about NFTs. Whether you’re an artist/creator, developer, or institution, this episode is for everyone.

      And, as with past such 2-3x explainer episodes (as I call them), it’s being posted on both the a16z Podcast and 16 Minutes feed, our show where we talk about tech trends in the news, including topics that keep coming up over again [ICYMI: past episodes include explaining Section 230; Tiktok; GPT-3; and the opioid crisis – you can find all of those at a16z.com/16Minutes. We also covered the historic auction at Christies this month, where an NFT by the artist Beeple sold for $69 million; and I mention that only since we reference that event in this episode.]

      Finally, since our podcasts bring you insights directly from the experts, the guests I’m interviewing today are two close friends of a16z crypto: Linda Xie, co-founder of Scalar Capital and former Product Manager at Coinbase; and Jesse Walden, founder at Variant Fund and former co-founder of Mediachain Labs, which was acquired by Spotify, where he was then an R&D lead.

      To be clear: NONE of the following should be taken as investment advice. For more important information please see a16z.com/disclosures.

      Terminology & foundations

      Sonal: So. Let’s just start with a quick set of definitions: What IS an NFT?

      Linda: So, NFT stands for “non-fungible token”, which is just a term used to describe a unique digital asset, whose ownership is tracked on a blockchain.

      This can be a really broad set of assets from: digital goods, like virtual lands and artwork; to a claim on physical assets, like real estate or clothing items.

      Sonal: What I heard you say there is not just digital, because it *can* cover something physical as well, that you can essentially represent as NFTs.

      Linda: Yah. It’s a really really broad space; it’s exciting to see NFT art really take off, but this covers a lot of different industries as well.

      Jesse: So, I like to focus on the digital side of things a little more, and, a metaphor that I would offer as a definition is NFTs are a way to make digital files ownable — instead of a financial asset, you can now own a digital media asset on the internet.

      And that’s why the file metaphor is apt: You can now own a JPEG, own an MP3. And, what you’re essentially doing when you create an NFT, it’s sort of like metaphorically ‘uploading’ that file to the blockchain — such that anyone can track its provenance and attribution.

      Sonal: So, Dixon described this in a recent blog post, very simply put, as: “NFTs are blockchain-based records, that uniquely represent pieces of media” — or in your words, Jesse, a file.

      One more word to focus on is the “fungible” in the non-fungible token, which is that you can represent these items uniquely — I just want to really emphasize ‘cause, again when you think of $1, that’s fungible (or even a single bitcoin arguably is fungible) — but something fungible is interchangeable, replaceable; it doesn’t matter what dollar I have, as long as I have a $1.

      But in this case, something is “non-fungible” means it’s super unique; and we can go into like what that means in a moment — but before we do, let’s talk now about the underlying crypto aspect of NFTs… not the specific crypto protocols, but maybe more broadly, what are the properties of crypto — ‘cause we don’t wanna make this conversation about crypto per se, but about how crypto enables NFTs.

      When you think about the physical world: sometimes it involves a notary; like a third-party bank; it involves someone to (in the art world), like provenance-tracking through certificates… — this ability to own and track a digital file, without a third-party player intermediary, is key.

      Jesse: That’s right, you depend on the bank to maintain the ledger; or the title to a property that you buy, there’s some property registry that the state or the city maintains. So you’re always dependent on a third party to track the attribution of ownership: how the title changes hands, how bank statements get updated.

      And bitcoin changed the game because it enabled this public, decentralized ledger — where no one party is in control — and yet each individual owner of a bitcoin is able to verify their ownership using cryptography. As a result, you don’t have to depend on a single third party to verify ownership.

      Linda: Yeah, middlemen are tracking ownership for people of all these different assets — and they’re taking fees for the service; they’re preventing some people from using the platform — and, what’s really powerful with crypto is you have all these open protocols that you can kind of plug into each other.

      And so, when you have NFTs, you can plug them into decentralized systems and be able to trade these NFTs with anyone in the world, and have that be instantaneous. You can also imagine plugging into using your NFT as collateral; so let’s say you have video game items that’re worth a lot of money, you can actually imagine taking a loan out from them.

      And so NFTs on the blockchain allow anyone to permissionlessly own, issue, trade them.

      Sonal: And the other property of being able to track provenance; which has essentially a built-in secondary market to it — which is this idea that not only do you track the provenance, but you can actually track the financial benefits that accrue as a result of that built-in secondary market. This is particularly true in cases of digital artworks, etc.

      Jesse: Yah, the secondary *resale* of an asset can be programmatically constructed, such that anytime the NFT changes hands, a portion of the resale value goes back to the original creator.

      Sonal: And by when you say “programmatically”, automatically, that is a distinct property of crypto — specifically, smart contracts that you can do that type of programmability of a contract.

      Jesse: Yeah, it can be totally automated, totally transparent — Contrast that with royalties in the music industry, which is like a completely opaque system with many layers of middlemen that are each taking a cut, right.

      It’s a wildly more efficient architecture; that’s uniquely made possible by blockchains and smart contracts. The blockchain’s really good at tracking the history of things — Sonal, if you send me one bitcoin, everyone can see that you have one less and I have one more <Sonal: right> — and the history of that transaction is forever sort of enshrined on the blockchain. The same is true of non-fungible tokens in that, when they’re incepted or “minted”, they’re signed by the creator using their cryptographic keys — which now enables anyone to see okay this file was signed by this creator or this person — that message is constructed in the same way any other cryptocurrency transaction is constructed.

      Thereafter, that NFT lives on the blockchain alongside all other transactions, and everyone can see it. And so if that NFT changes hands, and say Linda buys my NFT, everyone can see I transferred ownership to Linda. And as a result, we start to build this very rich history of the interactions people have with media on the internet. Whereas today, think about an image you see on Instagram: You could screenshot that; you know, crop it; and then paste it on another platform, say like repaste it on Facebook. And as soon as you do that, you break its entire history, its entire provenance — you no longer know who made it, what it’s about, where it originated… And, with this new sort of architecture, we can now sort of have a z-access into the entire history of any piece of media on the internet.

      And: through that channel that information flows, value can also flow.

      Sonal: Concretely for artists, this means an artist today who may have created a work 20 years ago — and that work completely appreciates in value, but the last owner is the only one who benefits from that — if the programmatic arrangement is that that artist continues to get value, they can always get paid on this built-in secondary market. Like, if it later becomes millions of dollars versus $500 for a painting, then you’re getting money back each time it is sold. Which is not possible before.

      Jesse: And I think, important to note, that’s just *one* of the possible arrangements that can exist, when the rules around monetizing creativity can be expressed as code by any developer and any creator on the internet. 

      Linda: The ownership history is really important — the ownership history is something that is really uniquely accessible on the blockchain, because everyone can see, and therefore some items might be more meaningful to certain people. Let’s say “Magic: The Gathering” has a tournament where this deck of cards actually won this tournament, you might want to buy these set of cards because they’re historical, and the winner of these games actually used this deck to play.

      From the art perspective, just imagine your favorite musician or creator owning a piece of art. And, now that ownership is just tracked in the blockchain, that piece of art might become more valuable to you because of who’s owned it in the past.

      We also have a lot of projects that are working on fractionalizing NFT art: So, splitting up these NFTs into multiple pieces; and these individual pieces are also tracked on the blockchain, and you can trade them through decentralized exchanges.

      So, it’s really powerful when you can plug these NFTs into all these different crypto protocols, because in a traditional system, these middlemen aren’t plugging themselves into all these other companies and middlemen. You can kind of freely do whatever you want with these NFTs, which I think is a really big difference.

      Jesse: Yah, I think it’s important to contrast the way NFTs work to the way the traditional web works; so, with social media today, when you share a file or share a piece of media, you upload the file to the platform. And what’s actually happening under the hood is you’re “copy-pasting ownership” of the file to the platform: What I mean is that somewhere along the way you signed the terms of service that allows for the platform to monetize that piece of content as they see fit, and maybe they give you a cut of the revenue, maybe not — but the platform gets to make that call. And, they also get to make the call on how that content is consumed, and there’s not a whole lot of innovation going on there because any developer who plugs in to try to innovate has been shut down in the past.

      Now, contrast that to NFTs — and I’m going to run with this metaphor of uploading a file to the blockchain —

      Sonal: Keep goin’, I love someone who owns a metaphor… <chuckles> <Jesse chuckles> do it! <laughs>

      Jesse: Okay, so, with this metaphor if you’re uploading files to the blockchain, and then those files become NFTs and they behave in the way that other crypto assets behave, that means that they’re permissionlessly accessible to anyone, anywhere with an internet connection. The implications are that any third-party developer can then innovate on the way that media is consumed: Like how the audience sees it, how people can interact with it or program it.

      So, one way to think about what’s happening with NFTs is we’re building this universal,  open media library — on top of which any developer can build the next Spotify, or build the next Instagram, or build the next Facebook — and when there’s a lot more competition, there’s gonna be a lot of benefit to consumers… and likely to creators as well — because as Linda mentioned, all of this can happen without the traditional middlemen taking a cut of the value that’s flowing between the creators and consumers.

      Sonal: That’s great.

      What an NFT is and isn’t

      Let’s get a little specific, though — let’s actually talk about the forms NFTs are taking, specifically. I think this is a great place to help tease apart what’s hype/ what’s real, as is the premise of the show. And so far, I’m actually having a hard time — and I’m someone who’s been covering this space: I mean bitcoin since very early on, Ethereum since very early on, NFTs since very early on — and I am honestly confused myself! So, maybe you guys can just help break it down.

      Just to quickly recap, Jesse, you’re saying any media file; Linda’s saying any good, digital or physical — that leaves pretty much anything… So specific examples include things like:

      • art;
      • it can be in games;
      • in music — there are audio NFTs (this has been really interesting to me lately);
      • there are blog posts, like I see people on our friend Denis’s site talking about making NFTs of blog posts;
      • Brian Flynn wrote about token-gated newsletters
      • And another interesting example recently (it was a self-proclaimed first, but likely true): Someone wrote about how they created the “first ever tokenized crowd-funded equity research report”.

      …Can you guys just quickly help tease apart what *is* and *isn’t* an NFT? It seems like everything is!

      Linda: I really think that anything <chuckles> in the world can be an NFT… as in, anyone creates something that is unique, that can be owned.

      The problem with physical goods is that you do have to have someone custody it, so there is a process behind that of having to make sure that you can audit that in the real world: And maybe multiple people own it, and it can’t be moved just by one person; so, there are pieces to that — but otherwise I find it to be an extremely broad category.

      We’ve seen really cool things come about, where we’ve had the token-gated newsletters, which you mentioned — basically needing to have a certain number of tokens in order to access this newsletter. And people are doing like token-commissioned permission chats where these tokens are required to enter the chatroom and start talking so, you know everyone has like a level of skin on the game. You have to own like a certain amount of tokens in order to enter these groups: it proves that you have some sort of ownership into this community that can be adjusted over time. (The idea is that even one day that there could be DAOs formed where token holders can vote on how many tokens are required to enter this newsletter or chat group or something.)

      And that piece, it’s kind of tangential to NFTs — I don’t necessarily think that social tokens themselves are NFTs, because sometimes people are creating these tokens that they’ve minted like a million of them; but if the creator of this group is issuing individual badges or unique items within that, then that can be an NFT.

      Sonal: Can you say more on what you mean by “social tokens”?

      Linda: Yeah; social tokens are just a really broad category of tokens that are issued by individuals or communities. So sometimes it’s- other terms are used like personal token, community token, creator token — but social token’s kind of the term that encompasses all of it.

      And there’s just a bunch of different experiments happening in the space: So we’ve seen people tokenize their time; so one of these tokens equals one hour of their time, and that becomes freely traded. We’ve also seen someone like R.A.C (he’s a Grammy Award-winning recording artist) tokenize his social token, and his token holders get access to this private Discord group, and then they receive like all these additional benefits… and he retroactively distributed to his supporters — so this is a way that creators can interact with, and reward, their early supporters.

      So it’s a really broad category and it can really be anything associated with an individual or community.

      Sonal: And how is social tokens similar and adjacent to NFTs — and then when is it *not* NFTs? Can you help distinguish there, just to help the understanding of what is / isn’t an NFT.

      Linda: Yah, sometimes social tokens can be NFTs in that a creator is issuing some unique piece of artwork directly to their fans — but in a lot of cases, social tokens can also just be fungible tokens. So like R.A.C. token, they’re all fungible so you can basically hold like a certain level of them, and that can always be traded and bought back and it doesn’t really matter which R.A.C. token you’re purchasing. So those are kind of more adjacent.

      And I think the reason why social tokens and NFTs get lumped together a lot of times is just because it enables the creator economy, it enables creators to engage with their fans directly… and so, these are often tied pretty closely together.

      Sonal: Right, but basically the bottom-line is — if it is fungible, it’s not an NFT; and if of course if it’s non-fungible (hence non-fungible token), then it is an NFT.

      Linda: Yah. 

      Jesse: I think the line between fungible and non-fungible tokens is blurry for a reason, and that’s because the interplay between the two is enormous:

      • You can take a non-fungible token, and turn it into fungible tokens by fractionalizing it;
      • And then you can make those fungible tokens — which represent a piece of the original NFT — you can make those into a social token.

