Frameworks v0.2

https://docs.google.com/document/u/0/d/1-UiEeoiV0xBFVZgid63FRaph03OCmHzyEExubn63j0U/mobilebasic#

Many of the thoughts in this document draw on and synthesize concepts from economics, math, physics, chemistry, biology, and psychology. Here are a handful of core concepts that are often relied on as inputs:

ATOMIC VALUE SWAPS

An Atomic Value Swap is the measurement of the sustainability of repeated core transactions in an ecosystem. Payment for goods or services is an example of an atomic value swap, one where cash is exchanged for an item or service. Both parties deem the transaction to be beneficial and therefore the transaction occurs. If the price of a product or service is too high, the buyer will not engage in the transaction.

Secular to secular (money/goods/services) atomic value swaps are easily understood by the market clearing price of the exchange. Secular to sacred atomic value swaps are significantly more complicated to understand as behavioral psychology tends to skew expected reactions from supply or demand to changes in the transaction.

This extends best to less tangible exchanges as a concept to understand non-monetary transactions. For example, asking for an invitation to a new product is exchanging fractional social indebtedness for a scarce resource.

The three questions that help me ring fence the atomic value swap in any situation are:

Examples:

Instagram has two main atomic value swaps with its users, one to creators and one to consumers. Creators of content expend time and energy in the form of work in exchange for distribution and building an asset that can be monetized (audience). Consumers are willing to view ads in their consumption experience in exchange for entertainment. A third atomic value swap exists to advertisers, which is a typical secular-to-secular exchange of money spent on advertising (“ROAS” / return on ad spend).

Smaller atomic value swaps exist at the product feature level. The action of liking a post is a consumer expending a fractional amount of work to essentially “thank” the creator (and a small amount of social signaling, but to a lesser degree). Such an exchange would not occur if the hurdle to thank the creator was too high. By reducing the friction to engage in the interaction low enough, the atomic value swap occurs and is sustainable.

BUSINESS MODEL—PRODUCT FIT

“Business Model—Product fit” is just as critical for a company to succeed as “Product—Market fit.” Optimal Business Model—Product fit is the company level version of the Atomic Value Swap.

Examples:

Marketplaces generally take 20% of every transaction that occurs on the platform. Why has the invisible hand determined that 20% is the correct take rate for marketplaces? It’s important to understand the alternative to marketplaces and what they offer to the supply-side, which typically bears the cost of the fee rather than the demand-side. The marketplace offers pre-existing demand to incremental supply. A would-be supplier on a marketplace can rest assured that if they put their correctly-priced goods or services on a liquid market that demand will show up and transact. It’s not unusual for companies to spend approximately 20% of their top line revenue on marketing, which is essentially demand generation. If the supplier were to outsource all of their demand generation to a single entity, that entity would be entitled to collect what would otherwise have been spent, or about 20%.

OnlyFans’s innovation was one of business model—product fit. Credit card chargeback rates on adult sites were too high for payment gateways to incur the cost themselves. As a result, many payment gateways categorically refused to service adult content sites. OnlyFans internalized this additional chargeback risk and passed it on to its users in the form of a higher take rate. In a normal environment, a 20% take rate without delivering demand would be unsustainable.

LOW ACV (AVERAGE CONTRACT VALUE) DEMAND CANNOT REQUIRE EDUCATION

If the expected economic return on an acquired customer is low[a], any acquisition path that requires education of that consumer to the virtues of the product will inevitably lead to failure unless a macro tailwind or zeitgeist eventually eliminates the educational cost[b][c][d][e].

HIGH ACV DEMAND MUST REQUIRE EDUCATION

This is enterprise sales in a nutshell. If the addressable demand for a product with high ACV did not need to be educated about the virtues of the product, market forces would naturally give way to a competitor who charges a lower ACV and acquires customers more effectively. If a high ACV product “sells itself,” the producer should anticipate lower cost competitors to enter the market.

USER-GENERATED CONTENT > EDITORIALLY DRIVEN CONTENT FOR AD-DRIVEN PLATFORMS

It is impossible to compete for the same ad dollars with a product that has strictly higher COGS (cost of goods sold).

Examples:

The ongoing crisis of how to sustain the business of journalism in a post-internet world was born when news moved online and began competing for the same advertising dollars as UGC platforms. Prior to the shift, news publications were very attractive businesses with a large market share in advertising and a healthy paid consumption model (see NYT[f][g] revenue collapse and slowly recover through the focus on subscription)

EDITORIALLY DRIVEN CONTENT > USER-DRIVEN CONTENT FOR SUBSCRIPTION-DRIVEN PLATFORMS

No user-generated content platform that offers distribution (and not monetization) to the marginal content creator can succeed with a paywall.

Examples:

Netflix and Spotify are great examples of paywalled content that primarily offer monetization to their suppliers. Medium is a good example of a failed paywall because its original value proposition to supply was built more around distribution than monetization.[h][i][j][k]

THE SEVEN DEADLY SINS ARE ACTUALLY THE SEVEN CORE MOTIVATORS

All successful consumer-facing companies appeal to one or more of the seven deadly sins. They are time-tested core motivators that incentivize people to do things (the fact that they have survived for all of time without any edits is proof of their power). There are no successful consumer companies[l] that do not appeal to any of the seven deadly sins.

Different motivators can apply to different constituents within each company, even different behaviors from the same constituent.

