FRAMEWORKS v0.2

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:

• Activation energy
• Behavioral economics
• Cognitive biases
• Darwinism
• Entropy
• Game theory (particularly Repeated Games)
• Moral Hazard
• Nudge Theory
• Potential and kinetic energy
• Predation
• Price elasticity of demand
• Probability theory (particularly Expected value)
• Prospect theory
• Social psychology
• Supply and demand (particularly Economic equilibrium)
• The invisible hand
• Thermodynamics

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:

• What is the value being delivered?
• What is the perceived value of what is delivered?
• How fairly compensated is the creator for value delivered?

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 for 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.

FRAMEWORKS WITHIN BUSINESS MODEL—PRODUCT FIT

LOW ACV (AVERAGE CONTRACT VALUE) DEMAND CANNOT REQUIRE EDUCATION

If the expected economic return on an acquired customer is low, 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.

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 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.

THE SEVEN DEADLY SINS ARE ACTUALLY THE SEVEN CORE MOTIVATORS^[b][c]

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 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:

Sloth: Uber, Amazon

Pride: Instagram, Tik Tok

Gluttony: DoorDash, Netflix

Lust: Tinder, OnlyFans

Envy: Pinterest

Wrath: Twitter

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, 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). 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. The vast majority of the capturable enterprise value in the mobile social space 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. [Additional thoughts on data transfer via infrastructure cost as another layer]

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, without whose existence, many fintech startups would not be possible (too much consumer friction = unsustainable CAC).

MARKET RISK VS. EXECUTION RISK

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 is not a suitable venture investment.^[d][e][f]

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

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 the 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. Success stories in every new network will be homegrown—the opportunity/switching cost for would-be emigrants established on other platforms is too high.

SUPPLY AS COMMODITY VS. SUPPLY AS UNIQUE ARE FUNDAMENTALLY DIFFERENT STRATEGIES^[h]

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^[i][j].

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, 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.

Examples:^[k][l]

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^[m][n][o]

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. Self-actualization has virtually inelastic demand. 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^[p][q].

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 assuming available substitutes.

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 SPECIALIZED TOOL WILL ALWAYS BEAT A GENERALIZED TOOL OVER TIME^{[r][s][t][u][v]}

A Swiss Army knife is very useful when you are space constrained. 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).

DISTRIBUTION VS. MONETIZATION

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 offer pure distribution. 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. 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).

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.

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 (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). 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:

• What was the demand for picks and shovels in 1847?
• What was the demand for picks and shovels in 1849?
• What was the demand for picks and shovels in 1856?

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 lockstep 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.^[w]

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.

FIRST ORDER IRRATIONAL, SECOND ORDER RATIONAL

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? 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.^[x][y][z]

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.^[aa]

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.

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.

THEORIES

The staging area for frameworks to develop and be pressure tested.

Any non-default Subreddit with >1M subscribers^[ab] is large enough to support a standalone, venture scale business. This is partly because subreddits tend to be the lighthouse that attracts early adopters in a category and crossing a critical mass is a strong signal.

User behaviors tend to exist in the wild in some primitive form and at sub-scale due to friction. By removing friction and streamlining the behavior, companies can catalyze the conversion of potential energy to kinetic energy.

A platform’s value can best be understood as the integral of all human labor that has been invested into it.

The existence of a homegrown meme is a litmus test for the power of a community. It is proof of the scale and intensity of engagement and original thought. Any community capable of producing a homegrown meme has escape velocity if channeled correctly. An “inside joke” is the primitive version of a meme that exists in the wild without hyperscale.

Every B2B company can be distilled down into a “productivity tool,” where it offers an attractive net-present value exchange of money for current or future time savings.

Upon being understood by the ecosystem, it is impossible to change the atomic value swap of a company. The company may place additional value on the scale to increase revenue, margin, or defensibility, but only in an augmenting capacity.

Venture capital is a unique opportunity that enables the purchase of time with money. It allows a company to reach forward in time and hire people that would otherwise not have joined. The same applies to strategic partnerships and contracts.

The world is a series of pendulums swinging back and forth between poles. Decentralization eventually gives way to centralization, political parties in power, anonymity to identity, etc. Special opportunities arise when multiple pendulums are simultaneously aligned in their motion.

