Takeaways

Operators should learn finance and investors should learn empathy
The most popular celebrity could one day be a digital one
Employment can be thought of as a legal way to own another person

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What can operators and investors learn from each other

With WeWork’s fall from grace, there's been a realisation that companies actually need to make money [2]. I've also seen comments that operators would benefit from basic finance knowledge. This article about what operators can learn from investors, and vice versa, comes from Brent Beshore of the investment firm adventur.es:

WHAT OPERATORS CAN LEARN FROM INVESTORS

Capital efficiency and capital allocation matter

Growth is not necessarily good. Growth can even be value destructive, depending on your cost of capital and return on it. The book "The Outsiders" recently popularised the concept that a CEO's main job is capital allocation, so you're now seeing more focus on this. For the less financially experienced, this is saying you need to know how much your funding costs, what your expected return on investment is, and how efficiently you are expanding.

Circle of competence will limit you, but keep you alive

Nobody would assume they can conduct surgery without the proper training, yet everyone and their parents (literally) assume they can be above average investors. Perhaps it's due to the paradox of skill? I don't want to discourage people from trying new things, but be wary of overextending.

WHAT INVESTORS CAN LEARN FROM OPERATORS

All businesses are loosely functioning disasters, and some are profitable despite it

Many investors lack operating experience due to the recruitment funnel of "banking to private equity to hedge fund". Because of this, they model businesses with spreadsheet math and lack the context for why their activist proposal would be difficult to execute. The better investors acknowledge their knowledge gaps and seek ways to have more empathy for operators.

Outsized returns require divergent thinking and action

Investors like to believe they are bold risk takers, though I doubt this is the case since everyone's incentivised to be with the consensus [3]. True contrarians are, by definition, rare. And of that rare group, even fewer are right.

Digital celebrities, so hot right now

I heard a catchy but strange song on Spotify and went to youtube to look up the artist. Turns out, it was by a digital celebrity, Miquela [4]. Michael Dempsey elaborates on this digital celebrity phenomenon:

The vast majority of these characters today live on social media and post their day-to-day lives and thoughts with the world. Miquela (one of the most famous) has done a shirt collab, released music, and gotten in fights with other digital celebrities.

Many people might find this weird. However, think about your average interaction with a "real" celebrity. Have you even seen them in person before? Will you? For all intents and purposes, they might as well be a digital one, since you'll never come in contact with them. What if they’d secretly replaced a member of the band you listen to?

Michael touches on Hatsune Miku, a popular digital idol that is part of a $100 million market in Japan alone. You can read more about the history of it here, and below is a picture from a concert where it performed. Yes those are actual people dancing to a hologram.

digital celebrities could lead to a world where digital identity layers taking on physical traits is more socially accepted.
Human celebrities could also utilize their likeness to create new alter-egos or digital manifestations of themselves that live online
As this segment of the market matures, I do believe the idea of “digital vs. human influence wars” will become more of a reality.

Whether it be your carefully curated social media posts, online gaming avatar, or forum identity, we've all created some form of digital personas. Could a fully digital celebrity one day have enough influence to significantly affect real world events? If Hatsune Miku asked its fans to vote for a candidate, would they? I think there's a 5% chance a real world event is affected by a digital celeb in the next 3 years, but 50% chance in the next 20.

How to legally own another person

Nassim Taleb discusses the nature of work and organisations [5]

Why were [freelance monks] banned [by the church]? They were, simply, totally free. They were financially free, and secure, not because of their means but because of their wants. [...] Complete freedom is the last thing you would want if you have an organized religion to run. Total freedom is also a very, very bad thing for you if you have a firm to run

Most firms give some amount of freedom to employees. However, they have a level of expectations for what the employees are supposed to do and deliver; they're not paying them to ignore their work and write a newsletter instead [6]. Firms want control.

So employees exist because they have significant skin in the game – and the risk is shared with them, enough risk for it to be a deterrent and a penalty for acts of undependability, such as failing to show up on time. You are buying dependability.

Taleb gives an anecdote comparing a contractor vs an employee. If you had a contracted pilot for your summer holiday flight, she could cancel on you if she got a better offer. The employee pilot will be more reliable since she's incentivised by her regular paycheck.