Examples[m]:

Sloth: Uber, Amazon

Pride: Instagram, Tik Tok

Gluttony: DoorDash, Netflix

Lust: Tinder, OnlyFans

Greed: Bitcoin, Robinhood

Sloth tends to be the easiest to monetize because the end user places a fairly consistent price on the trade off between money and time (convenience). Pride is also easy to monetize—see framework on elasticity of demand and Maslow’s Hierarchy of Needs. Gluttony is straightforward in its monetization as it is rooted in consumption. Lust, while easy to monetize, has historically been confused with long-term mate finding, a seemingly impossible atomic value swap that has plagued dating websites. Envy is slippery to monetize, as the challenge is how to own the point of purchasing decision (the path from inspiration/envy to a monetizable transaction can be long and convoluted). Wrath is a very difficult sin to monetize and often manifests through in-group/out-group dynamics. Greed is the hardest of all sins to monetize, naturally so as the user is loath to engage in a sub-optimal transaction[q][r], and will prefer to be monetized via any other sin (i.e. sloth in the form of performance fees).

WHY “WHY NOW?”?

Venture capital is a very specific instrument that is purpose built to fund companies that are capable of explosive value creation over compressed periods of time. Concurrently, the invisible hand is a constant force that continually reduces the ability of any one company to generate outsized value. That means that venture capital is particularly well suited to finance companies that are capitalizing on “dam-breaking” moments—sudden changes in technology and regulation (and to a lesser extent, capital markets and societal shifts)[s][t]. Each time a new shift occurs, it is analogous to the formation of an unstable radioactive isotope. The radioactivity throws off a huge amount of energy in the form of capturable enterprise value, but is subject to half-life decay (the invisible hand’s movement). Over time, the isotope decays and eventually becomes lead, at which point no new companies can generate enterprise value from the shift. Without a sufficient answer to the question of “Why Now?”, any venture capital invested into the company or category is subsidizing company building that would be better served by alternative capital instruments (with a lower cost of capital, i.e. debt, etc.).

Examples:

A helpful metric to examine is “Enterprise Value Per Year,” which often elucidates the distinction. Since inception, Facebook has generated an average of $43B in enterprise value for every year of its existence (Google is $54B/yr, Apple is $50B/yr). Conversely, Disney has generated an average of $3.5B in enterprise value for every year of its existence, a full order of magnitude off (Nike is $3.9B/yr, etc.). To put this in perspective, Lululemon, a great example of a successful consumer clothing company founded in 1998, is worth $43B—Facebook has created a Lululemon every single year since 2004.

The reason why we have not recently seen additional mobile-first social companies emerge is because we are well into the half-life decay of the smartphone.[u] The vast majority of the capturable enterprise value in the mobile social space[v] was done in the first few years after smartphone saturation (Snapchat was founded in 2011). In the same way, we have not seen a successful new company leverage DVDs, even though at one point it was a watershed moment in technological capability.

[w]

Uber, Lyft, and other ride-hailing companies could not exist pre-smartphone. More than simply a homogenous operating system to connect drivers and riders via the same software, the most important technological enabler for on-demand innovation was cellular networking speeds. The original iPhone was released using 2G/Edge, which was too slow to support real-time GPS and turn-by-turn directions. It wasn’t until the iPhone 3G that cellular bandwidth was capable of delivering these critical features. While the original iPhone was released in 2007, the iPhone 3G took another year, being released on July 11, 2008. Uber was founded nine months later.

BEING THE ANSWER TO “WHY NOW?” FOR OTHER COMPANIES

If a company can deliver, mostly through technological innovation, an answer to the question, “Why Now?” for other companies, it will be a venture-scale outcome assuming proper business model—product fit. The challenging part here is that the vast majority of the customer base for the innovating company does not yet exist at the time of founding (market risk). This is the venture-scale company level version of Incentivizing Time Speculation.

Examples:

The classic example of this would be Fairchild Semiconductor. The introduction of semiconductor technology enabled a Cambrian explosion of new businesses to exist. A more modern version of this would be Plaid[ab][ac], without whose existence, many fintech startups would not be possible (too much consumer friction = unsustainable CAC).

Market risk is where the demand for the product is unknown. Execution risk is where the demand is well understood, but the hard part is in the delivery of value against existing competition. Any company that is pure execution risk without any market risk[af][ag][ah][ai] is not a suitable venture investmen[aj]t.

Examples:

Instagram, Snapchat, and most of what we consider “consumer” companies neatly fall into the market-risk bucket. No amount of money spent on a customer survey or consulting project would yield the conclusion that there is an opportunity. It requires an explorer to basically set sail with conviction and strike land.

An example of execution risk would be becoming a franchisee. There is well understood demand for the product, but delivery of that product to demand is not so simple. Opening a new location in a new city or country would be some small amount of market risk, so near pure execution risk would be opening a franchise location a few blocks away from another one.

INCENTIVIZING TIME SPECULATION IS THE MOST POWERFUL ENGINE IN VALUE CREATION[ak][al][am]

Speculation, defined as taking risk through the allocation of resources, is an incredibly powerful feedback loop. If a platform can correctly incentivize users to speculate with their time and energy, it will be very successful. The speculation of time and energy is an easier atomic value swap to extract value from than the speculation of capital as the cost of the middleman is more evident in the latter and will promote disintermediation. A common way that this is phrased is, “build a platform for others to build their own businesses on top of.”

Example:

The United States achieved its position as the leading superpower in the world by being the most attractive country for time speculators. It now has a monopoly on ambitious immigrants which serves as a lucrative bucket fill rate, regardless of leaks. Further, the beginning of the end for the United States will be when another country achieves a strictly better value proposition for time speculators either through a more attractive offering, or the erosion in expected value of the American Dream.

