Searching for user-centric products with network effects that create platforms, solve real problems, and/or foster communities
I took some time this week to think about how the five beliefs I shared in my last post all tie together. Heres a brief refresher on what they were:
Individualism and self-empowerment will be consistent themes for a long time. There are more ways than ever for any single person to enrich themselves monetarily or otherwise
Software is still in its early stages and many markets have yet to be meaningfully changed due to it
In this era of constantly being online, everybody will seek out a group or community that they identify with and can build with
web3 and crypto are in their early days and most companies, DAOs, etc. around today will not be here down the line. Those who are building for the non-red pilled as well will win
Hardware will ride the tailwinds of software’s evolution and become even more prevalent and sophisticated
But here’s the thing. Some, if not all, of my beliefs aren’t mine alone. You probably share a similar set of views, even if you haven’t listed them out before. As an investor, if I want truly unique and outsized returns, I need to have some sort of contrarian view. Values and thesis have to have an asymmetric perspective, if not they are repeating the obvious - most of these come out in the actual investment process, not the sentence above. Beliefs four and five are likely the closest to contrarian views that I have, but [maybe naively] I think that my contrarian views can be on a micro level and not macro. Forcing my thesis thesis to be contrarian in some way felt as though I might be pigeonholing myself into something too strict.
I liked the explanation framework used by USV because I think it’s helpful to breakdown each component part of my underlying thesis. It prevents USV, and soon to be me, from being boxed into too rigid way of thinking but also validates that a single sentence or thought can be unpacked in so many ways. Let’s dive in.
User-centric is a term that, to me, means having a specific end user in mind and making sure their experience is as powerful and valuable as can be. A company like Figma made the design creation experience flawless and easy to demonstrate. Robinhood made investing accessible (and addictive) to the masses and brought wealth to many who never could have imagined it. Tiktok created a brand new way to consume content (for hours on end) but also made it easy to create content. Stripe has become your developer’s favorite tool because of how it simplified a previously difficult problem through easy to install SDKs and APIs. The list goes on, but all of these products have a clearly defined end-user and made that user’s experience delightful. This requires constant iteration, feedback from customers, and having an identity. The most successful user experiences make the product an extension of the individual and empowers users to produce tangible value.
Products can be both digital and physical, and often the latter can power the former. More than is expected, anyway. Zoom is a digital product that made the pandemic manageable for both companies and individuals because of its quality and ubiquitousness. Imagine being on WebEx for the last two years. The Whoop I wear every day is a physical product, meticulously crafted to be both minimal and powerful. Its technology also powers an app that gives me a treasure trove of data. Other physical products might include EV batteries, satellites, and anything else you can touch. Some, like Packy McCormick’s last piece on Hadrian, would be the perfect mix of software and hardware. Like I wrote in the last two pieces, I think hardware is set to take off and we’ll be in a revolutionized world of both atoms and bits sooner than later.
I’ve written extensively about network effects, but they are among the most powerful forces against competition and for scale that a business can have. Remember that network effects are the growth in value for a user of a good/service as more and more people use that good/service. See the image above representing Metcalfe’s Law and network effects for telephone lines. Some of the most successful companies that have thrived due to network effects are Facebook and eBay, where respectively, the users have contributed content that made the site addictive and goods that make the product a first-stop. Network effects are harder to find now given that company clones (e.g. BNPL, 15-minute delivery) are popping up left and right. Access to capital and digital tools have made growth easy, but when lasting network effects push a company’s growth to the front, that is a winning sign.
Note:
One thing to clarify, before diving in to the final portions of thesis, is as you see at the end of my thesis sentence I used “and/or”. While a perfect storm of a company may have all three of these traits, not all companies with network effects can also be platforms (e.g. Facebook which internalizes its network effects), and so on for each trait and quality listed.
Next is creating platforms. A platform is a product whose value to its creator is less than the value of all those that use it. Platforms should help users get things done and provide them value. Shopify is the perfect platform, it enables its merchants to sit atop and sell through its software with many customers none the wiser. This same view can be taken with a handful of web3 companies that are exploring the boundaries of what a platform can be. They often facilitate the relationship between some third party and the end user, such as OpenSea creating a way for interested parties to buy NFTs from parties interested in selling them. Identifying OpenSea as a platform is easy when you consider that $14 billion in sales went to NFT sellers and OpenSea “only” made about $1 billion in revenue. It benefits users to buy from OpenSea for selection, discovery, and price and it benefits sellers on OpenSea who now have access to demand, a simplified selling experience, and trust.
“Solve real problems” is potentially the most controversial part of my thesis. In theory, every company that exists can and should solve a problem. That problem can be an enormous one (internet search is bad - Google). It can also be a smaller, niche one (book people don’t have a good place to talk about books - Goodreads). But companies that don’t solve a unique and tangible problem, and can’t generate revenue while doing it, seem to pop up left and right in 2022. The amount of 15-minute delivery companies is bewildering, but their recent demise is not. D2C replicas selling products only differentiated by branding are standard. I want to focus on companies that are solving something real. Wealth inequality, a great example of a real problem, is being worked on by thousands of people who have dropped out of college to work in web3. Crypto has changed the lives of thousands of people and doesn’t require a college degree. But it does provide access to money that otherwise could have lost all value (e.g. Rubles) or didn’t exist before (e.g. an artist moving from Etsy to OpenSea). The premise of building the future outweighs the $250,000+ bill of college. I expect there to me more young builders solving problems in both web3 and web2.
Lastly, I will be actively seeking out companies that foster community. Communities are groups that share particular traits, beliefs, or values. They typically are large but not enormous, because of the filters for their specific heuristics. For example, Discord communities around different DAOs typically are <10,000 people, depending on the DAO of course. As I mentioned in my post on beliefs, Notion forms smaller communities within large ones (companies) by centralizing opportunities and ideas into a single, shared location. Similarly to empowerment, Robinhood brought together communities of investors who had never bought a stock before, had enough money to open an account, or even realized they were interested in investing. Members of communities don’t have to know each other, they never even have to meet. What makes communities special is that when and if they do meet, there is a common characteristic that unites people and has changed their lives in some way. web3 is a community. Users of neobanks are a community. There are boundless groups yet to be formed.
Wrapping things up, I have my eyes on a lot. And to make that doable, I have to have a flexible thesis but a strict filter. Yes, my thesis is without question vague and a bit generalized. But to hone in on anything more specific, at this point in my journey, would box me in. I know what kinds of companies interest me, will need to learn more about which do not, and I want to evaluate with an asymmetric lens and ask myself, “what will be obvious in retrospect?” There is a mental model called inversion, where instead of thinking about a problem from its natural starting point and going forward, you look at it from a resolution standpoint and understand what had to be true to get there. Inversion will become a common evaluation tool as I regularly review my beliefs and thesis to see how accurate I’ve been.
Moving forward, I’ll start to get back into the swing of writing investment memos, tying them back to my thesis, and keeping a scorecard for how things have gone. Let me know your thoughts in the comments or via email!