The $100B Niches Hiding Inside Payments

22:52And my wife, who's pretty much always said, you know, the hardest you've ever worked and the happiest you were was during the anti-fraud days at PayPal when we nearly died or we nearly died. She was there as well. Those were the days when you looked exhausted, but you actually were obviously very happy. And, you know, she was telling me, I know you swore off doing financial services. I know you're never going to touch payments again, but just this once, give it a chance. And that actually had some influence as to my responsiveness too, because you're working on a payments company. And part of my reluctance to deal with trial pay was like, I can't handle another near payments company.

23:35Like I went into social media for a reason. I don't want anything to do with this stuff. And so as I was slowly getting reeled back into working on payments, we started talking about this, the sort of a social BML was one of the sort of shorthands we used discussing what it would be. The general store analogy was interesting because at the same time, I actually remember which one of us knew this because you also speak Japanese and this could be the thing you told me, but I remember reading about social credit in different economies. There's a notion of just pay me later or pay me next time in Israeli grocery stores, which is still common today.

24:13If you're checking out in Israel, apparently in a small enough town, you can just show your bag to the cashier, they'll remember, and then they'll get you next time if you forgot your money. This is even more formalized in Japan, where until very recently, you would give your business card to the store keeper, even if they didn't know you. If you had a business card, they would write what you bought on the back of it, and that was your total. And the notion of, you know, just put it on my tab is a thing that's, you know, obviously fairly American concept, and so on. And so we were converging on this i was talking to a startup at the time as kind of just learning about the industry that was trying to build a social credit score kind of modeling it on the chinese social score which is used for a lot more than than credit obviously so we were swirling around this idea of payments and solving the i don't have my credentials with me but i still need to get through this like another sort of metaphorical version of this was i'm watching tv there's just really cool ad back in the day when people had advertisements in between things in TV.

25:15And I really won the thing that was promised to me at the price that was promised to me. But I could do it on my phone, but I'm definitely not going to get off my bed. And so like what if there's some area under the curve that you can capture by bringing these transactions closer in time and improving conversion, obviously. So that's the kind of the swirly origin story.

25:39A lot of it, I think the two of us had a slightly different version of what would be fun. So I think as a payments guy, you were mostly thinking like, let's go do some payment stuff. As a person recovering from doing lots of machine learning in a service of social media, which was, you know, good and well, but wasn't really what I was meant to do. And lusting for the days of doing machine learning to fight fraud. My MO was, I just want to build a really cool credit score. and then someone else will take care of payments like lending payments. I don't really know anything about it and I've done payments, don't need to do lending.

26:14But building a really cool score, that would be amazing because I remember just the reams of data we had access to at PayPal. We could maybe get some data, maybe we could buy some data, we could mine Facebook for data. I'm trying to get in touch with Mark Zuckerberg to see if he might give me some of his data. And so a lot of that was sort of in my head while you were like, I just want to close some transactions. I think that maybe if there's any difference between the motivations. You were much more motivated by, let's go find a merchant. Well, but the similar motivation was like, you know, trial pay.

26:43I think we were in the throes of selling to PayPal, but then they left me at the altar. Not your PayPal, but many generations later PayPal. And I was like, I never want to start a company again. This is so painful. And you had been in the throes of that as well. So it was also like, let's get this thing going. And we'll hire other, but then you introduced me to Nathan. and Jeff, and we kind of formally incorporated. But I also, like the other thing that I distinctly remember, and you remember this in a very negative light, because it's PHP, but we had a meeting. I kind of think of the origin of being the Allen and Cupra conference in 2012.

27:23Oh, yeah. I don't find a negative thing. No, no, I know, but it was funny. So we have this meeting, like, so we're going through the list with San, remember, your old chief of staff, right? So we're going through the list, And it's like, oh, we both know Jim McCann, who's this very friendly guy who used to be on all the commercials for 1-800-Flowers. Remember, 1-800-Flowers, you can order flowers. Order it right now for me, or whatever the commercial was. So we ping him to get a breakfast meeting. It was like a 200-person conference. Anybody can meet with anybody. But it's like, hey, why don't we have breakfast?