ALL USER-GENERATED CONTENT NETWORKS ENFRANCHISE A CLASS OF CONTENT CREATOR THAT WAS PREVIOUSLY DISENFRANCHISED

The reason why Charli D’Amelio is the #1 Tik Toker is because she is a dancer. Tik Tok is the first platform to incorporate audio as a native part of the core product consumption experience, and thus the first opportunity for dance to be properly appreciated as content.

JFK would have been less advantaged in his presidential campaign without the invention of the television. Similarly, FDR would have struggled in a post-TV era.

Another way to interpret this framework is that a new content network that aims to poach top users from a pre-existing one will fail.[an][ao][ap][aq][ar][as][at][au] Success stories in every new network will be homegrown—the opportunity/switching cost for would-be emigrants [av]established on other platforms is too high.

SUPPLY AS COMMODITY VS. SUPPLY AS UNIQUE ARE FUNDAMENTALLY DIFFERENT STRATEGIES

Treating supply as a commodity is the core philosophy of all marketplaces. This leads to supply competing to serve the firehose of demand with that competitive dynamic translating into a consumer surplus. Treating supply as unique is the classic “arm the rebels” approach which requires the supply to think of themselves as non-fungible. Supply that believes itself not to be a commodity will invest in products that allow themselves to differentiate from competitors, capture more margin from their customers, and avoid being platform dependent[aw].

Examples:

Uber is an excellent example of supply as commodity. Interestingly enough, I explicitly wouldn’t want the same driver as I had last time because in all likelihood, they are very far away when I need them. Shopify is a great example of supply as unique. No company using Shopify thinks of themselves as a commodity[ax][ay][az], which is exactly why they invest the time and energy into setting up their own storefront rather than plugging into a marketplace with pre-existing demand.

POTENTIAL ENERGY IN AN ECOSYSTEM MUST BE CONVERTED INTO KINETIC ENERGY

Every new company addresses pockets of potential energy that has yet to be converted into kinetic energy. The product offering targets these pockets, typically within the end user or customer, and works to remove barriers to allow or catalyze the natural conversion of that potential energy into kinetic energy. Importantly, incentives govern the conversion process and are immutable, like gravity and the laws of physics.

The sharing economy is built on the idea of identifying pockets of untapped potential energy (latent inventory), and converting it into kinetic energy (merchandised supply with little to no opportunity/carrying cost). By converting this potential energy into kinetic energy, sharing economy companies added new supply to pre-existing exchanges, lowering the market clearing price and monopolizing the new supply. Total addressable market can be conceptualized as the integral of potential energy in an ecosystem.

ELASTICITY OF DEMAND APPROACHES ZERO AS YOU ASCEND MASLOW’S HIERARCHY OF NEEDS[bc][bd][be]

Assuming that items are not subject to scarcity pricing of utility value (i.e. there is a pandemic and toilet paper is out of stock), consumers have an increasing willingness to pay any price as you move up Maslow’s Hierarchy of Needs[bf][bg][bh][bi]. Self-actualization has virtually inelastic demand. [bj]Self-expression also has highly inelastic demand. Never underestimate a person’s willingness to pay to close the gap between how the world perceives them and how they perceive themselves.[bk][bl][bm][bn]

Examples:

Conspicuous consumption and many Veblen goods are examples of esteem needs, and therefore very high willingness to pay. Conversely, physiological needs with pure utilitarian value exhibit very high levels of price elasticity.

A parent’s willingness to spend on healthy food for their child elucidates the difference in intercept point on the hierarchy. For the child, it is purely sustenance and left to their own devices, would not necessarily be willing to pay a higher price. For the parent, the wellbeing of their child is part of the parent’s self-actualization, hence the near inelastic demand.

A Swiss Army knife is very useful when you are space constrained. [cc][cd][ce]It is less useful when you need a dedicated screwdriver to assemble a room full of furniture. Similarly, products with a generalized value proposition will inevitably be cannibalized by more specialized competitors. Convenience is the only defense generalized tools have against erosion by specialized tools.

Examples:

Very famously, Craigslist as a generalized tool has been competed against by more specialized tools in each of the classifieds categories. Similarly, over time, eBay has been cannibalized by competitors who are focused on a specific vertical within eBay (i.e. Poshmark, Bring a Trailer).

[cf][cg]

DISTRIBUTION VS. MONETIZATION[ch]

Platforms focus on offering the supply side of their ecosystem either distribution or monetization. Those that focus on a combination of both will be challenged by the specialized vs. generalized dynamic over time.

Examples:

Facebook, Instagram, Twitter, and Tik Tok [ci][cj][ck][cl][cm][cn]offer pure distribution[co]. No constituents on the platforms receive any monetary payment for their participation, incentivized only by the prospect of building an audience and engagement. Shopify and Patreon offer pure monetization. No customer of Shopify or Patreon expects to increase their distribution simply by being on the platform. The main value proposition is in the monetization of pre-existing distribution. YouTube and Twitch are good examples of platforms that offer both distribution and monetization[cp][cq][cr][cs][ct][cu][cv][cw][cx]. Rather than being the best of both worlds, over time, it is often the case that they offer the worst of both worlds, leading the supply side to multi-home across distribution platforms and turn to more effective monetization tools (an example of the specialized vs. generalized framework).[cy][cz][da]

10X EXPERIENCE TO A SINGLE, CRITICAL CUSTOMER

Every company has a singular critical customer, the cornerstone on top of which the business would not exist otherwise. The atomic value swap with the critical customer is the most important exchange to ensure long term viability. The company can only attain its initial foothold within its critical customer base by offering a 10X better product than the next best alternative. A product that is only 2X or 3X better will not have enough activation energy to overcome the inertia of switching cost.[db][dc]

Examples:

Many companies’ critical customers are fairly simple. For example, Shopify’s critical customer is the incremental e-commerce business. Salesforce’s critical customer is the incremental sales division. The critical customer can get hazier with multiple constituents, like a marketplace or user-generated content network. For marketplaces with a single SKU, or where the customer does not actively choose the supplier (Uber), their critical customer is the demand side. For marketplaces with multiple SKUs, or where the customer engages in active choice (AirBnB), their critical customer is the supply side. All user generated content networks’ critical customer is the content creator.

