The Economics of Logos

Plus! Elsewhere in Reputation Markets; Knocking Down Data Walls; Closing the Arbitrage; Cost Avoidance; State AI Investment

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The Economics of Logos

One of the recurring questions in The Diff is: what is money? We talked last week about credentials and moneyness, and a while earlier we explored why companies issue alternative currencies, whether they're in-game coins or loyalty points and how being able to issue currency sets some countries apart from the rest. But there's another quasi-currency that's also worth exploring: logos. Visit the homepage of a B2B company, and you'll often see a parade of logos. Visit a VC's site, and you'll see logos, too.

What you're seeing is the surface of a unique form of intracorporate lending, where companies let other companies borrow a bit of their brand in exchange for some exposure (or, in some cases, in exchange for knocking down the price of a product a bit)[1] It's often a truncated selection, since some of the most prestigious companies are big enough to have an explicit policy that makes them less accepting of random startups asking to use their brand name. And some of the most interesting companies out there stay interesting by being secretive—the fewer reminders there are that they exist, the fewer competitors they have to worry about.[2]

Valuable logos have extreme returns to scale because they have overlapping feedback loops:

Meanwhile, it wouldn't be a quasi-financial system without more purely-financial intermediaries. One of the rituals around fundraising is that when a company raises money from a fund, each one has a chance to put the other's logo on their site. This, too, has the usual returns to scale: Sequoia, Founders Fund, and a16z are very likely to get mentioned—if there's a next-generation fund in the round, even if the cognoscenti would rather have an LP stake in that fund than in Sequoia's vehicle, it doesn't have the cachet to make it onto a short list. So the system of logos tends to reinforce whoever's most powerful, in much the same way that bilateral trade between two countries tends to be denominated in the currency of whichever one has a more widely-accepted currency, or in the dollar.

The profusion of logos is a form of reputational credit expansion, with all the usual upsides and downsides thereof. If tiny company X does a deal with established company Y, X bragging about it is actually a way to make the market more efficient—it's a valuable signal if they've convinced a reputable company that their product is a) a better deal than established providers, and b) better to buy than to build. So a section of the economy that doesn't have some way to make this kind of reputation-enhancing win visible is one that doesn't have enough circulation of reputational credit.

But it's possible to get Minsky Moments here, too, where a company's ubiquity becomes a bigger part of its growth. Any time there's a way to create credit, there will be people who engineer ways to create too much of it. Something similar happened in a more legible way with the link graph: when Google launched, they could use hyperlinks as an incredibly convenient tool for measuring reputation—if lots of people link to irs.gov, and those links tend to use words like "Tax," you know that irs.gov is a great place for information about taxes. But that created an ecosystem where other companies were also incentivized to earn those links, or even to buy them. In that case, Google had more or less privatized the link graph, and could set up policies that mitigated some of the most annoying abuses while still leaving room for some hustle. But nobody really owns the concept of startup reputation (Y Combinator might come the closest, and they certainly have some visibility into how logos end up in the places they do).

In the meantime, we're in an era of reputational free banking: anyone who can spend a few minutes in Photoshop, a few dollars on Upwork, or a few seconds with DALL-E can enter the reputational banking business and bootstrap from there. But as with other financial systems, this is great when it accelerates productive investment but vulnerable to overshooting.


  1. The use of logos (or even anonymized references i.e. “a Fortune 500 retailer”) are an explicit negotiating point in many B2B software MSAs, particularly if the vendor is an early-stage company. These clauses can get quite detailed, outlining explicitly when use of logos is permitted—for example, you may be able to negotiate use of the logo for an investor deck, but not on your website, etc. ↩︎

  2. This makes logos an especially strong signal in any business that sells to hedge funds and prop traders. If they can get their customers to leak incremental bits in exchange for something, they must have a lot to offer! ↩︎

  3. Good salespeople are always practicing a sort of informal operations research when they decide the optimal sequence for different points they could make. This has been informal because there just isn't enough time in the middle of a meeting to jot down some formulas and decide whether the optimal next move is to tell a semi-relevant anecdote that contains some social proof or to mention the next feature. But as more of these interactions happen in text form, or in easily-recorded audio and video, and as that information gets more amenable to analysis, you'll eventually have a Sales Copilot telling you things like "this prospect is worried about pricing" or "this one would find it relatable if you mentioned that you own a dog." ↩︎