      So there’s this token called B.20 which is a fungible token. And it represents a claim on some of Beeple’s NFTs, which an investor bought and essentially fractionalized ownership to. And now that that B.20 token exists, it can be programmed into all sorts of other value: So in addition to owning a piece of a Beeple, you can imagine some third party spinning up say, a Discord server and saying you need a B.20 token to come in here and hang out. That’s an example where it started with a non-fungible token; Beeple created it; then a collector bought Beeple’s non-fungible token; fractionalized it into a fungible ERC-20 token (that’s the B.20 token) — and third-party developers can remix and add new experiences.

      Linda touched on all of this, but the interplay between the two is important to note that you can easily take a non-fungible token and fractionalize it into fungible tokens, that then can become these social or community tokens. And so that’s a fun sort of design space to explore.

      Sonal: I mean we’re talking so far about kind of digital versions of what already happens in the real world, being able to do things in different ways. But if you think about what’s NOT possible right now in the real world, the idea of fractional ownership is super important and goes to the things that crypto can uniquely do. ‘Cause right now, if you want to fractionally own an artwork — I mean, I guess there are some very kluge-y websites where you could go and kind of combine resources with somebody — but guess what <chuckles> you can’t really split a physical artwork! So, it kind of reminds me of that story, I don’t know, it’s like a Bible story about like splitting the baby; like, who’s the real mother? But the point is, you can enable fractional ownership.

      I still am stunned at this idea with Top Shot, that you can essentially buy and own a *moment*, a favorite hit moment in a physical sports game. And by the way Linda, I’ve been meaning to text you about this, but I’ve been addicted to watching CLOY (Crash Landing on You, the K-drama); honestly when I think of all these amazing moments in a show like that, I know this sounds nutty, but what if people could bid and own moments on their favorite TV shows — as if it’s theirs — even if millions of people can watch it! Like, the idea that you can own it, and it’s part of your identity, is so freaking awesome.

      Linda: That’s what I love about crypto, you can have these concepts that you never really would have thought about otherwise — about being to own moments, and media, and people’s lives — imagine like YouTube creators streaming what’s happening to their life, and be able to own really exciting moments of it. I mean there’s so much possibilities there… it’s really exciting to see people become so creative with NFTs and what you can own.

      Common questions

      Sonal: On that note, let’s actually switch to what’s overblown or not, and tackle some common myths and misconceptions — everything from energy to whether it’s a hype cycle. And of course we’ll keep talking about the applications, but let’s first dig more deeply into what it means to own something digital.

      Start with this common phrase: “It’s just a JPEG”. How would you guys address that comment — “like ohmygod someone spent f’ing $69 million for just a JPEG?!” I mean, Jesse, you’re saying it’s a file. Guess what? On the internet, files are pretty worthless, and infinitely replicable.

      Jesse: So I would say that the number of times a file has been reproduced on the internet, is directly correlated to the value of that file’s NFT — meaning the more times a piece of media gets shared online, the more social value it has.

      To make this concrete, it’s helpful to think about a very well-known piece of traditional art, like the Mona Lisa. Where the Mona Lisa has been reproduced probably a zillion times — it’s on every t-shirt, postcard sold at the Louvre; you can see it anywhere on the internet — yet there’s ONE Mona Lisa in the Louvre Museum, and ownership of that piece of artwork is incredibly coveted, incredibly valuable.

      Sonal: I have to admit I’m getting a little tired of the Mona Lisa analogy, but it is a useful one <chuckles> — the key point and what I really heard you say, which is so counterintuitive, is that something is more valuable the more that it is replicated…

      And in fact, it just makes me think of how in general, as the world of the web became more about abundance versus scarcity — you know, the long tail is that you can have infinite choice on the web — it is really fascinating how people have been, when they went past the limits of the Blockbuster shelves in the physical-goods world, it’s interesting that Netflix would do things like binge seasons and drops, that kind of created this digital scarcity — like a limited-edition effect; like this thing is going to be on for three months, and then it disappears.

      So it’s another analogy of this interesting relationship between something not being necessarily rare or scarce — and in fact, even infinitely replicable in the case of files and JPEGs — but you can enforce this digital owning, or even a piece of it (if you want to go into the fractional ownership bit), and that is incredibly unique.

      Jesse: That’s the idea — is you’re not owning to try to be the ONLY person who can access a given JPEG or piece of media — rather you want to own the piece of media that everyone else sees.

      Memes, you know, travel the internet at a rapid clip; they get shared infinitely — you can now own a piece of internet history, or the most viral meme. And I think very soon we’ll see that these owners are credited, socially, on platforms where that work is distributed.

      Linda: We’re seeing that play out with CryptoPunks, which is just one of the earliest NFT projects. And we saw two CryptoPunks sold for $7.5 million each — one of the sellers being Dylan Field, who’s the CEO and co-founder Figma — and what’s really interesting about this is, yes, anyone could just copy this image…

      Sonal: …He, himself — sorry to interrupt you — he, himself, could copy his image, because he had it as his profile photo for a while, and he had to like (he didn’t have to, but he chose to) take it off his Twitter profile. Which I thought was so funny. But keep going.

      Linda: Yeah, exactly. So anyone can copy this; but if you actually look at the CryptoPunk NFT itself, you’ll see who owned this.

      And the fact that somebody had owned this so early on… it’s almost become this status symbol where people want to demonstrate that they can prove their ownership really early on in this space. And so that ownership history also really matters: Being able to discover an artist or creator really early on, and being like one of the first supporters, and having that tracked on the blockchain. Future times when that is sold, you can prove that you were this early adopter, and that is very valuable to people.

      Sonal: There’s a great analogy I heard, to extend what you said even further — but basically, if you think of the placard next to an artwork like at MoMA or some famous museum — it tells a description of what the art is, the materials, the date; the artist, if it’s not someone anonymous — and then it says at the very bottom, you know, sometimes in very small letters, who owns it, or it’s lent by someone on this collection so-and-so. And not everyone pays attention to that, because most people just care about the art, and then some people actually care about who owns it.

      But now, you’re doing that exact same thing but on the internet, where the whole world can see it — not just like going physically to MoMA and seeing it. Or even to use Jesse’s analogy, Mona Lisa and seeing it in the Louvre; it’s like not only can you have that kind of insider notion of the ownership, but you can make it more outsider facing by letting everyone see it. That is pretty powerful.

      Jesse: Yah, and developers are gonna lean into that. Because all that data about who owns it, where it came from, what its history online is — that’s just an API call away. And, right now, again it’s very difficult for developers to find all that information on web-2 platforms because the history of media is not tracked architecturally in the way that blockchains track it.

      So it’s like a 100 times easier for developers to surface that information — and that’s why I think you’ll see that little placard in the museum — you’ll see the digital equivalent of that on all social surfaces in the near future.

      Sonal: Did you guys see Matt Levine on Twitter, he said this line that “NFTs are a new form of tradable ostentation rather than a new form of tradable ownership.” Did you guys have any reactions to that?

      Jesse: I mean ostentation is one of the reasons people might collect NFTs… but it’s not just the speculative value, or being ostentatious about being the owner — increasingly over time, I think owners of NFTs will start to realize more and more sort of compounding utility as developers build new spaces for you to bring your digital property. For example today, you can buy a piece of digital art as an NFT, and you can bring it into a virtual world (like Cryptovoxels or Decentraland) and display it there. And that’s a very early example of a third-party developer who has nothing to do with the creator of that NFT, being able to build a new virtual experience — that’s just the tip of the iceberg; there’s, you know any third-party developer can then build on top of Cryptovoxels because it, too, is open-source and permissionless.

      And so what you start to see is this sort of Lego-block approach to building new experiences, where developers can build more with less, and the innovation compounds much more quickly. And so, that statement undervalues the possible utilitarian nature of being an owner.

      Linda: Yah, I don’t really agree with that statement, ‘cause I think it dismisses a lot of the use cases. And if we even talk about the more traditional stuff — like NFTs representing tickets or financial assets or real estate — these are just more efficient ways of transferring, and without having as many paperwork and middlemen involved.

      And so this is a net benefit to society, versus people trying to display their wealth.

      Sonal: I’m so glad I asked you guys because again the premise of this show IS to tease apart what hype/ what’s real, and it is interesting that someone whose work I deeply respect… has an interesting observation — and to hear you guys push back on that.

      What do you make of the comparisons that people are making to the ICO boom, what would your response be to that? ICO boom being “initial coin offerings” — playing off the term for IPO, obviously initial public offering — but in that case, it was more risky people argued, because an ICO was before the thing even existed. Like at least in an IPO, the company exists. By the way: Our friend Nick Tomaino made a simple observation that an NFT is a concrete product, a digital good, not a promise about the future, which I thought was a good argument. <Jesse: Yeah. I like that.> Any thoughts on what the hype/ what’s real on, “oh no, we’re in another ICO boom; it’s like tokens all over again”?

      Linda: It just reminds me a lot of 2017 when a lot of people came into this space — and the word ICO was thrown out a lot, and there was definitely a lot of hype around that.

      But, through that process, a lot of really incredible projects came out of crypto. And, a lot of people who joined the space ended up staying because they saw that it was a lot more than just-get-rich quick; and there were communities, and really unique ways of creating value in this world.

      So, yes, there are a lot of people that have come into this space, wanna just make some money off of it — but there are a LOT of really creative people that have joined the space and are going to stick around, and experiment with what’s happening, and really build some things that we have just never seen before.

      And it is nice that this time, it’s artists who have just worked so hard and are getting rewarded for this type of work. Someone like Beeple, who has been working on this craft for so many years, this is something that people are valuing.

      Sonal: I mean, on Beeple specifically his work was digital from the beginning anyway, but he’s essentially creating — and this goes back to the definition, this kind of one-of-a-kindness — because it is an NFT, it is unique and trackable that way.

      I do love that… but there’s no question there is like a hype cycle going on, we’re at that moment in whatever the Gartner curve, or whatever the framework you wanna use; there’s always a trough of disillusionment phase… I guess I just need a little bit more to understand, okay yes, this is very exciting — but right now, in this moment in time, how do we assess that it’s working / or not working?

      Jesse: I think the question you’re getting at is what is valuable, which NFTs are valuable?

      And the answer to that question is kind of like answering the question, “what is art?”; and my answer to that question would be whatever the beholder thinks is art.  And similarly, whatever you know, the market thinks is valuable… is a valuable NFT. And that’s why I think you’re seeing such wide-ranging experiments in what can be transacted as NFTs, from blog posts, you know to digital art.

      And there are a lot of niche groups that want to own you know an item that’s culturally relevant to them, for various reasons — whether it’s for speculation, the idea that they might be able to resell it in the future; or, you know, because they just want you know their name on this sort of digital placard next to the item to say “I supported this creator”, right like I wanted to you know support their work.

      So there are a lot of different reasons people might value NFTs, and there’s a lot of different subcultures and value systems that you know comprise this market, and that’s why it’s sort of expanding in all directions.

      Sonal: So the buzz is not necessarily a bad thing.

      One of the things that came up a lot in the early days of the history of NFTs, starting with CryptoKitties, was the scaling problem, and the fact that Ethereum was not ready for that level of excitement yet — and it pushed a lot of solutions into thinking about scaling. So some of the hype cycle in 2017 actually led to good infrastructure improvements, and the installation of things we needed…

      I mean it definitely makes me think that Mediachain was just a bit too early, actually. I remember… even before you guys founded Mediachain, always having this problem in the creator world of having to track libraries of digital assets, it was very difficult to find out — ‘cause the information was not coupled with the JPEG itself — forget even who owns it and who to pay, like you don’t even know who made it. And this is true of memes, everything, on the internet — which you know IS about remix culture, and extensibility, and-and composing things and combining them.

      Jesse: Yeah, a lot of the ideas that are being realized around NFTs are ideas we were exploring back then. And there were two critical things missing from the ecosystem at that time: One was the ability to easily create a token — that’s uniquely enabled by a smart contract, and smart contract platforms like Ethereum, and Flow, and others. The other thing that was missing was markets for these digital assets: So, we now live in a world where roughly 10% of Americans own cryptocurrency. And so the idea that digital assets have value is sort of a prerequisite for digital MEDIA assets, like NFTs, having value.

      To Linda’s point earlier, the 2017 market was a prereq for the NFT market today. So, the markets had to come first; markets drive — you know, they’re volatile, and they drive these speculative frenzies — but they also drive infrastructure, and mental models that stick.

      How NFTs work

      Sonal: That’s a perfect segue to the next thing I wanted to talk to you guys about, which is the broader taxonomy of the players and the ecosystem that’s already emerging around all this.

      And before we do, let’s quickly talk about how they work, to help make it concrete — like step 1-2-3 to minting an NFT, trading it, doing whatever?

      Linda: Okay; step one would just be deciding to put your work as a representation on the blockchain. And so “minting” involves really interacting with the smart contract, and submitting that — there are different marketplaces that try to make that really easy for you to do it. And so some of them will have a button that you’ll click to mint this process, you can select different attributes of like what’s the name of this piece of artwork, what’s kind of the royalties involved if there are secondary sales, like how much do you want involved?

      So, a lot of these will make it super easy for you to go through that process. I think the hardest part actually, is getting set up with a wallet, and onboarding yourself into accepting cryptocurrency and that piece — but there are marketplaces now that make it accessible.