27:52And I pulled like an all-nighter making this demo in PHP. I basically like cloned. It's just funny. Like, hey, I can do this in five seconds now. But I cloned 1-800-Flowers site and then made a whole like pay with your identity. So you do a checkout, like add the dozen roses to, you know, make up for the bad stuff that I did. Sending it to my wife, click pay. Oh, she don't have my payment card with me. Ooh, I can pay with Facebook. What does that do? It does Facebook connect and make sure that I have over 500 friends. And actually Facebook had, I mean, to your point, they had a lot of interesting data.

28:25They had their own internal flags around did they think this account was fraudulent or not. And Fraudulent back then was more of like, it was just created not as a real account. It wasn't a real person because an account is not a person, right? Hopefully they're the same thing, but not necessarily because one person can have multiple accounts. But if there's one to one, so that was our fun demo. And then I remember Jim McCann was like, this is great. Let's do it. So two other colorful points from that. So it was a good breakfast. And then in the middle of it, he goes, oh, yeah, we used to do exactly this thing back in the day when the service members would call us and say, send me my wife some flowers.

29:06And no, I don't have my credit card with me. And like, oh, that's fine. Thank you for your service. We'll just get you on the next one. And he intuitively grokked this idea that like you can absolutely post pay a thing if you have enough trust. And we were basically there raising our hands saying, we'll take the responsibility for, you know, they don't pay you. It's okay. We're going to eat it. And so he was like instantly smitten. He had been a great proponent of the product and like a supportive person slash presence in my professional life ever since that breakfast. And he had absolutely no reason to trust us other than like he has some degree of sense who we were.

29:44And it was like, you guys are great. You seem like you're really, you know what you're doing. He was so excited. We have no idea. Well, then we got handed to this, what was his name? He actually now runs a successful startup. The guy that was his... Amit. Yes, Amit Shah. Yes. So Amit took over. We implemented. He was very, very excited. But, and I remember I came up in Microsoft. I think I did this in Microsoft Word or Excel. Like, here's our pricing sheet. Because we needed a pricing sheet. And I was like, why don't we charge 7 %? Like, so in consumer finance for these things, there's a concept of an MDR and an APR.

30:19So merchant discount rate, because you're discounting what you pay the merchant, because you're advancing in the cash right now, you're not collecting it until later. So call it a 7 % merchant discount rate. But I think there was like some table. I just literally made this up. And then there was an APR. But the APR here, there was no APR. It was just MDR. But then nobody, like I showed this to somebody. I think it was Rob Pfeiffer, actually, before we hired him. I had like a real finance employee. Yeah, but I showed him this. He was like, ooh, free flowers, right? Because it's like you just didn't have to pay us back.

30:50So the returns were not fantastic on that. So cynical. Um, but, uh, yeah, I think he literally said free flowers. It's like, this is a great demo, but free flowers. He's just generally a very smart, but very cynical guy. So we were not going to be perturbed by some cynicism. I love Rob. Uh, his sister used to work for me. So I remember, uh, interviewing him in the context of a firm. Although I think at the time he was still Expedite. Yeah, he briefly bumped around as Expedite. Yeah. And then we finally renamed it. What was it? It was, it was incorporated as Expedite Software Inc.

31:20Erik Torenberg:Yeah. I think that's right. And so how did the idea evolve as you, you know, what went from there? When did it start to really get product market fit or how did the space play out in the way that? Every startup has the 40 years in a desert. Like it's just a given. Like if it's worth talking about, Xpost. I mean, some startups people just like quit too early or, you know, something happens to destroy it. But I've never run into a company where people start a company and they just like hit product market fit. and 24 hours later, they're just selling and everything's going swimmingly. So you always have this period where it kind of still makes sense to show up to work, but you don't really know if it's going to end in a great nothing.