Taleb then defines "company men" and "companies people", whose identities are intertwined with the places they work for:

A company man is someone who feels that he has something huge to lose if he doesn’t behave as a company man – that is, he has skin in the game
A companies person is someone who feels that he has something huge to lose if he loses his employability
The employable person is embedded in an industry, with fear of upsetting not just their employer, but other potential employers. An employee is – by design – more valuable inside a firm than outside of it

Many people feel tied to the place they work for and change themselves to fit in with the company culture. The combination of wanting to remain employed at your company and employable generally in the industry incentivises you to dress a certain way, talk a certain jargon, and behave a certain stereotype [7]. This works to your advantage when the company or industry is still around, but to your disadvantage when you're laid off or the industry is in decline.

I've realised that an employee's work generates value mostly for the employer rather than the employee. You're trading future upside for employment and reliable paychecks. This isn't necessarily bad [8], but you need to understand that this is the implicit trade off you're making. Also keep in mind that you're expendable [9].

Slave ownership by companies has traditionally taken very curious forms. The best slave is someone you overpay and who knows it, terrified of losing his status. Multinational companies created the expat category [...] Why? Because the further from headquarters an employee is located, the more autonomous his unit, [hence] the more you want him to be a slave so he does nothing strange on his own

Taleb explains that in today's increasingly specialised world, a business can shut down when one step in the process is mishandled. This is why things appear to run more smoothly and efficiently than in the past, but errors are costlier [10]. Hence, businesses want to buy dependency, thus hiring employees that have a lot to lose should they be unreliable. In his view, the companies essentially legally own their beholden employees.

Taleb discusses two exceptions to this:

One type is the salesperson whose resignation would cause the loss of business, and, what’s worse, he can benefit a competitor by take some of the firm’s client
The other one was the trader about whom only one thing mattered: the profits and losses, or P/L. […] could get so disruptive that they needed to be kept away from the rest of the employees. That’s the price you pay

If you're an employee judged by a single metric that you have direct control over, you have more independence, and with it more upside and downside. You become closer to an independent contractor within the company rather than an employee. Again, this arrangement works for some and not for others. You can be the most popular person at the firm one year and then fired the next.

The alternative to employment is to start your own business, like what Lindsay Burton did with Kayo conference series (an awesome series btw). Being a fully independent contractor exposes you to the full upside but also downside. Many people like the idea of independence but don't actually want to deal with the frustrating trivialities involved.

People whose survival depends on qualitative “job assessments” by someone of higher rank in an organization cannot be trusted for critical decisions.
So although an employee is here to prevent an emergency, should there be a change of plan in anything, the employee is stuck. While this paralysis can stem because of the distribution of responsibilities causes a serious dilution, there is another problem of scale

I've found that many decisions made within an organisation are to either cover someone's ass or to support an individual's agenda, rather than what may be good for the company as a whole. This makes sense given the incentive structure we've discussed above. Employees are not encouraged to take risk, and the companies that do so are the exception [11].

Is the answer to all quit and run our own business? Clearly not, since most of us would fail. However, if you are an employee, know what you’re giving up and getting in return.

Footnotes

Gaz Regan has a cocktail newsletter if you're interested
Ok, so this wasn't an entirely fair critique. If you're incentivised to grow orders and are valued on a multiple of revenue rather than profit, the logical thing to do would be to sell 1 dollar for 10 cents and book as much revenue for as long as possible. I'm not saying it's sustainable or smart, but it's rational why so many companies have grown this way. I haven’t written about WeWork since everyone already has; see Matt Levine or Byrne Hobart’s articles if you’re interested
People would rather be with the consensus and wrong rather than against the consensus and wrong. For more details see this article by Tren Griffin
I'm predicting someone judging me on my music taste now
Sent in by friend and reader Tian
No, I do not do this. Really.
The realisation that you can do the same amount of work in a T shirt and jeans vs a suit must have been revolutionary. In some ways though, it was! Cultural change takes time. This applies to all places - for all their spiel about acceptance, try wearing a suit in a tech company and see how many snarky comments you get.
I'm less critical than Taleb here of employment. Everyone has their circumstances on why they're doing what they do. Hey I need to pay rent too.
Applies even to founders and majority control shareholders in a business, as seen by Uber and WeWork. The survival of the company (and investor money) is the priority above all.
For more detail, see the O-ring theory of development in the "Other links" section
Two notable exceptions are Stripe's "What is the most ambitious version of this idea" and Amazon's "Disagree and commit" philosophies. Many companies claim they encourage risk taking but actually don't want the associated volatility.
I’ve mentioned this before, but some of the design and layout for the newsletter is inspired by other newsletters, such as The Profile

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