Perfectly Boring

In this episode, we cover: Introduction (00:00) Chandan's background and building CoinTracker (02:26) The tipping point into crypto and tax compliance (06:14) Trials and tribulations of committing to crypto (11:30) Thoughts on expanding into enterprise (14:00) Reflections on recent tax regulation and some expected shifts (18:42) Expanding the relationship with the consumer (21:30) Working in the ecosystems of integrations (24:38) Where CoinTracker is headed (29:00) Links: CoinTracker: https://www.cointracker.io/ First tax guidance that the IRS released: https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21 More from CoinTracker For a 10% discount for new CoinTracker users go to: https://cointracker.io/a/boring Interested in working for CoinTracker? They're hiring across the board: https://www.cointracker.io/about TranscriptWill: Welcome to the Perfectly Boring podcast, a show where we talk to the people transforming the world's most boring industries.Jason: I'm Jason Black, general partner at RRE ventures.Will: And I'm Will Coffield, general partner at Riot Ventures.Jason: And today we're talking to the co-founder and president of CoinTracker, Chandan Lodha. Chandan is actually a classmate of mine in school and has since built, now, a unicorn business in the crypto tax space called CoinTracker. Not my first time talking to Chandan about the business, but maybe, Will, what were your impressions after our conversation?Will: Yeah, I was really impressed with, I think, the simplicity of the value proposition for CoinTracker. Which is—Jason, as you highlighted in the podcast, it's sort of death and taxes. And they found a kind of ubiquitous pain point that everybody participating in the crypto space feels around needing to become tax compliant at a certain point, and how they not only solve that problem but then think about it not as the finite value proposition, but as the beginning of what will be a sort of ubiquitous relationship with the consumer, and how to be a partner for them as they go deeper in their crypto portfolio and life.Jason: Yeah. And matching the increasingly complex landscape of crypto with an increasingly, kind of, simplified, approachable version that is within the confines of taxable events, et cetera, that brings that kind of trust all the way back.Will: Yeah, I mean, the landscape of integrations and assets that they have to get their arms around is not static. It is—Jason: It is not.Will: —[laugh] it is not static at all. And just really impressive what they've built over a relatively short period of time while also being founded in the midst of a bull market in 2017, building through the course of crypto winter, and now positioning themselves as you know, one of the category-defining platforms as we kind of go into another major building cycle for crypto.Jason: Yeah. Well, before we get too deep, let's jump into the interview.Will: Welcome to Perfectly Boring. Today, we're joined by Chandan Lodha who is the president and co-founder of CoinTracker. And today, we're going to be going on a deep dive into the very esoteric and complex world of taxes as it relates to the explosion in activity that is happening in Web3 and crypto trading. Chandan, thank you for joining us today, and we'd love to start by giving the audience a little bit of a background into your career and how you kind of ended up at this place and building what you're working on.Chandan: Absolutely. Thanks for having me. So, my background is mostly in the tech space. I was a product manager by training; I worked at Google for a couple of years. And basically ended up getting more interested in FinTech.And so my co-founder and I—my co-founder, John who's also from Google—basically ended up starting building in the FinTech space. And it was actually building on traditional financial rails, like, automated clearing house ACH and SWIFT network that was super slow, super inefficient, didn't work in a, kind of, internet-enabled digital way. That led us to be frustrated and diving deeper into the crypto space.Will: Awesome.Jason: And what in particular about the, kind of, tax angle was interesting to you? And give us—I mean, obviously crypto is moving so quickly, has been kind of accelerating, certainly recently, but it's gone through these waves. It's kind of important to know what the timing is and where that entry point was. So, maybe you can give us a little bit of sense of timing there, too.Chandan: Right. So, we started working on this in 2017, kind of mid-2017. And what was happening was we were building a personal financial assistant type of app that would help people save money, build wealth, kind of automate financial assistance. And like I was saying, it was really frustrating to work on ACH and SWIFT network. And the reason why is it would take 11 days for our first settlement between a checking and savings account bank transfer, with a $1 fee on a $5 transfer. So, it was slow, it was inefficient, it was expensive, it didn't work on weekends, it didn't work on holidays, it was not a 24/7, 365 system.And at around the same time, people were getting super hyped around cryptocurrency, right? This was leading up to one of the biggest bull runs at the time. And so we kind of got curious. We were pretty skeptical at first, to be completely honest, but we kind of dove in a little deeper. Like, what are the fundamentals here behind bitcoin and why is there so much hype here?And what we ended up finding out was, it was a digital-native, global financial system that could be built using this technology. So, that got us, kind of, intrigued from a technological perspective. And next thing you know, I had an Ethereum miner that we built in the office, I was running a Monero full node on my computer, I had 15 different cryptocurrency exchange accounts, it was just super wild. And as a result—Jason: Yeah, it's immediately going down the rabbit hole in crypto.Chandan: Down the rabbit hole. Exactly. Down the rabbit hole. And as any, sort of, early crypto person can tell you, the next thing you're trying to do is keep track of all your transactions and wallets and addresses. So, we had a complicated spreadsheet doing that.And then we had formulas pulling in price feeds, and then we had Google Apps Scripts. And it was two minutes to open the Google spreadsheet, so we basically built a very, very simple landing page that only allowed people to track their cryptocurrency portfolio. And it was just—it was a solution for ourselves. We ourselves were like, “We need this.” So, we built that.And we kind of knew we were onto something because immediately random people from around the world, people in Thailand, were emailing us saying, “This sucks and you need more features.” And we were like, “Wow, [laugh]. This random person in Thailand is emailing us complaining that our tool isn't good enough. That means we're onto something. We should make this better.” And, kind of, the rest is history.Jason: Gotcha. And you wouldn't have been the only one to continue down the path of, kind of, traditional financial tools. Like, there's been plenty of companies that have gone on to be quite successful, certainly, to varying degrees, but it's not like great tools having been built in that space. What was the tipping point into crypto? Was it this kind of global sense of scale when you have the people from Thailand or was it something else that made you switch and make a big bet, still? I know there was a lot of hype, but the fundamentals are still building in a big way.Chandan: Right. So, this ties back to the question you were asking about tax, and it kind of bridges into crypto as well. So, on crypto, in particular, we really wanted to work on something that had the potential of a thousand-X-ing in the next five years. And the reason why is because you know, we were leaving our cushy, comfortable, privileged lives at Google, and so if we're going to take a big risk, it better have asymmetric upside. And we felt like crypto is one of those few industries where yes, it's really risky, it's unclear whether it's going to take off—this is 2017—but if it does, you could change the world.And so that's why we took a bet on crypto is because we felt like we had confidence that there was a lot of asymmetric upside potential because the financial system that we were building on before was not internet-enabled, it was not globalized, it was not working 24/7, 365. So, that gave us competence on the crypto angle. And then what we ended up kind of figuring out is that if we build all the infrastructure to connect people's cryptocurrency exchanges, wallets, et cetera, then taxes becomes an obvious problem to solve for people with that same data set that people are willing to pay for right now. It wasn't some hypothetical, sort of, future blockchain IoT AR, something-something magic; it was, “I have this problem right now. I need to file my taxes. It's impossible to do by hand.” And we actually have all the data to make that possible. So, that's why we had the confidence on that.And to your other point, there were other people doing this; we were not the first. So, we actually, before building any of this stuff, googled it, tried to figure out what else was out there, and there were a couple solutions, but all of them were built for a very esoteric, sort of accounting-style audience, not smooth, really easy to use, best-in-class web apps that you would expect from, you know, 2017. And that gave us a lot of confidence that, wow, if a lot more people start using cryptocurrency, they're going to need something that is as easy to use as any other top Web3 app or Web2 app at that time. And so we have the confidence to take the bet there.Jason: Gotcha.Will: I remember 2017 is when I personally started trading crypto and thinking about it as a piece of my personal portfolio. And I remember that at the time, there was little to no framework and a tremendous amount of debate going on about what was taxable, what wasn't taxable, around what data the IRS was going to have, around what data the IRS was not going to have, and how to report your taxable information to the IRS. It felt a lot like the Wild West at that time. You must have made some, kind of, critical decisions about the way you believed taxes should be paid at the time without a lot of clear framework to substantiate it. Could you walk through it was going on at the time, how you were thinking about this maybe how things have evolved since?Chandan: Well, I'll start with a quick disclaimer that I am not a tax advisor, and this should not be taken as tax advice. [crosstalk 00:09:33]—Jason: [laugh].Will: That's—we're—Jason: Probably should have had that at the top.Will: —should have started with that. Yes.Chandan: But given that, I have been working in this space for four-plus years, and so I'm happy to provide some informational—sort of, what I've seen, which is, at the time—so the first tax guidance that the IRS released about digital assets was in, actually 2014. It's a public notice; you can Google it. It's [2021-14 00:09:55].And basically, the TL;DR of what it says is that cryptocurrencies like Bitcoin are taxed as property. Now, for the non-tax experts listening to this, what that means is that they have capital gains and losses somewhat similar to the way equities—stocks—do where there's a cost basis, which is the price you acquire the asset, and then there's the fair market value the time you sell, and the, kind of, the difference is your capital gain. So, that was kind of the framework that was already established. You know, if you're looking at government agencies and seeing who's moving the fastest, you know, the IRS is, you know, definitely wants to make sure that, you know, assets that people are speculating on are getting taxed properly.So, they had that framework in place for three years before we started doing any of this, and that gave us, sort of, the first principles groundwork on how we should, sort of, build our tax engine. Now, of course, the crypto industry is moving super-fast, way faster than regulators are going to be able to keep up with, and especially now we're seeing DeFi, we're seeing NFTs, we're seeing, sort of, all kinds of derivatives, perpetual futures, things that don't even exist in equities world. So, there are plenty of gray areas, but the core fundamental of having a property-style tax sort of set of rules applying to crypto gave us the groundwork to cover the vast majority of, sort of, ordinary cases. When there were gray areas, what our philosophy has always been is to kind of interpret the rules to the best of our ability, give people—our users—the ability to choose and make decisions, and sort of default to conservative options. And then for advanced users who are working with a CPA or accountant, the option to take a more aggressive approach if they want to.Jason: 2014. So, you already had a framework to kind of work with. Between then and now there's been a crypto winter. Like, walk us through what that meant for the business, and what that kind of clarified about your mission. Because for the companies that I've talked to that have kind of built through it was a very clarifying period of time, and a lot of people that were really maybe not as committed to it fell out, and the people who stuck through were rewarded in a really big way. Maybe you can talk us through some of the, like, the trials and tribulations that you went through as the market took a really big downturn, kind of on the tail end of 2018.Chandan: That resonates with me deeply. So, as you just said, basically, things were great in 2017. Anyone who was buying was going to make huge ROI. And then if you recall, early-2018, everything peaked and then plummeted. And so as a result, at the time, it was very painful, but in retrospect, it was actually very transformational for our company and for many others, in that a lot of hype and speculation and fraud and nonsense and BS and hysteria had built up because there were so much money being made.And that brought in a lot of, sort of, grifters and sort of like unsavory characters into the cryptocurrency space. And that was not great because then it ended up having this reputation of being very shady, when in fact, actually, a lot of the transaction activity has nothing to do with being shady at all. And so because there was this multi-year winter, a lot of the people who weren't long-term mission aligned with the, kind of, fundamentals of cryptocurrency building blocks, ended up leaving the space and moving on to other things. And it was really hard; we had to really tighten our bootstraps, really focus on cutting costs, really focus on delivering more user value. We, for example, launched a new portfolio subscription product during that time, which really helped us build up more revenue.But I mean, it was dire times. We were small team, it was really hard. The IRS extended the tax deadline in the US for the first time in history. And it hit us—you know, Covid in 2020 hit us in March, right around the time it was tax season when we make a lot of our normal revenue during a normal season. And so yeah, it was brutal.But because it was so brutal, it forced us to be really focused on product-market fit, delivering user value, growth, cutting costs, building profitability, which we did. And as a result, like you said, now the companies that have stuck with the crypto space through that winter, or through other winters, have built really loyal user bases that are highly retained, and people have seen what it's like to go through good times and bad times. So, that has made us very much stronger company now.Jason: And during that time, did you ever think about expanding into the enterprise side? I know you primarily focused on the… individuals who are less sophisticated, et cetera. Maybe you could walk us through the kinds of trade-offs that there are with working with enterprises. I'm sure you've spent a lot of time thinking about whether or not you'd expand into that space.Chandan: Definitely, we have thought about it. We actually even tested out some products and got some customers on board, and we do work with some enterprise customers. But like you said, our bread and butter is consumers. We built a really strong and compelling product in the B2C crypto tax and portfolio tracking space. I think what it comes down to is, as a startup—and you guys are, you know, investors; you talk to startups all the time—it's like, our key advantage is being very focused on one problem, and executing on it faster than a bigger company can. Again, as a result that has driven us to be extremely focused on solving these B2C problems.Now, I do think there's a very large and growing compelling opportunity to focus on enterprise including in the spaces that we're working in, but as a startup, the key thing we can do really well is focus. And so that's why we've been razor-focused on the B2C problems and pain points and products. And I do think as more companies now, more public companies, are bringing Bitcoin onto their balance sheets and their treasuries, we're seeing more—like, the crypto ecosystem itself is burgeoning. Like, there's all these crypto startups now, a lot of them are accepting payments in crypto, paying out in crypto, and they're all going to need ways of tracking this doing accounting, doing bookkeeping. It's very much in our natural wheelhouse of extension, it's just not the first thing we've chosen to tackle because we want to build excellent products in everything we take on.Jason: That makes sense.Will: What is the natural extension, in your perspective, about the relationship with the consumer after you solve this problem for them? What does this sort of open the door to, from kind of a product expansion and value expansion perspective?Chandan: So, right now, one of the core problems that CoinTracker solves is at the end of the year, you've completed all your transactions; we will reconcile them for you and generate some tax forms. The extension of that is basically providing year-round value to people, not just once-a-year value at the end of the tax season. And so I'll give you some examples. We, during Covid, like I was mentioning, launched this portfolio subscription that helps users basically get more insights into their cryptocurrency activity on a daily basis. That includes notifications, alerts, tax-loss harvesting strategies, cost basis information, the ability to optimize people's portfolios, year-round.And the reason why that matters so much is because it actually helps people do tax planning, wealth optimization, tax optimization, which can only be done during the actual tax calendar year, not when the year is over. So, that is one way that we're adding more value. And to take that even one step further, what is going to be really amazing is being able to actually help people make actions on their cryptocurrency in a non-custodial way. So, it's going to be really cool is now you have your wallets, you have your exchanges tracked here, we can help you do things like rebalance your portfolio, or tax-loss harvest your portfolio with a very simple UX, without storing your private keys because you're already using this as your central, sort of, hub to manage your cryptocurrency portfolio.Will: So, it's really—it's a path to being one of the definitive robo-advisor platforms for consumers as relates to their crypto exposure?Chandan: I think it's something similar to that. I'm not sure I would necessarily say it's exactly a robo-advisor because we're not imminently planning on becoming an investment advisor. But it's something in that vein, where it's a one-stop-shop to be really simple interface to interact with your cryptocurrency portfolio.Will: Given the volatility in crypto, tax-loss harvesting feels like such an unbelievably powerful tool if you can effectively deliver it to folks where it should just be extraordinarily valuable. That's really exciting. I hadn't thought about that.Jason: Well, and also, I think it's a part of the tax portion that individuals aren't typically thinking about, right? They're like, certainly, we have the Wall Street Bets people that are day-trading, et cetera, [laugh] but I think for the most part, people are, you know, building a basket over time, you know, I'm just talking about your average person that maybe they bought Bitcoin or Ethereum, it's gone up or down a little bit. And they wouldn't necessarily be thinking about tax-loss harvesting in their own, kind of, course of doing business. But they might be checking their CoinTracker—I get my emails every day, which is [laugh] honestly, like, a huge value in and of itself—and I've seen that in there, just that one simple thing where you can be saving money. I mean, it can be pretty substantial impact on your taxes in a world that's feels like it's getting more complicated.And maybe we can, kind of, circle back to the tax regulation. I don't know if you want to speculate on how things are changing right now, but we saw some regulation go through that was attached to the infrastructure bill, and reporting. Obviously, an explosion of activity, tons of rug pulls and scams that are unfortunate headline grabbers, to your point, around, it's not just shady actors, but they get the kind of the loudest, sometimes, out there. Where do you expect things to shift if you are able to make any kind of predictions? Or maybe