32:01And we were definitely meandering through the great nothing period for a while. After 100 Flowers, we had a non-stop interactions with said Amit, who was never happy with the conversion rates, with the user interface. And he was mostly right. Like he was kind of a grumpy, demanding guy, but he knew what he was talking about from the product and financial perspective. And he was definitely not going to pay 7%. And so we were sort of limping through that. We're generating a little bit of volume. But among other things, the notion of, hey, you can pay us later, showed up after you selected the flowers.

32:42And so he would say, look, you guys are cannibalizing my credit card volume. If I were charging nothing for it, of course I'd send you more transactions, but you're charging me more than credit cards. So it's a dumb idea. I don't want to pay anything for it at all. You guys ought to be ashamed of yourself, basically. And we were sort of trying to convince other merchants, but we had one merchant that was essentially saying, yeah, I mean, these guys are nice guys, but it's kind of worthless. And so it was going nowhere fast. And then we had another friend, somebody named Nils who ran a company called Beautylish, which is kind of still around, but they were selling online cosmetics and beauty products.

33:23And the only difference that Beautylish did as they implemented Expedite, I think by then it may have already, I think it was named the firm by then, was that they told their shoppers, UpFunnel basically, as they were selecting their shampoos and perfumes that you could pay in three installments or 30 days later or whatever it is we were trying to sort of do then. And that had an instant 30 % increase in conversion. And that was the, oh, we know what this is. This isn't an alternative. This isn't actually solving the pajama problem. It is solving my budget is this, but if I could pay over multiple periods of time, it would expand a lot.

34:10And so the second we sort of understood the very beginnings of that notion, we turn it right around into a sales campaign and very quickly found a bunch of small-ish brands, primarily direct to consumers, who could not care whether we charge them 1%, 5%, or 12 % because they were trying to grow their top line and telling their shoppers that, hey, you could pay for this over time instead of having to cough up the cash right now. was transformative. And so I would literally get these love letters from merchant CEOs saying, and I'm still friends with a lot of them, like early adopters. Most of these people have now either sold their businesses or the business has failed or they've gone on to do something else.

34:45But I still run into people who were, like there's this woman named Tracy from TradeZ. TradeZ.com was a... Oh yeah, yeah, yeah, yeah. I just saw Tracy. I remember her, yes. She's wonderful. And she was an early advocate for us because her business literally... I forgot about her. She would email me screenshots of her dashboards and say, this is the affirm effect. Here's a 35 % pop you guys caused for me. Like, please do. Well, there was a solution to the pajama problem. And then it was also all the mattress companies. Oh, yes. That was another. That was the big one. I just remember it's like, you know, wait, there's a company called Purple and there's a company called Casper.

35:20It's just like they just kept coming out of the woodwork. And that was transformative. And I remember actually we were talking about this in the context of like, how can you charge a high MDR and get away with it? That sounds bad, not get away with it, but like actually show sufficient value to the merchant. The highest MDRs are actually for-profit education institutions. So some of them are like 50, like, I mean, I don't like these guys in particular, but like University of Phoenix. So there's the private equity firm Apollo, but there's also like this holding company of all these for-profit institutions called Apollo Group or Apollo something.

35:54And University of Phoenix, I think, is the biggest one. And they just assume that most people aren't going to pay. and the gross margins are so high because it's an online course, they're like, okay, you could take 50%. But you're stuck with the receivables on the back end, which goes back to the fraud fighting that Max was talking about before because the gross margins of the mattress, like these mattresses, I don't know if you ever bought one. It's pretty cool because they didn't actually ship you a mattress that looks like this. It rolls out. So you get this like cylinder. It's pretty small.

36:24Some of them are boxes. Some of them are boxes, but some of them, it's like you just open it and then it just like, it's like one of those old like toys that you'd put in like your bath and then it would expand or something. That was like the mattress. So they had very, very high gross margins. So therefore a lot more flexible on the MDR. And more importantly, nobody wants, like you're in your pajamas on your uncomfortable mattress. You don't want to spend$1 ,200 on a mattress, but if it's like 30, like once you subdivided, it just has a massive increase of conversion rate. Yeah, there's a couple of other sort of technical things that are probably worth tapping into in that story.

