Geoffrey Moore - Building Gorilla Businesses - [Invest Like the Best, EP. 261]

My guest today is the renowned tech author, consultant, and venture partner at Wildcat Ventures, Geoffrey Moore. Geoffrey has spent his career focused on the dynamics surrounding disruptive innovations and his book, Crossing the Chasm, has become a canonical work for young businesses trying to unlock mainstream markets. This discussion is a masterclass on business strategy. We start with Geoffrey’s more recent work on category-defining businesses, break down his life cycle of adoption framework, and close with the ways messaging should change as a company evolves. Please enjoy this great discussion with Geoffrey Moore. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:03:08] - [First question] - What he means by a gorilla business [00:07:10] - An example of how companies self-organize into gorillas, chimps, and monkeys [00:09:41] - Why architecture is so important and how it applies to company building [00:13:11] - How and when businesses should think about open and closed systems [00:14:50] - Ways in which enabling tech companies are superior to application ones [00:16:39] - Thoughts on approaching and hiring a singular use case company [00:18:23] - Markets underestimate competitive advantage periods for technological gorillas [00:20:38] - The inertia and duration of being the creator of a space’s architecture [00:23:28] - Advice for early-stage companies when creating or dominating categories [00:25:16] - What he’s learned about identifying trapped value [00:26:49] - Questions that can identify trapped value, factoring for time, and horizontal uses [00:41:49] - Problems with risk exposure in B2B and applying this model for value creation [00:33:37] - His initial discovery of the life cycles of adoption and its five categories [00:39:29] - Perspective on venture capital funding and going from idea to the chasm [00:44:10] - What good pragmatists in pain look like [00:47:29] - Successful vertical uses-case sales motions [00:50:03] - Guarding from becoming over-specialized in a singular focused effort [00:50:52] - The Diffusion of Innovations; Ways messages work their way through a company to keep up with category evolution [00:55:00] - How extensible these ideas are to non-technology businesses [00:56:04] - The race between innovation and distribution [00:56:44] - What about the world today has changed or influenced his thinking [00:59:17] - Ways big companies can stay competitive in emerging categories [01:02:23] - The company he’s most enjoyed studying over his career [01:05:25] - Shared characteristics of exceptional leaders he’s met and talked to [01:07:48] - The Gorilla Game, Crossing the Chasm [01:08:14] - The kindest thing that anyone has ever done for him

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:43Patrick O'Shaughnessy?

  updating models, Canalyst is now used by over 400 institutions, including the largest money managers globally and by a number of guests on the show. With detailed company-specific models and data on virtually every public company, Canalyst's clients are able to ramp up faster, update models instantly and incorporate the highest quality fundamental data into any workflow. If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalyst.com/patrick. That's C-A-N-A-L-Y-S-T.com/patrick. Stay tuned after the episode to hear more about Canalyst's new quant product, Candace. This episode is brought to you by Hall Capital Partners. Hall Capital manages more than $40 billion in global multi-asset class portfolios on

• 1:28Patrick O'Shaughnessy?

  behalf of endowments, foundations and high net worth families with investments managed by distinguished investors, many of whom have been guests on this podcast. Hall Capital is always looking for exceptional investment talent at any stage and size, with particular focus on diverse teams, which they believe better drive decisions and outcomes. If you're raising capital or considering doing so, their team is seeking more great investors with which to partner across asset classes. Alternatively, if you're a passionate investor considering a career change, please reach out to Hall Capital to inquire about joining their teams in San Francisco and New York. To learn more, visit hallcapital.com or email [email protected]. That's [email protected].

• 2:15Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

• 2:42Speaker 01

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 3:07Patrick O'Shaughnessy?

  My guest today is the renowned tech author, consultant, and venture partner at Wildcat Ventures, Geoffrey Moore. Geoffrey has spent his career focused on the dynamics surrounding disruptive innovations, and his book Crossing the Chasm has become a canonical work for young businesses trying to unlock mainstream markets. This discussion is a masterclass on business strategy. We start with Geoffrey's more recent work on category-defining businesses, break down his lifecycle of adoption framework, and close with the ways messaging should change as companies evolve. Please enjoy this great discussion with Geoffrey Moore.

• 3:40Patrick O'Shaughnessy?

