Competition Matters Less in Software

What is it that makes software startups so able to disrupt incumbents? Why does competition seemingly matter less in software compared to other industries?

Software companies are very maneuverable. Especially new entrants. There are relatively small CapEx requirements to maintain existing products so pivoting and expanding doesn’t require as much of a operational/financial tradeoff as compared to non-tech. You can keep your previous product running for next to nothing. Plus you can instantly push new changes to existing users.

Software can instantly scale to fill any niche or unlocked growth opportunity. The marginal cost of servicing a new user is basically zero, and it’s instant. Larger companies are held back by old processes, bureaucracy, hyper-focus on a larger revenue stream, etc.

Network effects (which many competing tech companies rely on) can be unraveled. I’ve always had the hardest time arguing this point. Friends have pushed back against me, saying that the whole point of a network effect is that it can’t come undone easily. I wasn’t quite articulate enough to counter that argument, but Marc Andreessen says it well in Elad Gil’s book:

Marc: I think network effects are great, but in a sense they’re a little overrated. The problem with network effects is they unwind just as fast. And so they’re great while they last, but when they reverse, they reverse viciously. Go ask the MySpace guys how their network effect is going. Network effects can create a very strong position, for obvious reasons. But in another sense, it’s a very weak position to be in. Because if it cracks, you just unravel. I always worry when a company thinks the answer is just network effects. How durable are they? To your point on data network effects, I would just say that we don’t see it very often. We see a lot of claims, and very little evidence. The reality is, there’s a lot of data in the world, and a lot of ways to get data. We have not seen very many data moats that actually make sense, even in science.

You can G2M through many channels. Technology companies often go to market through several different hyper-focused channels. All you need to do is find one LTV/CAC positive channel and pour money into it. Non-software companies are often stuck having to do generic lifestyle marketing and branding which doesn’t easily attribute or confirm ROI.

Software is less tied to external forces like regulation, macroeconomic trends, and cultural norms. I’d argue that the whole point of some software companies is to get around or hedge against the effects of these things. Software firms compete more so on product and distribution.

Software is feature-driven. Coke and Pepsi taste the same in blind trials — their slow-changing brands and distribution drive sales. If a software company builds a better feature set, they can win customers on the basis of their product or service’s functionality .

Data is fungible. Users can switch between WordPress and Medium, for example, at will and with no cost. This is a part of what drives software companies to be platforms: if your value is the aggregation and network effect rather than the info itself, users have a cost to switching (fewer eyeballs)

Great software companies tend to be category creators. I disagree with the Thiel view that startups must go zero-to-one or have a grand secret — most amazing businesses can be reframed in incremental terms, like Netflix is just TV but online, or Facebook is MySpace but for your college friends. Most software companies simply don’t compete much on price or quality. To be fair, this point is a bit of a truism: categories tend to be defined by the most prolific companies, not vice-versa.

All I’ve done here is enumerate the some factors in play. The challenging part is figuring out how these different forces work together, in which situations they appear, and what properties of the market emerge from them.

Of course these points are simplified. Many enterprise software companies, for example, have strong lock-in effects on data. It’s very difficult to export your task management or CRM tooling into another system. Perhaps digging more into these exceptions would make for a good followup post.

Agree or disagree with anything written here? Have something to add on? Drop me an email (will@thisdomain) or tweet (@whrobbins)!

Senior: My Summer at Umbrella

As I’m sadly nearing the end of my time at Umbrella and looking forward to my senior year of college, I wanted to write down some of the interesting things I’ve learned this summer.

I originally joined with one personal mission: add as much info as possible to my understanding of what I want to do with my life. The role was for a wear-every-hat gap-filler. And I really liked the team — I could see myself fitting in well with the culture. To be honest, I wasn’t in love with the problem space at the time, but it was new and mildly intriguing.

As the summer went on, however, I ended up becoming rather interested in senior living. Growing old creates problems in basically every part of your life, and most modern tech-enabled companies aren’t designed to work with seniors. I’m increasingly convinced that there are a truly gigantic number of opportunities and interesting problems out there.

Starting with some things about seniors in general:

The financial calculus is harder. Many seniors live on fixed income and have a lot of uncertainty surrounding how long they’ll live and whether or not they’ll have unexpected medical costs. This makes seniors reluctant to spend on anything that’s not necessary.

Word of mouth carries lots of weight. Seniors are very deliberate in evaluating their experience as customers. It can take weeks for seniors to get comfortable enough with a product to recommend it to friends — and they often have a smaller set of people they talk to. These dampen viral coefficients for a nascent single-player company like ours. It’s unknown how strong word of mouth will be for a more advanced senior-focused tech product. On the flip side, careful recommendations often have a higher impact and make friends likely to convert.

Trust and security are huge concerns. A disturbing number of Umbrella’s members have been previously scammed by unethical contractors or even had their bank accounts emptied by fraudsters. Some sales leads aren’t comfortable giving us a credit card number or basic personal info, and for good reason given the level of abuse targeting seniors. Figuring this out across marketing, sales, and product has been an interesting challenge.

