Culture is the Last Source of Alpha

"All value creation is downstream of culture" — Shyam Sankar (Palantir CTO)

Public markets systematically misprice company culture, and in the age of infinite leverage the mispricings, both on the upside and the downside, are growing more severe. Culture is simply the people who make up an organization. Put another way, "a group of people and the culture they create are one and the same" (Ken Kocienda). Ken's boss knew this better than anyone:

"I've always been of the opinion that the most important thing you do as a leader is to hire the right people. It's more important than the strategy, it's more important than the product. Because if you hire the right people, they will figure out the strategy and they will build the product."

— Steve Jobs

What Jobs does not mention here is passion — something he possessed in spades. Without a fire that refuses to flicker and burns deep inside of the leaders of an organization, mediocrity inevitably seeps in.¹ If leaders do not address it head on, "the right people" will quickly abandon ship. The culture falls apart.

On the other end of the spectrum, passionate leaders continually raise the bar. Their passion drives an incessant search for improvement. Continuous improvements rely on continuously asking why:

Great cultures cultivate curiosity; curiosity is the cradle of creativity; creativity creates asymmetry.

Culture compounds — it is a flywheel on both ends — either a stairway to heaven or a death spiral to hell.

Why Culture Matters More Than Ever

The best people are now 100X to 1,000X more impactful than the average person versus 10X prior to A.I. Great cultures not only attract and retain these 100X people, but they also cultivate everyone within the organization to play at their best. The variance between an individual's peak performance and their average is generally greater than the performance gap between different people.² Great ideas can come from anywhere within a great culture.

In our new world, Jobs would double down on the importance of people. The right person can now both figure out the strategy and build the product with exponentially fewer resources and coordination costs than ever before — hence 'the age of infinite leverage.' These types of people are what Keith Rabois aptly calls barrels. Historically they were the ones who aimed the team — the ammunition — in the right direction. Barrels now have limitless ammunition at their fingertips. They no longer need to deal with the inescapable march of bureaucratic creep that all companies historically faced as they scaled.

As Jobs says, 'A' players like to play with other 'A' players. For the first time in history, it is possible for a company to achieve tremendous scale without degrading the density of A players.

"It's always been the case, even in large companies, that a relatively small number of people actually move the needle and drive the company forward in meaningful ways. That drive, however, has been filtered through a huge apparatus, filled with humans, who accelerate the effort in some vectors, and retard it in others… Agents, however, will tilt much more heavily towards pure acceleration, making those drivers of value much more impactful."

— Ben Thompson

Great ideas have always flourished in small collaborative groups, but we are now in an era where these groups are all that is needed to execute them.

The Reaction from Operators

Many companies came into this new age at exactly the worst time. Over the last decade cultural moats³ have drastically degraded at many organizations. Easy times make weak men; weak men allow mediocrity to seep in. Leaders are waking up because if they don't fortify their culture now, their A players will leave knowing that they can barrel over bureaucracy somewhere else. If you start to lose your A players, your company is destined to lose.

With a 40% machete to the workforce, Jack Dorsey is adamantly refusing to let past cultural mistakes at Block linger any longer. Though seemingly drastic, Dorsey and many of his contemporaries are simply seeking equilibrium in the same way nature does. They are repenting for their cultural Covid-era sins in the only way possible — by creating a natural disaster:

"Ninety-nine percent of the change to a landscape happens in one percent of the time — earthquakes, floods, eruptions. The slow steady stuff barely moves anything. Culture is identical. Most of what you do day-to-day barely registers. But a handful of moments — specific, visible, impossible to misread — reshape the terrain completely."

— Marc Randolph (co-founder; Netflix)

Fighting reflexivity is usually a losing battle. It is better to prevent cultural cancers before they metastasize, so the question becomes the extent to which leaders are proactive vs reactive. The underlying reason turnarounds in business pose such difficulty is the company's cultural turmoil underneath it all. If the right people are not in place to execute a turnaround plan, it will remain a plan for eternity.

A New Paradigm for Public Markets

It is now the job of Wall Street to take a page from Sand Hill Road. Public markets love to think about a business's moat. Today that's the wrong place to focus. The biggest winners over the next decade will come from understanding who has the strongest cultural moat. The bridges and ladders to overcome many business moats are there for the taking. Cultural moats are more important than ever for this exact reason. The winners will be those whose collective culture of curiosity leads to the creation of entirely new experiences with these tools.

Analysts, just like operators, are looking for any edge possible that these new tools present, but when every analyst converges to the same agentic workflow with the same data sources powered by the same LLMs, where does alpha live? The link between culture and alpha is simple — culture is difficult to grasp from the outside, and therefore culture is rarely properly priced by the public markets. But even if someone knew a company had an A+ culture, the task of valuing it remains nearly impossible due to the asymmetry of business home runs.⁴

What are we doing in the world's greatest game if not scouring for sources of alpha? Admittedly there is one glaring example where markets are trying to properly price culture: The Elon Musk kingdom. At Relativity, we do not believe Musk has created the only culture that can keep compounding for decades to come.⁵

Footnotes

1. "Mediocrity is invisible until passion shows up and exposes it" — Michael Ovitz ↩

2. "If you really want to understand human potential, ask yourself this question. What is greater? the difference between two individuals or the difference within an individual and himself or herself." — Gio Valiante ↩

3. Generally used to describe a business's competitive advantage such as economies of scale, network effects, switching costs, etc. ↩

4. "In business, every once in a while, when you step up to the plate, you can score 1,000 runs." — Jeff Bezos ↩

5. Special thanks to Stephen Mackintosh (https://substack.com/@stephenmackintosh) for reading drafts of this. ↩