37:00But that was the next big leap. So the mattresses was the precursor to the great expansion into DDC brands, which I'm sure we'll touch on. But before we get there, a firm briefly flirted with being a payment provider to the online educational facilities, which we ran out of kicking and screaming because the reason they're willing to pay these enormous MDRs is because the quality of education is largely terrible. So the reason people don't pay most of the time isn't because they're like, oh, I thought about it now that I have a master's degree in basket weaving. I just don't want to pay for it.

37:36It turns out my degree is worth nothing. Like, why did I sign up for this ridiculous thing? And so we were, to go back to sort of, you know, things like, what is it called? General Assembly? Is that their? Oh, yeah, yeah, yeah, yeah. There's a whole sort of class of these, like, we will teach you how to code. Another pre-EI thing, like, learn how to code? Just ask Chad GPT to code for you. But back in the day, when it was still important to learn how to code, but you didn't really want to go to college before you just want to take a six-week course. There were plenty of the University of Phoenix clones.

38:04Clones Academy. Yeah, there's all these guys. And we saw that trend and thought, oh my God, like these people are willing to subsidize education, which is cool and on mission for us. And yet the loss rates to consumer dissatisfaction were so high, we lasted like a half a year in that space. But back to mattresses. So the thing that's really powerful about direct-to-consumer, or you can think of them as vertically integrated businesses. So there's some factory in Brooklyn, presumably, or who knows where. China. China. I thought the mattress guys manufactured locally because... I don't know. But they were all in Utah.

38:42Remember that? Yeah. I feel like it was like there was like a Utah mattress town or something, but I think they just all originated there. Casper is in New York, or was it? No, but Purple, I think, was in. Purple. And then there were like other Purples that were... The thing, one of the weirder things, the manufacturing was actually all consolidated. So they ultimately sort of paid very little for these mattresses that were kind of all the same. I mean, don't want to reveal any industry secrets, but memory foam is memory foam. Anyway, and so they, their primary value or their value equation was really interesting.

39:15So first of all, they bought this memory foam in a box and sort of compressed and shipped it to you with a cool effect. the margin there were gargantuan because you are in fact just sort of taking petroleum and turning it into foam. But the other thing is the replacement cycle. And this actually goes to a, I think a Harvard Business Review article that came out right before Casper was founded. And all these guys, all these really entrepreneurial people read the same article, which essentially said this, people replace mattresses once every seven years. If you were the company that sells that mattress, it is the most important thing in the world.

39:48And if you miss it, the next opportunity is seven years from now. But the margins on mattresses, even before the sort of the foam and the everything else, are like 80 % or some eye-popping number. And so suddenly four or five companies were born from that article basically saying like, oh my God, so if we just figure out how to market a mattress, that you will either shorten your replacement cycle, so you buy the next mattress six years instead of seven years from the last one, or you just decide this mattress is the best mattress or the coolest one or the one that pops out of a box, that is like, oh, you know, there's so much money in it.

40:19And one, it resulted in a saturation of mattress industry, obviously. But more to the point, it created this enormous premium on, I will just compel you to buy a mattress by any means necessary. So telling you, I will give you a three-year loan at no interest at all, powered by a firm, of course, is like a small price to pay and a cool marketing campaign. And so there were multiple events like this in Affirm's history where we saw an opportunity for the merchant to significantly contribute to the MDR, which allowed us to eliminate the APR. In other words, consumer got a true 0 % load. The backdrop to this is actually really, really important to understand.