Serious attention to detail. There were multiple occasions where I’d talk to a potential customer and say something like “we charge $29/month,” then after talking for another few minutes, I’d reiterate that “Umbrella only costs $30 bucks a month.” Then I’d inevitably be interrupted: “wait, I thought you said $29, not $30?” Inconsistent information over the phone and sloppy landing pages are a big turn-off.

It’s harder to consistently communicate. While most of us are available through text, email, or phone calls, seniors often only use one or two of the three. It can be tough to design a system that works when any given user might require that you use a specific channel.

You can’t take all tech product concepts for granted. Ideas like recurring subscriptions (what if I don’t use it this month?) and on-demand work (so who are these people just showing up?) are alien. Seniors usually don’t keep up with tech news that might familiarize them with companies like Uber or Netflix, so you can’t even rely on common context to build a brand image and value proposition.

Bad design is really really bad. You can’t hide much behavior (linking an address to a map application, for example.) Hamburger menus, swiping, and press-and-hold are out of the question. Animations are probably too confusing as well. Other complex products may be able to get away with those design elements, but not Umbrella. Building a crystal-clear interface that is acceptable to everyone on the seniority-spectrum is hard.

You earn a lot of goodwill, at least as far as tech companies go. Serving seniors is a strong mission that unifies potential partners, customers, and teammates. While still one hell of a challenge, BD/sales/recruiting gets 3% easier. And that can make a huge difference.

Your customers love you more than you thought was possible. One of the best parts of working at Umbrella has been the immediate and significant impact we’ve had on our members. Every week we’d get a call or note saying “I don’t know what I’d do without you,” or “Umbrella is a godsend.” It’s a lot easier to push through an intractable bug in your code when the users are so genuinely grateful for what you’re doing.

You work with lot of fascinating characters. Seniors don’t seem to care what anyone thinks of them. Between the hilarious age-gap moments, borderline-crazy 500+ word emails, and heartbreaking reminders of our own mortality, seniors are by far the most human group of customers I’ve ever served.


Thoughts on the space overall

There are a couple strong tailwinds that make me very bullish on senior-focused startups.

First, seniors are becoming more and more digital. While plenty of our members don’t have email addresses or cell phones, that’s changing — fast. You can easily Google around for trends and stats here. By the time a startup begins to scale up several years from its starting point, this will be much less of an issue. So now is a probably a great time to get rolling.

Second, unique senior-specific UX and sales challenges create a surprisingly solid moat. Think about everything I listed above — I suspect that X but for seniors will be a viable startup idea generator. We already see early hints of this from GoGoGrandparent, the Uber for seniors that went through YC. (They’re double dipping on the idea generators: Uber for X and X for seniors!)

I’m convinced there will be several $1bn+ companies out there focused on senior verticals. One of the running jokes at the office was that an online megachurch would be an insanely profitable business. While that’s not a business we would ever want to build, just remember how successful televangelists are. Add on the scale of the internet, modern phone/tablet distribution, and social-network-like community features and you’ve got something huge.

AARP is investing $40mm in senior-focused companies. I’ve also heard more non-specific but senior-related chatter recently from mainstream VCs. I’m looking forward to seeing how the space develops! Let me know if anything catches your eye.


Shoutout to Sam, Lindsay, Emma, Erin, Samra, Caroline, Megan, Manuela, and David for a summer that went by way too fast! I’ll miss you all ❤

Notes on The Elephant in the Brain

For the past several months, I’ve been on a sociology and (evolutionary) biology reading binge. I recently finished my favorite book on the topic: Robin Hanson and Kevin Simler’s The Elephant in the Brain. I found its ideas so concise, useful, and explanatory, even for someone who’s done previous reading in the area, that I should share a little background as well as my notes from the book.

You may have heard the common X isn’t about Y examples:

Food isn’t about Nutrition
Clothes aren’t about Comfort
Bedrooms aren’t about Sleep
Marriage isn’t about Romance
Talk isn’t about Info
Laughter isn’t about Jokes
Charity isn’t about Helping
Church isn’t about God
Art isn’t about Insight
Medicine isn’t about Health
Consulting isn’t about Advice
School isn’t about Learning
Research isn’t about Progress
Politics isn’t about Policy

The point here is directionally right and this thinking serves as a useful heuristic for understanding systems. But it’s the the mechanisms and fine-grained details that provide a useful mental model and worldview. Hopefully the highlights will intrigue you enough to read the book yourself.

There are some interesting corollaries and implications to the Hansonian worldview that I think are horrendously underrated and not really explored in the book. Namely:

  • Everything is inherently political or status oriented because sexual selection, not natural selection, is what caused us to evolve (this was Darwin’s real discovery which was not fully accepted and modeled until the 1980’s).
  • Virtue signaling must be good, not bad. How else would we set norms on which (arbitrary) games we compete in? Some games are better than others from an external perspective. E.g. consumerist signaling is harmful to the environment.
  • We live in our own little dream worlds. But I don’t know if it matters from personal and philosophical standpoints.
  • Certain political philosophies (Marxism) assume a natural selection-based Darwinian view of human nature (which is only a small fraction of how we actually evolved).