All lean-forward consumption experiences compete with each other. All lean-back consumption experiences compete with each other. The two categories do not compete with each other.

The burden of live content is impossible for a single creator to bear themselves. It needs to be subsidized by other participants (Clubhouse, interviews) or content generation mechanisms (gameplay, auctioning, music).

The Switzerland approach is a very defensible strategy when there are multiple platforms competing for new demand. Offering platform-risk insurance to new suppliers leads to control of the firehose. (Part of the investment thesis in Unity3D)

The spread of information occurs first in the lossiest format possible (low bit rate, i.e. text) due to infrastructure constraints, and then progressively increases in fidelity alongside bandwidth capacity (higher and higher bit rate approaching lossless). This dynamic resets with every new communication medium.

Minimum viable bitrate is a metric threshold that networks must meet to allow higher bandwidth products to proliferate. The earliest platforms to scale on the first, inherently lower bandwidth, infrastructure will have low minimum viable bitrate, successively followed by platforms with higher minimum viable bitrate as bandwidth increases.

Wired terrestrial: Binary (Morse Code 1830s) > Text (Telegraph 1844) > Audio (Telephone 1849)

Wireless terrestrial: Binary (Morse Code) > Text (Telegraph) > Audio (Radio) > Video (Television)

Wired Internet: Text (BBS) > Images (Netscape/AOL) > Moving Image (Flash/GIFs) > Video (YouTube) > Live-streaming (Twitch) > Synchronous Live (Zoom)

Wireless Internet:

Text (Twitter) > Images (Instagram) > Single Audience Audio (Spotify) > Single Audience Video (Snapchat/Tik Tok) > Single Audience Live Video (FaceTime) > Multiple Audience Live-streaming Video (Instagram Live/Tik Tok)

Without time constraints, rapport strictly prefers higher bitrate interactions to lower bitrate interactions (In-person > Video chat > Phone > Text > Email).

Any company that can accurately be described as X for Y will face an enterprise value creation ceiling of X/10.

The internet is a metropolis where people vote with their time. There is a significant infrastructure cost, but neighborhoods within a city achieve density liquidity on their own over time. Gentrification within a neighborhood is analogous to platforms achieving scale.

Surplus utility is an output of improving on one or more of three core questions within an atomic value swap: What is the value being delivered? What is the perceived value of what is delivered? How fairly compensated is the creator for value delivered?

All multi-SKU marketplaces begin first as communities with an editorial voice.

Average user minutes per month is the homogenizing metric that identifies the potential of consumer platforms. It assumes that the market (most likely brand/performance marketing budgets) will set a universal clearing price for a minute of user attention (ceteris paribus). This metric is the highest at sub-scale and drops precipitously as the platform scales.

All performance marketing ad spend competes with each other and all brand marketing ad spend competes with each other. The two categories do not compete with each other at steady state. (Performance marketing can be defined as ad spend with the possibility for an infinite purchase)

Advertising driven platforms that cannot break out of brand marketing budgets into performance marketing will face a ceiling on revenue scale driven by dilated feedback loops that decrease velocity of spend and human-in-the-loop sales motions.

The traditional relationship between wholesalers (production risk) and retailers (inventory risk and customer acquisition) is shifting to one between dropship producers (production and inventory risk) and influencers (customer acquisition).

Top-down analysis of an addressable market almost always leads to a product strategy that fails because it misses nuance at the atomic swap level. Bottoms-up processes of iteration to viable atomic value swaps are the best way to bring a new product to market. See: Empathy vs. Sympathy

Any platform that launches with the explicit strategy of the celebrity power of its supply to achieve distribution will fail. Celebrity power as distribution only works for consumable products.

(Unpacking this since it’s a bit of a lightning rod—this is rooted in the assumption that the celebrities have a very good BATNA for investment of time and reputation and the likelihood that a sub-scale platform offers them a strictly better option is slim to none. Celebrities eventually adopt scaled platforms once the value proposition is competitive with their BATNA.)

Marketplaces that attempt to service a multi-homing supply side will fail.

Rent-seeking platforms have their own gravitational pull that impedes businesses built on top of them from achieving escape velocity. (This can be measured by the platform’s intensity of competition in its rent-seeking dynamic, or in this analogy, the mass of the platform)

The company or companies responsible for compressing public market SaaS multiples will be rewarded with the eroded aggregate enterprise value.^{[ac][ad][ae][af]}

The length of corrective feedback loops increases with the number of humans involved in a system.