10X is hard to come by through a single optimization[dd] (i.e. a 10X more delicious apple). It is typically achieved by a combination of vectors that multiply together (i.e. 5X cheaper, 2X better = 10X[de][df]). This is the basis for the common saying “cheaper *and* better.”

UNDERSTANDING SELLING PICKS AND SHOVELS

An oft cited phrase in venture capital is that the venture play in an ecosystem is to “sell picks and shovels” (another, less popular phrase is to open a laundry business). This draws on the California gold rush in 1848-9 where the only reliable way to make money amidst the boom in speculation was to offer goods or services to the demand. What is often lost in applying the idiom to a new market or opportunity is more deeply understanding the demand side. This is best understood by the disparity in the answers to the questions:

To perfectly apply the idiom to a new market, the demand for the goods or services must be undergoing an insane amount of explosive growth. It is not merely sufficient to offer goods or services to a pool of demand that is growing at a steady pace, as the invisible hand will likely act in lock step and reduce the addressable opportunity. This rhymes with the question of “Why Now?” but examines the same time period through a lens of serviceable demand.

Examples:

Many companies cater towards a specific generation, be it baby boomers, millennials, or Gen-Z. Unfortunately, the rate of aging of a population is simply not fast enough to warrant explosive growth. More poignantly, there are many companies in the “Deathcare” space, aiming to meet demand for end of life services. Short of some cataclysmic disease or natural disaster, the death rate of any population simply will not undergo anywhere near the same kind of growth rate that “gold prospectors” did in the 1840’s. A true venture scale company cannot be dependent on “time to pass” to naturally deliver them customers.

A very contemporary example of this would be Robinhood, whose business model, Payment For Order Flow, is indexed towards the number of people who identify as retail investors. By dropping the cost of trading to zero, Robinhood ushered in a new wave of demand and capitalized on serving it.

A very effective strategy to unlock potential energy in what may seem to be a calcified ecosystem is to do something that the existing, entrenched players deem to be completely irrational. The conceit in this strategy is that while the behavior may seem irrational at the first order level, it is rational at the second order level and often leads to a market leading position if not monopoly.

Examples:

Credit Karma is a perfect example of this strategy. When it was founded, the credit bureaus all made very good money by charging for credit reports. Whether by corroboration or complacency, Equifax, Transunion, and Experian neglected to rock the boat and were content in their business model of clipping coupons from customers paying to access their credit reports. By offering credit reports for free, Credit Karma employed a strategy that on face value seemed entirely irrational to the credit bureaus—why ruin a good thing[dm][dn]? But Credit Karma was after a much more lucrative pot of gold—financial referrals. Banks and credit cards would pay hand over fist for new customers and Credit Karma had them in spades because of their strategy. This was the second order optimization they were playing for and it worked beautifully.

NON-P&L OPERATIONAL LEVERAGE

A powerful dynamic that leads to steep growth is when a company benefits from contributed work product by non-employees. In question form, “How many man-hours of work do you get that you don’t pay for?” This applies widely across categories of work and leads to a dramatically compounding effect over time.

Examples:

Most communities are great examples of this. Developer communities help each other troubleshoot, leading to valuable CX leverage.

User-generated YouTube tutorials lower educational burdens and provide sales leverage.

Moderators of subreddits, Discord servers, and Twitch channels all contribute work that none of the companies pay for.

The supply side of marketplaces constantly works to merchandise themselves for the ultimate benefit of the company (AirBnB hosts meticulously detailing their listings, Uber drivers researching highest yielding areas, Etsy sellers merchandising their stores).

All UGC networks exhibit this to an extremely high degree.

Word of mouth can be interpreted as marketing man-hours whose cost is not borne by the company itself.

USER TRUST = CONSISTENTLY MEETING EXPECTATIONS

Long term product success is a function of continually meeting and/or exceeding user expectations. Each time a user engages with a signifier (push notification, search query, email, opens the app, visits the website, makes a purchase), the product builds trust with the user (signified meets/exceeds expectations) or betrays the user (signified does not meet expectations). Over time, the trust account with each user must maintain a positive balance or else the user stops using the product.[do][dp][dq]

Examples:

Rating systems are a product innovation to allow for more consistency in setting and meeting user expectations. In addition to the merchandising primitive which increases liquidity, ratings afford the platform better user retention by decreasing the frequency of betraying user trust.

User retention curves can be understood as the ability of a product to build and maintain the balances of trust across user accounts. Churn occurs when the balance of trust in a user account becomes negative.

HIJACKING HIGH SIGNAL-TO-NOISE MODALITIES

Similar to evolutionary adaptations in mimicry, an effective go-to-market strategy is to hijack signifiers that have already expended the work to establish a high signal-to-noise ratio with their addressable audiences. This is a form of attention arbitrage that must be coupled with utility that consistently meets user expectations, otherwise its efficacy will asymptotically approach zero.