  So Geoffrey, your books were some of my earliest education in the world of the competitive landscape of technology. And I'd actually like to start at the end in terms of how I think about your work, which is with the concept of a gorilla as a business. Everyone's going to know Crossing the Chasm. We're going to talk a lot about all the insight from that book and that thinking. But I think that gorilla as a concept is, for me, a great unifying theme of your work. Aspirationally, we all are going to want to be gorillas or invest in gorillas or start gorillas at some point. So maybe just begin there. What do you mean by a gorilla company? Define that for us to begin.

• 4:15Speaker 02

  The simplest definition is a market share leader in a powerful category. In order to sort of take that model apart, we created something called the hierarchy of powers. And the idea behind the hierarchy of powers was go back to investing. If you want to invest in a successful company, you want to invest in one that has more competitive advantage than the alternative investments. How would you actually analyze competitive advantage? And that led us to something called the hierarchy of powers. This is the core investment model behind the guerrilla game and living on the fault line and going forward. So the hierarchy of powers says the most powerful power is what we call the category power. It has to do with the technology adoption lifecycle and where is the category that this company specializes in monetizing?

• 4:59Speaker 02

  Where is it in its adoption lifecycle? And for most businesses, most of the time, it's on what we call mainstream. In other words, the category has been established for a decade or more. There's budget for it. It's kind of settled out. There's a pecking order of vendors in the category and the category probably grows close to GDP growth rates. And value investors spend most of their life with categories in that world. Tech investors, and my whole world is tech, we invest at the beginning of these life cycles. Sometimes before there's just even, there's not even a category, it doesn't even exist yet. It's called category creation. But the key moment in that category development lifecycle, what they call the technology adoption lifecycle,

• 5:41Speaker 02

  is when all of a sudden the world goes all in on the new paradigm. The way we went all in on cloud computing, the way we went all in on mobile apps, the way we've gone all in on streaming video. When it goes all in, what happens is all of a sudden the world, which in a prior year did not have budget for this category, now everybody has budget for this category. And so it creates this huge secular uplift in spend. We called it the tornado. We had a book called Inside the Tornado. Huge secular. So that's category power. If you are in that category, that rising tide floats all boats. That is the number one predictor of your future success for the next several years. So that's why you see these incredible valuations in companies that are losing money

• 6:25Speaker 02

  because the investment community said, yeah, but they're in the hot category. Having said that, the next thing we said is, well, that category is going to sort out with a pecking order. And the power law of returns from that pecking order is the gorilla is going to get the lion's share, or the gorilla's share, as you will. Number two will probably get half of what the gorilla gets. And number three will get half of what the chimp gets. And so that led to gorilla, chimp, monkey. Turns. And so the idea behind the gorilla game was you would see a category going into tornado. You would buy a portfolio of companies that could win. As you saw who was winning, you would gradually exit the ones that are monkeys and chimps, and put more and more money into your gorilla.

• 7:10Speaker 02

  And then you would hold the gorilla because the gorilla's power position, what happens is the ecosystem forms around the gorilla, which instantiates the gorilla permanently in that category. Now, you can screw it up, but in general, it's not just that the gorilla is powerful during the tornado. Even on Main Street, the world is now organized permanently around the gorilla's de facto standards and whatever. So there was just a clear sense of the sooner you could identify the gorilla, and then concentrate in the gorilla, the better it would go.

• 7:43Patrick O'Shaughnessy?

  I love it. And I remember the standout idea being that success from the investing standpoint is actually about less diversification as this gorilla gets identified, that you want to consolidate your bet in the category winner. And there's so many things to pick apart here, so I'm going to bounce around. I promise the listeners, like, we're going to build this complete picture. Maybe give an example before we go deeper into some of the abstract ideas around all of this. A favorite example of maybe three companies that sort of went into this period, this tornado period, where it was uncertain who the gorilla was going to be. And then kind of the story of how they arranged into this gorilla, chimp, monkey hierarchy. I just think putting like a real world example around it will help people understand the basic concept.

• 8:23Speaker 02

  In the client server days, the relational databases that was Oracle, it was relational technology and it was Informix. And gradually Oracle emerges as a gorilla and Ingress and Informix were chimps. And so what happened was Informix got acquired by IBM. By the way, that's one of the things a chimp can do is say, okay, I'm not the gorilla, so I need to join a bigger consortium. And RTI finally just kind of went away. And Cy... excuse me, and then Cybase took a shot at it. And Cybase played what we call a chimp role where they, on Wall Street with Sun, they actually dominated a market segment, the financial sector. But they never became a general purpose resource. And eventually Cybase got acquired, I think by SAP, I can't remember, I think it was SAP, yeah. That's one story.