      And some marketplaces will also maybe have you go through some onboarding process — and so they might have some due diligence on the artist; and making sure this is um real artwork and not copied by some other artist; and making sure it’s really high-quality pieces — and there are others that are just like hey, anyone can mint this.

      So, it’s quite a spectrum right now.

      Sonal: That’s great… but, I gotta set up my MetaMask, and like what does that even mean? Can you guys explain the wallet part too as well, ‘cause one theoretically does not necessarily have to actually interact with cryptocurrencies directly — so, if you guys could break down really quickly that bit too.

      Jesse: Sure I can take a stab at that. So, the concept of a crypto wallet boils down to what’s called a public and private key pair — So, basically you have a public address on the blockchain, which is where your assets/ your stuff is associated: So, Sonal has a public address, and you can tweet that out and say, “Hey, I’m Sonal, here’s my public address, and here’s all my stuff.” And your Bitcoin can be at that address; on Ethereum you’d have a different address, and all your stuff on the Ethereum blockchain would be associated with your public key.

      And then there’s the private key — the private key is what unlocks the transfer of assets in your wallet. So you need the private key to unlock stuff at your public address, and that’s the concept of a crypto wallet. MetaMask is the most popular wallet for Ethereum, and it’s a browser extension (you can install it on any popular browser); and, essentially what it’s doing is it’s setting you up with a public address for the Ethereum blockchain, and a private address.

      And what’s critical to note: Is that cryptographic key pair, it doesn’t belong to MetaMask, it belongs to YOU; MetaMask never sees the key pair, they don’t have any of the information, it’s yours. And that comes with a lot of responsibility, because if you lose your private key, you lose all your stuff — it’s kind of like cash in your wallet. And that’s why it’s called a “wallet” (even though it’s a little bit of a misnomer, because you can only do so many things with your physical wallet) but I think the reason that name has stuck, is that your cryptographic wallet behaves like a physical wallet in that if you lose it… all your cash is gone.

      Sonal: Okay, so now continuing the process, so we understand now how the wallets work, the browser extension for the wallet, some platforms can let you like literally create — sorry, mint an NFT — because you can create the artwork in any form you like, or whatever the object is, or digital asset or file.

      Now what happens after you mint it, what’s the next thing that happens? So you can put a name on it, you can specify program terms, you know what kind of royalties, different systems may have different options: Some of them themselves take 10%; others you can program in like as this increases in this much value; I’ve seen people do creative stuff like the artwork reveals itself the further you go along the bonding curve — like they’re doing creative stuff with the art itself kind of interacting, so it’s not just like a static piece of art that just happens to be going through this chain… What happens after the minting?

      Linda: You can do different things, depending on what you want to do with your NFT. So once you mint on these marketplaces, you can just have it listed, and try to share this link with other people, and have them bid on the piece of art. You can set a price; you can have people bid and then accept different bids.

      Or, you could just have this created for yourself: And, let’s say you want to make some worlds in a virtual land, and display your artwork in a virtual art gallery, and just place your artwork there…

      There’s all kinds of different things you can do with it if you think this piece is really valuable. I’ve actually seen people talk about swapping NFTs; so different artists are like swapping with each other. I’ve also seen people put up the art as collateral, and then get out a loan for it.

      So, you can really do whatever you want with this. But the most common, basic thing I’ve seen is just people selling their artwork, and someone purchasing it, and then maybe storing that like on their virtual land, or having it displayed on their profile. And there’s like a social element to it: People talk about it a lot, like hey I just purchased this piece of art, and they’ll talk about it on Twitter. And there’s an app that aggregates purchases from all of these different marketplaces, and displays it almost like an Instagram feed — so you can have like a social element to who’s purchasing what, who owns what, and have people form communities around it.

      Sonal: I’ve also often wondered if there will be like a Pinterest for NFTs, where even if you’re not the owner, you can kind of… “collect” it. Like one of the things that I use Pinterest for is it’s sometimes aspirational stuff I would never, ever buy — and just like having Pinterest boards is a way for me to “collect” it in a different way. Like I wonder if that would even happen, and if people would create, like, fees for doing that as well. I don’t know if you guys have seen that yet, but I wonder about that.

      Linda: I could see something like that happening, and, also just the fractionalization aspect to it — you can cut it up to really really really tiny pieces, and maybe people can own just really tiny elements of this piece as you’re looking through your Pinterest board or something.

      Ecosystem players

      Sonal: So, what you guys just described as all these different steps, there’s a whole ecosystem of players that have now emerged and are continuing to emerge. We’ve already named a few — like sites for showcasing an online collection; displays; like online galleries, we have curated galleries coming up; we have marketplaces; we have other tools for managing details… How would you break down the taxonomy — give me a map, and the terrain.

      Jesse: Yeah so there’s vertical marketplaces, right, where there’s marketplaces for like curated art or for certain types of collectibles. And then there’s horizontal marketplaces, like OpenSea, where that’s more of a search box for all NFTs. And the reason they can do that is all these NFTs live on the blockchain, it’s completely open. So they can query the blockchain and aggregate all of them. And you can find literally, pretty much every NFT on a horizontal marketplace like OpenSea.

      Sonal: Which is great, because not everybody knows how to interface with crypto. This is like the way the web itself evolved.

      Jesse: Right. And then, each of these kinds of marketplaces — both vertical and horizontal — more often than not, allow creators to mint, on the platform. Simple way to think about it: there’s both supply and demand: and you can either get it in the vertical form, which is specialized; or horizontal, which is sort of everything.

      One ofth really interesting phenomenon that’s happening on the demand-side of the market is you’re starting to see these really interesting collector… organizations sprout up: So, crypto makes it really easy to send value — like as easy as sending an email — as a result, people are pooling value in interesting ways in order to participate in this market. One really cool experiment is this thing called Flamingo DAO (DAO stands for decentralized autonomous organization) — the core idea is you can pool resources with anyone with a crypto wallet; send money into this smart contract, that acts as sort of like a bank account, and then that bank account can go and buy NFTs. The group can buy NFTs.

      And so what that kind of looks like is… maybe something like a fund, or you could call it a “gallery” that’s acquiring work. And by being in that collection, the creators’ gaining distribution to the audience of collectors/investors who pooled resources in the first place. So that’s another really interesting phenomenon that’s uniquely crypto enabled. And I think we’re gonna see a lot more of that.

      Sonal: I do too, and I looove that because one of my favorite things in the creator economy in general is the way collectives can emerge, both ephemerally and permanently (I have like a whole tweetstorm about this) — but I think it’s super powerful to think about what happens when you unlock that kind of coordination… Keep going.

      Jesse: Yah. I mentioned vertical and horizontal marketplaces; there’s also adjacent just media platforms — like we touched on Denis’s project Mirror — which is a blogging platform, where anyone can mint their blog posts as an NFT.

      And the question, why would you want to mint sort of a blog post or an essay as an NFT?

      Sonal: Yes, thank you for answering that!

      Jesse: <chuckles> If you’re an investigative journalist for example, there’s not a whole lot of great tools for you to monetize as an independent right now; subscription can be less conducive to long-form journalism. And what’s kinda cool about Mirror is — similarly to the prior idea of people pooling money — it allows for a writer’s audience, to pool resources in the form of a crowdfund: “Hey, I want to see this investigative report written, and here’s the money to do it.”

      And as a participant in that crowdfund, you don’t just become a patron of the creator, or the writer: You become an owner, a fractional owner, of the NFT that they produce when they publish that blog post. And, you can sort of analyze the psychology of one of these backers, but I think it boils down to two things: There’s the idea of *patronage*, right, you’re being a patron of this creator and helping them get the work done; but there’s also this vague notion that, in the future, if this piece becomes very valuable, I’ll be on the “cap table” of the post. Like Elon Musk published his famous blog post, the secret masterplan of Tesla. And just recently, you saw Jack, founder of Twitter, sell his first tweet (ever) as an NFT for millions of dollars.

      So, you can see this idea going a lot further: Where new, big ideas enter the world as blog posts, and people crowdfund those big ideas that they want to see happen in the world, and become part-owners in the blog posts — that becomes the sort of canonical representation of that idea.

      Sonal: I saw Dylan Field post a thread a couple of days ago that I thought was wonderful, talking about some of the extension of ideas around NFTs. He described like “proof of fandom” — and we have lingo in the crypto world of “proof of stake”, “proof of work”; and it was neat to have this idea of “proof of fandom” — it kind of ties back to this idea of monetizing moments as well.

      And in this case you’re talking about ways for creators to have their fans — and one thing we’ve talked a lot about on this podcast; I did a podcast with Kevin Kelly about how you can actually invert the model of payments, where it’s not a creator selling, but buyers and fans monetizing *their* attention — And so the idea of that is super interesting… because you can imagine fans and collectives like buying and owning these things.

      And Dylan even went so far to point out even “community as art” in that example, which I thought was super interesting.

      Linda: So, that’s an area that I’m really excited to see… I haven’t really seen too many people working on this yet, but, the idea of having so many DAO members being able to vote how this artwork looks and kind of have it be collective artwork.

      I was in this DAO called Saint Fame, and we would vote on different parameters of the design of clothing items, and then this DAO would manufacture them and ship them to people that purchased it. And so you had like this group of people deciding what the design looks like, and you can imagine that anyone can join these DAOs — it could even be anonymous people and from all over the world. And so you can collectively create or invest in things together, which is really exciting to me.

      Sonal: Connie Chan (our partner) has often talked about influencer monetization, and she talks a lot about what happens in China with livestreaming and how a lot of fans will ask their audience like “Should I wear this today, and do that?” And some of it can kind of veer on dystopian in some models, but in many ways, it’s also incredibly empowering that you can choose to monetize the things you want to and have models for doing it.

      But right now, it’s the platforms that take all the money. So what’s really interesting about what you just described is that you could essentially do the exact same thing — but in this sense, you’re creating not just artworks, but you’re actually creating collaborative decisions around… a person’s wardrobe, or a fashion line, or however they want to develop products (even physical products) based off of that. Which I think is super fun and interesting too.

      Jesse: Just one last thing to add there, along the lines of proof of fandom, is this idea I’ve been calling “Patronage Plus”: So in Web 2, it’s very easy to become a patron of an artist or creator whose work you admire, by subscribing to them on Substack or paying a subscription on Patreon. And what that essentially does is gives you access to their work, but it also allows being a supporter financially of the work itself.

      NFTs allow you to do the same thing: in some cases, the NFT can give you access to a Discord or a newsletter (and we touched on that) — but the *plus* part of patronage plus is what’s new and uniquely-enabled by digital ownership. And that is the possibility of being able to profit in the future from the resale of that ownership to someone else, maybe as the creator’s profile raises or the demand for their work grows.

      And, I think that “plus” is really key because it’s a very strong incentive to become a patron in the first place. So, patronage plus may end up growing the market way bigger than patronage that we saw in Web 2.

      Sonal: What’s so amazing about that is the golden age of art, many argue — like in the Renaissance era in Italy, Medici family, etc. — people argue that patronage in the first place is what unlocked that. And so what you’re describing is a more democratized form of patronage, and the “plus” is a way to really have this knock-on effect over time — which is really investing and democratizing — in a way that is accessible, to everybody. Because it’s not just the rich Renaissance families that can do the funding of the arts.

      Jesse: Yeah, it mixes patronage with capitalism.

      Linda: Yeah. So there’s a DAO called Yield Guild Games that I’ve been participating and active in, and there’ve been people in the Philippines who have been earning a living wage playing — like Jesse talked about you have these DAOs being able to own NFTs — and what they do, they’re a DAO of gamers: gamers from all over the world who are participating in these blockchain games.

      And there’s one really popular game called Axie Infinity — you have these like Pokemon-like creatures that battle each other, and each of these are NFTs — and you can battle and earn currency in this game. And sometimes these Pokemon creatures, like they might be too expensive because they’re so valuable. And so what we’ve actually seen in this DAO is players within this DAO leasing out NFTs to other players. It’s a really cool collective of people being able to join this group of gamers. And one thing that they’re doing right now is this DAO is investing in virtual land in the games that they’re playing, because they’re experts in these games themselves. And they’re actually developing like the land in these games as if…just in like a physical world of developing real estate and making it better (the idea is that they’re going to be just owning tons and tons of virtual land).

      Sonal: One quick thing — again, a DAO is a decentralized autonomous organization; people have often talked about cryptoeconomies over time enabling these sort of organizations because the history of the firm is very much entrenched in a physical world, not a digital world — but why do these things have to exist as a DAO; what’s the point of that? I’m asking because I’d want to know like, why a DAO specifically.

      Linda: So I don’t think everything has to be a DAO; there are plenty of times where a company makes a lot more sense.

      But, what’s really interesting about DAOs is there is a lot of more transparency — and so the funds that are managed by the DAO, it’s completely transparent where funds are being moved to and from, anyone can view the balance at any point in time. As you can imagine, a traditional company, you don’t have access to the balance sheet at all periods of times; and oftentimes, they’re just maybe released on a quarterly or annual basis.