Examples:

Spam exists solely through this strategy. The signal-to-noise ascribed to mail, email, phone calls, text messages, etc. gets hijacked by spammers to achieve an attention arbitrage. Spam can be best understood as mimicry of high signal-to-noise modalities that consistently underwhelm expectations. Without a corrective mechanism, spam leads to fatigue and the devaluation of the original communication medium.

Cold outreach that is well crafted and meets expectations successfully hijacks the high signal-to-noise modality it occurs in. Cold outreach that does not meet expectations is processed by the recipient as spam.

Facebook hijacked the prestige associated with Ivy League colleges in its go-to-market. By appropriating the .edu email addresses of elite institutions, Facebook was able to achieve a brand positioning that allowed it a top-down distribution motion. Coupled with a UGC network, which delivered the long-term utility, the initial arbitrage was translated into a defensible moat rather than vapor.

OTHER THINKING

OTHER WRITING

[a]Even if the target customer base is large? Isn’t there a diminishing cost per customer associated with scaling customer education? And do you see any difference if we are talking about one-off low ACV transactions vs subscription-type repeated low ACV?

[c]A recent example for me would be Calm. Convincing each incremental customer that meditation is good for them is too large of an aggregate burden for the company to bear themselves. However, as the shift and stigma around “self help” becomes “self care” and positive, the hurdle of activation energy to clear is progressively lowered.

[f]Excellent podcast on the history of the NYT for further info

https://www.acquired.fm/episodes/the-new-york-times-company

[h]Open core around open source software might be an anti-pattern? No monetization is offered to content creators, but it does offer wide distribution.

1. I don’t have enough pattern match around open source software to have an informed framework.

2. I would argue that the open core business model doesn’t explicitly prohibit access to the content, but charges for convenience.

3. Academic journals are a good example of an anti-pattern here. My best guess as to why they survive is that the consumers rarely pay for the subscription themselves, so it still feels “free”

[j]Right, no.2 is what I mean by monetizing for convenience they enable enterprise uptake and wider distribution. No.3 is a great point.

[k]in 3 are you referring to open access academic journals? What pattern are non-open-access journals? they charge both the creator, and the consumer.

[l]Appealing to one of these is certainly a plus, but I don't know that stating *all* businesses must is correct. Using the maslow's framework below, self-actualizing businesses like Calm or even Whole Foods aren't really addressing a sin, but can still be large. Perhaps a more accurate claim would be a business needs to either address some sin or its "benevolent" counterpart (ie Envy:Pinterest :: Equanimity:Calm).

[m]Where do you classify successful H&W and functional co’s against this? Co’s purporting clear aesthetic benefits (protein shakes, Vital Proteins and other collagen co’s, etc.) all clearly fall in Pride, but what about successful brands that simply make the user ~feel~ better? E.g., Liquid IV, Red Bull, Calm App? Maybe they are general ~facilitators~ acros motivators?

[n]Surprised that Pinterest is on Envy, any context to why? My perception of it is thats more of a search engine / utility, vs. Envy? I'd say Instagram/Facebook/Linkedin would fall into envy as well.

[o]Ah I see, -> envy used to create purchase behavior. Ya in that framework, { LinkedIn, Facebook, Snapchat } wouldn't fit

[p]I think it'd be fair to say that social media taps into varying degrees of Pride, Wrath, and Greed on the creation side and Gluttony, Lust, and Envy on the consumption side

[q]Do vegas, lotteries, Fanduel, Robinhood, etc. suggest people are willing to engage in obviously sub-optimal transactions when there is a chance at a life changing outcome?

[r]I think the success of the atomic value swap of gambling can be ascribed to Prospect Theory (basically overweighting of small probabilities): https://en.m.wikipedia.org/wiki/Prospect_theory

[s]How do you think about changes in distribution? FB created a lot of EV in the D2C arena in a short period (e.g., DSC), but the decay of that distribution channel happened incredibly fast. Is there a tie in to the question, "Can the challengers get distribution before the incumbents get innovation question" (a16z?) or is that less relevant?

[t]I process changes in distribution through the lens of Carlota Perez. There is an “installation” phase where the distribution infrastructure is established (i.e. railroads, smartphones) followed by a “deployment” phase where things are shipped over those rails (i.e. goods/people in boxcars, software). Facebook, with its rich user targeting and ingenious lookalike system, created its own “installation” phase for D2C brands to “deploy” on top of, but I would liken it more to the paved roads and sidewalks within a college campus rather than a transcontinental railroad. Because they are a rent-seeking platform, they have a gravitational pull that is hard, if not impossible, to achieve escape velocity from. I think the challengers vs. incumbents dynamic is a bit different. Applied to D2C, it would examine the competition between the upstarts (Warby, DSC/Harry’s, Glossier) and the incumbents (Luxottica, P&G, Estée Lauder). Which in it of itself is a very interesting topic!

[u]How much of this can we attribute to big tech's ability to quickly copy and implement the features of new standalone apps? E.g. Clubhouse, Houseparty, Substack, etc.

[v]Today this could be in a state of flux again. Most social apps were targeting users who were already teenagers when the first smartphone was launched. Meaning needs were similar. Today's college going generation grew up with smartphones* and Youtube, and their needs are different. Not addressed by just smartphone - atleast not the way Millennials used smartphone - but a combination. In a way, Fortnite is a social experience.

