The Truth About Silicon Valley Monopolies

Let me tell you a story. For decades, Silicon Valley has been the most competitive place in the world. As soon as you launched your great idea, 10 other entrepreneurs would be right behind you with nearly identical products. As soon as the iPhone launched, Android wasn't far behind. When Uber started taking over, investors scrambled to fund Lyft. And even after Facebook became dominant, Twitter, Snapchat, and Instagram all fought to steal attention. Most of the time, this was driven by entrepreneurs just wanting to make a better product. But sometimes it was just because investors wanted a piece of a lucrative new market and they couldn't get shares in the leading company early enough. But all that's changing. Investors are now colluding to create a single monopoly in each new market that emerges. And they're killing startups in the process. Consider Stripe, which for the past decade has been the fastest growing fintech company in Silicon Valley. Most startups would be lucky to secure investment from a single, single top tier venture capital firm. But Stripe has 17 backing it, and this creates a problem. See, when a venture capital firm invests in one company, they can't invest in direct competitors. So all of a sudden, if you want to start a Stripe competitor, you simply can't. It gets worse, though. See, Stripe was a part of the prestigious accelerator program Y Combinator. And because Stripe has done so well, they can now prevent new fintech companies from ever having a chance to enter the program. And it doesn't stop there. Many companies that sell products to small businesses get their start by launching on Hacker News. It's a massively popular website for startup announcements. But because Stripe is so powerful, they can kill any positive stories about competitors. This sinister plot is crushing the competitive spirit of Silicon Valley and stifling new innovation. There's only one problem. None of this is true. See, this story is from a viral Twitter thread posted by the founder of a Stripe competitor. The author's name is Ryan Breslow. And. And although it's easy to debunk most of his claims, I still think that we can learn a lot from this story. Ryan makes three key claims in his thread, so let's go through them one at a time. First, he argues that Stripe deliberately raised money from all the top tier Silicon Valley investors in order to block competition. And no one can deny that Stripe does have an incredible roster of investors. I mean, come on, even Elon Musk is an investor, and he basically never makes angel investments. But can this really block new companies? Well, markets don't usually work that way. If Stripe's only protection against competition was having lots of cash in the bank, other investors would flood into the sector in order to get a piece of the action. And in practice, that's exactly what's happened. Ryan has been able to raise over $1 billion for his company Bolt, which by all accounts is still very early stage. So it doesn't seem like finding investors is a real problem. And startup funding is at a ridiculous all time high right now. We'll dive into these macro trends in a minute, but we still need to talk about Y Combinator. In his thread, Ryan claims that Y Combinator turned him down because he was competing with Stripe. But YC funds direct competitors all the time. In fact, it's one of the main complaints about recent batches. Investors are constantly posting snarky tweets about how Y Combinator companies look the same and there are too many direct competitors in each batch. The idea that YC has held back on funding Stripe competitors, It looks ridiculous. Once you take one look at the list of most valuable companies that have come out of YC, 23 of the top 100 Y Combinator companies compete with Stripe in some way. Now, many of these companies operate internationally, like Razorpay in India. But Stripe is already a global company. So make no mistake, these companies are in direct competition with each other. And other Y Combinator companies are building businesses in America that go head to head with Stripe. Like Modern treasury, which offers banking as a service and competes with Stripe's treasury product directly. And we can't forget about crypto either. Lots of smart people argue that cryptocurrency poses an existential threat to classic fintech in the long term. And YC funded one of the biggest crypto exchanges in the world, Coinbase. Ryan may be wrong about his claim that YC doesn't fund competitors, but he didn't stop there. He went on to accuse Stripe of manipulating Hacker News into killing stories about his company. That's a serious allegation, so let's look at the evidence he provides. Ryan claims that on April 18, 2018, he submitted a new product announcement to Hacker News. Things were going well at first, and the post was getting traffic. But then all of a sudden a similar post about Stripe appeared and his post died off. There's only one issue with this, though. The Stripe post actually went up first a full two hours before Ryan posted, and anyone can see this evidence through the timestamps and the Internet Archive. If you dig into the actual substance of the two articles, it's easy to see why his post failed to take off. It was Written for a very stodgy corporate audience. And most people who browse Hacker News are software engineers. I mean, come on. The site is called Hacker News for a reason. Hackers like seeing deeper dives into how new technologies actually work. And this gets to the underlying issue here. Ryan's story certainly stretches the truth in pretty much every way possible, but it did do one thing right. It got him a ton of attention, and that was his real goal here. The thread got nearly 10,000 likes, and he basically became the main character on Twitter for the entire week. Sure, lots of folks laughed it off, but plenty of people did take it seriously, and they might be more likely to become Bolt customers. Now, marketing is a bit of a dirty word in Silicon Valley. Everyone wants to build a product that is so incredible that they don't need to spend any money to grow their customer base. But that's a rare situation. Drawing attention is incredibly important, and if you can get people talking about your product for free, that's going to lead to hyper growth at the early stage. And even though Stripe has a great product, this kind of free content marketing was incredibly important. When they first launched, they weren't posting conspiratorial Twitter threads, but