Every business model/strategy has a natural predator. There are no capitalistic apex predators on an infinite timescale.

Users hacking the system or employing workarounds are a breadcrumb trail for would-be killer features.

In aggregate, users will always prefer convenience over owning their own data or privacy.

Consumers split between a cheaper, open ecosystem with features and flexibility vs a more expensive, closed ecosystem with focus and design. Mac vs PC, iOS vs Android, Peloton vs Zwift, Plex vs Netflix. It is an ideological choice and users tend to make the same choices across products (Apple + iOS + Peloton + Netflix).

In a post-information age, we are limited in trusted routes to acquire information in a similar way we are socially limited by the Dunbar number.

All arbitrage opportunities eliminate themselves over time in an efficient market. Any company built on an “arbitrage” opportunity will fail long-term unless the core atomic value swap evolves.

NFTs are a decentralized technical primitive that allows people to digitally allocate money towards self-actualization. In-game cosmetics were the first, centralized, version of this motion.

All value creation occurs through the reduction of friction.

The most sustainable consumption decisions occur when the primary beneficiary and the purchaser are one in the same. A disconnect tends to pervert the atomic value swap and creates surface area for principal/agent issues to arise (i.e. assisted living facilities paid for by the children)

Companies that host well attended conferences have achieved escape velocity (non-P&L leverage is evidenced by the attendees).

Memetic power increases exponentially inversely correlated with cost of information distribution. Velocity of memes also increases.

Crypto gaming and play-to-earn is a misnomer. “True” gameplay is expenditure of time by the player for sacred entertainment value, not secular economic value. That sacred value can later be monetized, but by being financially motivated first, the atomic value swap of the “game” is polluted and becomes more akin to Mechanical Turk than gameplay. To the extent that the aggregate output of the user base is valuable beyond speculation (crosses the chasm to true collectibles/art), the game will be sustainable, but all will compete for incremental “player-time” and succumb to margin compression from multi-homing labor, eventually to zero profit.^[ag]

All games have a half-life of entertainment value that eventually decays to zero.

Greed and pure economic speculation is a pollutant to atomic value swaps that hamstrings the formation of sacred bonds within a community. (i.e. How often are friendships made in Las Vegas?)

VTubers are the first citizens of the “metaverse,” by nature of the fact that they are more incentivized to spend the incremental hour of time on their digital avatar instead of their analog one.

Hobbies are ripe petri dishes for venture outcomes as they start with a surplus of non-discerning labor.

Technology shifts kill business models. The internet and UGC will not support ad-driven editorial content. Web3 will not support pay-per-seat SaaS.

Centralized compute wins when hardware costs and transfer costs are both high (mainframes) and both low (browser-based applications). Decentralized compute wins when hardware costs are low but transfer costs are high (PCs + software in a box) and when hardware costs are high but transfer costs are low (App Store)

                                                Hardware cost

                                                High                        Low

Transfer cost                High                Centralized                Decentralized

                                                [Mainframes]                [Software in a box]

                        Low                Decentralized                Centralized

                                                [App Store]                [Browser-based Applications]

The only defensible value of a graph lies in its discoverability frontier for each user, not in the selected network itself. The utility of a graph can loosely be assessed per user in three categories: number of nodes (N), strength of nodes (X), and signal leading to future nodes (Z). High N graphs seem defensible at first, but then are existentially threatened by graph porting without high Z (i.e. Facebook’s social graph being ported to the smartphone contact’s app). High X graphs without high N are often the target of disintermediation if a monetization friction exists (i.e. babysitter marketplaces), but can succeed as free messengers services as loss-leaders that drive engagement (i.e. GroupMe, WhatsApp). High Z graphs are the strongest as they continually drive X and N up with usage (i.e. TikTok, LinkedIn).

“Slow truths” take a long time to come to fruition and require proactive building to take advantage of them. “Fast truths” demand reactive building to take advantage of them and are often less conducive to venture outcomes.