I know those bullets have a lot of big ideas packed into them — I could talk about each one of them for hours. Hit me up for more. I’d rather not attempt to explain everything in an overly-abbreviated post.

Here are my highlights. Update: here is another great list of highlights someone compiled!


Here is the thesis we’ll be exploring in this book: We, human beings, are a species that’s not only capable of acting on hidden motives—we’re designed to do it. Our brains are built to act in our self-interest while at the same time trying hard not to appear selfish in front of other people. And in order to throw them off the trail, our brains often keep “us,” our conscious minds, in the dark. The less we know of our own ugly motives, the easier it is to hide them from others. Self-deception is therefore strategic, a ploy our brains use to look good while behaving badly.

The point is, we act on hidden motives together, in public, just as often as we do by ourselves, in private. And when enough of our hidden motives harmonize, we end up constructing stable, long-lived institutions—like schools, hospitals, churches, and democracies—that are designed, at least partially, to accommodate such motives. This was Robin’s conclusion about medicine, and similar reasoning applies to many other areas of life.

The alpha male, for example, almost never tries to replace the gamma male from guard duty; instead the alpha directs all of his competitive energies toward the beta. If the goal were to help weaker members, the alpha should be more eager to take over from the gamma than from the beta.

Knowledge suppression is useful only when two conditions are met: (1) when others have partial visibility into your mind; and (2) when they’re judging you, and meting out rewards or punishments, based on what they “see” in your mind.

Now consider the human being. Like the redwood, our species has a distinctive feature: a huge brain. But if we think of Homo sapiens like the lone redwood in the open meadow, towering in intelligence over an otherwise brain-dead field, then we’re liable to be puzzled.

Now, our competitions for prestige often produce positive side effects such as art, science, and technological innovation. But the prestige-seeking itself is more nearly a zero-sum game, which helps explain why we sometimes feel pangs of envy at even a close friend’s success.

Coalitions are what makes politics so political.

The problem with competitive struggles, however, is that they’re enormously wasteful. The redwoods are so much taller than they need to be. If only they could coordinate not to all grow so tall—if they could institute a “height cap” at 100 feet (30 meters), say—the whole species would be better off. All the energy that they currently waste racing upward, they could instead invest in other pursuits, like making more pinecones in order to spread further, perhaps into new territory. Competition, in this case, holds the entire species back. Unfortunately, the redwoods aren’t capable of coordinating to enforce a height cap, and natural selection can’t help them either.

But our species is different. Unlike other natural processes, we can look ahead. And we’ve developed ways to avoid wasteful competition, by coordinating our actions using norms and norm enforcement—a topic we turn to in the next chapter.

Collective enforcement, then, is the essence of norms. This is what enables the egalitarian political order so characteristic of the forager lifestyle.

right, it was learning to use deadly weapons that was the inflection point in the trajectory of our species’ political behavior. Once our ancestors learned how to kill and punish each other collectively, nothing would be the same. Coalition size would balloon almost overnight. Politics would then become exponentially more complicated and require more intelligence to navigate,

Typically, these are crimes of intent. If you just happen to be friendly with someone else’s spouse, no big deal. But if you’re friendly with romantic or sexual intentions, that’s inappropriate. By targeting intentions rather than actions, norms can more precisely regulate the behavior patterns that cause problems within communities. (It would be ham-fisted and unduly cumbersome to ban friendliness, for example.) But regulating intentions also opens the door to various kinds of cheating, which we’ll explore in Chapter 4.

But there are acceptable and unacceptable ways to do this. It’s perfectly acceptable just to “be yourself,” for example. If you’re naturally impressive or likable, then it seems right and proper for others to like and respect you as well. What’s not acceptable is sycophancy: brown-nosing, bootlicking, groveling, toadying, and sucking up. Nor is it acceptable to “buy” high-status associates via cash, flattery, or sexual favors. These tactics are frowned on or otherwise considered illegitimate, in part because they ruin the association signal for everyone else.

When abstract logic puzzles are framed as cheating scenarios, for example, we’re a lot better at solving them. This is one of the more robust findings in evolutionary psychology, popularized by the wife-and-husband team Leda Cosmides and John Tooby.

Here’s another way to think about it. We typically treat discretion or secret-keeping as an activity that has only one important dimension: how widely a piece of information is known. But actually there are two dimensions to keeping a secret: how widely it’s known and how openly or commonly it’s known. And a secret can be widely known without being openly known—the closeted lesbian’s sexuality, for example, or the fact that the emperor is naked.

Scalping—the unauthorized reselling of tickets, typically at the entrance to concerts and sporting events—is illegal in roughly half of the states in the United States. That’s why you’ll often hear scalpers hawking their goods with the counterintuitive (yet perfectly legal) request to buy tickets. Like wrapping alcohol in a paper bag, this practice doesn’t fool the people who are charged with stopping it; the police and venue security personnel know exactly what’s going on. And yet scalpers find it overwhelmingly in their interests to keep up the charade. This is another illustration of how even modest acts of discretion can thwart attempts at enforcing norms and laws. Note that professional norm enforcers, such as police, teachers, and human resource managers, have a strong incentive to enforce norms: it’s their job. Even so, they’re often overworked or subject to lax oversight, and therefore tempted to cut corners. Sometimes the threat of mere paperwork can be enough to keep police from enforcing minor infractions.