you can give people a sense of since 2014, how the IRS has clarified their position on these assets.Chandan: Right. So, in 2014, cryptocurrency usage was a tiny fraction of what it is today. So, there was some guidance, there were some people, but it wasn't a central focus of the government. It was a very fringe thing, even in 2017 it was sort of like this. After that major bull run, people started making millions of dollars and it was just wild; it started getting more media coverage, things like that. There was a little bit more attention paid.Then a few years later, we started seeing the IRS send out tens of thousands of warning letters to people that they knew had cryptocurrency activity but hadn't filed. So, then we saw, okay, the IRS is stepping up its efforts and really paying attention to this. And now, like you just referenced an infrastructure bill in November of 2001, we basically saw that the government is going to basically force all US-based cryptocurrency exchanges to put all of their users into tax compliance by the end of '23. So, what we're going to see over the next few years is a very small number of people being tax compliant, going to really high level of compliance. And as a result, there's going to be tens of millions of American taxpayers are going to need to find a way to become tax compliant in their cryptocurrency transaction activity. And that is what makes such a compelling opportunity for us right now is that we've built a really compelling solution for exactly those users.Jason: Gotcha. And what is the role of, you know, the individual wallets? I mean, just from my own, I bought Bitcoin in 2014, you know [laugh]? I've been in it for a while. I ended up—Will: You love to brag, man. Congratulations.Jason: No, I sold it [crosstalk 00:20:48] eight grand. I thought it was a genius. Bought it, like, you know, $200 sold almost all of it at eight grand. So, it was it a great return on investment, but like, should have obviously held on. But I'm fairly deep in this space, have been for a while, and boy, do I have sprawl across—now I've got Solana Wallet, an Avalanche Wallet, I've got a Coinbase Wallet, MetaMask Wallet, I have crypto staked here, there, and everywhere.If you really are going down the rabbit hole, your assets are spread out in a big way. And I'm curious how you are helping your user base as I assume, you know, that these are accessible markets now to the normal person, right? You and I can become a market maker on Uniswap, and that's, like, a new thing for an individual user. Is that an interesting avenue for you guys to explore and expand your relationship with consumers? And do you have any insights as how that will be treated over time by the IRS?Chandan: Absolutely. Okay. So, I think you've touched upon multiple good points. The first is people are getting into more and more complexity in the crypto space. It's not just buying and selling Bitcoin anymore; it's all kinds of Web3 stuff. It's DeFi, it's NFTs, it's staking, it's lending, there's new crazier things that people are coming up with every day.And so this just further exacerbates that original problem that we saw in 2017 of people need a simple, unified way to keep track of everything that's going on, the sprawling sort of nature of cryptocurrency, like you said. So, that is absolutely in our wheelhouse. It's a major area of focus. We've recently added support for NFT tracking and portfolio tracking, and we're going to continue developing that further in the DeFi realm as well, like you said. We already support hundreds of different exchange integrations, thousands of different cryptocurrencies, and now there's things like L2s, all this kind of stuff.So yes, absolutely, very core to the focus of what we're doing. The second thing is helping make some of this more complexity and sprawling sort of cryptocurrency stuff more easily accessible to more people. Because yes, if you're Jason and you're a crypto guru who got into the space in 2014 and are super deep, awesome, but the average person isn't necessarily going to know how to be an automated market maker on Uniswap, or how to, like, stake their Avalanche or whatever. So that's, again, where some of the stuff that we were just chatting about becomes really critical is super simple, easy to use interfaces that wrap the complexity behind using all these protocols behind the scenes and make very simple UIs and user experiences for people to understand, what am I actually doing? How can I actually do it, but with simple buttons, not complicated tooling, or command-line tools, or you know, whatever other kind of complicated stuff people are having to do. So, that's sort of the second area where I think we can really help bring people into these new types of opportunities in a responsible way that helps them actually understand what's going on.Jason: What's so interesting about that is if we think of just like TurboTax, as, like, the really reductive [laugh] parallel here, right, to a certain extent, you are going the opposite direction that TurboTax is going, which I think is really, really fascinating. That you're kind of like leaning into, hey, we're actually going to help you proactively manage this, rather than just stay in the tax lane. Which I think is such a—you know, people do need, kind of, that trusted service or advisor or product or something like that, where they do know that they can be tax compliant, right? My parents aren't looking to, like, go super deep, and, like, figure out the tax stuff later, you know, but they want to be kind of active in some of that more trustworthy activities that are now accessible. So, I think that's a really interesting avenue of expansion and does feel really kind of core to your initial thrust.Will: Going to that point that Jason was just hammering on around the sprawl and this constant expansion of where relevant tax data sits, how do you think about the ecosystem of integrations and the depth that happens there maybe, particularly around some of the exchanges and major wallet providers? That's got to be a never-ending game of whack-a-mole, as you think about product and engineering.Chandan: Right. So, this gets to the sort of the core secret sauce of what makes CoinTracker valuable is that it is very hard to integrate all these things. Everyone has their own spec, everyone has their own API, everyone has their own format, many people don't have any format at all. The same coin has different names in different places, different prices in different places, different trading pairs in different places, and it's a total mess. And so what CoinTracker does, the key, the essence of what we do really well is integrate all of these things as they're always changing, evolving, adapting, getting more complex, and reconciling it into one straight-forward ledger of transaction activity.So, the core of what we're doing is basically partnering with all these different people and integrating them. So, you mentioned some of these APIs, like, for example, Coinbase is one of our partners, and we basically help make this super simple for anyone who's using Coinbase or Coinbase Pro. No matter what kind of activity you out there, it will be easily reconciled into CoinTracker. You mentioned TurboTax, too. Like, our ambition here is not to build a tax company. It's to make all of this sprawling complexity super simple and provide people value in various ways, for example, by integrating into TurboTax, and then you can get your taxes filed in TurboTax if you choose to be a TurboTax [unintelligible 00:26:06]—yes, that's exactly what we're focused on is taking the sprawling complexity of integrations, making all the engineering effort that's required to work on that at scale, but then obfuscating it away from users, so they don't have to think about it at all.Will: Yeah. And I would imagine all of those different stakeholders and exchanges and wallets are aligned in wanting to see a CoinTracker integration because they're going to see regulatory hurdles here around tax compliance be a hindrance on engagement from a consumer base and a hindrance on transaction volume if there isn't a really robust and really intuitive platform for folks to consolidate all that information.Chandan: You nailed it.Jason: I think also, it's just a brilliant way to funnel the largest possible footprint of crypto users into a single product, which is death and taxes. Like, [laugh] you know, like—Chandan: And Bitcoin.Jason: If you just think about it, it's like, okay, great. There's going to be a project here that does this, right? And this, that the other thing that's, like, trying to help you, but everybody is going to need to file their taxes. [laugh]. So, we can hit—some service provider in the US will hit basically one hundred percent of crypto users, and you guys are making yourself the most attractive point and then expanding that relationship with other products and services throughout the rest of the year. Which is—yeah, I think it's phenomenal.Will: Super. Yeah, it's really cool. So, now that we're full-swing in another bull market, what are the big challenges facing the business? What are the big, kind of, campaigns that you guys are on right now?Chandan: By far, the number one thing is scaling.Will: Yeah.Chandan: Like you said, last year was absolutely wild in the crypto space. The amount of growth that we're seeing on all dimensions, crypto trading, DeFi, NFTs, new users getting into this space, transaction volume, every single record was broken last year. And as you can imagine, taxes are a sort of lagging indicator of the success of transaction activity in the prior year. So, this is going to be by far the biggest crypto tax year in history. And we're a startup, so as a result, it's all hands on deck to scale and handle way more transaction volume, way more users, way more integrations, way more people, basically trying to get all this stuff figured out. And so for our US-based customers, that's kind of January through April, and we're recording right now in February, so we're getting right into busy season.Jason: [laugh]. Well, thanks for making time.Will: Yeah.Jason: You referenced US-based customers. I was going to ask around—this is happening everywhere. I think India might have just announced how they're going to be taxing crypto, there's massive, massive markets that are finally bringing some clarity to the crypto space. Where does that fall in priorities? I guess you got to get the US [laugh] right first, and then figure out the rest of the world later? Or where do the ambitions lie in the next couple of years, do you think?Chandan: I wish we had the luxury of just focusing on one country at a time, but like you said, new massive markets are coming online, and this is—you know, it's a land grab. So, right now, for the tax side, we support US, UK, Canada, and Australia. And on the portfolio tracking and portfolio subscription side, we actually have paying users in many countries. And the reason why we can do that as a small team is because the cryptocurrency sort of system works the same globally, right? Bitcoin works the same in India, and the US, Brazil, China because it's just an online protocol.What's different are the local tax rules, but 80% of what we're doing is integrations, right? It's understanding how the Bitcoin, sort of, blockchain works and setting up node infrastructure for the relevant chains, and reconciling all the data. And if we do that right in one place, it actually works everywhere. It's that last 20% of the go-to-market, partnering with the local tax experts, making sure everything is localized, language, payments, that is the kind of the lift for bringing on new markets. And you mentioned India; like, yes, there's tens of millions of new cryptocurrency users that are going to come online in the very near future who are going to basically need to figure out their taxes there as well and that is definitely an opportunity that we're excited about.Jason: That's awesome. Yet another advantage of building in the crypto space is that kind of like commonality, at least the baseline transactions, you don't have, like, a different system you've got to figure out for each country.Chandan: That's right.Jason: Makes a lot of sense.Will: The key question I have here, and this is sort of what we almost always wrap up with is if you're really successful if CoinTracker reaches its full potential, how has the world changed? What's the ten-year vision for where this company is going and the mark that you guys want to leave on not only this market but—it sounds like—the global economy?Chandan: Love this question. So, I think what you have to believe—you know, if you sort of suspend disbelief, and you imagine, okay, we're teleporting ten years into the future; what kind of currency are people using? And the kind of vision we have for this is a digital-native, global financial system. So, you can imagine, let's say some kind of cryptocurrency—Bitcoin or otherwise—is kind of the way that people are transacting value over time and space. And if that's the case, that means there's going to be billions of daily active users of cryptocurrency, billions.And all these people are going to have the same pain points around financial services that they do with fiat-based financial services, taxes, bookkeeping, portfolio tracking, sending, remittances, all these things. And what we want to do is build really simple tools that billions of people can use to manage all their cryptocurrency transactions. And the reason why we're doing all of this is because our mission is to help increase the world's financial freedom and prosperity. So, if we do this right, we will be able to do that on a global scale.Jason: Incredible. Love the mission. Thanks so much for coming in, Chandan. It was lovely to have you and congrats on all the success today.Will: Yeah, really unbelievably impressive, and we're super excited to not only be customers but to continue to track the success of the company as you guys build.Chandan: Awesome. Thank you guys so much, and good luck. I want to see your continued growth and success building out the podcast, too.Will: We'll need it. Thanks.Will: Thank you for listening to Perfectly Boring. You can keep up the latest on the podcast at perfectlyboring.com, and follow us on Apple, Spotify, or wherever you listen to podcasts. We'll see you next time.

In this episode, we cover: 00:00:00 - Introduction  00:02:20 - “B's” Background and the Beginning of Axle Payments 00:06:40 - Why Transportation and Freight 00:17:00 - The Details and Risks of Working with the Industry  00:22:45 - Client Changes from Working with Axle Payments 00:28:30 - Axle Payments' Future   00:33:15 - How Axle Payments Makes Money 00:35:50 - The Supply Chain Crisis   00:39:00 - The Future of the Industry Links:Axle Payments: https://www.axlepayments.com TranscriptWill: Welcome to Perfectly Boring. I am Will Coffield from Riot Ventures.Jason: And I'm Jason Black from RRE Ventures.Will: And today on the podcast, we've got Bharath Krishnamoorthy, who is the founder and CEO of Axle Payments. And Bharath is joining us today to talk about the unbelievably boring and strange world of freight intermediaries and invoice factoring. Jason, this is a business you know pretty well—have known Bharath for a couple of years—but this was a really interesting discussion. You know, like, what were some of the key takeaways that you had from our discussion with [B 00:00:37]?Jason: Yeah, I think this is another classic case of an under-digitized industry that runs the world, right? It's a multi-trillion dollar industry that's run on paper, fax, Excel, phone calls, and human relationships. And you've got these freight intermediaries that actually benefit from all those relationships, those things are actually fantastic. That's what they want to be focusing their time on that allows them to offer great services to their customers, but we've got a new kind of class of tech companies coming in that are offering new financial services that allow for, kind of, QuickPay and faster payments in the industry. And that's a benefit to everybody involved, but the incumbents have a difficult time actually meeting those new demands of the market.And I think what B has built with Axle Payments is a way for that industry to focus on what they're best at, which I think is what we want to see technology and financial services do. So, I thought it was a fantastic discussion. And before we get too deep into the weeds, let's kick off the interview with B.Will: All right everybody, we are joined today by Bharath Krishnamoorthy, who is the founder and CEO of Axle Payments. Bharath, thanks for joining us today.Bharath: Yeah, thank you for having me, Will.Will: So, that I don't botch this going forward, Bharath actually goes by B. So, B, appreciate you being with us today. And I think maybe as kind of a way of kicking off the podcast, what we've been kind of doing throughout the first couple of episodes is having the founder give a little bit of a background just on, sort of, themselves personally, kind of your personal and professional background that ultimately led you to founding Axle Pay, and then we'll kind of dive into the business from there.Bharath: Sure. Sounds good. So, my personal background, I grew up in New Jersey, moved to Virginia in high school with my family, studied economics at JMU in Virginia, and then moved to New York for law school. So, graduated from Columbia Law School, practiced as an attorney here in New York, doing M&A and private equity work, which is about as fun as it sounds.And sort of parallel with this, my co-founder, Shawn, who's my high school best friend, had taken a slightly different path. So, you know, he went to UVA for school and then started working in the FinTech space, a couple of different FinTech startups of varying sizes. And throughout this, we'd started a bunch of small businesses together. Those have been the projects where I'd felt the most energized and the most excited to actually do work. It seems sort of obvious to me, and I think to him as well, that down the road, that's what we ultimately wanted to do, right, was to build something really dope together, something big enough that it could be our full time jobs, right, where we could quit our jobs and just work on something awesome together.And the obvious difficult question was, you know, what are we going to build? So, in 2017 when I was working as a lawyer and Shawn was working at this tech startup in DC, we were taking these buses back and forth to visit each other all the time. Probably you know Greyhound, Megabus, you may or may not know that there's, like, a dozen other smaller regional operators that all kind of operate similarly in the same areas. And we realized that these companies are just, they're kind of like airlines in terms of their business model, but just way lower tech. And so we came up with this idea to build a revenue optimization solution for them that would basically help them with their pricing and scheduling in order to maximize the money they earned.Started working on that; we have to quit our jobs, incorporated the company. We got a few customers within, I think, about six months, we were doing about 100 grand in annualized revenue. So, it was, you know, it was working a little bit. And what we realized is it wasn't going to work much more than that because the market in the US was just very small, right, that if we totally knocked it out of the park and did everything right, maybe we get to a million dollars a year, which sounds like a lot of money, but really isn't that much if you're banking on everything going perfectly.So, that started this process of us really taking a step back and trying to find a better opportunity. And we basically just, like, pivoted over and over again over the course of two years to various opportunities in the transportation space. Eventually we came up with this framework, right, that whatever we decided to do had to meet three criteria: it should be something that we thought we had a relative advantage at given our backgrounds, it should be something that we cared about solving, right, so a problem that we would feel good about working on today, tomorrow, and in ten years; and it should be a really attractive business opportunity. And it's pretty difficult to find something that satisfies all three of those.Where we eventually found some traction was in the world of freight finance. And we found this problem which, at a high level, was solving cashflow problems for small logistics businesses. And it struck all three chords, right? It was at the intersection of transportation and finance. By this point, we had a lot of exposure and a lot of relationships in the transportation industry, and both of our professional backgrounds very closely tied to the financial world.Second, it was a pain point we cared about, right? It's not that we were coming from a long line of truckers or had some extensive background in the logistics industry, but we were small business owners, and we know that for small business owners, cashflow problems are often the most salient problems they face. And so the idea of solving that problem for thousands of companies was just very compelling for us. The first client we closed literally had his COO recording him signing the contract because it was such a life-changing experience for