[w]It's pretty interesting glancing at the top 100 apps in the social networking chart. After the top 10, it's basically a bunch of dating, flirting, and make new friends/meet new people apps. Very limited diversity. AndClubhouse now sits at 46.

[y]Yes, though I would expect the enterprise value created by Clubhouse to be a small fraction of the total created by companies in mobile-social during the first “half-life”

[z]I would also say rather than mobile first, its defining characteristic is "audio first". Fits the framework as an early adopter of the ubiquity of audio devices these days.

[ab]Most interesting story I've heard about Plaid is that Robinhood engineers were literally sent to the Plaid office to build the bank connect solution - literally pulling Plaid into the market and enabling the denovo fintech market. Still need to verify the extent of this though :)

[ad]Most tech VCs like the former and hate the latter, mostly because Execution risk can be handled well by incumbents.

[ae]Yes, mostly because of the need for a strong answer to the question of "Why Now?"

The latter is 100% a viable path to building enterprise value, it just does not fit with the demands of explosive growth over a short amount of time.

I grimace at the conflation of the peculiar taste of venture capital with what constituents "entrepreneurship." Venture-backed companies are a strict subset of entrepreneurial endeavors, much the same way that frozen TV dinners are not representative of all food.

[ag]As I understand it, the market risk that Doordash internalized was demand for delivery in the suburbs. It wasn't until they took a POV on fast food/fast casual + suburban density that it started taking off.

[ah]interesting -- pizza/chinese food delivery was quite common in the suburbs I grew up in, even amongst families with a stay-at-home parent. I had always imagined doordash's risk to be operational/execution: many-to-many deliveries in low-density suburbs is much harder / more expensive than one-to-many

[ai]The key distinction is delivery of name-recognized brands in fast food and fast casual. That initial liquidity with Chipotle, McDonald's, etc. delivery gave them the toehold to achieve positive unit economics in less densely populated environments where a cold start would have otherwise hemorrhaged cash.

[aj]I have to disagree with this statement. I can name plenty start-ups that funded in a crowded space with already established players. For an example, Zepto.

[ak]I really like this section. Curious how you think about this in the context of influencers. Are most people willing to "time speculate" because of inherent interest in the thing or because of interest in the fact that influencers are using the thing? Similar to the early growth of the US, many of the colonies were actually playgrounds for friends of the King of England...

[al]Time speculation is fascinating because the average non-established user does not perceive the true opportunity cost of their own time spent. Compound that with people’s tendency to assume the best possible outcome in an array of expected values and you get a very large, inexhaustible pool of potential energy, so long as the payoffs are publicly validated. Imagine a set of risk-loving purchasers whose only asset to spend is time. The shop that can offer them the most attractive set of outcomes will be privy to an abundance of demand.

[am]Very interesting! I like this a lot. Particularly as the cost of global travel decreases, the inhibitor to risk-loving purchasers flowing to areas that reward time speculation best is just (a) immigration barriers (time/cost), (b) language barriers, (c) the felt loss of community (friends/family). I do wonder if a marketplace service company could really thrive if it developed a global platform that addressed all 3 of these friction points together.

[an]There are exceptions to this when the newfound platform made an otherwise mediocre celebrity excellent.

[ao]Yes—I would argue that they are a better fit as content producers for that network than prior time investments. I.e. Jason Derulo

[as]Would this hold true in politics as well in your opinion? Ie a new political party should find its core electorate in segments disenfranchised by current parties? Example (strictly for this point)- Bernie Sanders? Andrew Yang?

[at]That is a fascinating question that I have never contemplated before. My gut reaction is that yes, every truly new political ideology must have its own homegrown leaders, but I think the portability of audience is significantly higher for political leaders as the inputs to success are largely the same (no new fundamental user primitive to appeal to)

Basically vertical integration in the digital world (controlling the supply chain of content all the way to customer success etc.)

[ax]Aren’t these supply companies still then heavily single-platform dependent? Or Shopify qualifies as an invisible partner and platform is distribution channels on top?

[ba]Maybe some more specific examples like Airbnb? Craiglist no longer can sufficiently serve the needs of supply/demand... Airbnb came in by increasing the quality of inventory through digital transformation so the potential energy of an underutilized asset became kinetic energy of "always want to look better" to stand out in the marketplace

[bb]Potential energy of players talking to each other in game can no longer be well supported by traditional comm tech --> discord

[bc]I think it's more correct to say that as you ascend Maslow's hierarchy, demand elasticity approaches INFINITY, but the PRICE elasticity of demand approaches zero. i.e. you're very elastic about purchasing a Tesla, but less elastic about the specific price if you do buy

[bd]We’re thinking about the same thing, but the current terminology is technically correct. Perfectly elastic demand will only pay a single price for something, no matter the quantity. https://thismatter.com/economics/demand-elasticity.htm

[bf]This is a much better framework than to shoehorn consumer demand into the seven deadly sins anachronism. Fun, but should be paired with a more sophisticated model.

[bh]I looked into Maslow and the Seven Deadly Sins (which I first heard from Reid Hoffman) - I think for consumer demand it does depend on the vertical. Finance, for example, seems to be a very different beast: Maslow's Hierarchy of Needs would need a very fat bottom and a very small top. Financial security is quite relative: could mean getting unemployment benefits, but could also mean a Roth IRA to the middle class, or a golden parachute to a failed fortune 500 CEO. The price sensitivity for products that ensure financial security is very low across the entire spectrum of financial products. Even to the point that finance may need it's own price-demand framework. Likewise, the debt-free/financial independence movement COULD be considered touching upon psychological-->self-fulfillment, but again I think it's more in line with security than anything.