41:03And one of my sort of, you know, things that I rage against have and will continue to until it's made illegal or eliminated by other means is the fake 0 % look. So if you ever have gone to a, you know, fill in your favorite department store, there is a sign somewhere. These days somewhat less prominent that says, get a branded credit card from fill in the blank. 0 % APR. there's an asterisk next to the zero which says something along the lines of assuming you make a purchase for the next 12 months or 24 months if you're a penny short or a day late paying your principal the interest accrues retroactively to the beginning of time basically the day you got that card you swiped it for a thousand dollars you wake up and you owe three thousand dollars two years later so this is called a deferred interest credit card and a huge opportunity we tapped into directly from that rage was this idea, well, our 0 % is going to be a real zero.

41:59When you go to buy the inflatable mattress or the mattress from a box, you're going to get a 0 % loan. And even if you're a month late or a year late, we're not going to change the price because we are so sick and tired of these ridiculous people who are lying to you about zero with an asterisk. It will never be an asterisk on a firm zero. That is the origin story of why we don't charge late fees. We don't do deferred interest, all the sort of gimmicks and gotchas that the industry loves to throw at people. We've run away from all of that primarily as a point of like, you know what, when you decide to do this for three years with us, you will never get screwed.

42:29You'll never be surprised to the negative. And so that was another sort of big bounce up point. And then every mattress company was like, oh, wow, like these guys are doing it. We should do the same thing.

42:39Erik Torenberg:Because fast forwarding a bit, a lot of people hear a firm today. And you know, one quick thing they think is, you know, buy now, pay later. What is this not fully encapsulated? There was this mess about the company today in its entirety. One of the things in the email thread that I just reread in the origin, origin of a firm was your claim that advertising and payments are converging, which was the thesis behind trial pay and the thesis behind a bunch of different things. Actually, a failed project within PayPal called PayPal Shops, where I was trying to, personally, I built this thing where I was trying to remarket what you just bought.

43:12That information should give us a sense for what you might buy next and all that. And all these things, by the way, have turned out to be true. Like there was just, you know, 15, 20, 30 years before their time. But a firm more and more today is means for merchants to not just satisfy demand. So somebody comes in and says, look, I'm going to buy this thing, but my budget is this big. I won the shoes. I'd love a bag. But a firm is there to say, actually, we can help you finance this on transparent terms. A lot of times, a third of the time on no interest at all. You should get the bag and the shoes.

43:45It's safe. That is the brand promise of a firm and it works tremendously well, you know, tens of billion dollars a year worth. That is now becoming more and more about creating a platform for merchants to tell their shoppers, hey, we are launching a new thing. We have this desirable new product we are selling. we've transacted with roughly 50 plus million americans alone and we're now live in four countries and growing pretty quickly and so we have shifted to just satisfying demand to helping merchants create or guarantee demand and the convergence of payments and advertising is upon us although 15 years later that's how it's predicted you're too early with trial pay absolutely too early with paypal well the other side i remember maybe it was in that thread or not i should i I should find that email.

44:32But most companies have very high customer acquisition cost. And like the joke that I make now as a VC is that when I see 90 % of consumer companies, I'd kind of rather buy Google stock or Facebook stock because that's where all the customers come from. And I distinctly remember many, many conversations around how do we have negative CAC, right? And like, I think to me, one of the coolest things about a firm to this day is it has negative customer acquisition cost. I mean, it is paid to acquire a customer. and there are some companies that you would think they look like this, but they don't because they're basically white labeling something.

45:07But going back to the mattresses, let's just say that you're late on one of your payments. Casper, the friendly white ghost mattress company, because Casper is a white ghost, doesn't want to get her cat or something. We had a cat named Casper when I was growing up. They don't want to send you a Dunning notice saying like, get off my mattress, you haven't paid me back. They want that to be a third party. Versus other companies where, yes, you know, what is the difference? What B to B to C is a really interesting category. It's business to business to consumer. I tried doing this with trial pay because it's like, all right, you're playing a Zynga game.

