This is a lightly edited version of my monthly newsletter. Sign up here
- The way you imagine things could be drastically different compared to most. Take the 10 second test to find out how!
- IPO pricing is difficult and success is hard to measure
- The direct relationship newsletters provide is game-changing, and I think the industry has huge room for growth
How well can you visualise something?
I just learnt that people visualise differently. Take this 10 second test:
I’m at a 3 to 4, whereas my cousin swears she’s at a 6 . This goes a long way towards explaining my confusion whenever people were telling me to visualise things… I never could get the detail and clarity that everyone else seemed to be experiencing.
For those people that score a 1, you likely have aphantasia, a condition in which you’re unable to visualise mental images. There’s skepticism over whether it’s real, but the research seems convincing. The initial paper studied a person who initially had high visual memory and then lost it. Since he was able to talk about the distinct difference between his two states, I’m inclined to think this is a real phenomenon. The research estimates 2% of the population having aphantasia, a small amount on the other extreme (hyperphantasia), and most people are in the middle with good visualisation ability.
The newer paper has a questionnaire, more scientific than my simple test above, that you might want to check out for confirmation. I’m inferring that a score of ~30 or lower indicates aphantasia, and a higher score close to 80 indicates hyperphantasia .
Was an interesting day when I realised the way I think is completely different from how most people think! The strange thing is I could have gone my entire life without knowing, since it’s not something you’d discover on your own. Combined with the low occurrence rate, no wonder it’s taken so long for the scientific community to realise the existence of aphantasia. What’s even stranger is that despite this literally life-changing knowledge, I don’t see how anything changes for me. It doesn’t seem like you can learn to get better, implying we’re all stuck at whatever we grew up with (or were born into?). It also doesn’t seem like there have been many negative side effects thus far . Knowing about this has made me less confused whenever I read or hear people talking about using my imagination though! Do let me know how you end up scoring!
What goes on behind the scenes of an IPO?
People hear about IPOs frequently, but usually are less aware of what happens behind the scenes. a16z recently wrote a post about the process, and I’m following up with some of my experience. As a reminder, none of this is investment advice. Ever.
[The S1] also serves as a marketing document positioning the company and its role in the marketplace, because the company has to avoid public promotion during the waiting period and follow strict rules around what they can and can’t say on behalf of the company. But behind closed doors during this time, the company does pre-pitch the company story and financials to potential investors.
The “dumb” retail investor buys into an IPO because they’ve heard the stock will do well. The “smart” retail investor does diligence on the S1, comes up with their own financial model, and then decides whether they should participate. Most retail investors assume there’s a level playing field, since the S1 should show all the important publicly available information and there shouldn’t be anything they’re missing out. This has never been true. Professional investors meet with management all the time, even pre-IPO. They don’t get material non-public information from these meetings, but I can assure you that nobody would waste their time doing management meetings if they weren’t helpful in some way.
With the order book in hand, the underwriters (banks) will allocate the shares to institutional investors. As part of this, they — and the company — want to minimize IPO allocations to investors that have a track record of selling the stock too quickly. They don’t always succeed in doing this, but that’s OK, since some selling helps make a “market”.
There’s a capital markets team in the investment bank that works together with the company to decide how much stock to initially give out to the interested investors. Investors could ask for 10 shares at a $40 IPO price, but just 5 shares if the IPO price goes up to $45. Investors frequently ask for more shares than they think they’ll get, leading to an offering being “oversubscribed”. Nearly all offerings are oversubscribed, so if you read the news reporting that, just ignore it. The intent during this bookbuilding process is to determine what price the company should IPO at, how much “real” demand there is, and who to give it to. I think regular IPOs usually allocate ~80% to institutional clients and ~20% other (Winnie, correct me if I’m mistaken here). Importantly, you and I don’t get to buy at the IPO price, but only at the price the stock starts trading at, which is usually higher.
People often assume an IPO means the entire company is going public — just because those companies are required to open their books and report their earnings on a quarterly basis — but actually no more than 10%-15% of the company is typically being sold. Such limited supply can have outsize impact in a short time frame, especially if there’s great demand.
No company I know of has given 100% of the company away during an IPO. I suppose it’s possible, but that would be strange and probably a red flag . The price is usually set to have a first day “pop” as a form of reward to the shareholders that supported the company and to also generate positive publicity and good vibes for the company employees. Critics of the IPO process think that this “pop” leaves money on the table, which is true, but most employees would (irrationally) prefer to have the stock IPO and keep going up rather than the reverse.
