I was recently given a few interesting questions on big-picture tech and investing principles. Here are some thoughts:
On big tech co defensibility
I think many investors over-weight for the theoretical aspects of a moat and under-weight practical ones. To be fair, good investors use mental-models to understand and generalize concepts. But it’s very difficult to discount an idea that is conceptually elegant though flawed in detail.
Network effects are the top-of-mind example here. In my view, Facebook — the poster-child of network effects — isn’t nearly as defensible as other tech giants that have ecosystem effects (Google search is much better partly because of data harvested from peripheral businesses like Android and Gmail) or brand equity (Coca Cola is otherwise indistinguishable from Pepsi).
A trite, tweet-sized rebuttal to FB’s moat would sound something like “how did MySpace’s network effects turn out? Or AOL’s, or Yahoo’s?” While NFX are great when you have them, they disappear just as fast once the flywheel starts spinning in the other direction.
I can imagine FB’s core social utility being split off into a number of separate products. We saw this with Instagram before FB acquired them. We saw Snap fill the private/ephemeral need, and not even FB’s massive network effect could save Poke from massive failure.
I also think FB is acutely aware of this: they’re investing more in video streaming to lock content-creators to the platform. They’re also drawing inspiration from WeChat with Messenger by tying in tools to make it a platform rather than a social network feature.
Mark Zuckerberg is one of the last people I’d want to bet against. But I can say the same for Bezos, Page, Brin, etc.
On the most important characteristics of founding teams:
Of course the ability to attract talented hires and being hard-working are useful traits. Solving a burning problem in a large and growing market is great too. Just as being tall is useful to a pro basketball player. I view these more as prerequisites, not forward-looking predictors of success.
Many investors and operators alike seem to favor category creators — companies that build something totally new. Zero to One, as Thiel would say.
But historically, many of the best companies were not the first to the punch. Going by market cap: Apple did not build the first computer or smartphone, Amazon was not the first to sell things online, Microsoft wasn’t the first to make an OS, Google was just a clone of Alta Vista, and Facebook was like MySpace or Friendster.
Even smaller companies like Flexport or Quora can be glibly described as “freight forwarding, but with software” or “Yahoo answers, but with good content.”
To be clear: this does not (and should not!) diminish the achievements or impact of any tech companies. I’m actually humbled by how transformative incremental changes can be. I see this as a testament to the power of pure focus and insightful iteration on the learnings of others.
There are probably other characteristics higher on the list of greatness principal-components. But this is one of the most underrated and misunderstood in my opinion.
On evaluating teams:
First, I look for something wrong with the team. Not to find a reason to pass, rather to make sure that they’re not “too perfect” or cookie-cutter. At risk of sounding like an armchair philosopher, founders with a vision for something truly innovative will look a little strange or contrarian. Founders simply following trends generally opt for more traditional or “prestigious” career paths before starting a company. As a quick aside, I think this is what tech people get at when they use the “don’t hire people who went to business school” mantra as a shorthand for describing outsider-ist tech culture.
Second, I try to understand how the team will continue to attract stellar people both inside and outside of their current areas of expertise. There are a lot of potential levers to pull here. Perhaps everyone is super cool or brilliant (or both!) and other great people will want to just be around the team. Or maybe the founders are respected engineers who only have street cred with other engineers, for example. Then how will they recruit and retain salespeople?
Third, I want the team to be thoughtful about the cultural diversity vs tribalism paradox. Especially in the early stages, teams need to be able to move quickly, be agile, and have laser-focus on the vision. To get through the early-stage grind where you spend all your time with the same people, it helps to be “like-minded.” As you grow, however, that can incubate serious problems (Uber) and you’ll have a harder time cultivating different viewpoints and skill-sets. Ideally founders have thought through this and will be able to handle the team culture through different stages of the company lifecycle. You could even generalize this to being deliberate about scale and knowing how to learn about management.