him. And I was like, “Man, if we can just do that again, I'm going to feel really, really happy.”And then the third is that it was, it's kind of a no-brainer business opportunity, right? Huge market, highly fragmented, the incumbents are notoriously low tech, so there's a really clear opportunity to come in, build a better tech-enabled solution and really consolidate the space. You know, that was mid-2019, and it's sort of an off to the races since then.Jason: What drew you to transportation as an industry to begin with?Bharath: Pretty random. It was, we're literally riding on those buses thinking of business ideas, and we're like, well, here's a busine—here's an industry that needs help, right? The bus industry clearly needs better technology. And it started there, and then through that, we just ended up meeting a bunch of other founders and investors who work in transportation technology. I think over the course of those two years, we really started expanding our lens.I think initially, we were very focused on the passenger transportation side, just given that's an industry that we had direct exposure with. Buses aren't sexy, but passenger transportation is sexy because of Uber and Lyft, and freight was just sort of this other part of the ecosystem we didn't really think about. But over time, we realize, like, hey, from a business perspective, freight transportation is actually much more interesting. A) there's just way more money flowing through that ecosystem, there's just there's a lot going on, and it's a lot more complex, right? So, there's a lot of different types of opportunities. And B) the bar is so low right now, in terms of where the state of the art is, so there's a lot of room to come in and deliver a ton of value to the companies that are operating in it by building them better technological solutions.Jason: As you're starting to look at transportation, what drew you away from the passenger side into freight? And what does a typical freight operation in the US look like today?Bharath: So, a typical freight operation in the US today, there's basically three key players in the space to understand: you've got carriers on one end, which are the actual trucking companies who are getting paid to haul freight; you have shippers on the other end, which are the end customers, right, so these are companies like Target or WalMart who paying to have their freight moved; and in between, you have 100,000 freight intermediaries, which is an umbrella term that captures freight brokers, freight forwarders, 3PLs. And what these companies have in common is that they're essentially acting as outsourced logistics arms for the shippers. And they'll find carriers who have excess capacity and connect them with the shippers who have too much demand. So, they'll essentially broker those transactions.What's interesting about this ecosystem is that it's under a lot of stress right now and it's changing very rapidly, right? So, these freight brokers have essentially operated in the same way for decades, but over the past five or six years, there's been this rapid influx of venture-backed, tech-enabled freight intermediaries. These are companies like Convoy, Uber Freight, Flexport that basically raised a bunch of venture capital and used it to build software that's enabling them to disintermediate this customer segment. And in part, they're doing that by expanding their product offering to include payments and financial services.And that's what's putting so much pressure on these incumbents to try and modernize, right? They're not just going to lie down and give up. They're going to try to figure out how can we get those same capabilities, ideally without having to raise a billion dollars in venture capital ourselves? And that's where we come in, right? We're essentially building the software and the tools to give that long tail of the market the equivalent capabilities of the Convoys and Ubers of the world.Jason: And can you give us a sense of scale for that market? Like, what is the topology of the industry? My sense is very fragmented, lots of small mom-and-pop kind of business operations. Could you put some numbers on that?Bharath: Yeah, that's a great question for people who are not from the logistics industry, the first time they hear the numbers, it's kind of like shocking how big it is, right? So, in the US alone, there's over $700 billion generated in freight movements, right? So, payments to carriers and to freight brokers. And freight broker segment of that market—the freight brokers and freight forwarders—rake in almost $250 billion. So, it's a pretty sizable segment.In terms of how fragmented that is, there's about 100,000-plus freight intermediaries in the US. And the top four of them combined are only raking in 10% of the segment's revenue. So, there's a lot of fragmentation. So, when we look at the market, we see just a ton of these small mom-and-pop shops that are, you know, small relative to these big billion-dollar companies, but meaningful businesses, you know, raking in millions of dollars a year, often employing 5, 10, 15-plus people. So, it's a very, very fragmented market.And each of them does things in their own way, their business model is slightly different from other ones, they maybe add-on other services that other ones don't provide, or they don't provide other services that some of their competitors do. So, it's very interesting, complex space.Will: And, B, as the venture-backed companies have moved into the space, wha—I mean, aside from having better digital tools, has there been a key mechanism that they've used to win over customers and build market share? I mean, is there, like, a key differentiator that the Flexport and Convoys are introducing to the market that created an opportunity for Axle Pay?Bharath: I think it's hard to narrow it down to a single one. The industry was just very outdated and these companies—the Convoys, the Flexports—they're doing a lot of things differently, and that combination of things is making it very compelling to the shippers. One in particular that has really changed expectations in the market is around this payments and financial services, right? And this is particularly true for the digital freight brokers, right, which are the Convoys and Ubers.So historically, the broker didn't need to pay the carrier until they received payment from the shipper, right? So, if the shipper pays him 30 days after the load is moved, then after they receive payment, the broker will pay whatever they owe to the carrier then. What's changed is that Convoy and Uber have normalized the practice of offering their carriers next day payments. In the industry is called QuickPay. So, as carriers have come to expect QuickPay, all of these other freight brokers have been forced to provide it.But it's very difficult for them because remember, their shippers are still waiting 30 days to pay them. So, now these other brokers are in a spot where, “Hey, we just moved the load. Now, I need to pay the carrier today, but I'm not going to get the money for that load until 30 days from now.” And that's, I think, really the genesis of the problem that we went to market solving. What we do is we go in and buy that freight broker's invoice, let's say it's $1,000 that they're supposed to get paid from the shipper, we will buy it some amount upfront, let's say $900. We'll pay some of it to the broker right now will pay out the carrier in entirety, right, so we're providing that QuickPay to the carrier. And then 30 days from now, when the invoice becomes due, we'll collect from the shipper the full amount, and we basically pocket that spread.Will: Factoring isn't a completely new concept, right? I've got to imagine that there are lots of folks that have been doing factoring, even specifically within the trucking freight ecosystem for decades, maybe give folks a little bit of the state of play of how factoring is currently done within this, kind of, specific niche, and how you guys are kind of turning that on its head.Bharath: Yeah, that's a great point. So, factoring has been around for literally thousands of years, right? It's one of the oldest forms of business financing. Huge ecosystem, right? There's over $3 trillion dollars in invoices factored globally.To your point, in the US the largest vertical for the factoring industry is actually freight and logistics, right? So, there's a lot of companies in this space. They are very similar to the freight brokers that we're serving, in the sense that it's a very outdated industry, right, very low tech, not a lot of innovation. You know, just one example, a lot of these factors still require clients to fax them documents in order to factor the load, which is outrageous because I don't even know how to send or receive a fax, and then if think about the fact that their clients are truck drivers who were literally on the road the vast majority of the day, that makes it a lot—even more difficult to understand how that works.In contrast, right, we're building a tech-enabled solution. The software that we've built our business around, provides us three very distinct competitive advantages. The first is that it allows us to do a lot more than just factoring, right? We're able to automate a lot of the key back office workflows for our clients and provide them more sophisticated reporting so they can make better decisions. So, when I'm talking about these back office workflows, I'm talking about carrier payments, invoicing, collections, book reconciliation. These are all really important, but normally time consuming, and error-prone business functions that our clients just no longer have to worry about.And it's more than just, like, the hour saved or the reduction in hours, right? If you look at it from the perspective of these, like, small freight brokers, right, they got into this business, they started a freight brokerage because they love logistics, they love sales, they love client service, but I guarantee you, none of them got into freight brokering because they love accounting, or accounts payable or accounts receivable, right? So, it's the parts of the business they see as the most mundane, but are still absolutely critical for growth that we're able to take over for them. The second piece, the second really—Jason: Sounds really Perfectly Boring, I will say.Bharath: [laugh]. Yeah.Jason: It's the perfect time to have you on the show.Bharath: For sure. The second big advantage that we get from the software is that it allows us to run a much more efficient and effective operation, right? So, if you look at freight factoring companies generally, it's very difficult for them to scale, and that's because they're normally based on these really manual and paper-based processes that become really difficult to manage as you add too many clients and debtors into the portfolio. In contrast, we're able to automate a lot of that operational overhead and streamline our onboarding and client-funding cycles so that we can continue to deliver really high quality service, even as we're rapidly scaling the business.The last differentiator is—you know, I mentioned that factoring—that freight and logistics is the largest vertical for the factoring industry in the US, but a nuance there is that almost all of those factors exclusively service the carrier, right, the trucking companies. Very few of them will take on freight brokers as clients. And the reason for that is a piece of the Uniform Commercial Code, which is a statute which has been adopted by all 50 states. And this piece of the UCC provides carriers a first position statutory lien on their freight broker's invoices. So, what that means in practice is if you as a lender, buy an invoice from a freight broker and that freight broker uses that money to pay a sales rep or to cover some other business expense instead of paying the carrier who hauled their load, then you as the lender, are really out of luck because that carrier still has that statutory lien which supersedes your own.So, when it comes time to pay, the shipper is legally obligated to pay the carrier instead of you, which is a bad position to be in if you're a lender. What we've done to get around this problem is we've designed our product to handle multi-party payments. So, in addition to onboarding all the brokers into our system, we separately onboard their carriers. They create their own accounts, we verify their identity, we link to their bank accounts via Plaid, and this enables us to directly pay out the carriers to extinguish their lien at the time that we purchase the invoice. So, now we're in first position so when that invoice becomes due, we're able to safely collect on it.Because most of these other factoring companies are running on an off-the-shelf software that lacks this functionality, they're really just not able to effectively compete in this space.Jason: That's interesting. So basically, you have perfect information on both sides, right, which allows you to see that both the shipper and the carrier are receiving the proper payments, and you're able to factor, kind of, the time in between confidently because you can actually watch the flow of funds. Is that correct?Bharath: Yeah. A hundred percent right. Normally, if you don't have this type of software and you're trying to buy that invoice from the broker, you don't really know what's happening with the money once you send it to them, and because of that you're taking on a lot of additional exposure. In our case, that's not a problem, right, because we have visibility on both sides.And what's really cool here is that it provides this risk mitigation benefit to us, but it also solves the brokers' pain point of them wanting to QuickPay their carrier, right, which was sort of the original genesis of this whole problem, which is that they need cash to pay the carrier today. We can make that even faster by paying it out to them directly instead of sending money to the broker and then having them pay the carrier, right? So, it's sort of a two-birds-with-one-stone solution.Jason: I think you brought up an interesting point which I'd love to dig into as well is, like, there still is a bit of risk in the system, right, even with a typical loan, right? People can default on their loans. What mechanisms have you guys come up with to make sure that you have, kind of, the proper payments flowing through and that you're not putting yourself at outsized risk. This looks like, you know, a great part of that solution, but things can still break down. I'm curious how you guys, you know, do kind of quality assurance and make sure that you're also going to be in a position to get paid properly and payout properly?Bharath: Yeah, that's a great question. So, when we look at risk mitigation, we look at it at three levels. On the first level is us underwriting the client themselves, right? So, that's making sure that they have the proper licenses to operate, that they have no other liens against their assets, there's no red flags on their [Carrier 411 00:20:25] account, right? So, just making sure that we trust them to be a good actor, essentially.Once we've approved the client, we separately have to approve or reject each of their shippers, right, their customers. And this looks more like a traditional credit underwriting approach. We'll look at Ansonia, Experian, Dun & Bradstreet. If there's not great credit data available, or if they don't have great credit, then we will not approve the shipper.Once we've approved both the client and the shipper, we separately approve or reject each individual invoice, right? And so this is looking at, on a transaction basis, do the receivable documents match and do they make sense, right? Is the carrier they're asking us to pay the same carrier listed on the bill of lading? Is the bill of lading signed? Is the dollar amount they're requesting the same as what's included on the rate confirmation? That type of thing.So, between these three layers, we're able to catch problems before they end up in our portfolio. There's other things outside of this we've implemented. For example, you know, we buy the invoices full recourse, we only advance a certain portion of it. It's a full suite of risk mitigates, but the combined effect is that we are very protected in our portfolio. So, we've not actually lost a penny in more than the past year. Actually, since we hired our head of operations we haven't lost a dollar.Jason: And what percentage of freight intermediaries do you bring out on the platform, of the people who apply to become Axle Payments customers?Bharath: So, I don't have the exact number there, but it's a good portion. It's around, I would guess, like, 70, 80 percent. We typically see more rejections on the shipper side, right? So, they're working with debtors that we don't feel confident will pay us, or there's issues on, like, the invoice-by-invoice level. But we are generally able to work with most clients, right?So, we a lot of times will reject them upfront, like, there's some issue, maybe there's someone has liens against their assets, their account is inactive, but we'll usually work with them to get those remediated. It's not super often that we find someone who we both cannot work with, and can't get them to a position where we could eventually work with them.Jason: And once you're on the platform, then you've got that visibility as well, which is great.Will: I think this is all super interesting, and I'm curious, you've been operating for long enough at this point and I'm sure I've had a couple of these great intermediary and kind of broker clients for any one client for 12 to 18 months at this point. I'm curious, like, what you notice in the evolution of their business after they start working with Axle Pay, and just what streamlining cashflow does for the freight intermediary from an operational perspective, and then, you know, kind of what the impact of not only streamlining cashflow but also accessing digital tools for running other parts of the business. Like, what's kind of the emergent behavior you're seeing, if any, within the customer base?Bharath: Well, that's one of my favorite questions because it's incredible what we see with the clients, once they start working with us. A huge number of them just blow up, just start growing very, very quickly. On average, our clients grow, over a 12 month period, about 75% over the course of the year. So, if the average client is doing $100,000 in revenue, January 2020—or January 2021—12 months later, we're expecting them to do 175,000. The segment of our clients that actually already have a functioning business when they start working with us grow much faster, even.So, with that portion, if they're already doing least 50,000 a month in revenue, we see them growing on average 250% over the course of the year. And there are some crazy outliers there too, right? People who started working with us, and then a year later are doing more than ten times as much revenue as they were a year prior.Will: That's insane.Bharath: Yeah, it's really cool. And it feels really good, right, to talk to them. And, you know, I'm not going to take credit for their success; they're all excellent at what they do, but it's awesome to hear them attribute, you know, even a portion of that growth to working with us and having the capital they need to scale and having a partner who can take over a lot of the business administrative functions.Will: There's an interesting dynamic at play here where most of the other venture-backed businesses in the market have decided to be the operators themselves and to build the technology to be the most digitally native, nimble operators in the market. You've taken a completely opposite tack of saying you're actually going to be an arms dealer to the a long tail of operators in the market to enable them to compete in a more digitally powered market. How does this play out? Like, what is the evolution of the way the old guard, now armed with tools that you're selling them, engages, competes with the new guard and this kind of class of venture-backed companies that have come into the market over the last really, you know, just over the last three to five years?Bharath: The way I look at what we're doing is very similar to what Shopify did in retail, right? So, you have Amazon who comes in and builds this incredible business and really consolidates a huge chunk of the retail market, but there's still this long tail of retail businesses that are not just going to give up and die, but who will demand and pay for services that allow them to compete with Amazon. And Shopify was able to build a massive business by building that tooling for the long tail of the market, right? I think the founder of Shopify uses the analogy that Amazon is the Empire, and Shopify is arming the Rebels.And what we're doing is something very similar, right? You have Uber, and Convoy, and Flexport who are building these incredible, valuable businesses by consolidating a large chunk of the logistics space, but there's still a very long tail of the market, that's not going to just give up and die, right? They're looking for services that will allow them to compete. And we're filling that gap by providing them the tools that allow them to compete with these companies. And you know, I am a huge fan, if it's not clear, of all three of those businesses, right, Convoy, Uber, Flexport, and even some of the