How financial products interact with other verticals, now that's where things get interesting. For example, can one buy themselves into an elite college? And if so, how much does one pay? r/wallstreetbets is more symbolic of a community of traders than anything, and thus could command a higher entry price. Feeding children for a parent collapses the hierarchy altogether: self-fulfillment comes from the act of providing basic needs to a child - who wouldn't sacrifice everything for their child?

Quite literally food for thought.

[bi]Hmm, I don’t know if “finance” is a core part of Maslow’s Hierarchy of Needs as I understand it. There is security in the sense of physical security as well as job security/employment, but it’s not clear that extends beyond a short term view or into disposable income.

Also, I would argue that the example of a parent feeding their child would be a perfect example of this framework, where they would have near infinite spend while the child would not themselves.

[bk]would also add increasingly high demand for dynamic information e.g. not only paying for exclusive access to information but also ensuring that the information continues to be relevant to them and highly curated. Removes the need to have to sift through it yourself.

higher willingness to pay: The Information, Substack

lower willingness to pay: Twitter

[bn]it's so interesting, as we are on our way to eliminating global poverty, if we just eradicate that first layer of maslow's hierarchy. do we add a new one of top? this is a 100+ year question after I am long gone :)

[bo]I like your metaphors! One thing that I think matters is how easy it is to switch tools. If I've got a swiss army knife on me and my screwdriver's out in the garage, I'll just use what I've got. Similar to how I'm inthe google ecosystem and even if another individual product is better, how much effort will it be for me to go grab it.

[bp]Yes! Adding additional clarity: convenience is the only defense generalized tools have against erosion by specialized tools. Thank you!

[bq]I think this is highly context dependent! Look at enterprise products like Rippling and NetSuite.

Rippling spent 2 years in stealth building every integration possible and offers a suite of products that work cohesively together.

[br]I would emphasize the "over time" part here. Smaller, scrappier challengers will inevitably cordon off a single point of value delivery and focus on being strictly better, and win.

[bs]It seems that prior to the rise of cloud SaaS in an on-prem world, some buyers / business units may purchase bundled software that serve several purposes (and each does not have to be the best), because it's much easier to buy and manage this way. But this problem is much easier to solve now with cloud, and the proliferation of point solutions for every function/role and specific tasks within each function (just look at the sales tooling landscape) seems to corroborate your point.

[bu]I think an interesting complement to this point is that a Specialised Tool (and the company behind it) will very often try to Generalise over time (and in doing so may lose some of the edge and focus that made it successful to start with). Leading to an unbundling / bundling / unbundling cycle

[bv]The bundling / unbundling cycle is very real (I conceptualize is like a pendulum). I don’t have a ton of evidence of specialized tools increasingly generalizing over time, but I think there is solid precedent for aggregators who enter the market and act as the next layer of generalized tool

[bw]Although to address the specific dynamic of specialized movement to generalized, I think it would classify as “product creep” and definitely subject itself to the dynamic as you pointed out.

[bx]Is a better way to frame this as the perpetual "bundling/unbundling" dynamic?

Specialized tools do win over time - until specialization gets to the point where the market is fragmented that the consumer is again willing to pay a premium for something to bundle up the specialized tools and solve all the problems in the same place.

[by]I think about specialization as more of an infinitely fragmenting pattern, like a perpetually branching upside-down tree. As time passes, labor specialization has strictly increased (think of the variety of ways to make money that exist today vs. a century ago vs. a millennium ago). The same thing has happened with tools. There are orders of magnitude more tools that exist today both physical and digital (i.e. compared to the first rock). Periodically, for convenience’s sake, a bundling will occur (Swiss army knife, cable television, Atlassian, etc), which is kind of like the trunk of a new upside-down tree at the current latitudinal progression, but it also fragments. Entropy pushes towards more and more specialization over time.

[bz]I think this gets at half the equation: specialization increases performance, but it also increases switching costs and cognitive overhead of maintaining multiple tools (in addition to actual cost of maintaining multiple unbundled products) -- all of these factors put a break on rewards to specialization.

[ca]As specialization occurs, it is not necessary to hold state of all pathways. To operate an automobile, you need a drivers license, but to drive a commercial truck or motorcycle, you need a separate license/endorsement.

[cb]I think the proliferation of specialization creates opportunities for *curators* i.e those who have plumbed the depths of new tooling and identified the right combination of the tools to be used for the purpose at hand. tool influencers, if you will :)

[cc]Another argument is that Swiss Army Knife also becomes useful when the utility of the tool becomes highly commoditized:

Most people have a few areas where they want to optimize on, and some areas where a B product would bring 99% of the utility. A screwdriver is competitive when the perceived value of the task is high.

(e.g. superhuman does email REALLY well because email is a high frequency/high value tasks by executives, the non-executives want to imitate such behavior)

[cf]now seeing this more and more in the form of API's that go deep on one function vs companies that offer said function as 1 of many service offerings

[ch]I would phrase this "Social Capital vs. Financial Capital".

(See: https://julian.digital/2020/03/28/signaling-as-a-service/)

[ci]I'm curious if TikTok will keep offering just distribution, given its recent efforts in eCommerce (partnering w/Walmart, Shopify integration...). It's following the path of Douyin (Chinese TikTok) which seems to be "successfully" offering both distribution and monetization for their top creators.

[cj]I would assume they will continue to focus solely on distribution. The content currently created is hyper-optimized for views, which is a perfect fit for the advertising business model. If they start to offer native monetization to creators, I would imagine that the creators will start behaving in a different capacity, and strictly worse for the strength of the advertising business model.