      So the DAOs even the playing field, create more transparency; there’s lower barriers to entry in a lot of cases: You don’t even have to reveal your identity; it’d be really hard to join a company where no one knows who you actually are. That just fits very closely with the ethos of crypto of: global, open, kind of nature. <Jesse: Yup>

      Sonal: And by the way to be very clear, we don’t mean identity as in like anonymous, because you’re pseudonymous technically; like people can actually trace WHO you are without actually knowing who you are.

      The energy question

      So, now I’m going to have you guys break down even more misconceptions for me — like we talked about “just a JPEG, what’s so unique about a JPEG” — but there’s actually a lot more misconceptions, especially given recent buzz, all this commentary about “the energy, the energy, like minting is all this energy”.

      This is obviously an artifact of people thinking in terms of Bitcoin, which can be energy intensive; so, can you help clarify the energy question when it comes to NFTs?

      Linda: Well I think that there are a lot of misconceptions around that. So yeah, proof of work does require energy, but not every blockchain is proof of work. Proof of work involves physical miners actually verifying that these transactions happened. And so it’s just really energy intensive because you have to prove that you’re expending some sort of work, to produce this output.

      And so in Ethereum’s case, they’re migrating from proof of work to proof of stake — which is kind of equivalent of virtual mining – so, rather than spending let’s say $1000 on mining equipment, you’re taking that $1000 and locking it up into the system, and being randomly selected to verify based off the capital that you put in. So it’s just a virtual aspect of mining, and you don’t have to have the physical ones expanding energy.

      And then increasingly, we’re also having more movement towards Layer 2, like protocols built on top of Ethereum. Because people do want the be less energy intensive when it comes to verifying ownership on a blockchain. So there’s going to be less of that narrative, I think, going forward.

      Jesse: Even proof of work mining gets more of a bad rap than it deserves; it’s certainly true that it consumes a lot of energy. However, a lot of the miners who are doing the proof of work locate in areas where there is latent capacity — so renewable sources of energy that are untapped, for example like hydropower; there’s excess demand, well then it goes into mining. Like for example, there’s like natural gas emissions from oil fields; and that’s gas that is otherwise, it’s going into the atmosphere, but instead can be burned to produce proof of work proofs and earn Bitcoin.

      I’m not, you know, defending this practice. But I’m just noting that a lot of these emissions are either sort of latent, OR, a large part of the energy mix of proof of work mining is from renewables. And that again, is part of the conversation that’s under-discussed.

      Sonal: I am so glad you brought it up because the whole point of the show, again, is to give the nuance, that may or may not exist out there.

      Jesse: I also think a lot of the noise out there about the energy consumption of NFTs, really fails to take in the sort of relative measure of energy consumption more broadly.

      So, if you think about something like Art Basel, there’s a lot of very rich collectors who fly private to Art Basel every year in order to collect work. And I don’t know what the emissions of all those private jets is, but I would expect it’s a lot of CO2. And so to get into the game of quantifying the specific emissions of an artist’s work, I think is a very complex topic that’s sort of under-appreciated in 140 or 280 characters on Twitter when you say “Oh, this NFT caused X amount of CO2 emissions.” Well, what about all the freeports, what about all the private jets flying to Basel every year?

      So it’s a very nuanced topic, and I don’t think it’s fair to creators who are just using these new tools — which are becoming more and more efficient — to shut it down on the basis of this very headline-grabbing, relative value measure.

      Sonal: That’s fantastic. By the way I have been to Art Basel Miami, not the one in Switzerland, in 2006; I did not fly in a private jet, I was a grad student, I did not have that much money — but yes, I agree with you, that it would be very slippery slope.

      Linda: I also saw a tweet by Andrew Steinwold saying that actually, these digital art[s] are actually really environmentally friendly in that you’re not buying all these like physical supplies of like cotton for canvases, and wood for easels, and oil… And then you have all these shipping costs of moving this artwork to other people.

      There is always going to be aspects to anything that’s created, that you can always analyze and look at what is not environmentally friendly about it.

      Sonal: You’re absolutely right, and in fact, one of my absolute favorite artists, I bought a painting from her. I went to her show in New Orleans; I flew. She shipped the art to me afterward, it was such a process trying to bring it here, and the shipping — just even the materials to pack it, like all of it, it was intense and very complicated — and in fact, I had to hire someone to help me open the crate because it’s like screwed in, in wood. It was like not even possib- there was energy used to like take the thing out of this box. <Jesse chuckles> So, I agree with you. It’s a very tricky game to start comparing on that front.

      “Permissionless” innovation

      Okay! This idea of “permissionless”, you used that phrase a lot. If I were like a regulator and hearing that, I would freak out and be like, “Permissionless?! That means all kinds of bad behavior and actors and blah blah blah.” How would you address the concerns about things being permissionless — or even this idea that you know, you can’t even recover your key if it’s lost — there’s not like someone who’s holding that for you.

      Jesse: We can define it in the same way like cash is permissionless, right. Again, the wallet analogy is useful because if you lose your wallet, chances are you lose your cash and it’s gone. And similarly in the cash economy, you can buy all kinds of goods; they can be illegal goods, or they can be perfectly normal goods, and cash is used for both things. And so the same is true of cryptocurrencies, and I think the same is true of NFTs.

      There’s going to be bad actors right, there’s going to be people infringing on other people’s IP — and you know the legal system is going to have to step in and address those issues. However the benefits I think far outweigh any sort of negative or nefarious uses of the technology in that any developer can build new experiences around the way we consume media… again, when you contrast today where only the developers who work at Facebook or only the developers who work at Twitter can experiment, and innovate on the information that we see on those platforms… I think we’re in a much healthier state if EVERY developer in the world is free to innovate in a open way, without having to ask permission of these big platforms.

      Sonal: Right, that’s what you mean by permissionless. And by the way, it’s worth noting all those examples you cited — copyright infringement, IP, etc. — that’s pretty prevalent in the physical world, and you don’t often always have recourse (unless you’re Getty in doing this ridiculous royalty and provenance tracking).

      And, we’re talking about you actually have the solution baked into the very problem in the system here.

      Jesse: Yeah, in one sense, you could argue that blockchains actually make the job of forensics a lot easier because all the information is publicly accessible and available to anyone.

      Sonal: Our partner Katie Haun would obviously argue for that argument; I mean, at the DOJ that’s literally what she did!

      Jesse: Right, it’s all about finding the right balance where the bad actors can be addressed, and meanwhile the good actors are free to innovate.

      Corporate innovation & NFTs

      Sonal: Okay, so last thing. Can you guys give some just super quick practical considerations for startups or industry? I’d love to particularly hit mindsets, it doesn’t have to even be advice — for people who are consumers, people who are creators, and even institutional players.

      Linda: I find that just having conversations, and kind of plugging yourself into communities, and building in public is always really great to do in the crypto space. This space is still really early on, and people are all trying to figure everything out. So no one is a complete expert on what’s happening in NFTs and everyone’s very open to talking, collaborating. So never be afraid of asking questions; joining different communities on Discord, or Twitter, or wherever they’re chatting.

      Sonal: Big corporates and the big institutional banks and big DeFi players like banking and traditional players — they’re not the types to go into a Discord and try things out or have the mindsets you outlined. Any thoughts there, for that group?

      Linda: Traditional institutions can consider how NFTs could make things more efficient for themselves — so having these financial assets that everyone has to keep track of, might be really inefficient or costly. NFTs will enable this to just be a lot smoother of a process for them.

      So it may be worth looking into research — it doesn’t have to be digital art that they’re turning into NFTs; it could also just be unique financial assets that they have to manage themselves.

      Jesse: Yeah, big corporates and others participate in the markets for creative work, through various channels, a lot of companies work with creators and influencers on marketing and distribution. And NFTs offer a new channel for both of those things, right?

      I also think that, coming to be an owner of a creator/influencer’s work will be another way to gain their attention and potentially gain distribution through the lens of marketing. And that’s kind of an interesting idea.

      Sonal: One of the ones that I find very compelling is a new definition of employees in a modern era, where employees can be creators while working for a company and kind of get more ownership of their ideas — ‘cause traditionally it’s like very binary model; there’s not like a middle ground — and I wonder if that’s going to evolve through NFTs within companies, and even extending outside the borders of companies like in a classic open-innovation model.

      Jesse: So I think you’re touching on a really big idea — I would describe that as the ownership economy — where, in Silicon Valley, employees at startups get equity in a startup to align their incentives with the success of the company. And that model has worked really well for attracting the best talent to kind of work at startups. But it’s not been accessible to everyone, right, and as a result, the talent pool is not as big as it could be. And crypto kind of changes the game in that now it’s possible to send ownership value — whether an NFT or ownership of the bitcoin network — which you can now send that anywhere in the world instantly. And as a result, you can make ANYone an owner on the internet.

      And so I think this is a really profound idea where, it’s going to change the way that people come to work, in that they won’t have to go and become a full-time employee to earn some ownership value for the value that they contribute to the platform or service that they’re building or consuming.

      Sonal: Which reminds me of course of that famous Bill Joy quote that we all love which is that the smartest people in the world won’t ever all work for you. So, if you’re gonna embrace open innovation, open source, or extend your talent pool, that is a great way to give those employees quote-“ownership” — even if it’s fractional ownership, which is great.

      Jesse: Yeah, and NFTs make it accessible to everyone, not just technologists but consumers and creators as well.

      Sonal: Awesome you guys. So on this show — even though this a 3x explainer episode — I ask people to kind of give me a quick, short, you know “what’s your bottom-line” on this whole theme; give it to me.

      Jesse: I have a media background, so I love to fixate on a future where literally, every piece of media is incepted as an NFT — I’ve used this term a few times in the discussion, but I think what we’re building here is this universal library of media that’s programmable and where value flow is baked into the technology itself. And that’s just going to lead to a renaissance in online creativity, where the creators of the work are remunerated more fairly than they have in the sort of Web2 era.

      Linda: Yeah, there’s a lot of really exciting stuff happening in the NFT art space, and we have so many creative people coming in and it’s going to make crypto overall much better. But NFTs are also applicable to many industries where you track ownership, and currently have a middleman taking fees for that service. So, I expect there to be NFTs in all kinds of different industries like gaming and finance and healthcare and all kinds of other areas.

      Sonal: It’s an inevitable story of technology that you give people tools and things will happen — so it’ll be interesting to see what happens when we unlock that human ingenuity. You guys, thank you so much for joining this week’s episode, this 3x explainer episode of “16 Minutes”. Thank you so much, Linda and Jesse.

      Jesse: Thanks for having us.

      Linda: Thank you.

      • Jesse Walden is the founder and managing partner of Variant Fund, investing in crypto networks and founders. Previously, he was a partner at a16z Crypto and cofounder of Mediachain (acquired by Spotify).

      • Linda Xie is the co-founder of Scalar Capital, a crypto investment firm. She was previously a product manager at Coinbase and a portfolio risk analyst at AIG.

      • Sonal Chokshi is the editor in chief as well as podcast network showrunner. Prior to joining a16z 2014 to build the editorial operation, Sonal was a senior editor at WIRED, and before that in content at Xerox PARC.

      Amazon Narratives — Memos, Working Backwards From Release, More

      Colin Bryar, Bill Carr, and Sonal Chokshi

      When you hear stories about Amazon’s “invention machine” — which led to a company with not just one or two products but several successful diverse lines of business — we often hear about things like: Memos, six pages exactly and no powerpoints at all!; or, the idea of just “work backwards from the press release”; and other such “best practices”… But what’s often lost in hearing about these is the context and the details behind them — the what, the how (as well as their origin stories) — not to mention how they all fit together. Knowing this can give us insight into  how all companies and leaders, not just Amazon and Bezos, can define their cultures and ways especially as they scale. After all, Amazon was once a small startup, too.

      So in this a16z Podcast with Sonal Chokshi — the very first podcast for the new book Working Backwards: Insights, Stories, and Secrets from Inside Amazon (out February 9) — authors Colin Bryar and Bill Carr share not only how Amazon did it, but how other companies can do it, too, drawing on their combined 27 years of firsthand observations and experiences from being in “the room” where it happens. Bill was vice president of digital media, founded and led Amazon Music, Amazon Video, Amazon Studios; and Colin started out in the software group, was a technical vice president, and then, notably, was one of Jeff Bezos’ earliest shadows — the shadow before him was in fact Andy Jassy, president and CEO of Amazon Web Services (soon to be CEO of Amazon).

      The two share not only the early inside stories behind (ultimately) big business moves like AWS, Kindle, Prime — but more importantly, the leadership principles, decision making practices, AND operational processes that got them there. Because “working backwards” is much, much more than being obsessed with your customers, or having company values like “are right a lot”, “insist on the highest standards”, “think big”, “bias for action”, and more. The discussion also touches on hot-topic debates like to lean-MVP-or-not-to-be; the internal API economy; do you even need a chief product officer; and if you need less, not more, coordination as you grow. Can startups really be like Amazon? Yes: and it comes down to how leaders, organizations, and people at all levels decide, build, invent… using the power of narratives and more.