smaller ones like Loadsmart.We, you know, we've met with some of the founders, some of them are invested in the company. They're building great businesses and I think they're going to build huge multi-billion dollar businesses that will be profitable, independent public companies, but there's still going to be a lot of other very large logistics players in the business, right? So, if I zoom out ten years what do I think the market looks like? I think it will continue to be highly fragmented, but I think every player in this space is going to be tech-enabled because if you're not tech-enabled, you're not going to be able to keep up and the business is going to die. Now, if you look at those technical players, a handful of them are going to be tech-enabled because in the early 2020s, they raised billions of dollars in venture capital and built out their own internal proprietary software, but the vast majority of the market will be tech-enabled because they used the profits they were generating to pay for software services that gave them the equivalent capabilities.Jason: You know, this is, kind of, maybe an inversion, a little bit, of enabling the kind of incumbents here. The incumbents are incumbents for a reason, right? They have a lot of great relationships, et cetera. Now, that you're providing them with a modern set of tools, what advantages do they have in order to compete? I mean, as you mentioned, it's a multi-trillion dollar industry, so there's plenty of space for great companies of different kinds of origins to be grown, but what are the advantages of being an incumbent here now that you've enabled them with, kind of, technology and financial services to compete?Bharath: Yeah, I mean, I think you hit the nail on the head, right? They have been huge rolodexes, right? It's the relationships, both the people they work with, and with customers, employees, and they have a lot of in-house expertise and knowledge that allows them to deliver a really great service. I don't think those benefits are going to go away or become less important just because someone has built software that helps them operate more efficiently.Jason: Yeah, one amazing thing here is, you're kind of getting paid to build trust with an amazing, huge incumbent base, initially with factoring and some back office workflow. I can imagine that you have a pretty robust roadmap for things that you'd like to build going forward. Maybe you can talk about some of those features that go beyond just the factoring part of the business.Bharath: You know, we see this as, sort of, three phases, and this first phase is just building out this carrier payments platform, right, and taking two freight brokers and just making it as great of a product as we can and being the market leader for that. And I think we can build a massive business on just that. But like you said, I really think what's exciting here is that's, sort of, a platform to build out a lot of other cool products and services.So, phase two, I see as building this all-in-one financial services platform. And what's exciting there is there's adjacent financial services we can introduce, like credit cards or [shipper 00:29:25] finance. There's better workflow automation tools, right, to help them run a more efficient business.And where it goes from there is to this phase three, right, which is—you know, my co-founder and I joke, it's world domination, right, because there's logistics is just one of the biggest markets in the world, globally, and there's this opportunity to take this suite of solutions that we're building for freight brokers to distribute it to shippers, to carriers, to take it international, right, to Canada, Mexico, overseas to Europe, and build a payments network that allows all of these different players in the supply chain to efficiently transact with one another. And that's where I think the really exciting opportunity is, right? There's a lot to be done; there's a lot of value to create there.Jason: Yeah, no, I can imagine that the international freight landscape looks quite a bit different than the US. What are some of those, you know, interesting idiosyncrasies that you guys have uncovered? I know that's a couple phases down the line, but it is a global ecosystem, we have a global economy now, so I'm curious what opportunities you see in other countries.Bharath: Like you said, there's a lot of nuance between different countries. I think one of the biggest things that separates the US market from most other domestic freight markets, is that, besides just the dollar amount of transactions happening in the US, is that in most countries, if you go to Germany and you look at the freight that's coming in, it involves a lot of different modes of transportation more frequently than just trucks. In the US, so much of the freight movement is via trucks. Like obviously, things are shipped in, and obviously things are flown in, but trucks just make up a vast majority of it. And that becomes less true as you go to other countries. And they're reliant more on international shipments to get products in.Jason: I would assume they still also have the factoring issue. Are there other, kind of, unique issues that pertain to maritime or air freight that are kind of unique to that market versus trucks?Bharath: Of course, the factoring issue is still there. I think one of the interesting ones is around this shipper finance problem, right? So, when you look at the shippers themselves—so, like, again, these are the companies that have freight that needs to be moved—there's this issue of them getting financing both to buy the goods themselves, to pay for the very expensive shipment overseas, to pay customs and duty fees. And right now, they go to a bunch of—you know, it's a super fragmented space of independent lenders who provide this trade finance to the shippers. I think there's a really cool opportunity for us to piggyback off the business we're already building to provide a better financing solution to those shippers, right, for a couple of reasons.One is that because we're going through these freight intermediaries, we have access to all of their shippers, right? If we partner with our client and say, “Hey, we're going to distribute to your shippers. We'll do a revenue share.” Which really reduces the cost of us acquiring new clients, right, because we can just piggyback off their distribution channels. The second is that our current clients, the freight intermediaries, have all of this data on the relationship with their shipper, right?For example, if they say, like, the shipper we're working with has been doing 5 million a year in revenue every year, like clockwork, but then two years ago they did 4 million, last year they did 2 million, this year they're doing 1 million, well, that's a sign that, like, maybe we don't want to be lending a bunch of money to that business, right? So, there's interesting underwriting applications of the data they're collecting. And then finally, with these international shipments, the freight forwarders often take possession of the goods themselves, which means we can use that to secure the loans, right? Which is like, “Hey, it's a long-term relationship. If you don't pay back the first one we made, then we will take possession of these goods.” So, there's an incentive for them to make sure that we're currently—you know, we're always being paid out on time.Will: And B, one of the things we actually haven't touched on much yet is, you know, you're a lender, and would be great to spend a little bit of time talking about, like, kind of, the capital side of the business, some of the unit economics there. And you're creating a monster amount of value for your clients. How does Axle Pay make money?Bharath: Right now we have two sources of capital. So, like many tech startups, we raised money from VC funds, and that comes in as equity and funds the business operations, right? So, that's paying our salaries, our marketing spend, our software costs. Separately, we also raised debt from other sets of financial institutions, and that's where we get the money to actually lend out to the clients, right, because VCs aren't going to give you a million dollars if you're using 800,000 of that to lend to another business, right? And so this allows us to get a lot of leverage off of our equity dollars.So, when we first started, right, because we had no real operating history, we had to go out to hedge funds or high net worth individuals to get that debt that we could then lend out. I think as the business scales, there's opportunities to go to larger banks, who will, [write 00:34:29] larger credit facilities and have a lower cost of capital. And farther down the road, there's an opportunity to set up securitization programs where we're basically able to sell off that debt at an even lower cost of capital and get that off of our books, as you had alluded to.Will: Yeah, I mean, I think that there's a super interesting opportunity to do that, particularly as you accrue more data to support at least what appears to be ridiculously compelling numbers as it relates to default and repayment stats. So far it looks like unbelievably reliable borrower with a very predictable payback period.Bharath: You know, like, right now, there's a lot of people with a lot of money, looking to deploy that in the market, and getting a lot of interest from lenders of all different sizes and backgrounds who are looking for somebody to get a piece of that. So yeah, I think to your point, there's a lot of cool stuff that can be done in the long run.Jason: Well, yeah, and we've also—you know, now that we're kind of getting to a little bit into the, like, the shocks. We've had a COVID impact, you know, massive global supply chain shortages. We also at the same time have kind of a generational shift in a lot of these, you know, under-digitized industries that are now rapidly digitizing. I'm curious what you see as kind of like, the macro impacts on the freight space right now, and how that's been evolving and maybe accelerating in the past year or two.Bharath: The obvious one is, like, the current supply chain crisis. I think people naturally look for a single cause and effect, which is tough to do here because there's a lot of problems, right? There's raw material shortages, there's exceptionally high demand, there's driver shortages, factory closures, right? And I think a lot of these are, you know, indirectly caused by COVID, people not being able to work, so the factory shuts down; people not being able to spend money on anything except physical goods, so they're just buying a ton of physical goods. And I think there's this narrative that, like, oh COVID caused this supply chain crisis, which is not entirely true, right?I think, yes, those are all causes of the current crisis, and COVID did sort of supercharge the problem, but there were underlying trends which I think made this crisis somewhat inevitable and which are continuing to accelerate. One of these is, this is just the growth in e-commerce. Obviously, the growth in e-commerce is increasing demand, but what's more interesting is that it's not just increasing demand; it's a new type of demand, that's putting a ton of stress on supply chains, right? Before, you would go to Walmart and you would buy whatever Walmart had in stock, and there's sort of a handful of brands they carry in stock for each good, and you go get it there. And that's a fairly simple supply chain problem.But today, you go to Amazon, which is, you know, quote-unquote, “The everything store,” and there's a million different brands for every product you want to get. And then there's actually a ton of things you can't get on Amazon that all these direct-to-consumer brands are selling to you that, you know, creating more competition. And each one of these companies needs to have their own supply chain set up to be able to deliver a product in two days to you, wherever you are in the country, right, which is a much more interesting and complex problem than what we've been dealing with in the past. Then if you combine this with globalization and the diversification of supply chains—so people are getting those products from different parts in the world—you get even more complexity. And then you look at this in the context of an industry where technology and processes just really haven't evolved much in a decade, and you get a recipe for disaster, right?They're solving today's highly complex problem with tools that were designed for a much, much simpler supply chain. So, you know, this is going to sound really self-serving, but to me, the obvious solution is in technology, right? We need better visibility into the movements of goods and the status of payments up and down the supply chain. We need to make it easier for brokers and for forwarders to run really efficient business operations. We need to supply them with the analytics that allow them to see problems in the supply chain before they become an all-out crisis.And you know, I don't think—I'd be lying if I said Axle is going to single-handedly deliver all of these solutions to the market, but I do think will be a key piece of that solution, and I think there are a number of other really cool, interesting companies in the supply chain tech space that are delivering the rest of this solution.Will: B, what does the market look like in ten years when, you know, you're a public company, you have sufficiently armed the long tail of these great intermediaries with the digital tools to succeed and grow in kind of a, you know, modern supply chain, what has changed forever? Are there any, you know, kind of, predictions you have about the way the Axle Pay is going to dramatically alter the topology of this industry?Bharath: Yeah. I mean, I think from, like, a payments side, it's just going to be clean and efficient, right? It's not going to have multiple companies auditing the same physical piece of paper to find out if a load was delivered on time, right? That data is going to be digital and it's going to be easily accessible by everyone up and down the supply chain. Payments will flow seamlessly between parties, access to capital to scale will be a lot more efficient so you're not going to have these behemoths existing just because they happen to have access to capita;. It's going to be the businesses that actually run the most efficient operation to deliver the best service will get access to capital they need in order to scale it, and those are the businesses that dominate the market.Will: And so, I mean, that sounds a little bit like we're almost predicting that what is today an unbelievably fragmented market, once armed with these digital tools, is potentially going to see some consolidation, right? I mean, and a lot of your customers have operated in almost an exclusively regional kind of mindset for, you know, basically their entire existence. With these new tools, do you think that they start to—we start to see more national expansion from some of the leaders of the pack here, and therefore some consolidation?Bharath: Yeah. So, I think the market will still be fragmented, but I think it will be relatively a little bit less fragmented. So, I think to your point, there will be some consolidation. I don't think it's going to have—you know, I don't think the market has, like, winner-take-all dynamics where there's going to be, you know, two or three freight brokers that dominate the US market. I think it's going to be a lot of smaller freight brokers who are able to deliver really good, tailored service to their clients, but maybe it won't be 100,000 freight intermediaries in the country.Jason: I think there is, like, a generational shift that's happening, and the people who grew up on, like, iPhones and smartphones, [audio break 00:41:16] and they also don't know how to fax anything [laugh]. Like, I have no idea how to fax things. I could watch a YouTube video to figure it out. There are also—as you kind of mentioned a little bit in the consolidation piece, like, is it going to go truly national?—there are benefits to the existing players, and I'm curious, like, what resistance there is in the market to change.Because, like, e-commerce isn't new, factoring isn't new, tech in workflows isn't new but, you know, for some reason, it feels like they're all coming to a head. You tend to have people who were, kind of like, on the forefront but, you know, maybe there are pockets that have resisted for one reason or another.Bharath: You know, we've definitely spoken to brokers who are basically like, “Brokers shouldn't need factoring because they shouldn't need to QuickPay carriers, right, so I don't want to work with you.” Which is very much this mindset of like, “Hey, when I built this business, this was not a problem, so I don't need this solution because that's the way things are.” Which is just, you know, it's the resistance to change. And I think that's the same approach which is like, “Hey, I don't need to provide visibility to my customers in real time because I built a great business and never did that, so why do I need to do it now?”And I think what's inevitable is that those companies are not going to be… around in ten years, right? Because at the same time, there's a bunch of other people we've worked with who are 28-year-olds, 32-year-olds, starting freight brokerages who are asking—you know, emailing us, asking us if we have an API, right? Like, “Hey, can you integrate with our stuff because we'd rather pipe all this data in so we don't have to do manual data entry.” That attitude is going to get them so much farther than someone who's just like, very resistant to change, right? And I think what's going to be great is that some of these companies have, like, the best of both worlds; some of our clients are just, like, super, super smart people who have a ton of logistics experience, who are great at running a business, and who realized, like, technology is not going to solve all of your problems, but it's going to solve your technology problems, right? It's going to solve a lot of things that you would have had to do manually otherwise.And so they're building businesses that are growing incredibly fast. I think it's easy to sort of paint the whole industry with a brush and say, “Oh, like, freight brokers are outdated.” And on average, I think that's true, but like you said, there's pockets here and there which are very tech-forward, who are reading about ways to implement technology to make their business better, and who are probably going to be the market leaders in five, six years.Jason: I always think it is fascinating in these markets that are meaningfully digitizing for the first time—like, they're using some software, but not modern software—the kind of tension between pushing, you know, all the way to the forefront with, you know, the demands of the customer base that might only be able to meet you halfway. Like what you have to do? Like, do you guys still enable people to manage, like, faxes coming in? Like, what did you kind of have to build in the product that made it attractive enough for the freight company that's been operating for 100 years and it's been passed down, you know, from generation to generation to the 28-year-old, who's just starting their own?Bharath: Yeah, that's a good question. So, we don't take faxes, but we have run into issues that, like, you know, I wouldn't have expected we ran into, and so we've had to build around it. So, for example, we've had clients who forgot their email address, right, which for me, is like forgetting your own name because it's so core to, like, you know, that's—it's like, I'd forget my phone number before I got my email. But that's, you know, they just come from a different world where it's just not as important. We had to build up the functionality for us to send payments by check—even though we offer free electronic payments—because a huge chunk of carriers would prefer to receive a check in the mail instead of getting the money direct-deposited into their account for whatever reason. And so, like, you know, we had to go integrate with another company and figure out how to manage that process.So, there's definitely been, you know, a number of these things which are like, if you asked me to write a list of the problems we might face, this would not have come up on that list, but by virtue of, like, the industry being a little bit older and used to different types of practices, we've run into those issues and we've been able to solve them. And I think that's part of it; like you said, it's meeting them halfway because everyone's sort of at a different point on this curve.Jason: Yeah. Because you're there to serve the customer, right? And so you got to kind of meet them where they are. Which I think makes a lot of sense and makes this a particularly interesting challenge to solve because you're solving for a fairly broad. Swath of customers that are—you know, might as a whole look homogeneous, but are heterogeneous, particularly because they're regional and smaller, older generation, you know, newer generation, et cetera. That's really interesting.Will: Bharath, thank you for joining us today, man. This is awesome.Will: Thank you for listening to Perfectly Boring. You can keep up the latest on the podcast at perfectlyboring.com, and follow us on Apple, Spotify, or wherever you listen to podcasts. We'll see you next time.