[cm]Agree, but do you think there is a difference between the incentive to optimize for engagement (in your words, self actualization), and the incentive to optimize for engagement with monetization. At a certain level of engagement, there is always third party monetization in sponsorships/patreons subs etc. In the end, engagement = monetization and I'm curious as to why you believe native monetization will make a difference.

[cn]I would examine it through the lens of attracting the marginal content creator. By only offering distribution, Tik Tok will have a monopolistic position over the incremental content creator interested in "making it big" through the quality of the content they create. Their audience can be monetized in other ways, but Tik Tok will always be the best place for them to grow their audience.

If they add monetization, they start to attract creators who are interested in making content that makes money, which necessarily weakens their monopoly on the prior group. You force creators to make a decision between creating content that grows their audience and content that monetizes their audience. At worst, it pollutes the original value proposition and poisons the well. At best, you have a native form of monetization, but your best creators will find that their efforts to grow their audiences will be rewarded the most elsewhere. This is why you see homegrown celebrities outgrow the platforms they grew up on when the platforms offer native monetization (i.e. Ninja, Ryan Kaji).

[co]I don't think that Tik Tok can be put in this category given it's algorithm. Tik Tok was built for random distribution - as a lottery. The brilliance lies in the notion that anyone can become famous. I love Alex Zhu's analogy that Musical.ly was America whereas Instagram/Youtube was Europe.

[cp]Intrigued by this perspective—obviously Youtube outperforms on distribution vs. monetization, but does that mean making monetization better would be bad? Or removing it from the platform would help?

[cq]The challenge with scaled platforms with existing monetization channels is that the creators and content generated tends to be calcified and hyper-optimized for said monetization format (i.e. prank videos on YouTube to garner the most amount of views). It is virtually impossible to change this (see theory 5)

[cr]Agree with this, but this section seems to imply you can’t have both discovery/distribution and effective monetization for creators. Or am I misreading?

[cs]You can! But you end up with a spork. It's not the best fork and it's not the best spoon either.

[ct]Sure, but we can agree YouTube is way more successful than TikTok, Patreon, or onlyfans? Just wondering how severe the downside is of spork life

[cu]It's really hard to compare established platforms at scale with ones that are still in their ascent.

[cv]I don't quite agree with the spork analogy. Distribution and monetization are interdependent. Conversely, you don't necessarily need a fork whenever you need a spoon.

I do agree that if you control both distribution and monetization, you may not be the best at either, but would have an opportunity to provide the best user experience as a whole.

[cw]This is the application of the specialized vs. generalized framework. (A spork is a two-utility Swiss Army knife)

[cx]This seems to suggest a big opportunity for a platform that matches youtube creators with the best integrated sponsorships. Like shopify, the supply of sponsors would be fully differentiated, since every Youtuber has their own style

[cy]Where did this observation come from? There are benefits to having a highly integrated system so it's not obvious to me that it leads to the worst of both worlds. It may not be the best for distribution, or the best for monetization, but tight integrations can lead to a much better overall experience.

[cz]This is an extension of the specialized vs. generalized framework. A simple litmus test is how often users of a platform that offers native monetization encourage their audience to engage in a different monetized behavior (support me on Patreon, buy my merch, donate to me, etc.)

[da]Excellent point here. With virtually limitless demand and supply on YouTube, going forward, their generalized model will hinge on moving more towards distribution or supply (not both). Good example of this are tightened algo adjustments, which ultimately keep top creators happy, while still driving activation with limitless distribution. But of course this drives mid and lower tier creators towards multi-home behavior (generalized products).

[db]This is (sadly, as a hardware person) why new hardware startups so rarely hit it out of the park. The physics of materials and realities of dominant software stacks make it unlikely you will hit >2X on performance. And the manufacturing costs are so enormous that you need to find multiple markets or a lucrative enough single market that will be willing to pay switching costs. It's an incredibly difficult needle to thread. Incumbents have the stomach and pockets to bear this. I think a revolution in materials science (maybe graphene) will cause this dynamic to reset.

[dc]I agree. It's also why venture outcomes in the hardware space tend to be "Why Now?" enablers like Fairchild Semiconductor, where the BATNA is non-existent, so 10x is easier.

[dd]Not to get too pedantic, but do you consider "10x" to be an actually measurable factor ex ante, or is it just a superlative statement? As in, if shown the next Uber/Airbnb/XYZ today, how would you actually measure today whether it fell into the _0x or _x buckets?

[de]IMHO this is also why general tools will be supplanted by specific tools - it’s much easier to provide 10x value to your critical customer if she’s been using a general tool so far. To get great business ideas, look for general tools whose user base is to a significant portion made up of a critical customer whose specific needs are not being met sufficiently (and can’t too easily by adding a couple features to the general tool). Ideally combined with the “why now”. New surging audiences representing tomorrow’s billions dollar tam will not come from nowhere but they’ll have been using a general tool already.

[dh]Yes, definitely very similar. The only thing I would add is that this strategy is one where the incumbents don’t observe and think to themselves, “I wish I could do that” but rather “They are insane, why are they doing that?”

[di]That's useful nuance. Almost like the pinnacle of a counter-positioning approach - lowest level would be "I might be able to do that, but too risky", second level is "I wish I could do that, but I know I can't", and third would be "that's insane, you shouldn't do that"

[dk]This reminded me of Josh's post from 2006: https://redeye.firstround.com/2006/04/shrink_a_market.html