      Show Notes

      • The early days of Amazon and the development of the company’s 14 principles [3:18], including one that says leaders should be “right a lot” [6:53]
      • Amazon’s use of written narratives over PowerPoints [9:05], and how meetings are conducted using narratives [15:55]
      • The tenets that guide Amazon’s decision-making [24:00]
      • Working backwards from a press release [26:28], using AWS as a case study [34:56]
      • Discussion of lean startup principles [37:31], and how Amazon’s core principles balance each other [46:21]
      • Advice for startups, including reducing coordination and centralization [51:16]
      • Lessons learned from shadowing Jeff Bezos [58:50]


      Sonal: Hi, everyone. Welcome to the a16z Podcast. I’m Sonal, and today I have another one of our special, exclusive first-looks-at-a new-book episode — and it is both a very timely and evergreen topic, because the new book, coming out this week, is titled “Working Backwards: Insights, Stories, and Secrets from Inside Amazon.”

      In it, authors Colin Bryar and Bill Carr — who between them have a combined 27 years of experience in the company — where Bill was vice president of Digital Media, founded and led Amazon Music, Amazon Video, Amazon Studios for a decade. And where Colin started out in the software group, was a technical vice president, and then notably, was one of Jeff Bezos’ earliest shadows, a legendary program there. Fun fact: the first shadow before that, I believe, was Andy Jassy, president and CEO of Amazon Web Services (and now to be CEO of all of Amazon). The book actually shares the origin story of AWS, among other businesses there, which we touch on briefly — though, as a reminder, none of the following is investment advice. Be sure to see a16z.com/disclosures for more information.

      But in any case, our focus today is really on what is the Amazon way — and can other companies really adopt certain best practices, too? In fact, as fast-growing companies establish and find their way, how do they define and scale their culture, processes, and more? We actually spend most of the episode digging, in detail, into two operational practices in particular — the infamous memos-instead-of-PowerPoints, and working backwards from a press release and FAQs. Given the presence of those two topics in tech folklore, and lots of misunderstandings as well — so I actually probe for the origin stories, the specific details of how they do and don’t work, and other nuances so organizations of all kinds can take what they want or need.

      Finally, we also debate within this episode the tradeoffs of lean and minimum vs. maximum viable products (and whether the emphasis is on the wrong letter there); whether product managers have a role in companies organized like this; and more topics throughout.

      Amazon’s early days

      But we start by very briefly discussing the foundational principles — and actually, the first question I want to start with, especially since I hate the “why’d you write this book” question) — Colin, Bill, honestly, there’s a tendency for folks telling these stories, these kind of narratives, to do a sort of hindsight is 20/20, not accounting for attrition data or the failure cases as well. So, part of me is skeptical that startups can do what Amazon did. And, what’s most notable, too, is that Amazon had not just one or two or three product lines, but literally entirely different yet successful lines of business under one roof. So, what drives that? And can startups really relate to the Amazon story then?

      Colin: Well, one thing is that the businesses you mentioned, they are substantially different. They require different expertise, they’re different customer sets — AWS is B2B, there’s streaming video, there’s the e-commerce business — but they all have one thing in common, and that’s what we talk about in the book, and we call it The Invention Machine. Which was the process and principles that Amazon used to develop these businesses. And the ones that we talk about, they started off as ideas on a whiteboard or emails — which many people were skeptical we should even do. Some of them grew into household names, but they all started off very small, and with just one or two people.

      Bill: I would first start by going back in time a little bit, and place you sort of where Jeff Bezos was and where all entrepreneurs start out. So, at the beginning, Jeff worked out of a simple office building with a handful of employees, and he would be hands-on for everything. The very first customer support emails, like, Jeff wrote or co-wrote. He could review the work and think about all the policies. He could direct the team, and set the tone and the pace.

      Well, that works just fine when you’re an early-stage company and you know there’s fewer than 20 of you, and you can all do a stand-up each morning, and you can be hands-on. But guess what? That completely breaks once you start to grow like a weed, and you found product-market fit, and suddenly you’ve looked around and realize you’ve got a team of 130, 200, 500 — and, you realize that there’s all kinds of decisions and meetings happening around you. You can’t be part of every decision. And so, to me what’s most remarkable and notable, is that Jeff sought to figure out ways to actually inject his lens of thinking into all those meetings — and then sought to create a bunch of processes that would reinforce the way he would think about the work, or do the work itself.

      Sonal: It’s this idea of operationalizing ‘the invention machine,’ as you guys are describing it. Some of those principles and processes — at a high level, to quickly summarize, to set context for our listeners — they range from customer obsession, ownership, invent, and simplify, “are right a lot” for leaders, learn and be curious, hire and develop the best, insist on the highest standards, think big, bias for action, frugality, earn trust, dive deep, have backbone, disagree and commit, deliver results — which, I love. And we don’t have to unpack all of those, because I will take, like, all day, and it’s the whole reason your whole book exists.

      I do want to ask about one before we go into some of the other practices, which is around leading. And the one that really intrigued me was #4, “are right a lot.” And you basically write that, “Leaders are right a lot. They have strong judgment and good instincts. They seek diverse perspectives and work to disconfirm their beliefs.” And I love this, because I always think to myself, “Yeah, dammit, a leader should be right all the time. Their instinct should be damn good.” Tell me more about that one, because that one made me chuckle a bit.

      Bill: Yeah this is — and just to be clear of course, we did not write that. That is Amazon’s words that Jeff and the S-team, being his direct reports, painstakingly reviewed to come up with that exact language to define that principle — as with all 14 others. They sweated over the details of every word, every sentence.

      And, this principle, “right a lot” — in some ways, it’s very straightforward, which is that as you move up, an early-stage CEO as they grow and progress, they need to be more in the mode of delegating important work and auditing work, but their most important job frankly is to make decisions. And, many decisions will come to you — whether that’s presented with a spreadsheet, a document, PowerPoint. There’s all kinds of data that will be presented to you with those decisions, but there are very, very few problems where the data gives you the answer. At the end of the day you’re going to have to use your judgment.

      What “right a lot” refers to is, number one, when those leaders are confronted with those decisions, that more often than not, they pick the right door, but the second part of the definition refers to, more importantly, how those leaders make decisions. Which is, a lot of people think that leadership is about their very strong opinion, arguing their opinion, and winning that argument. And what great leaders do, actually, is they can stake out a position — but they are willing to update (mean change their mind) on what is the right answer, based on new information.

      And you know, even Steve Jobs talked about this at Apple where, some product that they launched, it ended up being a mistake. And it was — one of his reports had been telling him all along, “We shouldn’t do this, we shouldn’t do this, we shouldn’t do this.” And then after it launched and it failed, he came back to that person and said, “Why didn’t you talk me out of this?” And the guy said, “Wait a minute, I tried to talk to you out of it. What are you — what are you talking about?” And he said, “Well, you didn’t do a good enough job, because you didn’t present the evidence to me in a persuasive enough way to make me realize why your point of view was so important.” And so, it’s thinking about it and framing it that way — about bringing forward the right data, and the right information — and then it’s also the job of a leader to solicit that to make the best decision.

      Narratives over PowerPoints

      Sonal: Well that is a perfect segue to a question I’m dying to ask you guys about — because so many companies, their culture is like the mission statement and the values that you’ve shove in a drawer. And so people spend so much time talking about the words and the precision of what they want those principles or values to be, but not actually how to operationalize it.

      So, in that vein, because your book really does outline how to operationalize that through the processes and practices that you guys share. One of the ones that comes up all the time in Silicon Valley folklore is the infamous “no PowerPoints, write a memo.” Let’s tackle this one first, because what you just shared, Bill — about “convince me, share the evidence in a persuasive way” — the point is to be effective and be heard, you have to do that well. So, what is your best advice about how leaders and people in the group can share that information?

      Colin: So, Amazon started experimenting with writing narratives in 2004. And it was a result of weekly meetings, four hours every week with the S-team (Jeff’s direct reports), where 2-3 teams would come in and give either updates on their business — it could be a decision that needed to be made, or investigating new areas to go into. And the business was growing fast, and we realized that we were not making the right types of decisions. Some of the meetings would go over, we never really accomplished what we wanted to.

      I was Jeff’s TA [technical advisor] at the time. We had been looking at other ways to conduct meetings, and we were big fans of Edward Tufte, who’s professor emeritus at Yale, he came to Amazon to speak a couple of times — and after one particularly painful meeting — it was later on in the week, it was toward the end of the day — Jeff said, “Let’s stop doing PowerPoints at these S-team meetings. It’s the wrong tool for what we’re trying to do, and let’s switch over to narratives.”

      Which are really just now a six-page memo. One thing that is a little bit misunderstood is these ideas don’t come out fully formed. They started out as four-page memos — it ended up that six-page was about the right length for an hour meeting. But, we did it because narratives convey about 10 times as much information. You know, the pixel density is about seven to nine times the pixel density. People read faster than people talk, and you can have multi-causal arguments in a narrative much better than a hierarchical PowerPoint. But we realized we just needed a better way to analyze complex situations and make better decisions. So we just experimented with this. And the first ones were not good.

      Sonal: Just to quote you guys, because this actually made me literally laugh out loud. You guys, write, “The first few narratives were laughably poor when evaluated by today’s standards. Some teams ignored the length limit…” blah, blah, blah. And I was like, yes, people are not — I mean, we may be wired to be good storytellers, but writing is actually a hard skill. I do worry that it becomes a bit performative. For the best writers, not just the best presenters, because — one of my colleagues when I used to work at Xerox PARC used to call this “pissing on paper.” Which is, like, this idea of, you know, how dogs piss around their territory. There’s also a real-time component, where people are performing in real time, like, leaving comments in the middle of the meeting.

      Colin: So, a common misconception is, well, now it’s just the best writers instead of the best presenters that’s gonna win out in narratives. We haven’t found that to be the case. It’s really the best thinkers [who] write the best narratives. And some of the best narratives I’ve ever read are by people whose first language is not English.

      Bill: Yeah, in fact, the best narratives, many of them are written by software development engineers who may not have even focused on their writing skills. A good narrative, it’s a very data-based and fact-based document. And, writing good narratives is way harder than making a good PowerPoint. And I think, honestly, a lot of companies don’t do this just because it’s hard. When Colin and I brought this to other companies, what tends to happen mostly is that the author will vomit out about 25 pages of just sort of raw data, at you. Getting that person to then shape it and narrow it down to six pages of well thought out narrative is really hard. And oh, by the way, if you spend 10 hours a day reading detailed narratives, I’ve got to tell you, it can be mentally exhausting.

      But when people muse, like, how does Amazon do it? Like, how is it possible that they can effectively manage such diverse businesses? One of my number one arguments is that they use narratives to conduct meetings, not PowerPoint. And actually, a former colleague of mine (Derek Anderson, who is now the Chief Financial Officer at Snap), I think he made the observation once that Amazon has like a “narrative information multiplier.” It’s a strategic advantage that the company has over other companies, because <Sonal: love this> their executives are, like, 7-8 times better informed about what’s happening in their company, and they’re able to give super granular, specific feedback to those teams.

      Colin: It allowed the S-team to stay connected at a much deeper level. As Amazon started to move into more and more businesses, the span and control of the S-team didn’t grow by 100X — it’s still a relatively small team, and they are just as involved when it was a small company, as they are now when it’s a large company.

      The other thing I’d add about narratives is it does remove a lot of bias from the process, where you can have a charismatic speaker with a so-so or even a bad idea that convinces your company to do something that you should not do. You know, the converse is also true. If you have a shy engineer with a great idea, but it’s a boring presentation. It’s one way in which Amazon removes bias to make better decisions and the idea floats to the top rather than how good of a talker the person is.

      Bill: And we could go on about this forever but, the other part is it actually is a great way to get your team more engaged from top to bottom, especially in a COVID time. The way that these meetings work is you share the document — and you know, whether it’s with G-Suite or with Word — then everyone can then use the comment feature, and it doesn’t matter whether the person making the comment is a C-level person or a fresh-out-of-college individual contributor, all those comments get seen and heard.

      And then when you get into the discussion phase, all those people actually can then understand, you know, why we’re making the decisions we’re making. When you do a PowerPoint, you have to wait to get to the punchline, and while you’re waiting, you’re not sure, like, well, what are we actually doing in this meeting? With a narrative, you just take all that in, and so then you can have high-quality discussion versus that interruption and disjointed conversation you have with a PowerPoint. And if you missed the meeting, you can just read that document. So, there are so many ways in which the narrative method is superior to PowerPoint; that as you can tell, we can never go back.

      How narrative meetings work

      Sonal: Okay, so how does one do meetings then, based on these memos? One of the things you guys said is that sometimes it’s shocking, because the first 20 minutes of a meeting would be silent. And that made me chuckle, by the way, because one of the cofounders of Roam, the note-taking app, was sharing that sometimes they have entire meetings that are silent, because they’re just sharing notes with each other in Roam.

      Colin: Yeah, so Amazon meetings with narratives, they are strange to the uninitiated. It’ll be chit-chat before meeting when they were in-person or it’s online, people are starting to come in — but then there’s silence for about 20 minutes. And during those 20 minutes, people are just focused on reading. There’s no sound. They’re entering questions, and sometimes the presenting team can answer the quick questions right in the comments.

      So, for that 20 minutes, really there’s a huge transfer of information that you can’t see, and then the rest of the 40 minutes is really just high-quality Q&A and discussion on the questions that have already been entered or that come up. The six-page narrative is a forcing function to where you can cover that amount of information in a one-hour meeting.