In this episode, we cover: 00:00:00 - Reflections on the Episode 00:03:15 - What is Mortgage Servicing 00:13:20 - Impact of the Great Financial Crisis  00:18:40 - Andrew's Background 00:24:10 - Valon's Technological Innovations  00:31:06 - Relationship with the Consumer  00:36:00 - Regulations and Regulators  00:40:40 - Valon's Future/Outro Links:Website: Valon TranscriptJason: Welcome to the Perfectly Boring podcast. Today we have Andrew Wang, CEO of Valon, on the show, and today we're taking on the topic of mortgage servicing. So quickly, what is mortgage servicing?Well, a mortgage is obviously a loan for a home. And mortgage servicing is the institutions that actually take care of paying off that loan over the 10-, 20-, 30-year timeline. So, that digital interface where you pay your bill, et cetera, that is not always your originating bank. And Andrew is building a fascinating business in this space. We learned a lot about the mortgage, the evolution of the mortgage servicing space over time, the impact of the great financial crisis, and the interesting approach Valon is taken, not only just with technology, but changing the relationship with the end customer. So, what were some of the interesting touch points that we got during the conversation, Will?Will: It was a really wild discussion because I started with a fairly preliminary understanding of what mortgage servicing was. And in part of the wind up that listeners are going to get an opportunity to hear, Andrew really gives us a perspective as to how critical mortgage servicing is to the underlying health of the US, and therefore global, economy, and how much of an afterthought mortgage servicing has historically been, and why that should not necessarily be the case, and why now is the, sort of, unique moment in time to be able to use advanced technology and a reorganization of the overall stack for mortgage servicing to bring a better product to market for both consumers, for originators, for investors, and for regulators. And so, I mean, really badass discussion, really cool company, a space most people never think about, definitely a boring space, but with a just immense amount of value to be created.Jason: Yeah, and hopefully our listeners go through kind of the same increase in excitement that I had during the conversation, which is you kind of over time just realize this entire industry of mortgage servicing, not only is it critical, but how much they're missing the actual point which is, if you really just focus on the homeowner and creating a great experience for them, this is a huge relationship, it's a multi-decade relationship, and there's probably not just one product you can offer them. But they're stuck in the staid and stodgy technology of yore, and haven't been able to move as quickly and break through to open that aperture and open that relationship with their customer. So, before we get too deep into the weeds, let's just jump into the interview. Here's Andrew.Will: Andrew Wang, founder and CEO of Valon, thank you for being on the podcast with us today to talk about the very boring, very large industry of mortgage servicing. For the benefit of our listeners, it would be good to start at a really high level and give people kind of a baseline for what mortgage servicing is, and maybe a little just on the history of the mortgage servicing industry, you know, before we dive in a little bit on the specifics of your background and Valon.Andrew: So, mortgage servicing is a sort of pervasive thing that exists throughout the mortgage ecosystem and in the lives of most American homeowners, but it is also just not very well understood in terms of the dynamics that are involved with mortgage servicing in terms of who's involved, how they're involved, and exactly what they do. But again, nonetheless, it's something where it's within every part of the mortgage ecosystem today. But to give you some background on mortgages and how mortgage servicing even is a real thing, let me first talk about the mortgage industry as a whole. When you think about the mortgage industry, it's obviously a very large component of the American economy today. When people look at it, they say, “Hey, 20% of GDP in terms of housing,” something that the US government often uses in order to boost spending; they lower our mortgage rates in order to cause people to have more savings and then spend on other things. It's just a very, very core piece of the American ecosystem.But it actually came into play really, during the depression, the Great Depression, were effectively pre the Great Depression, mortgages weren't really regulated all that much, and as a result, there were kind of weird, funky structures, even crazier than what people saw in 2007. And as a result of that and as a result of all these people who weren't able to pay their mortgages due to these balloon loans being in place, which are basically loans that don't amortize, and basically become due and payable at a certain point in time, what the US government did as a function of the New Deal was put these government institutions into place to create more affordable housing structures, to create these institutions who would really regulate the housing market, or really add liquidity into the housing market so Americans could actually own a home.Will: And that kicked off the current, almost philosophical ideal that we have today about homeownership kind of being the epitome of the American dream. This was—the mortgage was almost an invention to bring that to fruition after World War Two?Andrew: That's exactly right. So, after World War Two, it became more and more core to the American dream. When everybody talks about, “Hey, what is the American dream?” It's obviously being able to get further in life based on your own merits, it's about owning a home, and starting a family, building a community, all of those different things, and the home is just so central to that dream. But exactly to your point, it started from post-World War Two.By the 1990s, it became such a large component of how the US economy even functioned and worked that there was more and more so this focus on affordable housing, putting people in homes, putting people in sort of a structure that creates the ability, creates stronger communities, and create a more robust ecosystem within cities, within neighborhoods, and everything else. So, that's how mortgages became so intertwined in the American system versus, you know, other countries, which may have relatively high homeownership rates, but just not nearly as high as the United States. That's, like, the genesis of how mortgages became a big component of it. The mortgage servicing aspect of it actually wasn't as relevant of a thing, that became more of a thing, actually, after the great financial crisis, the GFC. So pre-2008, what ended up happening was actually that most people when they got a mortgage were serviced by the same people who gave them that mortgage. So, you had Countrywide, you had some of these older institutions which have since gone bankrupt or have been acquired by more older financial institutions, servicing the mortgages. So, it wasn't really a separate thing, for the most part, at that point in time, and it wasn't really an important topic, actually.Jason: Before we go too deep, maybe you can define servicing. Like, how does that show up in the average American's life? What is servicing when it comes to an individual?Andrew: So, mortgage servicing specifically is what happens right after you get a new mortgage. So, when you get a new mortgage, you go to your originator. It can be someone who works at a bank, it could be mortgage broker that is a family friend of yours, it could be someone on Main Street who has a sign out that says, “I'm a mortgage lender. Come inquire about rates.” Once you get that mortgage from them, you have to make the payments back because you've got the mortgage to buy your home.That entire process of making those payments and the institution that you make those payments towards, that is the mortgage servicer. Now, when you look at that very simply, that is similar to a debt collection agency where you're effectively making payments, they're collecting on the debt and they're making those payments back to the person who made that mortgage. Now, what's actually more complex about mortgage servicing, as opposed to normal general debt collection is the fact that one, there's a lot of more regulation associated with it, right, because there is a home involved, and there's a lot of regulation around how you deal with homes; there's a second component which is, as per the government agencies and as per many state regulatory agencies, you are considered the trusted financial advisor to the homeowner along the homeownership journey. So, when a homeowner says, “Hey, I'm unable to make a payment; I need some help,” the mortgage servicer isn't allowed to just say, “I don't care. Deal with it,” they're often required to go through all these interactive processes to make sure that the homeowner can actually get the right solution and continue owning their home.Long story short, just jumping quickly back to what we were just talking about, it's really core, and part of the thesis, really, of the American economy that they want to keep people in homes, they want to keep people getting homes, increase the homeownership rate, make it part of the American dream. So, what they did was they made mortgage servicers responsible for keeping people in homes.Jason: Gotcha. And this was on the back of the great financial crisis?Andrew: Correct. Actually, it was there before but what I was trying to really get into was that pre the great financial crisis, it wasn't as really hot of a topic because homes were honestly increasing prices all the time; anyone who bought a home basically made money on their home, so just not really a big worry throughout the entire ecosystem. So, when people thought about mortgage servicing back then, it existed but it wasn't really a concern. It wasn't a focus of both regulators, politicians, really anyone in the entire ecosystem. But when the great financial crisis happened, what ended up happening was, well, people weren't able to get out of their homes, they weren't able to pay for their homes, their homes were less valuable than the mortgage that they took out.And as I mentioned just right now, the mortgage servicing process is actually also the process of helping the homeowner stay in that home. And that's why home mortgage servicing became such a large topic and became such a large focus because post the great financial crisis, it became all about making sure that people who took out these mortgages were able to put themselves in a position where they were able to keep their homes. Obviously, there was a lot of difficulty with respect to it. Obviously, there were a lot of people who were unable to actually pay for their mortgages on an ongoing basis, so there were a lot of what's called modifications, basically changes to the underlying mortgage in order to make it affordable. But that entire ecosystem really exploded both from a regulatory scrutiny perspective, from the amount of activity that was happening in it because of the great financial crisis.Jason: So Andrew, why does mortgage servicing even exist to begin with?Andrew: Yeah. So, this is one of those really long archaic, sort of, pieces of knowledge that people have to understand the ecosystem, understand the history, understand all the different dynamics before they end up realizing why it's even a piece of the entire pie. And if you look at other countries out there, like Great Britain, Asian countries where there's tons of mortgages, as well—China, Japan—but mortgage servicing as a separate concept, it's just not really a thing. So, it's really, for the United States, a concept that is tied to Fannie, Freddie, FHA, VA—which are basically Ginnie—these government institutions. So, the long story short, but still very long story, is that when the government put these different institutions in place, they created a concept where basically the underlying person who they wanted to interact with the mortgage was still the originator.So, I make a mortgage, my business isn't to hold this mortgage because the government wants to buy the mortgage and make it more liquid, and therefore more people can make mortgages, and therefore the cost of a mortgage is lower, but I still want you to be the person who interacts with the homeowner. So, I want to split this concept out. I'm going to own the mortgage, you're going to service the mortgage. And let's stick with that for now. So, that was, like, phase one of it.Then phase two of it was the fact that well, if that's going to happen, then every single person who makes a mortgage needs to be able to service the mortgage, so that's not fair to mom and pop shops across Main Street. If I originate whatever, 10, 20, 50, 100 mortgages a month, I'm not going to be at a place or a scale where I can run a true mortgage servicing operation. It just doesn't work. So, how am I going to deal with it? So, the government, again, to try to incentivize mortgage lending to incentivize liquidity in the space, said, “Fine. You can sell that servicing to another guy who then will deal with the relationship.”And boom, thus mortgage servicing is born, the idea of mortgage servicing is born, and this entire ecosystem then diverges. And really, not just diverges, it converges really to an efficient model of saying who is the best at mortgage servicing? Who are these cheap cost providers who are in the Midwest, who do it poorly, but thus can pay the highest price for mortgage servicing, and thus that's where all of the capital and all of the assets, sort of, flow? And that's why we live in the world we live in.Will: So, servicing is kind of an afterthought for the majority of the existence of a mortgage industry at large. Until, '08, '09. In '08, '09, everybody starts fixating on the servicing process as what it should always have been looked at, which is this really critical interface between the borrower and the lender, to a degree. And as a part of all of the regulation and the ongoing focus on servicing during that period of time, as we almost reworked the entire housing market, the cost to serve as a mortgage also changed a lot. Maybe you could just touch on that because there are a lot of compliance and regulatory framework aimed at servicing actually dramatically increased the complexity of doing servicing, which I think had a pretty profound impact on the cost to do so, right?Andrew: Yep. So, to elaborate further on these points that you're mentioning, the mortgage servicing ecosystem was really underdeveloped, both from one technology perspective as well as an understanding perspective, pre-2008. Again, people were not really afraid of being able to pay mortgages because naturally whenever you couldn't, you just sold your home and you probably made money on it. So, it's debatable as to whether or not [unintelligible 00:14:48] people are fully compliant back then whether the cost of servicing would be higher, but nonetheless, it is based on the data that people can see in the financials of mortgage servicing companies. Mortgage servicing became extremely expensive and really double, tripled in costs post-2008.And the way that it played out was basically the great financial crisis happened; people were unable to pay their mortgages; the traditional way would be to just put people out of homes, and as I mentioned earlier, the government's very incentivized to keep people in homes. And in order to make sure that the servicers were doing the right things, they basically put a bunch of different regulations both on the federal level and the state level to ensure that mortgage servicers were following the right processes in order to determine whether or not someone could make a payment for the mortgage, make sure that they're offered the right plans, and to make sure they were provided the right disclosures before they actually got through a process of foreclosing. So, when they put these regulations in place, normally you would think, “Well, these things can be somewhat automated. These things can be provided as part of the process.” But as I mentioned because it was so under-focused, there was just really not that much technology in the space, really not that many technological providers even involved in the industry.There's one main one, named Black Knight. So, when this all happened, these servicers went to Black Knight and basically asked them, “Hey, well, we are running into these issues. Can you help us?” And the answer was, quite frankly, “We will try, but we can't really guarantee all that much to you because there's a lot of changes, there's a lot of code that needs to change, and we just can't get it all done that quickly.” So, the only way that the mortgage servicers could handle these different regulatory requirements was basically to put people in place.You basically replaced what you would like to use, or what like to get done with technology, with people. So, you basically have this explosion of people cost in the number of people required to service a mortgage, and basically got to a place where today, there's two to three times as many people who need to be involved in a mortgage, versus pre-2008.Jason: What does the actual structure and distribution of mortgage servicers look like today, and how has that changed since the great financial crisis?Andrew: It's one of the things that honestly, the government focuses a lot on. There's a term, which is systematically relevant of financial institutions. So pre-2008, like I mentioned, there wasn't really that much of a concept of mortgage servicing. There were mortgage servicers out there, but most of the servicing was still held by the originators who made the mortgages. So, as a function of that, the ownership and really the people or entities that were servicing the mortgages was distributed quite similarly to the origination volumes.The guys who made the mortgages were the guys who serviced the mortgages, and as a result, there was a good split between bank who were very involved in mortgage space, as well as non-bank entities became more relevant, you know, probably post-2005. Today, we've gone into a world that is more and more non-bank-oriented, meaning the regulations have stepped up to such a dramatic degree that the underlying institutions who were originally involved had really substantially changed. I'll give you some simple examples. CitiMortgage, one of the largest originators previously, still a very large originator probably top five, now no longer services its own mortgages. It's completely outsourced—I think as of 2017—all of their mortgage servicing to Cenlar.Similarly, US Bank is no longer servicing their mortgages. The folks at JPMorgan Chase, Jamie Dimon has, you know, publicly stated that they want to get out of this business and they've been working with other sub-servicers to slowly migrate to a place where they're not servicing their mortgages anymore. So today, you are in a world now, where it's basically 70% non-bank dominated versus pre-2008, we were in a world that was probably 70% bank dominated.Jason: You're painted a really stark picture of an increasingly disjointed, highly regulated, under-digitized, mortgage servicing market. This sets the table really well, I'm sure, to start to talk about how you're changing those dynamics with Valon. But before we dive into the company, maybe you can give us a bit of background as to how you personally got involved with mortgage servicing to begin with.Andrew: I like to coin—or use the term that I am an accidental operator because my background is actually on the investment side. I started out, really, in my career focusing on investing in some of these legacy mortgages. So, my first job out of college was working at Goldman. I was on what's called the short-term products [unintelligible 00:19:24], did some stuff with mortgages, I did some stuff with aircraft, but I quickly moved over to a Soros Fund Management where my primary job was actually to look at mortgages. So, I started out actually looking at the legacy, what's called non-agency residential mortgage-backed securities, and looking at the data underneath and seeing what was going on with these mortgages.Naturally, as with much of the market, we went from buying these securities to a place where we started buying the underlying home loans, the actual mortgages as opposed to the securities that you can buy on an exchange. And as a function of that, I ended up having to work with the servicers because when you buy the whole loan, unlike a security where everything's packaged up for you, you don't have to think about the accounting, the servicing, whatever else, when you buy the whole loan, you have to go find the guy who's selling the whole loan, you got to understand what he's doing, so he's not selling us stuff that you didn't want to buy, he's running the processes the right way, and you also have to go work with the servicer to actually get the servicing to happen, because it's a licensed activity. So unsurprisingly, the way I got about it was I started calling all my friends who had owned whole-loan portfolios before, and I asked them, “Who do you guys work with? Who should I be talking to you?” And the answer was, very simply, “They all suck.” Like, nobody likes your servicer.Now, you would think that would be an answer purely from one perspective, one angle like it'd be the perspective of an investor, maybe they charge too much. But it turns out it's because they aren't liked by the consumer, extremely low NPS scores of on average about 16; they aren't liked by their investors, they're extremely commoditized and extremely poor customer service, and they're most certainly not liked by the regulators who just keep fining them over and over again. You search mortgage servicing [unintelligible 00:21:07], you basically have, like, thousands of pages about this. And it's still even happening today. And it's not even entities that, you know, are foreign and pretty small and not understood; it's even large institutions like Citibank which is—like I said—why they got out of mortgage servicing.So naturally, my view on it was, well, this seems like something that technology can solve. This is something that we should be able to do better. This seemed insane that in the 21st century, that we're still dealing with this type of stuff. But as you start to dig in more and you start to pry into the actual underlying business, you start to understand both the complexities from an execution perspective and the actual underlying technological challenges. So, I ended up trying to find a couple of venture companies to invest in to go do this, but I actually couldn't find anyone who had the right idea, the right setup, the right vision in terms of how to build this company.So, you know, I went about my way, kind of left this on the side, and focused on other things at the time. But actually came back to it when I started looking at mortgage servicing rights which, at the time, I didn't understand nearly as well because I bought what are called whole loan mortgages, this entire mortgage. Mortgage servicing rights are basically the contractual relationship between the person who owns the right to service the mortgage—like I said, to collect, to interact, to really deal with the data of the mortgage borrower—and the person who actually services the mortgage. So, it's the contractual right that allows you to sub-service a mortgage out. What's interesting about that is that is basically a way to own that relationship and contract that relationship long-term.And for me, as someone who had started looking more and more into FinTech, the way I sort of saw it was, here is a way and here is an asset class, and here's a space that actually allows the mortgage servicer to own these relationships and do have these long, sticky monthly engagement type relationships that they can have over 7, 10, 30 years. And that's a very unique thing to have. More importantly and most interestingly, it's in a situation where actually in this ecosystem, people pay you to own that relationship, people pay you monthly fees to say, “Hey, actually work with the borrower. Hey, actually interact with them, help