Digital footprints allow for experiences to be permanent signals rather than ephemeral. With the increasing surface area of social interactions being digitally defined, experiences can now act like Veblen goods. (e.g. Ticket prices for Taylor Swift’s Eras Tour)

APHORISMS

Preserving optionality has a cost.

[Optionality can be interpreted as a lack of focus. In order to preserve the ability to change direction, it comes at the expense of speed and acceleration in a singular direction.]

Trust in an organization is the limiting reagent for operational leverage.

[Micromanagement, the slang for lack of trust within an organization, can be best understood as a multiplicative cost on the man-hours required to finish a given task. Perfect micromanagement means that every hour of work demands an additional hour from every participant in the chain of command. Perfect trust means that no micromanagement exists and the multiplier cost is held at 1. The most efficient organizations operate with a multiplier cost approaching, but never 1.]

Empathy has an execution advantage over sympathy.^{[ah][ai][aj][ak][al]}

[Empathy manifests in execution as correct instincts, leading to increasingly compounding time savings. For every instinct that a decision maker understands intuitively and forgoes an experiment to acquire information, that decision maker saves the amount of time and work that an uninformed decision maker would have to expend to possess the same information (sympathy that requires split testing, surveys, etc.). This has a continual compounding effect and is the origin of “founder-market fit.” Operators who have more empathy with their target market are able to execute significantly faster.]

Illiquidity in private market investing is a feature, not a bug.

[Illiquidity institutes long-term thinking as the default rather than short-term thinking as the default, a fundamental shift in optimization.]

The path from zero to one is painting. The path from one to one-hundred is sculpting.

[Innovation is value creation through addition/iteration/synthesis. Scaling is value creation through subtraction and focus.]

Pain is an activation energy subsidy.

[Similar to the phrase “it is easier to sell a painkiller than a vitamin,” an addressable user or customer who is actively experiencing pain will likely be searching for a solution (have you ever Googled symptoms looking for a remedy?). This often means that simply offering the product to the market will result in the demand side doing the leg work themselves. Without pain, the supply side needs to engage in strictly more expensive customer acquisition.]

Don’t be surprised when people do things they’re incentivized to do. Don’t expect people to do anything they are not incentivized to do.^[am]

[The design of incentives within a system governs the flow of user behavior. In the same way that it is impossible to flow water uphill, no party will do anything that they are not incentivized to do.]

Every point of dilution must justify itself.

[The cap table is a very useful tool for founders, almost like a fantasy football roster. The people that are eating into your salary cap ought to be doing the most to foster success. Dilution should be allocated strategically.]

Laziness is the path to innovation.

[I think about laziness as defined as desiring the same output but expending strictly less input. As a result, laziness ends up being an incredible petri dish for creative thinking and problem solving to happen. Put another way, it’s imposing a resource constraint on the same function, demanding the same performance.]

Relationships are at their best when people give each other the benefit of the doubt and expect the best from one another. Relationships are at their worst when people do not give each other the benefit of the doubt and expect the worst from one another.

[Expectations are key to our perception of a relationship, whether personal or professional. Adding trust in another person’s judgment and you create the surface area for both delight and disappointment. The challenge is that they are very often self-referential formulas that would normally error out in an Excel sheet, but freely operate in the wild.]

The yellow flag always ends up being the thing.

[While this benefits greatly from survivor, recency, and availability bias, what is important to understand is that one’s “gut” or instinct is not a spurious judgment. It is actually a very sophisticated, efficient synthesis of every single data point observed historically and compressed into a lightning fast decision.]

True venture outcomes are the result of consistently under-estimated addressable markets.

[>100x returns are exceedingly hard to come by, but are often the result of the demand side of the investor market not appropriately pricing the investment opportunity. This happens when investors use a paint-by-numbers approach with market sizing and underestimate the eventual addressable market for the company. The more acutely this happens, the greater the potential upside.]

Focus without perspective never achieves the global maximum.

[Often in life we are faced with solving a multi-armed bandit problem. However, the probabilities and payouts can suddenly change over multiple iterations of the game. Perspective is required in order to re-assess the optimal allocation of resources. Focus on the non-optimal path, either in the first instantiation of the game, or because the game changes, leads to a strict local maximum, never the global maximum.]

Optimize for alignment, not outcomes.