In 1527, King Henry VIII’s marriage to Queen Catherine of Aragon seemed unlikely to give him the son he desperately needed, and at 38 years old, he was running out of options. Everyone at court knew that Henry wanted a younger woman—Anne Boleyn—as his wife. Unfortunately, his marriage to Catherine had been blessed by the previous pope, and the current pope was in no mood to grant an annulment. What the king needed was a pretext, a false but plausible justification to distract from his real reason. So, nearly 20 years into his marriage to Catherine, the king suddenly “discovered” that she hadn’t been a virgin on their wedding night, and that therefore their marriage was illegitimate. As pretexts go, this was pretty ham-handed. But kings don’t need their excuses to be particularly subtle or airtight; their power is enough of an incentive for most people to go along. In Henry’s case, his pretext was enough to let him break from Roman Catholicism (thereby launching the English Reformation) and secure his annulment from the head of the new Anglican Church. Pretexts are a broad and useful tool for getting away with norm violations. They make prosecution more difficult by having a ready explanation for your innocence. This makes it harder for others to accuse and prosecute you. And as we’ve seen, a pretext doesn’t need to fool everyone—it simply needs to be plausible enough to make people worry that other people might believe it.

Another domain is personal health. You might suppose, given how important health is to our happiness (not to mention our longevity), it would be a domain to which we’d bring our cognitive A-game. Unfortunately, study after study shows that we often distort or ignore critical information about our own health in order to seem healthier than we really are. One study, for example, gave patients a cholesterol test, then followed up to see what they remembered months later. Patients with the worst test results—who were judged the most at-risk of cholesterol-related health problems—were most likely to misremember their test results, and they remembered their results as better (i.e., healthier) than they actually were.

In recent years, psychologists—especially those who focus on evolutionary reasoning—have developed a more satisfying explanation for why we deceive ourselves. Where the Old School saw self-deception as primarily inward-facing, defensive, and (like the general editing the map) largely self-defeating, the New School sees it as primarily outward-facing, manipulative, and ultimately self-serving. Two recent New School books have been Trivers’ The Folly of Fools (2011) and Robert Kurzban’s Why Everyone (Else) Is a Hypocrite (2013). But the roots of the New School go back to Thomas Schelling, a Nobel Prize–winning economist best known for his work on the game theory of cooperation and conflict. In his 1967 book The Strategy of Conflict, Schelling studied what he called mixed-motive games. These are scenarios involving two or more players whose interests overlap but also partially diverge.

•Ignoring information, also known as strategic ignorance. If you’re kidnapped, for example, you might prefer not to see your kidnapper’s face or learn his name. Why? Because if he knows you can identify him later (to the police), he’ll be less likely to let you go. In some cases, knowledge can be a serious liability. •Purposely believing something that’s false. If you’re a general who firmly believes your army can win, even though the odds are against it, you might nevertheless intimidate your opponent into backing down. In other words, mixed-motive games contain the kind of incentives that reward self-deception. There’s a tension in all of this. In simple applications of decision theory, it’s better to have more options and more knowledge. Yet Schelling has argued that, in a variety of scenarios, limiting or sabotaging yourself is the winning move. What gives?

What’s the benefit of self-deception over a simple, deliberate lie? There are many ways to answer this question, but they mostly boil down to the fact that lying is hard to pull off. For one thing, it’s cognitively demanding.

Beyond the cognitive demands, lying is also difficult because we have to overcome our fear of getting caught.

When asked to raise both hands, one man raised his right hand high into the air and said, when he detected my gaze locked onto his motionless left hand, “Um, as you can see, I’m steadying myself with my left hand in order to raise my right.” Apart from their bizarre denials, these patients are otherwise mentally healthy and intelligent human beings. But no amount of cross-examination can persuade them of what’s plainly true—that their left arms are paralyzed. They will confabulate and rationalize and forge counterfeit reasons until they’re blue in the face.

Meanwhile, the rest of us—healthy, whole-brained people—are confronted every day with questions that ask us to explain our behavior. Why did you storm out of the meeting? Why did you break up with your boyfriend? Why haven’t you done the dishes? Why did you vote for Barack Obama? Why are you a Christian? Each of these questions demands a reason, and in most cases we dutifully oblige. But how many of our explanations are legitimate, and how many are counterfeit? Just how pervasive is our tendency to rationalize?

Kings and popes, for example, would often “invite” their subjects to line up for public kiss-the-ring ceremonies, putting everyone’s loyalty and submission on conspicuous display and thereby creating common knowledge of the leader’s dominance.

the psychology of humor—a topic fruitfully explored in the book Inside Jokes,

And many animals, in addition to using specific gestures, will also move slowly or engage in exaggerated or unnecessary movement, as if to convey playful intent by conspicuously wasted effort that no animal would undertake if it were in serious danger.