them find what they need, whatever else, and we'll pay to do it, and you're allowed to market additional things to them.” So, to me, that seems like such an interesting situation because not only can you have a business that is built to really improve the margins of the business and build automation around it, but you have this sticky relationship with the homeowner that you can really use to build trust, and really sell future financial products to.And that just seems like a very interesting business in my mind. So ultimately, I decided, hey, investing is interesting but this seems like too big of an opportunity to give up. So, I decided I wanted to go start a business, and this was the business I started, you know, right after.Jason: And one of the most interesting things to me is that it's not just a software component, right? Because you had looked at a number of other software providers and decided to do something a little bit more full-stack, which we don't typically see in the venture space. People tend to just want the software component and tend to steer clear of the services component. Maybe you can talk a little bit about why you still decided to include services as a part of what Valon offers.Andrew: There's an understanding amongst most venture investors that you want to be in the software business because it has a high margin business, it's defensible business, and it's less subject to changes in terms of margin profile because of the large amount of margin you have. Which, you know, is understandable. And that's ultimately actually where we thought we were going to get to, until we dug into and, sort of, operating this business, the actual origin of starting a mortgage servicing company as opposed to just the technology company was the fact that we realized that existing players were hamstrung by their current software in such a crazy degree that they weren't even able to migrate off of their existing systems to a new system. It's also a super-regulated space so anybody who wants to do it, wanted or needed to see clear performance, clear audits, really regulatory buy-in before they even made those things. So, it actually started out originally as an execution [ploy 00:25:31] where we said, “Well, we can execute faster, we can learn faster, we can dogfood our own product so much faster, and come back to people later on once we've been able to show these numbers.”But as we started doing this business more and more, we began to further understand that there's actually a really, really great opportunity running the mortgage servicer because you have that direct customer relationship. And that's such a valuable thing because even if we had automated all of the backend processes and even if we were focused on just making these margins more efficient, it's not really fundamentally changing how the borrower perceives it. It's changing the financial profile of these businesses. And additionally, a lot of the things that we wanted to do was build trust, and that's a front-facing thing; that's something that you need to be invested in as a business, which a lot of the existing mortgage servicers didn't have that perspective and that view. So, for us, it became more and more of a consumer story versus an enterprise SaaS story where we can say, “Hey, not only can we get this cash flow machine by doing servicing well and build really good software around it, but we can really build a great partnership with the homeowners that are being serviced by us and really build longer-term relationships with them.” So, that's where I think the turning point change from, “Hey, we're doing this out of necessity,” to, “Hey, we're doing this because we think it's the best thing we can be doing for people.”Jason: I love also that because the existing system isn't able to migrate off, their slow and outdated solutions and they're a highly fragmented space, it's effectively a commodity; you can come in, build a whole new tech stack, still put humans against the problem, but undercut on price. But you kind of used that extra cost as a way to broker a relationship directly with the consumer and offer a more expansive and holistic product over decades, which is a fascinating inversion of what the traditional mortgage servicing mantra and MO is. Maybe you can talk to us about how you actually convinced the originators and loan purchasers, mortgage purchasers, to trust you and your new small startup to actually service those loans? Because it feels like a difficult business to really get your foot in the door and get those initial loans through the platform so that you can build that trust with the originators and the loan owners as well.Andrew: To your exact point, it's a business that's extremely difficult to get into, [again 00:27:52], a lot of regulatory scrutiny, there's a lot of requirements to get into the business. And just name a couple here, you need—generally speaking—all 50 states licensed for you to be a quote-unquote, “Scaled servicer.” You need to have what's called agency approval, Fannie and Freddie approval, to be able to service most mortgages in the United States. So, between those different aspects, it's really hard to even get the legal requirements to be involved in this business, let alone get commercial contracts.But the way we approached this was really two-fold. The first part of it is, we were fortunate going into this space knowing that the existing players were so bad and so commoditized that actually, people were willing to work with different servicers. I'll give you a really simple example here: there's a company out there that we partnered with, it was one of our big investors, it's called to NRZ, and they're one of the largest owners of these mortgage assets. They own, like, 7% of the entire market. They own their own servicer, it's called Shellpoint.But even as an owner of that servicer, they don't actually give all of their business to their own business. And that's because they're trying to keep them competitive, that's because they're trying to diversify their risks, but the very fact that they don't give all their business to the entity that they are most financially incentivized to work with gives you a little bit of insight into how everybody thinks about this space, which is, “I'm not married to my vendor. I'm going to work with anybody who seems to be better. And there's a lot of things that are lacking, so you can try to convince me in a variety of different perspectives.” Obviously, if you've increase the bar because you've improved everything, that will no longer be the case, but today as it stands, that's how the ecosystem works.The second part of it, which is we actually went into this knowing that if we need these portfolios, we don't want to just have to convince people, we want to guarantees. So, we actually made sure that the initial investors in this company, the people who would take the benefits and the fruits of the technology that we built are some of the largest players in the space. So, we actually got folks like for example, Soros, NRZ, Jefferies, and a couple of other guys later on, to invest in the company with the belief that, “Hey, if I give you some mortgages to service and you actually are able to improve these margins, our business will be that much better off for it.” In some sense, they view this as, “Hey, this is an outsourced R&D effort. We can't hire good enough technical talent internally; we'll give you guys that through an equity investment, and if you guys win, we also win.”If you think about it as an example, NRZ spends something like, eh, on order of a billion dollars a year on servicing fees. If we can truly save them 10% on it and give that back to them—and let's say we save more than that, but we're just getting ten—well, that's $100 million a year that they're saving. And the way that their investments, or really their fund is really valued, that's a billion dollars of value that was just created. So, that's what's so interesting about this space which is, you have these players who are very incentivized for our success and we just made sure that we went to them very early on and said, “Hey, we're going to get this done. This is a very low risk for you; we're going to ask for a small portfolio, but if you give it to us and we succeed, we can both be big winners at the end of the day.” It's really about incentive alignment.Will: Andrew, I think one of the more profound things that you brought up here is that you're being paid to have a direct relationship with a consumer, a home-owning consumer, and that historically, I think mortgage servicers were happy being collection agents and not thinking about the long-term relationship that they had with the consumer, thinking about themselves as a commodity. How do you think about the relationship that you have with a consumer over the arc of your relationship with them and the types of products and services that you can start to bolt onto that relationship?Andrew: This is a really crucial point for us as a business, which is fundamentally and philosophically different from preexisting and the incumbent mortgage servicers. So today, the way people view this industry is that they view the extraction of value from the consumer as how they are still in business, the way that they generate margin. Meaning if there's a way I can extract an extra dollar from the consumer, for example, if I charge them a fee for making a payment online or for convenience, that's how they are continuing to make profits. Which is a very foreign and crazy concept, obviously, for people who are in venture and tech, et cetera. We take the approach that we want everything that we can do to make the consumer happier.a happier customer and investment towards making their experience better is how we actually make money. Because if you remember, at the outset, we don't actually make money from the consumer directly; we make money from servicing mortgages. And to us, the most efficient way to service the mortgage is a borrower who wants to use our automated products, who trusts us, and who doesn't call us with a lot of difficult questions. So, to do that, you have to really make sure you do everything right for the consumer so they are willing to trust you with that large financial ticket item that is their home. Now, I'll give you a couple of cool examples as to what you can do if you're a mortgage servicer who's really focused this way.So, really simple example; today, a lot of homeowners actually don't even use autopay, and you get a variety of different explanations. One of the really good explanations is that many people actually have lumpy incomes, so they don't really know when they'll get paid. Now, they want to use autopay, but the problem is because they don't know when they'll actually get paid, they need to make sure that they're paying when there's money in their bank. They don't want NSF fees, they don't want overdraft fees. We can use integrations with folks like Plaid to check their bank account and make sure that they have enough funds in their bank account before we pull, basically guarantee to them that you'll never get these type of fees.Now, that increases the convenience for the homeowner and allows them to put themselves on autopay, reduces actually for us the amount of times we have a call to make sure that they remembered to pay, and then overall, it actually results in a situation where we save more money and thus we make more profits at the end of the day. That's a really, really simple example.Another deeper layer you could go for example would be to tell people, “Hey, instead of just paying your mortgage through bill pay or whatever else that you're using, why don't you set up autopay and when you set up autopay will take $1 every time you use autopay and we'll actually pay it towards the next delinquent borrower.” Meaning it's a charitable donation; we're taking money out of our pockets to pay a delinquent borrower. Now, that doesn't seem like a big impact when you just think about the dollar, but when you think about the percentage of people who are current, and then people all do this, we actually can generate enough money that we can donate to delinquent borrowers. It actually reduces our overall delinquency rate and therefore our overall costs as a mortgage servicing company. That's virtually unheard of.Lower delinquency rates look better for agencies, for regulators, for investors, and we can do in a way which really doesn't take any money out of our own pockets, it just reduces costs because we're servicing with a lower friction way, but actually generates a lot of goodwill with the homeowner. Which then leads us into the second part, which is, well, we can actually cause people to stay on our platform because as the servicer, we actually can offer them the lowest rate possible. If you look at a world that we service the mortgage as well as originate, we don't care that much about making money on originations because we own the consumer, we own that relationship. And we know everything about them; we also have most of the information, so it's easily preprocessable. Which means that we can go to the homeowner and say, “You know, you're usually going to try to refinance right now, but I'll give you the best rate because I have zero marketing costs, and I just want to keep working with you.”So, you don't even need to shop with everybody else because I'm going to preload it, I'm going to give you the best rate, and you're going to have a very smooth origination process and servicing process because nothing will move off. So, you get more and more into these type of conversations around, hey, because of our relationship, because of the trust we build, we can offer people more and more products that honestly make them happier, and ultimately that will drive them towards using us more longer-term, which is exactly what we want. And that's what we find so interesting about the mortgage servicing space because while it's not understood this way today, it is the perfect setup to be in a situation where you're really building a long-term financial platform, and the mortgage is that linchpin to getting into that consumers life and really trying to build that trust relationship with them long-term.Jason: I've got to imagine the regulators absolutely love what you're doing. I'm curious if you're thinking through feeding that data loop back into the regulators because I can't imagine the regulation has gone down since a great financial crisis. I'm curious what relationship you have with the government on this front.Andrew: So, our relationship is primarily with the agencies. When you think about regulators, there are regulators who are the state regulators—they manage their own department of financial services in each state—there's obviously the CFPB, and then there's Fannie and Freddie who are called regulators, but really they're investors by and really regulate the mortgage market through their buying of mortgages. But from Fannie and Freddie's perspective, yeah, this is—you hit the nail on the head; this is exactly what they want, this is what they've been seeking for. When you look up on Fanny's website, “Hey, what is a servicer?” They literally write, “Trusted financial advisor.” That's what they want.But nobody does it today, and there's not much that they can do about it. So, from their perspective, they love this outcome where the servicer is thinking about this; they love an outcome where if the homeowner gets a stay with their originator, they have that continuity of relationship; and then they lastly love the outcome where if we are providing this platform on a greater scale, they then don't have to worry as much about the volatility of earnings for originators because they have this blended financial profile. It basically turns in originator from a company that basically has highs and lows based on how much origination is happening to a customer relationship management company. And that is honestly where they want this stuff to go long-term.Jason: And do individual homeowners get any say in the decision on who gets to service their mortgage? Or is it entirely up to the originals?Andrew: Unfortunately, it's buried on page whatever—probably, like, ten—on your closing disclosure, and then later on your mortgage documents, you get put to whoever your mortgage originator wants you to be serviced by.Jason: So, the way you'll… [laugh] coming into a home near you will be through your success with the people who are originating the mortgages and paying for that mortgage servicing contract?Andrew: Today, that is the case, but in very short order, by the end of the year, you can get a Valon mortgage. And when you're with Valon, you stay with Valon. We won't sell your mortgage, we'll keep your mortgage on our platform, and we'll build that long-term trust-based relationship with you.Jason: Tell us more about that.Andrew: Yeah, so we—I mean, we would love for a world—and this is something, by the way, plenty of people have gripes about where they want to be able to have a mortgage that they transfer the servicing based on their own discretion, based on who they want to work with, but that's a longer-term conversation, that's a highly regulator-based conversation. So, it's something that's not going to happen tomorrow. The easiest way that we can become partners with people who actually want to work with Valon is that we offer them a highly competitive mortgage. Again, the fact of the matter is, we don't need to make money off of mortgage origination; we make money off of having the consumer stay with us. So, we'll be happy to offer them possibly the lowest rates that they can get.So, when they come to Valon, they can get their mortgage refinanced, or if they're getting a new mortgage, they can just get a mortgage from Valon, and then thereafter, they'll continue to stay with Valon. There'll be serviced by Valon, when rates drop, we'll just be proactive and we'll preempt any sort of refinance that they want to do. They can log onto our webpage, they can log onto their app, and they will exactly know how much they can refinance it for, what the costs are, all those different things. But again, the nice part here is because we don't really need to make money on originations, like a Quicken, like a [loanDepot 00:40:13], or any of these other players out there—even Better Mortgage—they know that we have an incentive just to keep them on a platform and we can offer that lowest rate. And we can do that. So, that's what's so unique about it which is, you get that relationship, you get that great service, but you also get really priced competitive results, which we believe ultimately will build longer-term trust.Jason: I mean, it's an amazing and powerful refocus where you've effectively created alignment with all the major players in such a way that's made it difficult for any other competitors to compete with you. It's a pretty [laugh] amazing approach to the market that you've developed here. What gets you most excited about the future? Like wh—you know, obviously, you've got origination coming up; you know, in five, ten years, if you're massively successful, what's the impact you've had on the US economy and the US mortgage space?Andrew: So, there's obviously elements where we're helping consumers, right, so we can reduce the delinquencies in the system, like I mentioned, through different mechanisms. We offer people really cheaper financial products, which we believe they deserve, but I think the long-term most impactful thing is that we can provide, really, researchers as well as government regulators the right tools to make the right decisions. When you think about what basically happened recently with COVID, now the government went about and offered everybody forbearance, which is extremely expensive for both players in the industry as well as the government, but they don't really have a good way to address the crisis at hand. So, they used the very blunt-edged solution to it. As the platform that hopefully ends up winning the market, we can provide that information to the government; we can provide that implementation to them.So, they can be much more, with a sharp knife and really a small pencil, start to draw exactly what they want to end up happening. So, instead of giving a forbearance for every single person—which is what happened; they said, “You didn't have to pay a mortgage for nine months, twelve months,” instead of giving a forbearance to every person out there, you could say, “Let me check your bank account. Let me see that you're actually running into a crisis. And if you are, actually I will give you even longer. I will give you 18 months, I will give you until you figure out what to do next.”And for the people who didn't actually have a crisis, we're not going to give it to you. So, you actually can help the right people in this sort of situation. Alternatively, you might have a situation where the government wants to test a different modification program. Usually, it gets into a large argument about does this work; does it not work? There's not much data out there.But with a technological platform like us, you can actually go as far as to say, let's actually A/B test these results. If the government buys-in will test it with [unintelligible 00:42:54] portfolios, and we'll report these results. So, this is kind of where we believe government policy and really, American policy around housing can be really shaped if you had the right system and the right sort of infrastructure. So, while we are very focused on trying to build that long-term vision and build out a trust relationship with homeowners across the United States, we believe the longer-term impacts of doing something like this really come from the fact that we can leverage this infrastructure to help so many different people.Will: Aside from going deeper in the value chain on the mortgage lifecycle, are their orthogonal products—I know before we jumped on the call, we were sort of talking about insurance a little bit—are there other orthogonal products that are correlated to homeowners that from a product standpoint that you see Valon being able to bolt on to the platform over time?Andrew: I think the big new products that we'll be focused on outside of insurance as an example that we talked about where offering property insurance is a very natural next step, which we're already going to look to do by the end of this year is actually getting into things like for example, credit card debt consolidation. So, it's a very well-known thing that people when they get credit card debt sometimes want to refinance it with a HELOC because it's cheaper to pay a HELOC than a credit card. Now, that's not a very simple process today because getting a HELOC is a painful thing because you have to work with the servicer or you have to work with a HELOC originator. So, making it really easy where someone who has credit card debt, move it quickly over to their HELOC and pay less interest is obviously a quick next step. But that really actually speaks a lot more towards long-term financial management because again, we are dealing with such a large purchase and a large component of their daily—their monthly cash flows.So, as we look to what we do going forward, there probably will be a lot more around financial literacy, financial advisory, around all these different components. And if we can build that trust really leading the homeowner to make these right decisions and being able to forecast for them different outcomes based on what they want to do. So, I'd say that's probably the direction we'll ultimately take with this business. We need some time to work on all the different sort of initiatives that we have, but we're really hopeful that we can really make a difference here.Will: Andrew, congratulations. This is an unbelievably badass business and a very, very boring, esoteric industry that you are transforming. We really, really appreciate you taking the time to hang with us today and to give our listeners a look inside the mortgage servicing industry.Andrew: I appreciate it. Thanks for letting me talk. I went on a very, very long rant.Will: Thank you for listening to Perfectly Boring. You can keep up the latest on the podcast at perfectlyboring.com, and follow us on Apple, Spotify, or wherever you listen to podcasts. We'll see you next time.