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Elsewhere

Elsewhere in Reputation Markets

A decent model of a growth company is that everything it does matters only insofar as it lets the company get the right talent. Most of the value created in percentage terms happens early on, but in cumulative dollar terms it's mostly the result of the effort and judgment of people who were hired at some point after launch. (Some early career paths don't seem to make much economic sense for the company unless you see them as a way to identify and retain a small cohort of top talents.) So companies naturally care a great deal about hiring, and try to use various hacks to get it right, one of which is that they value referrals more highly than cold inbounds. Referrals combine some broadly useful correlations, like people meeting and hanging out with peers who share similar interests, and referrals also involve existing employees betting a bit of their reputation on new hires. For people who don't value that reputation especially highly, there are online marketplaces where people swap referrals in exchange for kickbacks. Part of how companies grow is that they establish norms when they're small, scrappy, and everyone knows everyone else. And, over time, they scale to the point where those norms just don't make sense any more.

Knocking Down Data Walls

Text and code are great media for training AI models because they're both ways to think out loud. It's hard to be sure you understand a topic well until you can write someone an email explaining some aspect of it, and codifying a process in terms a computer can understand is also a great way to ensure that you yourself understand it. In other media, there's a sharper distinction between process and output—which means that more of the data AIs train on shows the end result disconnected from how it happened. Which is one reason AI companies are paying streamers for outtakes and early cuts.

If you're worried about AI taking your job, one way to reframe that is that the output of your work contains training data, and 1) being able to produce unique training data is a good idea, and 2) that specific job is going to go away eventually. Getting paid a bit more to make it happen a little faster is a bargain that someone will probably take, and at least in this case the streamers seem willing to take it.

Closing the Arbitrage

The NYT has a good piece about public companies putting some of their treasury into crypto, sometimes with the explicit aim of attracting investors who want crypto exposure but have a mandate that doesn't allow it. Some fraction of the financial industry is always devoted to finding customers who say "I would like to do X but am only allowed to do Y; can you sell me a Y that is functionally X?" and the industry is too happy to oblige. Does someone need to own equities but want a bond-like payoff? Writing covered call options gets you part of the way there, with steadier-but-capped upside. If you want to own equities in a jurisdiction that limits local ownership, you may end up owning swaps instead (and depending on how much demand there is, you may be paying a premium to get access at all). In this case, it doesn't require any special expertise to switch from being a cash-rich public company to being a crypto play. But that also means there's more competition for the attention of the same set of investors, and that these investors are seeing a rising supply that may make the premium they paid regrettable.

Cost Avoidance

Layoffs are a surprisingly expensive choice, and one reason they're so severe and so clustered is that companies have incentives to delay them. The net effect of a round of layoffs is 1) of course, the direct effect of getting rid of some headcount and associated costs, 2) the loss of other people who quit because they want more job security, think the firm laid off the wrong people, etc., and 3) the ongoing productivity hit from reorganizing processes around the remaining employees and the inevitable morale hit. So one effect of labor-saving technologies like AI is that it leads to job loss through omission—companies are creating fewer new roles rather than eliminating existing ones ($, WSJ). This is, at last, a case where the economics of AI are more favorable for smaller companies than bigger ones: a smaller business is adding proportionately more headcount, so it's getting bigger savings. A large company might counterfactually want to employ one third as many people, but the only way to get there is to grow the scope of their activities 50% by holding headcount constant.

State AI Investment

The UK plans to invest in domestic AI capacity in response to a report advocating a state-owned 100k-GPU cluster ($, FT). From the article: "The new capacity, which would represent a 20-fold increase in the UK’s sovereign computing power, will be separate to privately owned AI data centres and will be deployed by the government primarily for AI applications in academia and public services." It's very hard to compete with the US-based labs and larger companies on private sector capacity, but it is feasible for a government of the UK's size to have the most government-owned compute. So what they can actually do is capture some of the AI-adjacent academic talent when they're deciding where to do a PhD, and that gives them a few years of lead time to find policy moves that lead to local jobs once those PhDs finish up.

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