[If success is defined over long periods of time, the best way to ensure consistent collaboration between parties is to spend the most time on alignment. Outcomes are an output of the execution ability of the group, not an input. This is why value systems, manifestos, etc. are core to long term business and professional relationships.]

It is impossible to judge a strategy without knowing what the goal is.

[When we look at an execution strategy and dismiss its viability, the first thing we should do is take a step back and try to interpret the goal. Without knowing what a party is aiming to achieve, it is most likely that we are projecting the wrong goal and walking away with an incorrect assessment of the strategy. This happens to incumbents trying to analyze First Order Irrational, Second Order Rational attacks.]

Group decision making is either a firing squad or putting a puzzle together.

[Learned mostly from investment committees, group decision making typically takes the form of a firing squad: a champion offers something to the group and everyone tries to shoot holes in it. If it survives (i.e. the burden of proof is cleared), an affirmative decision is made. Very rarely, that process can be objective by decoupling ego from the evaluation. Perhaps the rarest form is when a committee resembles putting a puzzle together--without the box handy. Each person is attempting to seek the “truth” in a collaborative way, offering small bits of progress until someone can confidently say what the puzzle looks like.]

Every great company builds two great products. The first is that which earns it a spot in the race. The second product is the company itself.^[an]

[Product—market fit is only the first step to building a transformative company. The more challenging product to build is the company itself, where the constituents are the employees and the marginal “customer” is the next recruit. Fortunately, humans and organizational efficiency/psychology is well-paved and can be learned and applied. Unfortunately, many founders either do not realize the demands of this second product, or realize it too late.]

In the beginning, you have time and energy, but lack resources. In the middle, you have energy and resources, but lack time. In the end, you have time and resources, but lack energy.

[This framing typically applies to life—when you are young, when you are an adult, and when you are old. But it also applies to the life cycle of every startup and elucidates what operators need to focus on at each stage of the company. In the beginning, you must solve for resources to get the company off the ground (venture capital). When things are working, you must solve for time by fighting heat loss in inefficient processes and poor performers (keeping the bar for talent extremely high and being maniacally focused on hiring). When the company has scaled and begins to succumb to inertia, you must solve for energy by either instilling cultural values that preserve the intensity of mission and passion, or refreshing the well of energy with acquisitions (the importance of culture, why Founder/CEOs tend to succeed in the public markets, and why M&A happens).

QUESTIONS

These are questions that I find myself reaching for time and time again in my toolbox. [Rationale for asking the question]

What is the cost?

[Nothing is free, every action or decision has an associated cost and naturally as optimists and opportunists we tend to gloss over the scrutinization of resource allocation because we are excited about the possibilities. It is important to clearly understand the associated cost of every decision.]

What are the very good reasons why things are exactly the way that they are?

[This is the inverse form of the question, “Why Now?” which warrants a more sobering answer. Our brains are very effective at coming up with answers to justify and align with an outcome we want, so reframing the output is helpful to think void of confirmation bias.]

What information could you learn that would change your mind?

[I believe that 100% conviction simply does not exist in the world (perhaps with the exception of psychotic disorders and religion). As such, I like to understand where on the spectrum of conviction and judgment a given position lies. An objective, self-aware answer to this question tends to help a lot.]

What are the reasons why someone who fully understands the value proposition of the product chooses not to use/buy it?

[Part of the startup/founder journey is having conviction around an internal truth and its inevitable bleed into society. Being able to set aside answers like, “They just don’t know,” help more deeply understand what headwinds a product faces in its adoption curve.]

Let’s assume that in a few years, we look back and this hasn’t worked out. Knowing what you know now, what happened?

[This is called a “pre-mortem,” and a useful question to tease out potential divergences in expectations and assumptions that rest on weak foundations. It forces the outcome and requires the answer to take the failure case seriously, avoiding the pitfall of a weaker question allowing an optimism/delusion escape hatch. The quality of the answer to this question is also insight into the degree of self-awareness and the respondent’s grasp of the rules of the game they are playing.]

In a post-X world, who is put out of business?

[“X” being the company. A fair amount of value creation in technology is net new and observable in worker productivity, etc., but most of it is still zero-sum with existing value. Successful, scaled tech companies cast shadows of disutility—an awareness of who you are driving out of business, whether directly or indirectly, is an important understanding of how the pieces move.]