In this episode, we cover:00:00:00 - Reflections on the Episode/Introduction 00:03:06 - Steve's Bio00:07:30 - The 5 W's of Servers and their Future00:14:00 - Hardware and Software00:21:00 - Oxide Computer 00:30:00 - Investing in Oxide and the Public Cloud00:36:20 - Oxide's Offerings to Customers 00:43:30 - Continious Improvement00:49:00 - Oxide's Future and OutroLinks: Oxide Computer: https://oxide.computer Perfectlyboring.com: https://perfectlyboring.com TranscriptJason: Welcome to the Perfectly Boring podcast, a show where we talk to the people transforming the world's most boring industries. I'm Jason Black, general partner at RRE ventures.Will: And I'm Will Coffield, general partner at Riot Ventures.Jason: Today's boring topic of the day: servers.Will: Today, we've got Steve Tuck, the co-founder and CEO of Oxide Computer, on the podcast. Oxide is on a mission to fundamentally transform the private cloud and on-premise data center so that companies that are not Google, or Microsoft, or Amazon can have hyper scalable, ultra performant infrastructure at their beck and call. I've been an investor in the company for the last two or three years at this point, but Jason, this is your first time hearing the story from Steve and really going deep on Oxide's mission and place in the market. Curious what your initial thoughts are.Jason: At first glance, Oxide feels like a faster horse approach to an industry buying cars left and right. But the shift in the cloud will add $140 billion in new spend every year over the next five years. But one of the big things that was really interesting in the conversation was that it's actually the overarching pie that's expanding, not just demand for cloud but at the same rate, a demand for on-premise infrastructure that's largely been stagnant over the years. One of the interesting pivot points was when hardware and software were integrated back in the mainframe era, and then virtual machines kind of divorced hardware and software at the server level. Opening up the opportunity for a public cloud that reunified those two things where your software and hardware ran together, but the on-premises never really recaptured that software layer and have historically struggled to innovate on that domain.Will: Yeah, it's an interesting inflection point for the enterprise, and for basically any company that is operating digitally at this point, is that you're stuck between a rock and a hard place. You can scale infinitely on the public cloud but you make certain sacrifices from a performance security and certainly from an expense standpoint, or you can go to what is available commercially right now and you can cobble together a Frankenstein-esque solution from a bunch of legacy providers like HP, and Dell, and SolarWinds, and VMware into a MacGyvered together on-premise data center that is difficult to operate for companies where infrastructure isn't, and they don't want it to be, their core competency. Oxide is looking to step into that void and provide a infinitely scalable, ultra-high-performance, plug-and-play rack-scale server for everybody to be able to own and operate without needing to rent it from Google, or AWS, or Microsoft.Jason: Well, it doesn't sound very fun, and it definitely sounds [laugh] very boring. So, before we go too deep, let's jump into the interview with Steve.Will: Steve Tuck, founder and CEO of Oxide Computer. Thank you for joining us today.Steve: Yeah, thanks for having me. Looking forward to it.Will: And I think maybe a great way to kick things off here for listeners would be to give folks a baseline of your background, sort of your bio, leading up to founding Oxide.Steve: Sure. Born and raised in the Bay Area. Grew up in a family business that was and has been focused on heating and air conditioning over the last 100-plus years, Atlas. And went to school and then straight out of school, went into the computer space. Joined Dell computer company in 1999, which was a pretty fun and exciting time at Dell.I think that Dell had just crossed over to being the number one PC manufacturer in the US. I think number two worldwide at Compaq. Really just got to take in and appreciate the direct approach that Dell had taken in a market to stand apart, working directly with customers not pushing everything to the channel, which was customary for a lot of the PC vendors at the time. And while I was there, you had the emergence of—in the enterprise—hardware virtualization company called VMware that at the time, had a product that allowed one to drive a lot more density on their servers by way of virtualizing the hardware that people were running. And watching that become much more pervasive, and working with companies as they began to shift from single system, single app to virtualized environments.And then at the tail end, just watching large tech companies emerge and demand a lot different style computers than those that we had been customarily making at Dell. And kind of fascinated with just what these companies like Facebook, and Google, and Amazon, and others were doing to reimagine what systems needed to look like in their hyperscale environments. One of the companies that was in the tech space, Joyent, a cloud computing company, is where I went next. Was really drawn in just to velocity and the innovation that was taking place with these companies that were providing abstractions on top of hardware to make it much easier for customers to get access to the compute, and the storage, and the networking that they needed to build and deploy software. So, spent—after ten years at Dell, I was at Joyent for ten years. That is where I met my future co-founders, Bryan Cantrill who was at Joyent, and then also Jess Frazelle who we knew working closely while she was at Docker and other stops.But spent ten years as a public cloud infrastructure operator, and we built that service out to support workloads that ran the gamut from small game developers up to very large enterprises, and it was really interesting to learn about and appreciate what this infrastructure utility business looked like in public cloud. And that was also kind of where I got my first realization of just how hard it was to run large fleets of the systems that I had been responsible for providing back at Dell for ten years. We were obviously a large customer of Dell, and Supermicro, and a number of switch manufacturers. It was eye-opening just how much was lacking in the remaining software to bind together hundreds or thousands of these machines.A lot of the operational tooling that I wished had been there and how much we were living at spreadsheets to manage and organize and deploy this infrastructure. While there, also got to kind of see firsthand what happened as customers got really, really big in the public cloud. And one of those was Samsung, who was a very large AWS customer, got so large that they needed to figure out what their path on-premise would look like. And after going through the landscape of all the legacy enterprise solutions, deemed that they had to go buy a cloud company to complete that journey. And they bought Joyent. Spent three years operating the Samsung cloud, and then that brings us to two years ago, when Jess, Bryan, and I started Oxide Computer.Will: I think maybe for the benefit of our listeners, it would be interesting to have you define—and what we're talking about today is the server industry—and to maybe take a step back and in your own words, define what a server is. And then it would be really interesting to jump into a high-level history of the server up until today, and maybe within that, where the emergence of the public cloud came from.Steve: You know, you'll probably get different definitions of what a server is depending on who you ask, but at the highest level, a server differs from a typical PC that you would have in your home in a couple of ways, and more about what it is being asked to do that drives the requirements of what one would deem a server. But if you think about a basic PC that you're running in your home, a laptop, a desktop, a server has a lot of the same components: they have CPUs, and DRAM memory that is for non-volatile storage, and disks that are storing things in a persistent way when you shut off your computer that actually store and retain the data, and a network card so that you can connect to either other machines or to the internet. But where servers start to take on a little bit different shape and a little bit different set of responsibilities is the workloads that they're supporting. Servers, the expectations are that they are going to be running 24/7 in a highly reliable and highly available manner. And so there are technologies that have gone into servers, that ECC memory to ensure that you do not have memory faults that lose data, more robust components internally, ways to manage these things remotely, and ways to connect these to other servers, other computers.Servers, when running well, are things you don't really need to think about, are doing that, are running in a resilient, highly available manner. In terms of the arc of the server industry, if you go back—I mean, there's been servers for many, many, many, many decades. Some of the earlier commercially available servers were called mainframes, and these were big monolithic systems that had a lot of hardware resources at the time, and then were combined with a lot of operational and utilization software to be able to run a variety of tasks. These were giant, giant machines; these were extraordinarily expensive; you would typically find them only running in universities or government projects, maybe some very, very large enterprises in the'60s and'70s. As more and more software was being built and developed and run, the market demand and need for smaller, more accessible servers that were going to be running this common software, were driving machines that were coming out—still hardware plus software—from the likes of IBM and DEC and others.Then you broke into this period in the '80s where, with the advent of x86 and the rise of these PC manufacturers—the Dells and Compaqs and others—this transition to more commodity server systems. A focus, really a focus on hardware only, and building these commodity x86 servers that were less expensive, that were more accessible from an economics perspective, and then ultimately that would be able to run arbitrary software, so one could run any operating system or any body of software that they wanted on these commodity servers. When I got to Dell in 1999, this is several years into Dell's foray into the server market, and you would buy a server from Dell, or from HP, or from Compaq, or IBM, then you would go find your software that you were going to run on top of that to stitch these machines together. That was, kind of, that server virtualization era, in the '90s, 2000s. As I mentioned, technology companies were looking at building more scalable systems that were aggregating resources together and making it much easier for their customers to access the storage, the networking that they needed, that period of time in which the commodity servers and the software industry diverged, and you had a bunch of different companies that were responsible for either hardware or the software that would bring these computers together, these large hyperscalers said, “Well, we're building purpose-built infrastructure services for our constituents at, like, a Facebook. That means we really need to bind this hardware and software together in a single product so that our software teams can go very quickly and they can programmatically access the resources that they need to deploy software.”So, they began to develop systems that looked more monolithic, kind of, rack-level systems that were driving much better efficiency from a power and density perspective, and hydrating it with software to provide infrastructure services to their businesses. And so you saw, what started out in the computer industry is these monolithic hardware plus software products that were not very accessible because they were so expensive and so large, but real products that were much easier to do real work on, to this period where you had a disaggregation of hardware and software where the end-user bore the responsibility of tying these things together and binding these into those infrastructure products, to today, where the largest hyperscalers in the market have come to the realization that building hardware and software together and designing and developing what modern computers should look like, is commonplace, and we all know that well or can access that as public cloud computing.Jason: And what was the driving force behind that decoupling? Was it the actual hardware vendors that didn't want to have to deal with the software? Or is that more from a customer-facing perspective where the customers themselves felt that they could eke out the best advantage by developing their own software stack on top of a relatively commodity unopinionated hardware stack that they could buy from a Dell or an HP?Steve: Yeah, I think probably both, but one thing that was a driver is that these were PC companies. So, coming out of the'80s companies that were considered, quote-unquote, “The IBM clones,” Dell, and Compaq, and HP, and others that were building personal computers and saw an opportunity to build more robust personal computers that could be sold to customers who were running, again, just arbitrary software. There wasn't the desire nor the DNA to go build that full software stack and provide that out as an opinionated appliance or product. And I think then, part of it was also like, hey, if we just focus on the hardware, then got this high utility artifact that we can go sell into all sorts of arbitrary software use cases. You know, whether this is going to be a single server or three servers that's going to go run in a closet of cafe, or it's going to be a thousand servers that are running in one of these large enterprise data centers, we get to build the same box, and that box can run underneath any different type of software. By way of that, what you ultimately get in that scenario is you do have to boil things down to the lowest common denominators to make sure that you've got that compatibility across all the different software types.Will: Who were the primary software vendors that were helping those companies take commodity servers and specialize into particular areas? And what's their role now and how has that transformed in light of the public cloud and the offerings that are once again generalized, but also reintegrated from a hardware and software perspective, just not maybe in your own server room, but in AWS, or Azure, or GCP?Steve: Yeah, so you have a couple layers of software that are required in the operation of hardware, and then all the way up through what we would think about as running in a rack, a full rack system today. You've first got firmware, and this is the software that runs on the hardware to be able to connect the different hardware components, to boot the system, to make sure that the CPU can talk to its memory, and storage, and the network. That software may be a surprise to some, but that firmware that is essential to the hardware itself is not made by the server manufacturer themselves. That was part of this outsourcing exercise in the '80s where not only the upstack software that runs on server systems but actually some of the lower-level downstack software was outsourced to these third-party firmware shops that would write that software. And at the time, probably made a lot of sense and made things a lot easier for the entire ecosystem.You know, the fact that's the same model today, and given how proprietary that is and, you know, where that can actually lead to some vulnerabilities and security issues is more problematic. You've got firmware, then you've got the operating system that runs on top of the server. You have a hypervisor, which is the emulation layer that translates that lower-level hardware into a number of virtual machines that applications can run in. You have control plane software that connects multiple systems together so that you can have five or ten or a hundred, or a thousand servers working in a pool, in a fleet. And then you've got higher-level software that allows a user to carve up the resources that they need to identify the amount of compute, and memory, and storage that they want to spin up.And that is exposed to the end-user by way of APIs and/or a user interface. And so you've got many layers of software that are running on top of hardware, and the two in conjunction are all there to provide infrastructure services to the end-user. And so when you're going to the public cloud today, you don't have to worry about any of that, right? Both of you have probably spun up infrastructure on the public cloud, but they call it 16 digits to freedom because you just swipe a credit card and hit an API, and within seconds, certainly within a minute, you've got readily available virtual servers and services that allow you to deploy software quickly and manage a project with team members. And the kinds of things that used to take days, weeks, or even months inside an enterprise can be done now in a matter of minutes, and that's extraordinarily powerful.But what you don't see is all the integration of these different components running, very well stitched together under the hood. Now, for someone who's deploying their own infrastructure in their own data center today, that sausage-making is very evident. Today, if you're not a cloud hyperscaler, you are having to go pick a hardware vendor and then figure out your operating system and your control plane and your hypervisor, and you have to bind all those things together to create a rack-level system. And it might have three or four different vendors and three or four different products inside of it, and ultimately, you have to bear the responsibility of knitting all that together.Will: Because those products were developed in silos from each other?Steve: Yeah.Will: They were not co-developed. You've got hardware that was designed in a silo separate from oftentimes it sounds like the firmware and all of the software for operating those resources.Steve: Yeah. The hardware has a certain set of market user requirements, and then if you're a Red Hat or you're a VMware, you're talking to your customers about what they need and you're thinking at the software layer. And then you yourself are trying to make it such that it can run across ten or twenty different types of hardware, which means that you cannot do things that bind or provide hooks into that underlying hardware which, unfortunately, is where a ton of value comes from. You can see an analog to this in thinking about the Android ecosystem compared to the Apple ecosystem and what that experience is like when all that hardware and software is integrated together, co-designed together, and you have that iPhone experience. Plenty of other analogs in the automotive industry, with Tesla, and health equipment, and Peloton and others, but when hardware and software—we believe certainly—when hardware and software is co-designed together, you get a better artifact and you get a much, much better user experience. Unfortunately, that is just not the case today in on-prem computing.Jason: So, this is probably a great time to transition to Oxide. Maybe to keep the analogy going, the public cloud is that iPhone experience, but it's just running in somebody else's data center, whether that's AWS, Azure, or one of the other public clouds. You're developing iOS for on-prem, for the people who want to run their own servers, which seems like kind of a countertrend. Maybe you can talk us through the dynamics in that market as it stands today, and how that's growing and evolving, and what role Oxide Computer plays in that, going forward.Steve: You've got this what my co-founder Jess affectionately refers to as ‘infrastructure privilege' in the hyperscalers, where they have been able to apply the money, and the time, and the resources to develop this, kind of, iPhone stack, instead of thinking about a server as a single 1U unit, or single machine, had looked at, well, what does a rack—which is the case that servers are slotted into in these large data centers—what does rack-level computing look like and where can we drive better power efficiency? Where can we drive better density? How can we drive much better security at scale than the commodity server market today? And doing things like implementing hardware Roots of Trust and Chain of Trust, so that you can ensure the software that is running on your machines is what is intended to be running there. The blessing is that we all—the market—gets access to that modern infrastructure, but you can only rent it.The only way you can access it is to rent, and that means that you need to run in one of the three mega cloud providers' data centers in those locations, that you are having to operate in a rental fee model, which at scale can become very, very prohibitively expensive. Our fundamental belief is that the way that these hyperscale data centers have been designed and these products have been designed certainly looks a lot more like what modern computers should look like, but the rest of the market should have access to the same thing. You should be able to buy and own and deploy that same product that runs inside a Facebook data center, or Apple data center, or Amazon, or a Google data center, you should be able to take that product with you wherever your business needs to run. A bit intimidating at the top because what we signed up for was building hardware, and taking a clean sheet paper approach to what a modern server could look like. There's a lot of good hardware innovation that the hyperscalers have helped drive; if you go back to 2010, Facebook pioneered being a lot more open about these modern open hardware systems that they were developing, and the Open Compute Project, OCP, has been a great collection point for these hyperscalers investing in these modern rack-level systems and doing it in the open, thinking about what the software is that is required to operate modern machines, importantly, in a way that does not sink the operations teams of the enterprises that are running them.Again, I think one of the things that was just so stunning to me, when I was at Joyent—we were running these machines, these commodity machines, and stitching together the software at scale—was how much of the organization's time was tied up in the deployment, and the integration, and the operation of this. And not just the organization's time, but actually our most precious resource, our engineering team, was having to spend so much time figuring out where a performance problem was coming from. For example in [clear throat], man, those are the times in which you really are pounding your fist on the table because you will try and go downstack to figure out, is this in the control plane? Is this in the firmware? Is this in the hardware?And commodity systems of today make it extremely, extremely difficult to figure that out. But what we set out to do was build same rack-level system that you might find in a hyperscaler data center, complete with all the software that you need to operate it with the automation required for high availability and low operational overhead, and then with a CloudFront end, with a set of services on the front end of that rack-level system that delight developers, that look like the cloud experience that developers have come to love and depend on in the public cloud. And that means everything is programmable, API-driven services, all the hardware resources that you need—compute, memory, and storage—are actually a pool of resources that you can carve up and get access to and use in a very developer-friendly way. And the developer tools that your software teams have come to depend on just work and all the tooling that these developers have invested so much time in over the last several years, to be able to automate things, to be able to deploy software faster are resident in that product. And so it is definitely kind of hardware and software co-designed, much like some of the original servers long, long, long ago, but modernized with the hardware innovation and