In another interview he says, “I don’t think it’s fair to get offended by comedians.” And yet what fans say they love about Burr is that he’s honest—“refreshingly,” “brutally,” “devastatingly” honest. So which is it? Is he just joking or telling the truth? The beauty of laughter is that it gets to be both. The safe harbor of plausible deniability is what allows Burr and other comedians to get away with being honest about taboo topics. As Oscar Wilde said, “If you want to tell people the truth, make them laugh; otherwise they’ll kill you.”

Conversation, therefore, looks on the surface like an exercise in sharing information, but subtextually, it’s a way for speakers to show off their wit, perception, status, and intelligence, and (at the same time) for listeners to find speakers they want to team up with. These are two of our biggest hidden motives in conversation.

But why do speakers need to be relevant in conversation? If speakers deliver high-quality information, why should listeners care whether the information is related to the current topic? A plausible answer is that it’s simply too easy to rattle off memorized trivia. You can recite random facts from the encyclopedia until you’re blue in the face, but that does little to advertise your generic facility with information. Similarly, when you meet someone for the first time, you’re more eager to sniff each other out for this generic skill, rather than to exchange the most important information each of you has gathered to this point in your lives. In other words, listeners generally prefer speakers who can impress them wherever a conversation happens to lead, rather than speakers who steer conversations to specific topics where they already know what to say.

Now, it did make some sense for our ancestors to track news as a way to get practical information, such as we do today for movies, stocks, and the weather. After all, they couldn’t just go easily search for such things on Google like we can. But notice that our access to Google hasn’t made much of a dent in our hunger for news; if anything we read more news now that we have social media feeds, even though we can find a practical use for only a tiny fraction of the news we consume.

But when researchers Jesse Prinz and Angelika Seidel asked subjects to consider a hypothetical scenario in which the Mona Lisa burned to a crisp, 80 percent of them said they’d prefer to see the ashes of the original rather than an indistinguishable replica. This should give us pause.

Consider the lobster—as David Foster Wallace invites us to do in an essay of the same name. “Up until sometime in the 1800s,” writes Wallace, lobster was literally low-class food, eaten only by the poor and institutionalized. Even in the harsh penal environment of early America, some colonies had laws against feeding lobsters to inmates more than once a week because it was thought to be cruel and unusual, like making people eat rats. One reason for their low status was how plentiful lobsters were in old New England. “Unbelievable abundance” is how one source describes the situation. Today, of course, lobster is far less plentiful and much more expensive, and now it’s considered a delicacy, “only a step or two down from caviar.”

A similar aesthetic shift occurred with skin color in Europe. When most people worked outdoors, suntanned skin was disdained as the mark of a low-status laborer. Light skin, in contrast, was prized as a mark of wealth; only the rich could afford to protect their skin by remaining indoors or else carrying parasols. Later, when jobs migrated to factories and offices, lighter skin became common and vulgar, and only the wealthy could afford to lay around soaking in the sun.

asked participants how much they would agree to pay for nets that prevent migratory bird deaths. Some participants were told that the nets would save 2,000 birds annually, others were told 20,000 birds, and a final group was told 200,000 birds. But despite the 10- and 100-fold differences in projected impact, people in all three groups were willing to contribute the same amount. This effect, known as scope neglect or scope insensitivity, has been demonstrated for many other problems, including cleaning polluted lakes, protecting wilderness areas, decreasing road injuries, and even preventing deaths. People are willing to help, but the amount they’re willing to help doesn’t scale in proportion to how much impact their contributions will make.

Patrick West calls it “conspicuous compassion.” The idea is that we’re motivated to appear generous, not simply to be generous, because we get social rewards only for what others notice.

Consequently, even the most celebrated studies are often statistical flukes. For example, one study looked at the 49 most-cited articles published in the three most prestigious medical journals. Of the 34 of these studies that were later tested by other researchers, only 20 were confirmed.

In fact, patients show surprisingly little interest in private information on medical quality. For example, patients who would soon undergo a dangerous surgery (with a few percent chance of death) were offered private information on the (risk-adjusted) rates at which patients died from that surgery with individual surgeons and hospitals in their area. These rates were large and varied by a factor of three. However, only 8 percent of these patients were willing to spend even $50 to learn these death rates. Similarly, when the government published risk-adjusted hospital death rates between 1986 and 1992, hospitals with twice the risk-adjusted death rates saw their admissions fall by only 0.8 percent. In contrast, a single high-profile news story about an untoward death at a hospital resulted in a 9 percent drop in patient admissions at that hospital.