So how to gauge the success of IPO after the “pop”? Beyond Meat is trading today above $100. Does that mean the company left money on the table? If you do the math, the company raised about $240 million from the IPO. Had the stock been priced at the first-trade price ($46), however, it could have raised nearly double that amount — and well more if it had priced at the closing stock price. Then again, people might not have invested as much at that price.
To further explain the “money on the table” issue, BYND priced at $25, meaning institutional investors (not you and I) bought it at $25. When it started trading, someone (could be you or I now) put in an order at $46, and a holder of the share was willing to sell at $46, hence filling that order. Some people would argue that if there was demand at $46, perhaps BYND should just have priced at $46 instead and gotten more cash from investors. Bill Gurley would argue to use a direct listing instead to match all demand and supply.
I agree there’s money left on the table, but think about the alternative. Suppose BYND priced at $100 right from the start. That leaves nothing on the table, but now there’s a much higher chance the price declines after the IPO. And if it does decline, perhaps the price momentum keeps sinking it lower. We don’t know how much of the current trading price of BYND is due to momentum, and it seems to me it could have gone the other way as well. The general public still thinks of FB, GOOG, and Uber’s IPOs as failures due to the lack of a “pop”. You might argue who cares about the general public, but employee morale within the company is affected as well. My point here is there’s currently less incentive for companies to get pricing exactly right, and who knows what the right price is anyway ?
Why are newsletters becoming popular and where is this trend going?
After I published last month’s newsletter, a16z led a $15mm funding round in Substack, the platform I’m currently using to send this . I’m going to talk about why a16z was interested in Substack and where I think this trend is headed.
From a16z’s press release:
Since then, the internet has opened up new opportunities for media producers. A writer, streamer, or podcaster can now reach an audience of millions. Powerful tools have been created to make it easier to self-publish any format of content. […] But most of this is driven by advertising-based business models from the 1800s — the technology may have changed, yet the economic model is largely the same.
Stratechery has written before on how ad networks facilitated the growth of advertising on the internet. The move from print media to digital media implied that the marginal cost to serve a consumer was zero. This reduction of the barrier to entry led to an influx of free content online, a trend which has still persisted but evolved into different forms . Because of the low cost to produce, high degree of substitutability, and high degree of fragmentation in the suppliers of content, content producers assumed that people wouldn’t pay for content, and that selling ads was the better business model.
As the CNBC article notes though, a few factors have led to the rise of alternative, subscription based models instead. The dominance and effectiveness of google and facebook in digital advertising means that advertising on traditional content producers such as news sites has become less effective. As an advertiser, I’d rather spend more of my ad budget on where 60% of the internet is going to pass through and get a higher ROI on my ad spend.
The stranglehold on traffic by Google and Facebook also potentially result in a cost to acquire the marginal user, implying that the marginal cost to serve is no longer zero. For the normal media site, you’re now facing a scenario in which you have declining organic traffic and a reduced relationship with your customer, but still face the problems of a glut of free content by your competition that makes it hard for you to differentiate.
As a result, we’ve seen most content producers reliant on ads suffer, even as the overall digital market continued growing. In response, some pivoted towards subscriptions, such as the niche tech news site The Information. The WSJ, Washington Post, NYT etc have all bought into this trend , hoping that their quality content will be enough to convince people to pay. Some might say their supposed success show that subscriptions are the way to monetize moving forward. I agree that subscriptions will continue growing, but am more uncertain about how scalable they can be.
today, a direct relationship between creators and audiences can unlock a new generation of professional writers and content creators. That’s where Substack — which is building the leading subscription platform for independent writers to publish newsletters, podcasts, and more — comes in.
The key to monetization is having that direct relationship to your audience. If you outsource that to Google or Facebook, you’re choosing to be intermediated. The newsletter trend is interesting precisely because there’s no chance of being intermediated, short of email providers starting to charge for the service . As a writer, it feels more intimate compared to publishing publicly on a website, linkedin, or medium. You feel better since your readers have opted in to the service, which implies that people actually want to read your ramblings 
Most importantly, Substack handles all of the tech powering a subscription-based platform for writers to engage with — and grow — their audiences.
I’ve written before about why I ended up choosing Substack. I’ve been
spamming emailing friends random thoughts for years now, and they occasionally were kind enough to reply letting me know I wasn’t just writing into a bleak empty void of nothingness. However, as the email list grew, I needed a more scalable and professional looking solution. A newsletter service allowed me an easier way to manage email signups, easier way for people to unsubscribe , and an overall better looking experience on web and mobile. It isn’t perfect, and I have a bunch of suggestions, but I’ve liked the move so far.