open software approach that the cloud has ushered in.Jason: And give us a sense of scale; I think we're so used to seeing the headline numbers of the public cloud, you know, $300-and-some billion dollars today, adding $740-some billion over the next five years in public cloud spend. It's obviously a massive transformation, huge amount of green space up for grabs. What's happening in the on-prem market where your Oxide Computer is playing and how do you think about the growth in that market relative to a public cloud?Steve: It's funny because as Will can attest, as we were going through and fundraising, the prevalent sentiment was, like, everything's going to the public cloud. As we're talking to the folks in the VC community, it was Amazon, Microsoft, and Google are going to own the entirety of compute. We fundamentally disagreed because, A, we've lived it, and b, we went out as we were starting out and talked to dozens and dozens of our peers in the enterprise, who said, “Our cloud ambitions are to be able to get 20, 30, 40% of our workloads out there, and then we still have 60, 70% of our infrastructure that is going to continue to run in our own data centers for reasons including regulatory compliance, latency, security, and in a lot of cases, cost.” It's not possible for these enterprises that are spending half a billion, a billion dollars a year to run all of their infrastructure in the public cloud. What you've seen on-premises, and it depends on who you're turning to, what sort of poll and research you're turning to, but the on-prem market, one is growing, which I think surprises a lot of folks; the public cloud market, of course, it's growing like gangbusters, and that does not surprise a lot of folks, but what we see is that the combined market of on-prem and cloud, you can call it—if on-premise on the order of $100 billion and cloud is on the order of $150 billion, you are going to see enormous growth in both places over the next 10, 15 years.These markets are going to look very, very small compared to where they will be because one of the biggest drivers of whether it's public cloud or on-prem infrastructure, is everything shifting to digital formats. The digitalization that is just all too commonplace, described everywhere. But we're still very, very early in that journey. I think that if you look at the global GDP, less than 10% of the global GDP is on the internet, is online. Over the coming 10, 20 years, as that shifts to 20%, 30%, you're seeing exponential growth. And again, we believe and we have heard from the market that is representative of that $100 billion that investments in the public cloud and on-prem is going to continue to grow much, much more as we look forward.Will: Steve, I really appreciate you letting listeners know how special a VC I am.Steve: [laugh].Will: [laugh]. It was really important point that I wanted to make sure we hit on.Steve: Yeah, should we come back to that?Will: Yeah, yeah yeah—Steve: Yeah, let's spend another five or ten minutes on that.Will: —we'll revisit that. We'll revisit that later. But when we're talking about the market here, one of the things that got us so excited about investing in Oxide is looking at the existing ecosystem of on-prem commercial providers. I think if you look at the public cloud, there are fierce competitors there, with unbelievably sophisticated operations and product development. When you look at the on-prem ecosystem and who you would go to if you were going to build your own data center today, it's a lot of legacy companies that have started to optimize more for, I would say, profitability over the last couple of years than they have for really continuing to drive forward from an R&D and product standpoint.Would love maybe for you to touch on briefly, what does competition for you look like in the on-prem ecosystem? I think it's very clear who you're competing with, from a public cloud perspective, right? It's Microsoft, Google, Amazon, but who are you going up against in the on-prem ecosystem?Steve: Yeah. And just one note on that. We don't view ourselves as competing with Amazon, Google, and Microsoft. In fact, we are ardent supporters of cloud in the format, namely this kind of programmable API-fronted infrastructure as being the path of the future of compute and storage and networking. That is the way that, in the future, most software should be deployed to, and operated on, and run.We just view the opportunity for, and what customers are really, really excited about is having those same benefits of public cloud, but in a format in which they can own it and being able to have access to that everywhere their business needs to run, so that it's not, you know, do I get all this velocity, and this innovation, and this simplicity when I rent public cloud, or do I own my infrastructure and have to give up a lot of that? But to the first part of your question, I think the first issue is that it isn't one vendor that you are talking about what is the collection of vendors that I go to to get servers, software to make my servers talk to each other, switches to network together these servers, and additional software to operate, and manage, and monitor, and update. And there's a lot of complexity there. And then when you take apart each one of those different sets of vendors in the ecosystem, they're not designing together, so you've got these kind of data boundaries and these product boundaries that start to become really, really real when you're operating at scale, and when you're running critical applications to your business on these machines. And you find yourself spending an enormous amount of the company's time just knitting this stuff together and operating it, which is all time lost that could be spent adding additional features to your own product and better competing with your competitors.And so I think that you have a couple of things in play that make it hard for customers running infrastructure on-premises, you've got that dynamic that it's a fractured ecosystem, that these things are not designed together, that you have this kit car that you have to assemble yourself and it doesn't even come with a blueprint of the particular car design that you're building. I think that you do have some profit-taking in that it is very monopolized, especially on the software side where you've only got a couple of large players that know that there are few alternatives for companies. And so you are seeing these ELAs balloon, and you are seeing practices that look a lot like Oracle Enterprise software sales that are really making this on-prem experience not very economically attractive. And so our approach is, hardware should come with all the software required to operate it, it should be tightly integrated, the software should be all open-source. Something we haven't talked about.I think open-source is playing an enormous role in accelerating the cloud landscape and the technology landscapes. We are going to be developing our software in an open manner, and truly believe whether it's from a security view through to the open ecosystem, that it is imperative that software be open. And then we are integrating the switch into that rack-level product so that you've got networking baked in. By doing that, it opens up a whole new vector of value to the customer where, for example, you can see for the first time what is the path of traffic from my virtual machine to a switchboard? Or when things are not performing well, being able to look into that path, and the health, and see where things are not performing as well as they should, and being able to mitigate those sorts of issues.It does turn out if you are able to get rid of a lot of the old, crufty artifacts that have built up inside even these commodity system servers, and you are able to start designing at a rack level where you can drive much better power efficiency and density, and you bake in the software to effectively make this modern rack-level server look like a cloud in a box, and ensure these things can snap together in a grid, where in that larger fleet, operational management is easy because you've got the same automation capabilities that the big cloud hyperscalers have today. It can really simplify life. It ends up being an economic win and maybe most importantly, presents the infrastructure in a way that the developers love. And so there's not this view of the public cloud being the fast, innovative path for developers and on-prem being this, submit a trouble ticket and try and get access to a VM in six days, which sadly is the experience that we hear a lot of companies are still struggling with in on-prem computing.Jason: Practically, when you're going out and talking to customers, you're going to be a heterogeneous environment where presumably they already have their own on-prem infrastructure and they'll start to plug in—Steve: Yeah.Jason: —Oxide Computer alongside of it. And presumably, they're also to some degree in the public cloud. It's a fairly complex environment that you're trying to insert yourself into. How are your customers thinking about building on top of Oxide Computer in that heterogeneous environment? And how do you see Oxide Computer expanding within these enterprises, given that there's a huge amount of existing capital that's gone into building out their data centers that are already operating today, and the public cloud deployments that they have?Steve: As customers are starting to adopt Oxide rack-level computing, they are certainly going to be going into environments where they've got multiple generations of multiple different types of infrastructure. First, the discussions that we're having are around what are the points of data exfiltration, of data access that one needs to operate their broader environment. You can think about handoff points like the network where you want to make sure you've got a consistent protocol to, like, BGP or other, to be able to speak from your layer 2 networks to your layer 3 networks; you've got operational software that is doing monitoring and alerting and rolling up for service for your SRE teams, your operations teams, and we are making sure that Oxide's endpoint—the front end of the Oxide product—will integrate well, will provide the data required for those systems to run well. Another thorny issue for a lot of companies is identity and access management, controlling the authentication and the access for users of their infrastructure systems, and that's another area where we are making sure that the interface from Oxide to the systems they use today, and also resident in the Oxide product such as one wants to use it directly, has a clean cloud-like identity and access management construct for one to use. But at the highest level it is, make sure that you can get out of the Oxide infrastructure, the kind of data and tooling required to incorporate into management of your overall fleet.Over time, I think customers are going to experience a much simpler and much more automated world inside of the Oxide ecosystem; I think they're going to find that there are exponentially fewer hours required to manage that environment and that is going to inevitably just lead to wanting to replace a hundred racks of the extant commodity stack with, you know, sixty racks of Oxide that provide much better density, smaller footprint in the data center, and again, software-driven in the way that these folks are looking for.Jason: And in that answer, you alluded to a lot of the specialization and features that you guys can offer. I've always loved Alan Kay's quote, “People who are really serious about software make their own hardware.”Steve: Yeah.Jason: Obviously, you've got some things in here that only Oxide Computer can do. What are some of those features that traditional vendors can't even touch or deliver that you'll be able to, given your hardware-software integration?Steve: Maybe not the most exciting example, but I think one that is extremely important to a lot of the large enterprise company that we're working with, and that is at a station, being able to attest to the software that is running on your hardware. And why is that important? Well, as we've talked about, you've got a lot of different vendors that are participating in that system that you're deploying in your data center. And today, a lot of that software is proprietary and opaque and it is very difficult to know what versions of things you are running, or what was qualified inside that package that was delivered in the firmware. We were talking to a large financial institution, and they said their teams are spending two weeks a month just doing, kind of a proof of trust in their infrastructure that their customer's data is running on, and how cumbersome and hard it is because of how murky and opaque those lower-level system software world is.What do the hyperscalers do? They have incorporated hardware Root of Trust, which ensures from that first boot instruction, from that first instruction on the microprocessor, that you have a trusted and verifiable path, from the system booting all the way up through the control plane software to, say, a provisioned VM. And so what this does is it allows the rest of the market access to a bunch of security innovation that has gone on where these hyperscalers would never run without this. Again, having the hardware Root of Trust anchored at a station process, the way to attest all that software running is going to be really, really impactful for more than just security-conscious customers, but certainly, those that are investing more in that are really, really excited. If you move upstack a little bit, when you co-design the hardware with the control plane, both the server and the switch hardware with the control plane, it opens up a whole bunch of opportunity to improve performance, improve availability because you now have systems that are designed to work together very, very well.You can now see from the networking of a system through to the resources that are being allocated on a particular machine, and when things are slow, when things are broken, you are able to identify and drive those fixes, in some cases that you could not do before, in much, much, much faster time, which allows you to start driving infrastructure that looks a lot more like the five nines environment that we expect out of the public cloud.Jason: A lot of what you just mentioned, actually, once again, ties back to that analogy to the iPhone, and having that kind of secure enclave that powers Touch ID and Face ID—Steve: Yep.Jason: —kind of a server equivalent, and once again, optimization around particular workflows, the iPhone knows exactly how many photos every [laugh] iOS user takes, and therefore they have a custom chip dedicated specifically to processing images. I think that tight coupling, just relating it back to that iOS and iPhone integration, is really exciting.Steve: Well, and the feedback loop is so important because, you know, like iPhone, we're going to be able to understand where there are rough edges and where things are—where improvements can even can continue to be made. And because this is software-driven hardware, you get an opportunity to continuously improve that artifact over time. It now stops looking like the old, your car loses 30% of the value when you drive it off the lot. Because there's so much intelligent software baked into the hardware, and there's an opportunity to update and add features, and take the learnings from that hardware-software interaction and feed that back into an improving product over time, you can start to see the actual hardware itself have a much longer useful life. And that's one of the things we're really excited about is that we don't think servers should be commodities that the vendors are trying to push you to replace every 36 months.One of the things that is important to keep in mind is as Moore's laws is starting to slow or starting to hit some of the limitations, you won't have CPU density and some of these things, driving the need to replace hardware as quickly. So, with software that helps you drive better utilization and create a better-combined product in that rack-level system, we think we're going to see customers that can start getting five, six, seven years of useful life out of the product, not the typical two, or three, or maybe four that customers are seeing today in the commodity systems.Will: Steve, that's one of the challenges for Oxide is that you're taking on excellence in a bunch of interdisciplinary sciences here, between the hardware, the software, the firmware, the security; this is a monster engineering undertaking. One of the things that I've seen as an investor is how dedicated you have got to be to hiring, to build basically the Avengers team here to go after such a big mission. Maybe you could touch on just how you've thought about architecting a team here. And it's certainly very different than what the legacy providers from an on-prem ecosystem perspective have taken on.Steve: I think one of the things that has been so important is before we even set out on what we were going to build, the three of us spent time and focused on what kind of company we wanted to build, what kind of company that we wanted to work at for the next long chunk of our careers. And it's certainly drawing on experiences that we had in the past. Plenty of positives, but also making sure to keep in mind the negatives and some of the patterns we did not want to repeat in where we were working next. And so we spent a lot of time just first getting the principles and the values of the company down, which was pretty easy because the three of us shared these values. And thinking about all the headwinds, just all the foot faults that hurt startups and even big companies, all the time, whether it be the subjectivity and obscurity of compensation or how folks in some of these large tech companies doing performance management and things, and just thinking about how we could start from a point of building a company that people really want to work for and work with.And I think then layering on top of that, setting out on a mission to go build the next great computer company and build computers for the cloud era, for the cloud generation, that is, as you say, it's a big swing. And it's ambitious, and exhilarating and terrifying, and I think with that foundation of focusing first on the fundamentals of the business regardless of what the business is, and then layering on top of it the mission that we are taking on, that has been appealing, that's been exciting for folks. And it has given us the great opportunity of having terrific technologists from all over the world that have come inbound and have wanted to be a part of this. And we, kind of, will joke internally that we've got eight or nine startups instead of a startup because we're building hardware, and we're taking on developing open-source firmware, and a control plane, and a switch, and hardware Root of Trust, and in all of these elements. And just finding folks that are excited about the mission, that share our values, and that are great technologists, but also have the versatility to work up and down the stack has been really, really key.So far, so great. We've been very fortunate to build a terrific, terrific team. Shameless plug: we are definitely still hiring all over the company. So, from hardware engineering, software engineering, operations, support, sales, we're continuing to add to the team, and that is definitely what is going to make this company great.Will: Maybe just kind of a wrap-up question here. One of the things Jason and I always like to ask folks is, if you succeed over the next five years, how have you changed the market that you're operating in, and what does the company look like in five years? And I want you to know as an investor, I'm holding you to this. Um, so—Steve: Yeah, get your pen ready. Yeah.Will: Yeah, yeah. [laugh].Steve: Definitely. Expect to hear about that in the next board meeting. When we get this product in the market and five years from now, as that has expanded and we've done our jobs, then I think one of the most important things is we will see an incredible amount of time given back to these companies, time that is wasted today having to stitch together a fractured ecosystem of products that were not designed to work together, were not designed with each other in mind. And in some cases, this can be 20, 30, 40% of an organization's time. That is something you can't get back.You know, you can get more money, you can—there's a lot that folks can control, but that loss of time, that inefficiency in DIY your own cloud infrastructure on-premises, will be a big boon. Because that means now you've got the ability for these companies to capitalize on digitalizing their businesses, and just the velocity of their ability to go improve their own products, that just will have a flywheel effect. So, that great simplification where you don't even consider having to go through and do these low-level updates, and having to debug and deal with performance issues that are impossible to sort out, this—aggregation just goes away. This system comes complete and you wouldn't think anything else, just like an iPhone. I think the other thing that I would hope to see is that we have made a huge dent in the efficiency of computing systems on-premises, that the amount of power required to power your applications today has fallen by a significant amount because of the ability to instrument the system, from a hardware and software perspective, to understand where power is being used, where it is being wasted.And I think that can have some big implications, both to just economics, to the climate, to a number of things, by building and people using smarter systems that are more efficient. I think generally just making it commonplace that you have a programmable infrastructure that is great for developers everywhere, that is no longer restricted to a rental-only model. Is that enough for five years?Will: Yeah, I think I think democratizing access to hyperscale infrastructure for everybody else sounds about right.Steve: All right. I'm glad you wrote that down.Jason: Well, once again, Steve, thanks for coming on. Really exciting, I think, in this conversation, talking about the server market as being a fairly dynamic market still, that has a great growth path, and we're really excited to see Oxide Computer succeed, so thanks for coming on and sharing your story with us.Steve: Yeah, thank you both. It was a lot of fun.Will: Thank you for listening to Perfectly Boring. You can keep up the latest on the podcast at perfectlyboring.com, and follow us on Apple, Spotify, or wherever you listen to podcasts. We'll see you next time.

Jason and Will are joined by Luke Schoenfelder, CEO of Latch, to discuss the role of Latch, and how they found innovations in something as seemingly unimportant as—locks. Luke breaks down the origin of Latch and their innovative eye for how to revolutionize a common household item. Luke and his team started with taking a look at the next steps for infrastructure, and they ended with Latch. Tune in for the full story!Luke's upbringing in Pennsylvania set him up for a non-linear path to Latch. He has worked in a range of companies and areas of expertise, from modular housing in Haiti, to time spent at Apple. He discusses the origins of building out his team at Latch and their inspiration to focus on the hospitality industry. By going straight to the customer Latch brought in a business model innovation that set them apart, one of many that align with Latch's vision. In this episode, we cover:  Reflections on the Episode (0:50) Introduction to Luke (1:41) Latch's Innovations (11:13) Manufacturing a Complex Product (16:52) Latch's Lock's Lifespan (21:28) The Experience of the Tenant (26:44) Latch's Next Steps and Expected Complexities (29:44) Latch Lens (37:32) How Latch Makes Money (43:12) The Future (46:15)

Welcome to the Perfectly Boring Podcast, a show where we talk to the people transforming the world's most boring industries. On each podcast, we will be sitting down with executives, investors, and entrepreneurs to talk about the boring industries they operate in and the exciting businesses they've built. Strap in for the most marvelously mundane ride of your life.