45:37Go get free coins if you sign up for Geico, powered by trial pay. Nobody knew who the hell trial pay was. So we actually tried sending messages to consumers. Like, you know, we got, I think we got blocked by our email provider. Because nobody, we actually had a right to email these customers, but they had no idea who we were. whereas actually having a financial relationship with 50 million people with negative CAC, I mean, it really is, not to pet you on, but it's incredible. Like, it's so hard to do. And we never see anything like this in the venture land. You know, like, because, yeah, there are lots of companies that can get to scale.

46:12I mean, Casper got to scale, but lots of CAC, lots of CAC. And that's why a lot of these business models, they tend to degrade over time because all the economic value goes to Google and Facebook. So if you can have negative CAC and then you can launch other products as well. Because you actually own the customer. And most important, the brand wants you owning the customer. Like, this is what I didn't get right at Trial Pit. Like, Zynga didn't want me owning their customer. Netflix didn't want me owning their customer. I just connected the two. But Affirm, the merchants actually want you to own the customer.

46:43It's very, you already have a burden of supporting a product and dealing with unsatisfied customers or technical support issues or whatever. a company that tells you 12 times for a year-long loan or 39 times, you know, if it's a three and a half year loan, hey, you're late or you got to make your payment or all the communications that come from your lender is just another type of burden that the brand is kind of like, I know what, Affirm, you guys can handle this. This would be great. And so the relationship with the customer is a key component of the foundation of a firm and our ability to develop new products is really built on that.

47:24One of the other really sort of cool to sort of go all the way back to the credit scoring thing. So we are the only company in the industry really, there's plenty of competitors who are trying and some degree of success, but mostly not really, who will go into longer term loans. And by longer, I don't mean mortgage or 15 plus years, but like three and a half years is a fairly long, period of time relative to the average buy now palliator, which is like six weeks. And to do that, you have to underwrite. Like you can't shortcut the, I'll just look at your FICO score or I'll just sort of, you know, I'll look at your Facebook friends.

47:57Like none of that works. You actually have to do a real, very sophisticated degree of machine learning work. There are two cool things about it. It's hard to do. And so it's just hard to compete with us on that front. But the other side is it gives you 39 shots on goal or 12 shots on goal to tell this consumer as you send them billing notices and as you have conversations with them, as they pay you to upsell them on a new service. And so these long-term loans, which are actually quite hard to manage and quite hard to maintain reasonable default rates and delinquency rates on, is the price you pay as a provider of financing to upsell consumers on more and more services.

48:33And so our business has been fueled by these long-term products, even though they are probably the most challenging part of payments. Yeah.

48:43Erik Torenberg:we've been covering some a firm history while we're doing a stroke episode I also want to ask a question about PayPal history I'll keep us straight you know there's been a book came out founders recently there's been sort of a lot of you know revisiting of PayPal both in its impact as a pioneer in sort of payments and fintech but also in terms of the people that came out of it and sort of the it feels like the highest concentration of or highest hit rate of people who would go on to do incredible things. The only comparable thing I could think of today is not even a company, it's the Teal Fellowship or something.

49:21Erik Torenberg:I can't think of a comparable company to PayPal today. I'm curious if you can. And all with, or many with extremely strong strengths, but also very strong personalities and some strong weaknesses as well. And so I'm curious if there's something you think that goes as that story is being told of its impact in the industry, how early it was and sort of the people that came out of it if it's something that's underappreciated or you think not quite grokked or any additions you want to make to how we perceive that company in that time period sort of an old answer and a new answer to this question which you might expect I've answered once or twice before so the canonical answer that I gave in a book which by the way is very good so there have been many much ink spilled on the history of PayPal the founder is actually a very good book and part of it is because it's well written, but part of it is because Jimmy, the guy who wrote it, interviewed every single character in the story extensively.

50:15He spent a lot of time talking to all of us. And so it's at the very least grounded in fact. So the answer I gave for his research was, as we were interviewing, certainly the early team and even the later team, we kept on selecting for entrepreneurs. We would ask, like one of the stock questions I would ask was, so what are you going to do after PayPal? And the answer that I welcomed the most was, oh, this is the last one. I'm going to start my own afterwards. So this, they're like, oh, if you're coming in here to kind of get your final graduate degree in entrepreneurship, of course we'd love to have you.