And yet medicine deserves its share of public scrutiny—as much, if not more so, than any other area of life. One of the simplest reasons is the prevalence and high cost of medical errors, which are estimated to cause between 44,000 and 98,000 deaths in the United States every year. As Alex Tabarrok puts it, “More people die from medical mistakes each year than from highway accidents, breast cancer, or AIDS and yet physicians still resist and the public does not demand even simple reforms.”

found that death rates plummet when doctors are required to consistently follow a simple five-step checklist. •Requiring autopsies. Around 40 percent of autopsies reveal the original cause-of-death diagnosis to have been incorrect. But autopsy rates are way down, from a high of 50 percent in the 1950s to a current rate of about 5 percent. •Getting doctors to wash their hands consistently. Compliance for best handwashing practices hovers around 40 percent. Some of these problems are downright scandalous, and yet, as Tabarrok points out, they’re largely ignored by the general public. We’d rather not look our medical gift horse in the mouth. Another way we’re reluctant to question medical quality is by getting second opinions. Doctors frequently make mistakes, as we’ve seen, and second opinions are often useful—for example, for diagnosing cancer, determining cancer treatment plans, and avoiding unnecessary surgery. And yet we rarely seek them out.

If we’re using medicine as a signal of support, however, then we’ll provide and consume more of it during a patient’s times of crisis, when they are more grateful for support. And this is exactly what we find. The public is eager for medical interventions that help people when they’re sick, but far less eager for routine lifestyle interventions. Everyone wants to be the hero offering an emergency cure, but few people want to be the nag telling us to change our diets, sleep and exercise more, and fix the air quality in our big cities—even though these nagging interventions promise much larger (and more cost-effective) health improvements. One study, for example, tracked 3,600 adults over seven and a half years. Investigators reported that people who reside in rural areas lived an average of 6 years longer than city dwellers, nonsmokers lived 3 years longer than smokers, and those who exercised a lot lived 15 years longer than those who exercised only a little. In contrast, most studies that look similarly at how much medicine people consume fail to find any significant effects. Yet it is medicine, and not these other effects, that gets the lion’s share of public attention regarding health.

Imagine a preacher addressing a congregation about the virtue of compassion. What’s the value of attending such a sermon? It’s not just that you’re getting personal advice, as an individual, about how to behave (perhaps to raise your chance of getting into Heaven). If that were the main point of a sermon, you could just as well listen from home, for example, on a podcast. The real benefit, instead, comes from listening together with the entire congregation. Not only are you learning that compassion is a good Christian virtue, but everyone else is learning it too—and you know that they’re learning it, and they know that you’re learning it, and so forth. (And if anyone happens to miss this particular sermon, don’t worry: the message will be repeated again and again in future sermons.) In other words, sermons generate common knowledge of the community’s norms. And everyone who attends the sermon is tacitly agreeing to be held to those standards in their future behavior. If an individual congregant later fails to show compassion, ignorance won’t be an excuse, and everyone else will hold that person accountable. This mutual accountability is what keeps religious communities so cohesive and cooperative.

In the end, our motives were less important than what we managed to achieve by them. We may be competitive social animals, self-interested and self-deceived, but we cooperated our way to the god-damned moon.

When Insiders Were Outsiders

When you become successful, there are two stories to tell: the triumph of that success, and the struggle of getting there. There are plenty of resources on the former — winning tactical advice, motivational think-pieces, etc. are easy to find. But I think people benefit most from the latter category.

Here’s a list of great hustle stories. Use these to remember that everyone had to start somewhere, and we’re all making it up as we go along!

If you can think of similar high-quality pieces, let me know! Contact methods on my homepage.

Worldview as a Competitive Advantage

Recently I’ve been thinking about what makes a strong competitive advantage in a world where individuals and firms are increasingly leveraged and specialized. The top several dozen venture investors basically monopolize the industry. (About 20 firms — 3% of the venture universe — earn 95% of the returns.)

The common value-add or differentiating dimensions are a great network, positive signaling effects, insightful operating experience, or the willingness to invest at the highest price. But it’s not clear that the majority of investors move the needle.

These are all useful from the perspective of founders. The tough part as an investor is that there are few unfilled niches. You’ll run into tough competition on all of the above features. So what’s left? From your perspective, does value-add even matter that much when VCs still pass on many amazing deals?

I think that worldview is the most underrated and robust advantages you can have over other investors.

An interesting thread in politics and psychology these past few years has explored how people change their minds. Example: ideas from Jonathan Haidt’s The Righteous Mind and Arnold Kling’s The Three Languages of Politics have made their way into the mainstream. The core insight here is that people rarely change their minds. Opinions on different issues aren’t individual beliefs based on separate analyses — they’re products of a single underlying worldview. If an idea doesn’t fit your worldview, you’re unlikely to accept it on its merit rather than break up an otherwise consistent and unified understanding of how things work.

This makes VC hard because the best deals are, almost by definition, outliers that don’t easily fit into any worldview. So having a worldview that’s more accommodating to a wide variety of ideas should let investors make the right picks which is historically very hard (see Airbnb and Robinhood examples linked above.)

Perhaps we should focus less on building a network or thought leadership or industry experience, and more on learning worldview-expanding (or, ideally, -shattering) ideas. Less of entrepreneur Eric Reis or How To Win Friends and Influence People, more of polymath Robin Hanson or The Sovereign Individual.