      Sonal: Tell me a little bit more about what needed to change in the specifics of meetings, in terms of running them. Because the premise of this conversation is — not everyone starts out as Amazon, and that startups can do these things — I’m trying to really tease apart, like, are we just replicating the meeting dynamic in the memo and then the same thing happens anyway? People would begin reading in the meeting, but then how would the decisions happen? Like, what happens next?

      Bill: There are a variety of different kinds of documents you’d review in a meeting. It could be an annual operating plan, it could be a monthly business review, it could be a PR FAQ about a new product. So, the conversation, literally what you do once people stop reading is you just go page-by-page. Or alternatively, if it’s a smaller group, and let’s say there’s just, you know, 10 or 15, you could literally just go around the room and say, “Okay, Sonal you’re first. What questions and comments do you have on the document?” And so, you would get the feedback, questions, and comments from all participants. And then the document itself would present some sort of specific proposal. It’s asking for some budget amount. It’s asking for, are we gonna launch this new product? And, at the end of the meeting, you are tying it up and wrapping it up and saying either, “No, we agree that, what you’ve written in this document, that plan works. Approved, go ahead,” or you debate and discuss it.

      One of the things you might do at the end of the document is make a clear section after you’ve presented all the facts to say, you know, what are the decisions we need to make today? And then list those out. Or, what are the important parts of this plan where we need your feedback and input. Like, we’re not sure whether we should go down path A or path B. A good document will clarify what are the decisions we’re gonna make.

      Colin: The one thing I would add is that a lot of first-timers to narratives, right after people read, they say “Let me walk you through the narrative” and you stop that right away. You know, you’ve just had that 20 minutes of high-fidelity bandwidth — why dumb it down with a two-minute verbal walkthrough of the document? You wanna get to that feedback loop as quickly as possible, just talking about the document.

      Sonal: We didn’t actually really say what goes in the memo. You observed that the memos can vary in form and format by function, and purpose. But can you at least describe what goes in the memo specifically? Like, even the ingredients would help.

      Colin: Amazon has different types of memos for different purposes. So, if it’s some monthly, or quarterly, or annual review, there’s the typical “what were the key wins, what did we do wrong, and what can we do better” and “what are the key initiatives coming up for the next year.” You can have appendices, too, and the appendices are supplemental data that everyone’s not required to read in the narrative meeting, but if you do need to go jump to it to answer a question, you can.

      Bill: It would include tables, with, like, here’s a summary of our financial results from the prior year. Here’s the table — the summary of our plan for the next year.

      Colin: They also work very well with design, which you may not think about at first. But if you’re going over mockups — either UI mockups for an app, or physical prototypes of some hardware, or a process that you’re gonna build — having a narrative actually helps set the stage to say before we take a look at anything, here’s what we’re trying to accomplish with the user experience. Here are our goals, here are the challenges that we’re trying to solve. You know, I’ve been at mock-up meetings where everyone thinks they’re a UI expert, but if you don’t have that <Sonal: Yeah, oh god> before and the comments on, you know, three or four things where you should move this over here. But you don’t do that if everyone’s on the same page with reading a short narrative beforehand.

      Another thing that can be in a narrative that’s really powerful — especially for something that’s going on on an iterative basis, as if you’re refining an idea over time — are tenets. And those are really — okay, what are the design criteria that we are not gonna compromise on, or that we’re gonna fall back on when we have to make tough decisions. And that’s front and center, usually up in the beginning of the document. “Before we go over Amazon’s pricing policy, I want to remind you, here are the four tenets that we’re following to make the following decisions.”

      And you know, to get to those tenets, it was difficult. It took several meetings just to say these are the correct set. That’s a good caching mechanism, because if you’re a manager at a company that uses narratives, you’re gonna be context-switching and reviewing multiple ones every day. And sometimes you may only meet with the team once a quarter, and you wanna be able to very quickly get up to speed.

      Bill: There’s another important technique where you can actually add at the end of the document an FAQ section, for frequently asked questions. So, you’re actually anticipating the kinds of questions the audience are gonna ask you. And a talented senior leadership team is gonna ask you hard, probing questions about things like, “Well, you say in your plan that you’re gonna go do X, but it seems to me that there’s an important hurdle here of — you’re gonna need this important partnership, <Yup> you’re gonna — you have this important dependency. What gives you confidence that you’re gonna — actually can solve that problem?” And you would answer it. Not only does that help reflect whether the author and the team have good mastery of the issues, but it also helps speed up the discussion and the decision-making.

      A lot of my work leading — you know, Prime video was making very expensive multi-year agreements with motion-picture studios to acquire their films and TV shows for the service. These were big numbers, lot of money involved. If we’re gonna go spend that much money, we’re gonna go write up a deal memo that describes, like, okay, we think we should acquire these films and TV shows. Here’s what the package is worth, here are the detailed metrics that show why we think this is a good investment — or why not, in some cases, because sometimes we would review it and say we’ve looked at this deal and we’re not gonna do it and why. And again, just because it’s a Word document, doesn’t mean you can’t put in a chart, a graph, some independent input, an Excel table — all those things can still be in there, but then the narrative needs to clearly state with a clear beginning, middle, and end, like, here’s what we’re proposing to do, we’re not proposing to do, and why.

      Sonal: Yeah, I think that the thing I find most compelling is how much this mimics how writers think, obviously. One of the things that I found when I first came to a non-media company — and was working at one previously — was oh, my God, I have to make so many freaking PowerPoints, and I hate it, because it’s a muscle that’s not ideal for storytelling as much as people think it is. It’s not, it really isn’t.

      But then next, what I love about what you’re saying there is that the FAQs is actually the equivalent of doing the “inoculation technique” — which is what really good op-ed editors will really build in — and that’s not just because you’re trying to inoculate the counterparty to the arguments they’re gonna make — it actually, what you’re really saying there, and I wanna pull this thread, is — you now can have a better, deeper discussion, because you’ve laid to rest all the common things that you can literally get out of the way in, like, a memo in 20 minutes.

      Bill: Yeah, I mean, in a good document, that all comes out.

      Amazon’s guiding tenets

      Sonal: I wanna actually go back to the tenets for a quick second, and then pick up on a thread that you brought up. One of the things, Colin — you described it as a caching mechanism for the leaders, where they — you have to do a lot of context-switching so they get to kind of revisit that cache when they have to get back into that context.

      Colin: Yes.

      But I was thinking about it from the point of view of the group in the room, not just the leader. And how it’s — really sets the shared context for the room, to have the most collaborative mindset possible, while disagreeing within that framework. And in your book, you write that “tenets give the reader an anchor point from which to evaluate the rest” — but here’s the best part. “If the tenet itself is in dispute, it’s easier to address that directly rather than take on all the logical steps that derive from that position.”

      And sometimes you guys spent meeting after meeting just debating to get the tenets right — which I think is really great, because it allows you to actually separate the thing that the tenet is, and then what flows from that.

      Bill: Yes, I spent 15 years at Amazon, and I’ve since gone on — and one of the things that shocked me was that certain topics get, like, recycled for debate constantly, right? <Sonal: Yes. Yes, exactly> And I was like, whoa, we don’t do that. We didn’t do that back at Amazon. Well, why is that? And one is the use of a tenet, which is that all that debate and discussion can land on a fundamental issue about, like, what this company should or should not do. And if you don’t come to a common agreement on it, then you will be constantly — you’ll waste so much time with relitigating these issues.

      The second reason is that what the narrative process forces you to do is by actually putting down on a piece of paper, not only the tenet, but then, like, so here’s the specific plan — then, you set the date for the meeting and everyone reads it, and then you decide. And, I realized that a lot of those things get relitigated. So, it was one of the ways [in] which Amazon was very effective, which people don’t realize, as a management company.

      Sonal: Yep. On that note, does it then serve an archiving function for new hires and onboarding, that you scale that tacit knowledge that’s been made explicit? How does that work?

      Bill: Yeah, great point, because the other thing I also saw was whenever you hired someone new in — within a matter of a week, they would want to go relitigate. They too, <Sonal: Yeah, totally, it’s exhausting> would trip across, well why don’t we do blank? Or why don’t we — and it’s like, oh my gosh — and you can just say, “Look, here’s the tenet, here’s the document. You know, take a look at this, and then come back and, you know, talk to me.”

      Starting with the press release

      Sonal: Right. And then when you do decide to relitigate, it’s an actual intent <right> versus an accidental, every-new-hire-repeating-recycling <Bill: Right> the conversation. Okay. So the other big Silicon Valley folklore when people talk about best practices from Amazon is this idea of working backwards from the press release. Now, I know that you guys talk about “working backwards” well beyond — it’s the reason it’s the title of your book, obviously — but I really want to probe specifically into the mechanisms of what that means. Because, like, how does that happen? Is it just, “Oh, I wrote a press release for this thing I wanna do” — it’s a product, it’s an idea, it’s a service. I really would love to hear what, where, how, and why. And also, I’d love to hear the origin stories, if you have any specifics there as well.

      Colin: At its heart, the working backwards process is really starting from the customer perspective — and everything you do works backwards from that. The PR/FAQ (the Press Release and FAQ), that is the tool that Amazon uses to achieve the perspective of starting from the customer. It’s different than how a lot of companies develop ideas and products. A lot of companies use a “skills forward” approach. What are we good at? What are our core competencies? What are our competitors doing? How do we nudge into this adjacent market? How much market share can we get?

      Bill: When I was in business school, and taught to think about, like, how you expand and grow, as Colin already described — you create a SWOT analysis.

      Sonal: What is it, the strengths, weaknesses, opportunities, threats, right? Right.

      Bill: Right. But there’s no “C”, there was no customer.

      Sonal: Right.

      Colin: Amazon has put in deliberate mechanisms to make sure that the customer is front and center from the very first iteration of an idea. So, if anyone says — raises their hand and says, “I have a great idea,” the first thing that the manager or the person in the group will say, “That’s great. Why don’t you go write a working-backwards document.” And what that is, it’s two things: it’s a press release, and then a frequently asked questions document. And the press release has to clearly explain to the customer what it is you’re building — what’s the problem you’re trying to solve for the customer, and why does it make their life better? It can be something very small, or you know, it could be moving into a brand new industry. It’s a fractal process, which is great.

      Another thing is, these PR FAQ documents — it’s an iterative process. First of all, most of the ideas that go through it don’t make it out on the other side. And second is that it takes several, several iterations and feedback to refine before the project gets green-lit.

      Bill: In fact, the origin story of, like, how we got to the PR FAQ — or at least a part of it — both Colin and I were present for this, because in 2004, I landed on a new role working as one of the founding members of the digital media team at Amazon. For perspective, at the end of 2003, 77% of all of Amazon’s worldwide revenue was media products. But it was all physical media products. It was books, CDs, DVDs, VHS tapes. And, the writing was on the wall that, like, this business is not here to last. That — there were already a couple of million iPods that were sold. Millions of people were using Napster to file-share.

      Sonal: Napster, right.

      Bill: Right? It’s pretty clear that, like, okay — now that we have the internet, it’s just a matter of time before people, you know, consume their media digitally. But we didn’t know how. So, what I did — pulling out my bag of tricks from business school — is [I] marched into meetings with Jeff where, like, here’s our projections for how big the e-book business will be over the next 10 years. And here’s our projected market share. And, here’s what the pro forma P&L looks like. And here’s the kind of deals we’ll make with publishers. And here’s the competitive landscape.

      And, I was so proud of all this work, and he looks up at me and says, “Bill, where are the mock-ups?” And I didn’t have any mock-ups at that point. I was doing, you know, like, “Oh, here’s the projection — I’ll get started and we’ll start working on launching, you know, a better e-book store.” And, by “Where are the mockups?” what he meant was, this is all super interesting — or not really actually, is what he was saying — but what’s more interesting is like what is gonna be the customer experience?

      And more to the point, as we started to debate and discuss different ideas — whether it be in digital music or e-books — the discussion was about, well, why would we bother building, like, a me-too versus what you know Apple’s already got the iPod and iTunes. So what’s in it for the customer to have just have another — a knockoff of that service? Like, what can we build that actually creates real value for customers, something new we should invent on their behalf?

      And we tried mockups for a little while, but frankly there were, like, so many questions and so many details that we hadn’t thought out, and Jeff one day said, “Okay, I got a better idea. Why don’t we — everyone in this room — write up the idea for what they think we should go build in digital? We’ll write those things up, and we’ll come back in a few days, and we’ll read those, and we’ll go from there.” And this is before we’d done narratives. We had not, you know, figured out this PR FAQ concept, yet. But once we did that, everything changed. And suddenly we were reading, you know, one document was describing, like, a puck that would sit on your countertop, and you can talk to the puck, and could order groceries from the puck. I described the document about, you know, what we might go do in digital music. Another one was describing an early version of what Kindle might become.

      But some of these documents were, like, eight pages long. We needed to get this to be, you know, more pithy and clear. And Jeff said, “I know. Let’s write the press release for each one of these ideas instead.” <Sonal: Ooh, neat> And he said, you know, we should read the press release, because normally that comes last. And he said, you know, normally the engineering group and the product group, they go and they come up with the idea for the product, and then at the very end, when it’s time to sell it, they chuck it over the wall to the marketing team and say, “Okay, figure out how you go sell this thing.”