RANDOM THOUGHTS

People are either CPUs or GPUs, but not both.

We all have user manuals that dictate how we operate. You can’t change your own (try as you might), but you can discover/engineer workarounds to avoid behaviors you don’t want to engage in. The best part about life is getting to intimately read your own user manual and sharing it with others. Many don’t finish reading; others only make it halfway; some never even open the book.

You are either an employee or an owner.

Restraint is only learned through a sense of ownership.

Money is only good for making memories.

The best long-term strategy in life is to make frequent karmic deposits in the universe.

Ignorance of subjectivity to cognitive biases is the primary reason for incorrect judgment by high performers.

Self-actualization is demarcated by the ascent through the following gates being the rate limiter: sustenance, money, esteem, time. Inverse motion can occur via pain.

The willingness to be perceived as wrong for an extended period of time is a valuable character trait.

The best education tends to be the most expensive.

Rivalry is a powerful growth dynamic.

Compensation can be broken down into financial compensation and emotional compensation. Increasing the former can stave off a deficit of the latter, but not indefinitely. If someone is not emotionally compensated, they will leave.

The best things in life are the result of continuously compounding functions^[ao].

The reason why we think highly of our own generation, but poorly of others is because we actively chose the sample set of our current generation while the sampling from other generations is random. This probably applies to social group identity in general.

Long term greed and short term greed are two entirely different things.

Constraints breed creativity.^[ap]

Intentionality is expensive.

Optimize for long-term happiness.

The “best of both worlds” often ends up as the worst of both worlds.

Our lizard brains and our rational brains are in a constant struggle with one another on every decision we make. The only way to become our best selves is to recognize and neutralize when our lizard brains are hijacking our judgment.

The invisible hand is Darwinism within Capitalism.

Patience is unobservable to us 3-dimensional beings the same way 3-dimensional objects are unobservable to 2-dimensional beings.

Radicalization happens the same way a pearl is formed. An irritant enters the mind, like a grain of sand, and layer upon layer of confirmation bias is secreted and hardened. Over time, the results are concrete and the process immutable without injunction.

Problems created by capitalism must be solved by capitalism.^[aq]

Economic inequality is caused by asymmetric ability to take risk.^[ar]

Increasing productivity within an ecosystem (normally distributed) leads to greater power-law distribution of outcomes and a higher Gini coefficient.^[as]

Cancel culture is the double-edge of the sword of populism.

Youth are the earliest adopters of new social platforms because their core motivators are largely focused on pride, envy, and lust rather than greed, wrath, gluttony, or sloth (requires money to indulge).^[at][au]

All service/hospitality is oriented towards experiences approximating royalty.

Gen-Z consumer founders pulled the short straw on timing tech macro trends (born too late to internalize and be able to innovate on the large macro trends of smartphone/mobile bandwidth/cloud)

Scalability of company or initiative is correlated with identified leadership (internal and external). Said another way, an initiative with no leader will not scale.

UGC platforms need centralized moderation (there is a correlation between scalability and centralization of moderation). This is a similar thought to the scope of law within a society/country as being the rate limiter of size. The United States scales because of the federal government. Confederacies can’t scale—internet service confederations won’t scale (i.e. BlueSky)

Corporate politics are a Darwinistic/evolutionary force within organizations. They pit employees to compete with each other for power and influence for the ultimate benefit and fitness of the organization (the fittest employees survive and lead). They are different within each organization. People who “hate politics” were likely competed out of their organizations.

PHILOSOPHY

These are some of the philosophers and concepts that have most influenced my worldview.

John Rawls’ Veil of Ignorance

Immanuel Kant’s Categorical Imperative

John Stuart Mill & Jeremy Bentham Utilitarianism

John Nash’s Nash Equilibrium

Joseph Overton’s Overton Window

The concept of Future Self

OPPORTUNITIES

These are some of the areas of opportunity that I think exist based on my pattern matching. If you are building anything in these areas, please email me at chris@pacecapital.com

*Outdated, will add later*

OTHER WRITING

• THE AMERICAN DREAM IS GOING DIGITAL (3 pgs)
• THE SHADOW OF DISUTILITY (4 pgs)
• YOU HAVE TO BE IN THE WATER (2 pgs)
• THE END OF SOFTWARE (2 pgs)