That’s the core point I want to make. As a quick and currently-relevant example, different investors seem to view Tesla through different lenses. Many tech investors I follow hold a big-picture worldview more in tune with what works for VCs. If the macro-trend of electric vehicles is there and the team is right, it’s worth betting on. Other investors, often public equities and bonds people, take a more grounded approach. Tesla is likely structurally unprofitable compared to other manufacturers that are quietly waiting for the right timing, plus their financials are comparable to GM right before it went bankrupt in 2008. One portfolio manager I know called the Tesla bond issue one of the worst he’s seen in recent memory. Luckily for Tesla, more optimistic investors controlled enough capital to purchase the issue anyway.

Of course these are total oversimplifications of each stance, but the point I’m making remains. I think investors make decisions on a case-by-case basis, but with significant bias from worldview. Or maybe worldview-veto is a more accurate descriptor of what’s going on.

There are a number of other interesting threads here such as the problem of demonstrating that you have the right subjective worldview to actually have an edge. Networks, operating experience, etc, are inherently more provable. (This relates to the Thiel contrarian philosophy: if others buy-in to your perspective, it’s not an edge.)

Another question is whether all this matters. You can’t go to an LP when fundraising and just say “I make the best decisions because I have a better wholistic model for how the world works.” The other value-add metrics also act as a positive signal. I named this blog Heuristically Speaking for a reason!

Thanks to Nathan Ju for reading a draft. Subscribe to not miss any future posts!

Degrees of Freedom

I often talk to companies that come up with complex plans involving a technical challenge, going to market, then scaling and fending off competitors. They want to do X to leverage Y, then finally become Z when the time is just right. I suspect this stems from (incorrectly) feeling like the problem they’re solving isn’t innovative enough. Perhaps we glorify different strengths of successful businesses (the product obsession of Apple, the scale of FB, the community of Airbnb, etc) and forget that no company can possibly combine all of those virtues into one perfect startup. Or maybe investors build thought leadership by constantly talking about bleeding-edge buzzwords and founders accidentally make that their default set-point.

Think back to the best startups of the past decade. They all follow fairly simple plans which essentially bet on one core thesis: taxis that you can hail with app. A site where people can rent out a room in their house. Let teens send pictures that disappear. None of these companies had a multi-phase plan from the start. They didn’t solve particularly novel engineering challenges, at least until they were already super successful and hitting scale issues. There was only one singular problem to focus all attention on. And it often sounded like a somewhat lame problem, even though it ultimately wasn’t.

When evaluating startups, I often use a mental model I call degrees-of-freedom. Count how many things need to go right for the company to survive. Each additional degree of freedom makes execution exponentially harder and more complex. (I use that word exponential in the literal mathematical sense, not in the metaphorical sense!)

If you’re dealing with regulatory uncertainty, and building on a new decentralized protocol, and introducing a new business model, sure, you’re doing something innovative. But too many things have to go right. Too many things are simply out of your control.

My advice to these ambitious founders is: don’t feel like you need to do something impressive on every front. Pick one idea to bet the company on, and don’t lose sight of it. Use simple foolproof execution strategies for everything else. Reduce the number of degrees of freedom.

Let’s all get more excited about “simple” startups!

Buying IBM

IBM is one of my favorite sales and marketing case studies. As the saying goes: nobody ever got fired for buying IBM. I had always appreciated the sales hustle, but thinking more about the “Buying IBM Effect,” I began seeing the same dynamic elsewhere:

Huge fund sizes, for example, can hurt VC returns. Deploying large amounts of capital is difficult if you’re only seeing a limited number of worthy startups. You have to choose between investing more capital per company and investing in a larger number of startups. Many investors chose the latter option. This explains some quirks of highly-saturated funding ecosystems like Stanford’s. I’ve seen companies there raise ~1mm with nothing more than an idea and a decent-but-nothing-special team. That’s not to say this strategy is impossible to pull off, but in every case I’ve seen, it’d be crazy to invest on team alone. Nobody ever lost an LP because they invested in Stanford startups, so excess capital is deployed there.

As a manager it can be too risky to hire a brilliant-yet-under-credentialed or not-well-rounded candidate. The upside is simply making the hire and your boss not realizing that you made a tough yet successful decision. The downside is that the candidate, while exceptional in one dimension, can’t cut it some other respect and drops the ball. Then you’re on the hook for bringing them on the team. Unless you’re fortunate enough to work in a managerial environment that understands the risks and rewards of making such a hire, it’s not worth it to take the risk of making the hire. Nobody ever got fired for hiring a mediocre candidate with the right background on paper. But exceptional is often what the organization needs.

Wealth managers want to provide clients with reasonable returns. Although active management and picking individual assets lets you attempt to beat the market, you’ll lose more clients by underperforming than you’ll gain by over-performing. So wealth managers usually defer to index funds which stick to average returns. (In my opinion this is the best strategy anyway, but the point I’m making is that wealth managers are forced into the passive/conservative strategy.) Nobody ever withdrew from a retirement fund because their returns were just fine.

The Buying IBM Effect is just a symptom: asymmetry between the upside and downside is the real problem.

In environments you can control, install a system that judges decisions on the swing instead of the hit. (My deepest apologies for the platitude.)