50:46Like, you know, if you're, you're that smart, you're that good, and you're that ambitious, you know, please come along. And so that's kind of the, why I think so many people that came out of PayPal proceeded to start companies and like literally, you know, hot second after we all dispersed YouTube and Yelp and Peter's first major fund at LinkedIn. and so that was not an accident. We were attracting entrepreneurs by design. The other part that I think has actually not been talked about and maybe subtle and sort of my own cut at this, but we knew the people in the room intimately. Like we literally, you know, exchanged fur mounds by hanging out in these sweaty rooms, brainstorming, screaming at each other and spending a lot of time as whiteboards and declaring the other person's ideas idiotic and so on.

51:30We knew the true version of that person. The sort of the extremely... I don't know, the ultra philosophical Peter Thiel and the, you know, go all in every time Elon Musk and the, these days, gubernatorial David Sachs, you know, all these people, like they all have kind of the presentation layer. And then there's like the kind of what they are like at a dinner party. And then like, what are they when they're really stressed out and just like head hurts, don't know what to do, and we have a real problem we need to solve. So if you know kind of the true base version of who we all are, as you watch one of these people go for something really big, like Elon taking humanity to Mars, which is extraordinary.

52:18And yet, you know, he's a human being. Like, I've seen him sweaty and tired and grumpy at the company kitchen a thousand times. Or Peter, when he is in his Dowden, calls me from some fundraising trip saying, I think we might run out of money. you know they're not gods. You know they're humans. And that inspires you to actually, like, you know what, if that guy who's just a normal dude, I spent a lot of time with him, he's normal. And he's going for this big of an idea, I should do the same. I should strive too. And so I think the combination of, these are very ambitious people. They all wanted to be entrepreneurs.

52:52But we also knew each other when we were young and filled with doubt, which many I think still are. I think that that sort of gives you confidence that it's not all, you know, better roses. It's paved with bumpy parts.

53:07Erik Torenberg:Is there anything we didn't get to that you want to make sure that we get to while we're here? I'm probably less optimistic about agentic shopping and I'm very optimistic about agentic payments. Yeah. I think the notion of robots will buy our Friday night outfits is misguided. We want to know what we look like long before the robot delivers it to your door. But I think the friction, this notion of the best user interface ever created is the credit card. This may actually be finally up for renegotiation because agents are in fact smarter than pieces of plastic and even pieces of plastic with rewritable chips.

53:46And so I think that's a lot of conversation around agentic commerce is probably looking 20 degrees off where, you know, how can I convince you to just trust the robot to buy the right thing? Like, I don't want to. Like, I love buying bike parts and I spend way too much time looking at two slightly different bike parts because I just have to participate in the purchase. But the part where I'm like, okay, that one, the end. Right now, that one is the beginning where you pull out your wallet. And so I think we're about to see some interesting innovation in payments user interface. So can I ask a question on that?

54:22So I mostly agree, but I think it depends on there's like the I need to research what to buy, where AI is just yet another tool at your disposal. Like you ask your friends, that's what I'm, it's a bike part, I'm asking you. I'm also asking AI, I'm asking both of you. But now I have the skew that I want. And I don't actually care which one of the 19 different places that I get it from. And I kind of think about the world, like you have people that care more about money than time, you have people that care more about time than money. The way that I kind of think about objected commerce, yeah, none of this is happening right now.

54:55so it's trying to prognosticate what's going to happen, is here is the UPC, here's the SKU that I actually want, go buy it for me at the lowest cost. It's kind of the thing that people that have a lot more time than money do right now anyway. And that's why I always point to camel, camel, camel is my favorite example of this because it's one of the top 100 websites in America that probably nobody with over$100 ,000 a year of income has ever heard of. But it's a way of saying, I know what I want. You're not helping. The robot's not telling me what bike part to buy, telling me what soda to buy. I know.