      And he said, but what if by the time that thing got to the marketing team, they said, “Yeah, well, the thing you built — for that really to work, we actually need that to have a price point of $99. But you’ve built it in such a way that it’s costing us $150 to manufacture each one — so, yeah, we’re not gonna be able to sell too many.” In other words, if you had known upfront that you needed to hit a BOM [bill of materials] of less than $99 to make this product go, then you would have designed the whole thing very differently and understood the constraints. It might have a whole lot of — there might be vaporware concepts. There might be concepts that you don’t know how you’re gonna solve. Maybe business model problems — but then in the FAQ, then that defines, okay, what are the hard problems we’re gonna have to go tackle to make this exciting product a reality?

      So, we switched to that method, and it was halting progress, and had we not really taken that approach, we would have not ended up with what turned out to be a breakthrough product, which was the Kindle.

      Sonal: That’s fantastic. So, a couple of questions to just quickly probe on a few nuances: First of all, I know what you’re really saying is, flip the perspective from inward-out to outward-in — which I think is really interesting, because that’s something I constantly think about content. Like, orient it in the value to the reader. But what would you say on the flip side, to the crowd that often says that part of the problem with “working backwards” [is], “Well, then you’re not really inventing what they don’t know what they want.” And how does one write a press release for the startups out there thinking, “Oh, well, you know, we’re creating a new category — this is not something that exists.” Tell me more about how you might address that crowd with this PR FAQ approach.

      Bill: I would submit that, in fact, that’s what this process is actually designed for. In 2004, when we started on digital media, the way e-books were, you could only read them on your PC. There were no, like, offline readers and tablets and devices in those days. They were priced way too high — like, the same price as the hardcover book. The e-books had existed for four or five years before the Kindle launched in 2007. But it was a tiny, tiny business. And it was a tiny business, because no one had imagined, well, what do I need to create, what’s the new thing I need to build to make e-books work?

      We defined what would be the ideal reading device — everything from, you would be always connected to the internet (which by the way, devices weren’t that way back in 2007). That you wouldn’t have to create some separate account or link your account to some mobile carrier. That when you got it out of the box, it already knew who you were, and so if you had actually bought a bunch of e-books online, they were magically already uploaded onto your device. All those kinds of things would be described in the FAQ section to say, “Yes, here’s hard problem one, and here’s how we’re gonna solve this problem” — or, “we don’t know how we’re gonna solve this problem yet, but here’s our path for how we’re gonna go work on that.”

      Colin: Yeah, I would just say, there are two very real use cases where Amazon used the working backwards-process to create something from scratch. With AWS, you know, cloud computing didn’t exist. And as we’re working through the Kindle issues — you talk about context-switching — an hour later we’d go to another conference room, and we’d be with Andy Jassy (who’s the CEO of Web Services), and we’d be reviewing Word documents about what would eventually become cloud computing.

      And it took us about two years to come up with, what are we actually trying to create? And you know, the first two were centered around storage and compute, eventually. And the press release — one area where it really helped to crystallize everyone’s thinking is — we came up with the saying that we want people in a college dorm room to have the same access as an Amazon developer to world-class infrastructure. And that <Sonal: Wow…> was just a powerful metaphor about, okay, so what are we creating — and, you know, what is this infrastructure that we really need?

      And starting from the customer experience, we had many, many small teams throughout the company just screaming at Jeff, at the infrastructure team, “I built my service, it’s taken me too long to deploy it and get it out and ready for customers.” And that’s where it started off as provisioning, but it kind of morphed through this working-backwards process to compute. And then in terms of storage — there’s a whole bunch of different types of storage. It narrowed down to simple storage service, was the very first thing, and then we would build out from that.

      Sonal: I love that example, because it really emphasizes this point, that when you start with the PR FAQ, you’re essentially starting with the differentiation. Because you’re really thinking in terms of the value — because there’s a million options for people to pick from — so that’s when you go from provision to compute.

      Because you’re thinking, if the customer is this kid in the dorm room having access to — and we often talk about the power. Like, actually Marc Andreessen, in his original 2011 “Why Software is Eating the World” op-ed, points to the power of this movement — like, you know AWS has been huge in bringing — we even have this op-ed about why every company is a fintech company. We actually call it “the AWS moment in fintech” — it’s quite amazing the impact that AWS has had on the industry, and there’s no question about that. But that precise point — of starting with the PR FAQ — to take what could have just been like, “Oh, here’s some storage, and here’s how to provision the services you need,” to here is how to create an entirely new business, that’s a whole different game.

      Lean startup concepts

      Bill: The other thing that’s really important to note, where the PR FAQ process is misunderstood, or, in conflict with the startup community today, is the lean and agile approach.

      Sonal: I wanna hear about this. Love it. Cause some fights, Bill.

      Bill: Here, let me tell you what the problem is with the lean and agile approach.

      Sonal: I love Eric Ries, for the record. He himself is the first — and he’s actually said it on this podcast, that sometimes people get a little cult-y and follow the letters of the rule instead of the principles of it. I actually personally am a big believer, having worked at Xerox PARC, in the maximum viable product sometimes instead of the minimum viable product.

      Bill: Yeah, it’s really — actually it’s the v part. The problem is that people focus on the m, the minimum, and they don’t focus on the viable. So, what is the definition of viable?

      Sonal: Yeah, what is the definition? What would you say it is?

      Bill: To me, the definition is like, “Oh, if I go build this thing, I have created a — insert size-of-business here — $100 million, billion dollar business — I have enabled, if I’m right, then this opens the path for, like, something really big. And I see instead happening, “Okay, I’ve got a sprint, I’ve got a couple of weeks. What can I get done in a couple of weeks?” Or, “Oh, what can I launch quickly to sort of test and learn?” Right, where then, you’ve created completely different constraints. And oh, by the way, if your whole dev team thinks with their whole roadmap, and breaks it into these little chunks of how do I you know iterate quickly, test, and learn, then you’re gonna launch a lot of small things where the actual size of the viable business on the other side of it might be sized in the one-million dollar range or two-million dollar range, or, like, the actual potential good outcome is very, very small.

      Now, there are plenty of places where this approach is totally applicable. Search, where you’re, like, how do I test and learn with, like, changes to the algorithm? Or changes to the logic, or a new AI model. But if you’re thinking about, I’m starting from scratch, I’m trying to create a new business — the problem with this MVP approach, where the viable part isn’t really thought out, and mapped out, is that people haven’t really thought through, like, well what could this really become, and why might this not work? And in many cases, they could have actually — if they instead spent more time upfront in the planning process — thought much bigger about what does the customer really need — or wow, I’ve really created some significant value versus frankly, these little incremental changes that don’t really even move the needle at all.

      Sonal: People don’t do press releases for incremental releases, they do press releases for big advancements.

      Bill: That’s actually an excellent point. If you parachute into a new company, and you look at their product roadmap, and there’s not one thing on there you’d write a press release about — then, like, you’ve got a problem.

      Sonal: Yeah.

      Colin: To me, viable means you read the press release of what you’re trying to build, and you want to buy or use the product. If it’s not something that you wanna buy or use, it’s not viable.

      Sonal: Yeah. I mean, I would also push back on the definition of viable, because what I heard from Bill — and Bill, you should correct me if I’m wrong on this — Colin, when you say like that obviously the customer is gonna wanna use it, but, to me viable is not just that it’s something a customer would use <Bill: Right!> because I think there’s a lot of dumb things customers would use, quite frankly. I heard it more as the enabling conditions to really make something bigger, and then also to address a deeper, more underlying opportunity sometimes instead of the surface opportunity. Because — not to get all jingo-ish on this — but I, of course, think of Clayton Christensen’s Jobs-to-Be-Done framework — and it’s sort of about, like, what is the underlying job to be done that is being fulfilled for this person? So, that’s how I heard the viable — what does it take to make this happen — whether minimum or maximum — and then also not only thinking about the product, but all the enabling conditions to get to addressing the deeper opportunity.

      Bill: Yeah.

      Colin: Another way where I’ve seen that MVP process being misused — because it can be useful — is that the process itself becomes the goal. And because I’m supposed to launch every two weeks, or I have an MVP so this MVP card is “go to the front of the line and get whatever resources I want because I’m doing an MVP.” So, don’t let the process itself become the end goal, and then don’t let the MVP get in the way of understanding your customers. Because you know, some people actually forget the customer problems that they’re trying to solve.

      Sonal: Which is the whole point of doing an MVP in the first place. I mean, the whole point is to be able to get that feedback so quickly. Because the whole reason that that idea came about was that, you don’t wanna have that very long delay in the feedback loop.

      Colin: Yes. And if you’ve watered down the feature set so much just to conform with what the process is, it’s a shallow, pathetic version of what you’re actually trying to test. And so you say, nothing here — when you never really gave it your best shot.

      Sonal: What’s really interesting is you actually, in your book, outline the total addressable market, or TAM. And I found that to be very interesting — especially in connection to the discussion about how to think about the biggest possible market for this product, working backwards.

      Bill: Yeah, we spilled a fair amount of ink on the TAM part in the book, because people with less experience sort of get this part wrong — to not only think about how many people have this problem, but like how big is the need. And for how many consumers is this problem really big enough that they’re willing to spend money to do something about it? How much would they be willing to spend? And, you know, how many of these consumers actually have the characteristics, or capabilities to actually make use of this product — and, a lot of people don’t really step through that clearly.

      Colin: The thing is that you wanna ask all of the hard questions upfront. And as we talked about, this is an iterative process. So, in the review meetings, you know if there are a couple of questions that you don’t know the answer to — you just append those to the document and say great, let’s come back in two weeks — however long it’s gonna take. And the FAQ, you can basically break it up into two different components. One is an external FAQ — that you’re explaining how does this product work, how much does it cost, why should I use this service versus what’s out there on the market, or why do I need to change my behavior. And then the internal FAQs — what are the things that we need to go organize and solve in order to make this product or feature a reality.

      And then, like you touched on — how big is this opportunity? You know, what is the total addressable market? Then you can size up the opportunity, and that’ll tell you whether it’s worth doing or how much to invest in it. Because one of the things that you ask when you go through the working-backwards process is, [is] this big enough to be worth doing? So it may be a good idea, but it just may not have the impact and scope on your customers or the organization to make a difference to be worth devoting resources to.

      Bill: When we were figuring out in digital media and AWS what are we gonna go build, and you parachuted into either of those teams and said, like, “Hey guys, how’s it going?” and we said, “Oh my god, we’re so frustrated, because we just wanna go and build this thing and get it out there, but Jeff, you know, is insisting that we go through this PR FAQ process and figure this all out in advance.”

      And I was among the people who found this frustrating. And it was only in hindsight that I realized, like, how smart Jeff was to slow us down. And we co-opted the marine scout sniper saying, which is that “Slow is smooth, and smooth is fast.” Or, “measure twice, cut once” — or sometimes Jeff would refer to himself as “the chief slowdown officer” when teams were sort of itchy to pull the trigger and build and launch something.

      What I came to appreciate in retrospect, is that to build — to actually create value, you really have to take the time and think big — that’s what the PR FAQ process does — and if everyone can go write PR FAQs, and you’ve got 30 or 40 different ones to review, then I’m here to tell you that the best ideas are gonna bubble to the top pretty clearly, based on this process. Whereas the MVP/lean process really is just about cranking stuff out, rather than first filtering, thinking through, refining…

      Sonal: What to do.

      Bill: …what to do. Yeah, people confuse speed and activity, with effectiveness.

      Principles in balance

      Sonal: Yeah, exactly. What I find so fascinating about that, by the way, just coming back to where we started, is how the 14 leadership principles balance each other. Because you describe Jeff in this context, and a lot of these processes as ways to slow things down up front — but then you also have principle #10 (or whatever number it was), for bias for action at the same time. You think of it as a whole system. And it’s really interesting, because it resonates to me with Ben’s — Ben Horowitz’s book on culture — because he describes, like, the value system of the samurai warriors, where they would have something that was like Bushido — where, there’d be something that was incredibly kind and generous, and then something that was incredibly vengeful in the same, like, framework. It’s very interesting how those motions are kind of opposite, but yet in balance.

      Colin: Yeah, they do work together. We started off the conversation about the “are right a lot” principle — well, the one right below that is “learn and be curious.” And the one right above it on the list is “invent and simplify” — and, you need to do both of those in order to be right a lot.

      The one thing I would add — you know, a lot of people say, well, Amazon, they either have so much money or so much time they can afford to do all these things. Long-term thinking doesn’t necessarily mean it takes longer to get to your end goal. You know, Amazon built a $100 billion business faster than any company. AWS got to 10 billion dollars in revenue from zero, faster than Amazon the retail business did.

      So, sometimes, to slow down to move fast — even with smaller organizations, [you] more than likely will get to where you want to be quicker if you take some of these steps. Typically, what you’re doing is you’re doing off-path, distracting activities, that by the way are taking away from your bottleneck resources — which are typically software engineering resources at a lot of organizations <Sonal: Yes, exactly>that are meant to build up long-term value.

      Bill: Yeah, and just to — the AWS thing is so remarkable. Think about that for a minute, because we just told you — I mean, what was it, Colin, 18 months, 24 months? How many months from go, before the team even wrote the first line of code?

      Colin: I mean, it was at least 18 months. And I did have software engineers after some of the meetings come to me and say, “Hey, can you remind Jeff that our job is to write software code, not documents?” and they were, you know, itching to go. It took a while to figure out what we should build, and that time was very well spent writing Word documents versus writing C code.