Where does this trend go? Substack grew from 11k paying subscribers in 2018 to 50k paying subs now, and the number of newsletters I’m subscribed to has grown over the years too . I’m 80% certain we haven’t hit peak newsletter yet, and Substack can double its paying subs. With millions of people still paying for dial-up internet, I’m confident that the market size of people willing to pay for content on a niche topic can continue growing. I do think the content has to be focused on a niche though, similar to how people expect Matt Levine or Morgan Housel to write about finance and would unsubscribe if the content changed topics. Only a few mainstream publications such as the WSJ are able to charge a paywall, so we might see a combination of 1) large mainstream publications having to do ads and 2) niche quality publications doing subscriptions.
People want to read good analysis on issues they care about, and a small subset of that would be willing to pay to support the creators. Looking at the average Patreon earnings, the average payment is in the small ~$10 monthly range. I think average payments don’t grow significantly, but the amount of paying users will. ARPU flat and DAUs accelerating, if you want to put a financial model together.
In the meantime, I’m treating all of this as an experiment to see how much I like writing. Given the potentially high upside and relatively low downside, I agree with others that it’s worth trying to write and publish your thoughts. Writing has helped me better understand concepts, connected me with interesting people, and given me something to procrastinate on instead of doing work. I hope to continue doing so for quite some time. As always, feedback welcome!
- I haven’t yet ruled out that this is a highly elaborate prank of hers… I also realise this is far less interesting for people who have normal visualisation ability, compared to people who have low visualisation ability and have wondered what’s been wrong their entire lives
- The 2 graphs on pg 9 have an obvious break around the 32 VVIQ mark, and the highest possible score is 80
- Besides the rather upsetting realisation I could never reach the same capability of vivid imagery that most people were capable of, that is.
- If the management team and former shareholders don’t want to participate in the future of the company, something makes me think there’s likely going to be no future for the company.
- Is Tilray worth $200 USD or $40 USD? Who knows?
- I’d like to take credit for Substack and Cameo both raising up rounds after I wrote about them, but somehow doubt that I’m actually that influential.
- For example the blogging wave to the facebook wave to the instagram wave to the tik tok wave. People feel empowered to create and publish their own content for (hopefully) the world to see, in a bid for fame or status.
- In various ways, such as a freemium model, limited paywall, hard paywall etc
- Unlikely, but given Superhuman’s popularity, there’s a non-zero chance?
- Whether out of sheer pity or genuine interest is a separate matter
- I used to mention this more often, but I really don’t mind if you unsubscribe if you’re not interested! I don’t like spamming people
- Some newsletters I’m subscribed to are Movements for micromobility, The Profile for long-form people stories, and The Diff for interesting non-consensus takes
- Full disclosure, I’m an investor in the startup
- Friend of a friend started a tennis service in NYC 
Some of you may know I like making drinks on the side. I asked a friend to take some photos recently and love how they turned out. Check out his photography site if you happen to need an NYC based photographer!
- Others write about Libra
- “We’re told that science self-corrects, but what the candidate-gene literature demonstrates is that it often self-corrects very slowly, and very wastefully, even when the writing has been on the wall for a very long time,” I’ve written about the replicability crisis before here
- Alternative measures of health such as grip strength and pushup capability might be more effective than traditional measures
- “Growing number of car-sharing users don’t rent cars for driving”, via the Movements newsletter for all things micromobility
- “The coaching interventions make some students realize that more effort is needed to attain good grades but, rather than working harder, they settle by adjusting grade expectations downwards.” I wonder if this generalises to most of work and life outside of school. Once we learn how hard getting good at something is, we lower our internal expectations? Makes me think about this article on ambition, which I want to explore in a future newsletter.
Addressing some feedback I’ve gotten below. Yes I do listen! Feedback is good! Send more!
- “Add a banner since I don’t remember who you are” - Done! Thanks to the people who voted for the font choice. The font holds sentimental value since it’s from Before Sunset, one of the best films I’ve ever watched. Check it out, though it’s the second movie of a trilogy so best to watch the first movie beforehand.
- “You’re way too long and boring” - Added a takeaway section right up top!
- “Can the footnotes have popup text or be linked” - Unfortunately I can’t fix that due to limitations of the newsletter service, but I agree that it’s a good feature to have.
- “Do you write more often than monthly?” - I do shorter weekly posts, let me know if you want to get those since I don’t want to spam this group weekly
- “Can you aggregate all the links in the post at the bottom?” - I’m too lazy to do that for now.