55:30Just give it to me at the lowest price. But it takes way too much time. And sometimes you can just observe one group of humans that already have something as table stakes and then porting that to another group of humans. I guess, do you think that that form of agentic commerce, because it's actually related to agentic payments as well. I have nine different cards. I don't remember the Amazon Chase, issued by Chase card terms for a non-restaurant purchase of something under$500. And if I've used my whatever, like, it's the same thing. Like, people that care more about money than time, they will figure that out.

56:04People that care more about time than money, they probably won't. I think directionally that'll make sense. I think the adoption curve is probably going to be fairly slow. And these things are always sort of easy to predict to be very slow and sort of the usual adage as well, slowly at first and always once. I'm not sure I can handicap that. Well, the reason people don't, so there's plenty of people who live in this somewhat murky world of sometimes I have money, sometimes I have time. And it has more to do than anything with the price and the degree of care you put into it. I mean, I don't always just buy bike parts.

56:43Sometimes I buy milk and milk is milk. So, you don't mind bike parts. I mostly buy bike parts. But I think what really happens for a lot of people, it's just sort of like, well, yeah, I'll find the cheapest price, but then I'm not sure how to handicap the probability of that item actually showing up at my door at the time of my desired outcome. Even if I'm okay buying some bike part from some faraway land and it's sold from three different retailers, I'm going to go with the most reputable one versus the one that's promising me the cheapest or sometimes the fastest. And so I think we're probably a few steps away from AI grasping both the preferences, but also handicapping how these preferences would change based on the input, which in fact maybe AI is already there.

57:39It's just that you haven't yet trusted your agent to do as good a job as you would. Like you can eyeball aside and be like, that looks like it was edited in the 90s. I'm just not quite sure that I'm going to spend$1 ,000 for a new cassette or$600, whatever the cassettes go for these days in bike cassettes, the rear assembly. Well, Bike Closet is the site that I'm thinking about that looks like it was made in the 1990s that will sell you a very cheap cassette. Exactly, but do you know if it were used by... Yeah, it's good. By someone, you know, teeth rubbed off and all. Yeah, so I think, I think we are in that difficult period where we're still figuring out.

58:16The other thing that, you know, just sort of maybe end on a positive note, the thing that's really true that no one seems to be celebrating just yet is grocery shopping is 100 % agentic. Like for anyone who uses Instacart, like you tell your Instacart shopper, go bring me milk. You don't think twice when they say, oh yeah, you wanted whole milk from Organic Valley, but I found some other brand and here it is. And you're like, oh, of course, like it makes sense. And so the AI inside that shopper's head is maybe not even as good as Gemini or KGV is these days, but you just sort of say, you go through Trader Joe's or Whole Foods or whatever you're shopping and you figure it out and it shows up and 99.9 % of the time, it is exactly what you wanted or better.

58:58And so we are already conditioned to allow some of these purchases to be fully outsourced. payments and shopping and everything else. And so we're definitely going to get there. It's just a question of how soon will we work through the quirks of like, well, returning of this wrongly purchased by part or waiting for it forever and not really knowing what's going to happen to it because it's in transit, but we don't know where it is. I think that may be protracted, more protracted than people think.

59:25Erik Torenberg:That's a good note to end on. We'll have to get a part two at some point when we talk more about the future. Max, Alex, thanks so much for having me. Thank you very much. Thanks for listening to this episode of the A16Z podcast. If you liked this episode, be sure to like, comment, subscribe, leave us a rating or review, and share it with your friends and family. For more episodes, go to YouTube, Apple Podcasts, and Spotify. Follow us on X at A16Z and subscribe to our Substack at a16z.substack.com. Thanks again for listening, and I'll see you in the next episode. As a reminder, the content here is for informational purposes only.

1:00:04Erik Torenberg:should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund. Please note that A16Z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, including a link to our investments, please see A16Z.com forward slash disclosures.

1:00:34Thank you.