      Bill: And not only that, it’s empirical fact that it was well spent, because the company set the record for the fastest company to a revenue milestone by spending the first 18-24 months planning.

      Colin: And you talk about distractions, we did not know at that time what other people were doing. You know, web services were no secret. There were other companies who — by their own right — should have gotten there first. We didn’t know if someone would come out with a set of developer APIs at that point in time.

      Sonal: I know. That scares me thinking about that, actually. Like, almost two years planning, like, that scares me.

      Bill: Think how scared they were.

      Colin: But Jeff had the fortitude to say it’s not ready yet. This is not what we want to build.

      Bill: It’s not viable.

      Colin: You know, talk about what makes Amazon special, you can read these principles — sticking to them is sometimes quite challenging, either when things are going really, really well, or when they’re not going well, or when there’s uncertainty. These are not just posters on the wall. They’re woven into the DNA of everyone who’s been in Amazon for any length of period of time.

      Sonal: I’m just struck at all the parallels in all the things you guys are saying — because, essentially, every business today is a creative business. What really strikes me is — I’m not gonna make a comparison between podcasts and AWS, but I will say that I talk to a lot of podcasters [about] how to make their podcast stand out, differentiate. Like, how to do editorial strategy comes up a lot — and one of the things I constantly say is, if you can’t be first or leading, then you have to be very differentiated. It’s really interesting when you talk about the bottleneck resources, I think of things in terms of opportunity cost and return on energy, or what I call ROE. And, similarly, you have to pick which things you’re gonna do for the greatest possible hits, or you’ll never punch above your weight, or be heard above the noise. Which I think is so fascinating;

      We had Jeff Lawson from Twilio on the podcast recently, and he’s, like, you know, we need to give them problems, not just like specs and things to work on — and so when you describe that they’re like, “Uh, we’re spending, you know, 18 months writing planning documents,” that is treating software developers as creatives. 

      Colin: It also creates alignment for the teams then who will go out and build — because sometimes it requires more than one team. If they’re not aligned on what the problem is, they’re gonna solve different problems and those components aren’t gonna fit.

      Advice for startups

      Sonal: Right. I want to switch into talking about some specificities, some advice for startups. 

      Colin: One tool you can use for startups — and I’ve actually done this at other companies — if you’re trying to figure out what to build, you can write competing press releases, with different takes on the problem. <Sonal: Oh, I love that> <Bill: Right> And then, it becomes pretty apparent when you’ve got two or three or four different approaches that, we really need solution A. Or, I’m gonna take the first part of this solution and combine it with a great idea that came up in the second one — and this is actually what we want to build. So, it’s a lightweight way to crystallize your thinking and also get alignment.

      Bill: Yes, think about how inexpensive it is to write a one-page press release versus how expensive it is to build mockups. To Colin’s point, when you read them all, as a group, like, the best ones are gonna be clear.

      Sonal: You know again, this is where I just can’t get over how creative the book is, in terms of its application to all kinds of creative fields, companies big and small — because to me, both the memo strategy, the PR FAQ — and then this idea that you both shared of being able to write competing press release and then harness kind of the wisdom of the group — it’s actually about the power of narrative, for really helping instantiate things that you know when you know. I think a lot about how tools change our thinking and vice versa, and you guys are essentially describing these practices for how that plays out in organizations, especially as they scale.

      On this note, you have a section in your book — the subhead is “Better Coordination Was the Wrong Answer” — because that’s one of the common myths that people have as they scale is, we need to coordinate better. And in fact, it creates layers and layers of crap to deal with. People create entirely new roles, like dedicated chiefs of staff just to, like, you know, create stitching and seaming between teams. And it’s just the most ridiculous thing I’ve ever seen and heard. And I just wanna hear more from you guys, especially because a lot of listeners — and we’re talking about what happens when you scale and grow very quickly — you guys really did see this phase at Amazon.

      Colin: Yeah, this is a case where Amazon faced the same question that a lot of growing organizations do — we’re adding more people, it just seems like it’s taking longer to get things done — but came up with a different answer. Some companies would say, let’s build coordination tools, let’s collaborate better. And Jeff said, I’d love to eliminate coordination altogether.

      Now, in practice, you can’t eliminate it completely — so, you break up into loosely coupled teams. And this was a hard, hard problem to solve, because it required to change the way we built Amazon, technology-wise, to decouple it into what’s now services-based architecture. That was hard to do back then in, you know, 2000-2001, especially as you’re growing super fast. But then there’s also the organizational component too, about how do decisions get made? It was a multi-year effort, to be quite honest, but if you’re gonna go grow 10X and 100X, we’re not gonna spend any time building — we’re gonna spend all of our time coordinating. So, you know, nip it in the bud. And Jeff wanted Amazon to be a place where builders can build.

      Bill: So, the ironic thing is that we started off with the process that was the conventionally accepted traditional wisdom — it was brought in what we called NPI, new project initiatives — it was — it was horrible. I mean, basically it was another example of the process becoming a thing, where you had to come up with, like, what’s your new project initiative? You had to write it all up, you had to project what are the financials behind it — most of which were totally wrong, and guesses, like almost all pro-forma P&Ls are. And then put it in front of a big committee, and try to take it upstairs.

      Not only was this process a massive waste of time, but then you’d have these frustrating business reviews with the team saying, “Yeah we really need to go build X, Y, and Z,” and Jeff and the S team saying, “Yeah, I agree, you know go build X, Y, and Z,” — but they’d say, “Well I can’t, because I need browse to do this. And I need the team that works on the checkout — order pipeline, and they already have these four other projects they’re working on, so I’m just sitting here in line, and I can’t go build it.” And so, you’ve de-empowered your teams. The senior management, they become like referees of, between teams, who’s gonna go do what. And, frankly, it’s not much fun. So, this was a huge breakthrough for the company, was breaking down — you know not only, of course, breaking down the code into APIs — but then breaking down the teams into single-threaded focus teams.

      Colin: There are some roles that don’t actually fit too well in this type of paradigm. So, for instance, like a Chief Product Officer doesn’t really fit in this role, because if you ostensibly are responsible for making every product decision in the company — from what’s going on in the warehouse to what should the — how should the apps be built, to how can we decrease delivery time — there’s no one person who can be obsessed with all of those details. And so, that role typically doesn’t fit as you separate into these small, separable, single-threaded teams. The fallacy is [that] as your company grows, that Chief Products Officer isn’t really doing that anyway, because they can’t get that much high-quality information to make all of those important decisions. You do want the teams closest to the customers making those types of decisions anyway.

      Sonal: Yep. I call that “bare metal decision making”, like, who’s the closest to the metal of the thing. And that’s what I think is super valuable about what you just said, and you’re essentially describing these small units as, like, every team has its own mini – like GM, of every mini unit as a leader, and then every product — you’re, like, so close to the core in that decision-making framework.

      Bill: That’s right, the idea is for each one to be like a self-contained unit. And in search, that’s all engineers — but in some other business like my digital video business, it was like a combination of engineering and marketing people and people working with studios. But you have all of the resources you need — you don’t have these dependencies that basically slow you down.

      Colin: During this timeframe where we’re making the transition, we were using narratives, and one of the questions that we actually required was for the teams to put in “what things that are not under your control that you wish you had under your control” — and how <Sonal: Oh, great!> are you gonna organize and create APIs so that can happen? Again, this is work that’s below the tip of the iceberg of where Amazon really put a lot of effort into. How can you still grow and be as nimble and as agile as we were when we started out. And, it’s not easy — but, you know, it only gets harder, so you may as well start now.

      Bill: Yeah, and don’t take away from this that Amazon was some Nirvana world, where you never had to worry about coordination with other teams. It was just that we worked so hard to minimize the degree to which we did.

      Sonal: Yeah. I’m very fascinated by how organizations evolve in general, to be effective, and when you think of any large company, it becomes a complex system. And you’re essentially describing how modular, self-contained units can thrive in these complex systems. It’s a lot like evolution, really.

      Bill: And these pieces all fit together, because then we have to move back to like, oh, the reason that Amazon could do that is because those teams wrote narratives and PR FAQs, so they made it abundantly clear. If Jeff wanted to see what is this team doing, “Oh, here you go. Here, read this document” — and in, you know, two hours, he knew exactly what they were doing.

      Sonal: Right, he makes him the chief ecosystem officer, essentially, not just the chief slowdown officer.

      Shadowing Jeff Bezos

      Okay. So, Colin — so a question I have for you. It’s really unique that you were able to shadow Jeff Bezos, and be his shadow. And you know, I don’t wanna make this about the glorification of Jeff Bezos. I’m so not interested in that, because I think there’s just plenty of narratives out there — what I am interested in, however, is this question of what it takes for a CEO and a leader like that to evolve. And what you saw in shadowing him on that front, and then also the act of shadowing. And that itself as a mechanism for learning, mentorship, apprenticeship, if you will. I’m very fascinated by this whole thing.

      Colin: Sure. So, I mean, my role as Jeff’s shadow was primarily two parts. One was just to make him a more effective CEO on a daily basis. Making sure that the right issues are surfaced, that the people coming into the meetings would cover the right topics and have enough information to make the right decisions. And afterwards that it gets followed up on. So, you know, kind of bookending the day. But then the second and more important part, the longer-term part, was it was a training role. And the way Jeff put it is, I want us to be able to model each other, and you know how we would think in different situations.

      One of the enlightening things that I realized during my time with Jeff is what he chose to work on during the two years I was his shadow or technical advisor. And it wasn’t the biggest businesses at Amazon — about half of the time were spent on what would become AWS and Digital, and those businesses had revenue of effectively zero for, you know, those two years. And he told me more than once, you want your top leaders and your most impactful people working on your biggest opportunities. And that may be different from what your biggest current set of activities are.

      How Jeff changed during that time and just to become a better CEO — one thing he said is, he learned how to become a better operator, becoming more operationally efficient. Fortunately, that is a teachable and learnable skill. And Jeff had some great people at Amazon, like Jeff Wilke, you know, who’s a great operator. He’s the CEO of the Consumer Business. And now in his own right, he’s this great operator and insists on the highest standards — it’s one of Amazon’s leadership principles. He holds people accountable, himself included, by the way.

      And I would say that I also learned that sticking to these core principles is harder than it sounds, but the time when you need them most is the times when it’s easiest to ignore them. So, for instance, Amazon Prime, he made the call that, “Hey, we’re gonna go launch this shipping project in the holiday season.” And it was not very popular at the time, but when he explained his thinking, that you know customers were basically giving us a B minus on our 3-5 day shipping — even though we had just gotten reasonably competent and spent a couple of a hundred million dollars doing that — Jeff looked at it, you know, long term and said, “Well, we’re becoming a smaller and smaller share of the overall ecommerce industry, so we’ve got to make the change now.”

      So, it wasn’t that Jeff had this insight that comes once in a generation for Amazon Prime. He just stuck with the leadership principles and took them to their logical conclusion. When it was tough to do in the face of the holiday season, of what our quarterly results were.

      Sonal: By the way for the listeners, because we don’t obviously have time to go into the whole book, but, you know, half of the book — the first half is about the principles and these practices and mechanisms — but the other half is actually showing, through these very detailed case studies and examples that you both participated in or witnessed or oversaw firsthand, in this invention machine at work. And that includes the Kindle story, the AWS story, Prime Video, and what you just mentioned, Colin, which is Prime. And what’s really interesting in that Prime section — is that not only that Jeff had the wherewithal to push through — but what’s really interesting in the Prime program story is that it’s all the iterations involved to actually get it to what it is today. Because there was, like, a 1.0 and then, you know, the loyalty program it later became. So, I think that’s a really great part of the book, for those that want to learn more, and — Bill, anything to add there on what you saw on the evolution?

      Bill: I do, in fact. Jeff — I remember Jeff, at least more than once, talking about the way a leader needs to evolve as the company grows. And I think about this frequently, which is — he said, at the beginning, the leader needs to really focus on what. Then they really need to focus on how. And then, eventually their focus really just becomes who. <Sonal: Wow.> What is, you know, what is our business? What’s our product, what are we building, what are the details of that? How is, what processes? How do we do the work? What is the filter, the lens through which we make decisions? And then who, of course, is who are my leaders? Who, how have I — making sure that I assembled the right team — and in doing so, how do I delegate responsibility to those people so that they can carry out those details?

      That is a classic and challenging transition for any entrepreneur/owner, who starts off being in control of every detail, and that they have to slowly let go of those details. And then they have to figure out how they put in place the right mechanisms to be able to properly audit the work of the teams. And that’s what, you know, we tried to describe in the book, is actually this management science, frankly, that Jeff and the team developed to really solve this problem.

      Sonal: “Working Backwards: Inside Stories and Secrets from Inside Amazon” by Colin Bryar and Bill Carr. Thank you so much, you guys, for joining the a16z Podcast.

      Colin: Thank you.

      Bill: Thanks, Sonal.

      • Colin Bryar

      • Bill Carr

      • Sonal Chokshi is the editor in chief as well as podcast network showrunner. Prior to joining a16z 2014 to build the editorial operation, Sonal was a senior editor at WIRED, and before that in content at Xerox PARC.