they were thinking about how to capture the attention of developers who had spent years struggling with awkward payment systems. The core of Stripe's early content marketing strategy cycle centered around just seven lines of code that could be used to quickly integrate payments into any website. It's easy to think of this as purely a product innovation, and it was. But by distilling their integration down to just seven lines of code, they immediately had a soundbite that could go viral on sites like Hacker News. Back when Stripe first launched on Hacker News In September of 2011, they flew straight to the top and instantly received hundreds of positive comments. The landing page they had designed to made Stripe's value proposition incredibly clear. And more importantly, it was designed to appeal to developers. There were already plenty of established players in the payments market, but the Collison brothers had discovered a secret that would allow them to disrupt all of their existing competitors. They knew that developers had an incredible amount of control over which technologies and services would be used at the companies where they work. Most senior executives don't understand code, so they just want something that works. Older payments companies thought that they needed to sell to those non technical executives in order to sign contracts, but the Collisons knew that developers were really the key to hyper growth. Today, Stripe is dominant and Ryan Breslow wants his company Bolt to unseat Stripe as the number one player in payments. So he's taking a page out of Stripe's playbook and trying to attract attention as aggressively as possible. And even though he sometimes steps over the line, he's done a great job of distilling Bolt's key key value proposition into a digestible sound bite. See, Bold is laser focused on one click checkout. This technology was pioneered by Amazon and dramatically speeds up customer interactions, all while increasing conversion rates. For years Amazon had a patent on one click, but now it's an open playing field. There's a problem though. See, Stripe actually has a one click checkout product and they launched it way back in 2014. But marketing taglines are incredibly sticky, so today many people don't even realize Stripe has this functionality. Bolt, on the other hand, has built their brand around one click from inception, so that's what they're known for. But there's a bigger question that we need to answer here though. Why is Ryan pushing boundaries so aggressively here? In general, social media rewards controversy no one wants to comment on a post that they feel indifferent about. So creating content that strikes an emotional chord is key to virality, but it has its limits. If you go too controversial, you'll face a backlash. And that's what happened to Ryan. Shortly after posting this thread, lots of prominent Silicon Valley investors called him out for twisting the facts and smearing his competitor. This type of content marketing can be incredibly rewarding when it pays off, but it's also very risky. So why is Ryan doing it? Well, I think it has a lot to do with trends in the broader financial markets right now. See, startup valuations are at an all time high and that's a double edged sword for entrepreneurs. On the one hand, it's great to be able to raise millions of dollars to go build the next generation of technology, but on the other hand, these valuations come with massive expectations. And if you don't deliver on your financial forecasts, you'll be under a lot of pressure from investors. Now to be clear, there's nothing wrong with a company being worth billions of dollars as long as they can back that up with big sales numbers and high monthly growth. But everyone seems to think that Bolt is simply too small to justify their multi billion dollar valuation. Startup valuations are often driven by revenue multiples. If your business is growing quickly and you're making $10 million, you might be able to raise money at a $100 million valuation. That's a 10x revenue multiple, and you won't see that often in public Markets only at the early stage, when companies are doubling or tripling revenue every year. Investors are basically betting that the growth will continue and the company will be worth even more in the future. This normally is a a problem during normal times, but today we're living in strange times that are anything but normal. Interest rates are at all time lows, and that means that investors have to hunt around for riskier investments in order to earn positive returns. Money typically invested in low yield bonds might flow to higher interest rate debt. Dollars invested in debt shifts over to public equities. And now we're seeing hedge funds crossover into startup investing, all in search of higher returns. These cascading effects have created a glut of funding for new companies. And now there is $900 billion allocated towards startups. This is across several stages. Traditional venture capitalists have $440 billion and growth focused private equity firms have 310 billion. There's also 155 billion sitting in SPAC funds ready to take startups public. It's an unprecedented amount of money and it's causing the number of UN unicorns to skyrocket. Typically, reaching a $1 billion valuation is an incredibly rare milestone. But last year, the number of new startups valued over $1 billion more than tripled valuations are getting absolutely insane. And you don't have to take it from me. One of our good friends invested in a company seed round at a $1 billion valuation. Raising money at astronomical valuations might seem great in the moment, but it creates a huge amount of pressure. And I think that's what's driving Ryan to get so aggressive about his content marketing strategy. He has tons of investors who need Bolt to absolutely dominate payments and quickly or else they could lose money. So, as much as I disagree with the core points of Ryan's thread, I have a ton of empathy for the guy. He's clearly a great founder, and there's no question that Bolt is a real company that helps speed up customer checkouts. One of the biggest reasons why startup valuations have gotten so high is because hedge funds have been abandoning their traditional strategies and crossing over into startup investing. Tiger Global just raised a massive $11 billion venture fund, and it's going to have a huge impact on Silicon Valley. I analyzed Tiger's strategy and boiled it down to three key takeaways in this video here, so watch this one next. Thanks a lot.