In environments you can’t control, design your product or pitch to cap the downside. Risk aversion is often an ulterior motive that you won’t uncover directly through conversation. It’s important to anticipate the structural biases of anybody you’re interfacing with and account for their internal decision making considerations.

 

Go-To Essays and Books

This is a list of essays and authors I re-read often — the type of writing where you get something new out of it each time. Inspired by Slava Akhmechet’s post.

These are the books that I re-read and recommend the most. Some are pragmatic, some are simply pleasure reading.

Tell me your go-to essays and books! Contact info on homepage.

Yes, I genuinely do like The Old Man and the Sea. Everyone yells at me for that one. It’s the one “school made me read this” book I didn’t hate. I usually re-read it once a year or so.

 

Getting Positive Feedback

I’ve noticed that founders often optimize for finding the most positive feedback possible. That’s directionally a good move and it aligns well with Paul Graham’s idea that it’s “better to make a few users love you than a lot ambivalent.” The benefits of positive feedback in conversations with potential customers are clear: you validate your product, build up a network of fans, and get to iterate towards what specific dimension of your product drives the most value.

But once in a while I run into early-stage founders who have nothing but positive feedback from all parties or have a hard time naming objections and complaints. You’d think that’s great news, but it always makes me a little uncomfortable as an investor. It usually indicates that the founder is exaggerating demand or they’re not executing their validation correctly. If literally everything you hear is positive, it probably indicates that users aren’t being totally honest in their feedback or you’re not pushing hard enough to establish an initial cult following. Here are two things to keep in mind as you talk to users:

Remove bias

Users won’t want to hurt your feelings. Make sure you present your startup as someone else’s idea. Or as a product already on the market which you happen to be researching. While users will have no problem criticizing an fintech product, they’ll be too nice to healthcare products or other “socially positive” businesses. Take every precaution to make sure the feedback your getting will match up with users’ revealed preferences (true needs) when the product comes to market.

Take what you can get

If people say they love your product, then make your ask larger and larger until you’re out of slack. In the early days of Stripe, the Collison brothers would ask people whether or not they would use Stripe. If the user said they would, the Collison brothers didn’t stop there. They’d respond with “great, give me your laptop and I’ll get you up and running.”

If you’re simply interviewing people, ask them to sign up for the beta waitlist. If that still works, ask them to refer you their friends as well for your waitlist. If that still works, ask them to pre-pay for a discount when the product launches. This will not only tell you how badly people actually want your business, it’ll build up your customer base! This is also super useful for investors.

 

Concise Ideas are One-Dimensional

Distill an idea to the most concise and clear form you can to make it memorable. 280 characters if possible.

Luckily some of the tweets, headlines, and soundbites we come across carry wisdom or at least nudge your headspace towards a new idea. This makes it too easy to forget that most things we talk about fall on a spectrum or have extra dimensions. Especially when maximizing viewership is so valuable for content creators.

Some of these are pretty straightforward. The value of “deep work” has been ingrained into our heads by the latest trends in business writing. On the other hand, several people I know online and in-person have said that the most effective people they know are all super responsive through email, text, and over the phone. So clearly you can be successful in both modes. What gives?

Taking a moment to think about it, you’ll realize that you don’t have to choose one. Block out an afternoon to dive into your work, then be obsessed with the outside world for the other hours in the day. Both of these techniques are complementary parts in a toolkit, not separate virtues you should aim for.

But you understand that already. The real argument I’m making is it’s critically important that we constantly reconsider the implications of our proverbs. Here’s an example (of many) showing why this can matter so much:

Humbleness and modesty are adjectives that usually show up when someone is being complemented. They’re great traits to have, and everyone clearly benefits when we all treat each other as equally capable and deserving peers. On the dark side of modesty, however, is imposter syndrome. (Which, by the way, disproportionately affects those from underrepresented groups!) I think that by asserting the ultimate value modesty in our bite-size thoughts, we impose a big mental and emotional barrier for people who shouldn’t act that way all of the time.

It can be incredibly useful to feel like you’re bad at something and have to improve ASAP. It motivates you to dive into nitty gritty details and be a sponge at the cost of self-esteem. Likewise, a sense of overconfidence can help you overcome risk-aversion, lead people, and sell, but at the cost of having an open mind.

Most worrying to me is that different people from atypical backgrounds have a stronger need to recognize and act on that duality.

As someone who’s never had trouble fitting right into the tech startup world, I feel that I have the luxury to not have to project any sort of confidence and can just default to whatever mood fits the situation the best (usually a feeling of being humbled by the many brilliant people out there!) But anyone who’s a part of an out-group faces a difficult tradeoff: using brazen confidence as a tool to validate themselves with the in-group will make you feel guilty over their immodesty.

Marketing “humbleness” or “confidence” as objectively desirable qualities misses the point. You can have moods where nobody can stop you, and moods where you’re still pulling yourself up by your bootstraps. They’re both horrifically useful tools at your disposal and you don’t need to stick with one or the other. Everything has a flip side that can be useful, as long as you can keep the balance.

In summary: most things are spectra, not polar, and most things are dimensional, not mutually-exclusive.

Thanks to Niraj for feedback. Subscribe to not miss any future posts!