• 9:06Speaker 02

  It was Cisco, it was Juniper, and there was Bay Networks, and all these things. Okay, it became Cisco. And once it becomes one of these things, then, then you have Cisco certified engineers and you have Cisco APIs. And the world goes, well, the safe buy is, nobody ever got fired for buying. And originally it was IBM. The original one was IBM, there was Burroughs, there was Honeywell, there was Control Data, there was all these original companies. I think the most interesting current gorilla is Salesforce. Salesforce got ahead fast enough, they didn't really have a direct challenger, they just took on share away from, from the client server world. But now you're seeing there's Workday on the back end, and there's ServiceNow, and there's, there's a lot of interesting companies in that area.

• 9:49Speaker 02

  But Salesforce is the gorilla, meaning people form around that cluster. And I think what an investor needs to understand is it's not just the company, the company power is a function of your allies as well as of your own enterprise. And so it's the sum of the company itself, plus all of the innovation that comes from its ecosystem, equals their total company power within the category.

• 10:15Patrick O'Shaughnessy?

  I want to come back to category creation and how you think about the idea of a category itself. But this is a great excuse to talk about your notion of architecture. If we were to think about a two by two matrix or something with open and closed architecture on one axis and proprietary and non proprietary on the other. This is for me, a critical unlocking idea and Salesforce is a great example. Most powerful version of a gorilla, and I love the litmus test of you never get fired for blank. The blanks are the gorillas. But talk us through this concept of architecture. Why is this so important within a category? What does it mean? And what does that two by two matrix mean?

• 10:51Speaker 02

  The difference between open architecture and closed architecture was Apple has a very closed architecture. You don't participate in Apple's architecture, whereas Android has a very open architecture. Okay. The idea is, do you want other people to complete your solution? The cable box was contained, but the Roku is an open architecture. In general, I think originally it was all closed. The IBM architecture was just IBM. Deck was just Deck. The Sun was just Sun. No, actually with Sun, they began to do open architecture. So they would buy their storage from a different vendor, or you'd get your operating system from the Berkeley operating system. So that was the beginning of open architecture.

• 11:31Speaker 02

  I think what we learned during the last 20 years is in general, open architecture beats closed architecture because closed architectures always have a single point of failure. Meaning if any part of the closed architecture doesn't work, you can't ship. In an open architecture, if you have a failure of one component, you can get it from another vendor and get back in the game. Now, open architectures are harder to manage for quality. And so that was always the challenge, but that was closed versus open. Proprietary versus non proprietary has to do with who gets to control the next release of this thing. So open source is not proprietary. Open source, there's no lock in, but proprietary, there is lock in.

• 12:11Speaker 02

  And so the most powerful idea was proprietary open architectures where you had proprietary control of an ecosystem that involved other companies, but they had to eventually play to your standard. And that's what gave the gorilla the most power because now what the gorilla can do is you kind of have to stay with me. I'm a market mover. I don't just move my own products. I move everybody's products. By the way, by staying with me, you leave my competitor behind. So every time I differentiate from my competitor and you conform to my standards, you just made yourself incompatible with their standards.

• 12:47Patrick O'Shaughnessy?

  Do you have a favorite open proprietary example?

• 12:49Speaker 02

  For example, in the relational database thing, there was a concept called row level locking. And Sybase did it one way and Oracle did it another way. And because all the independent software vendors, the SAPs and the PeopleSoft and all the people that wanted to build applications on top of a relational database had to choose. They went with the Oracle approach to row level locking, which disenfranchised the Sybase one. And so Sybase therefore had to go into a specific market who said, we're willing to do your form of row level locking because in the financial services industry, we have a bunch of problems that Oracle is not helping us with. You will help us with it. And then it created something we called market segment power.

• 13:31Speaker 02

  Sometimes we call that gorilla in the niche. It's the chimp strategy. The chimp can no longer compete with the gorilla head on across horizontal markets, but they can still win in verticals. And so that was what Sybase did on Wall Street. It was successful for them.

• 13:44Patrick O'Shaughnessy?

  How do you think that new companies should think about this matrix of open and closed proprietary and not in the early days of their businesses and products and strategies? Like, it feels like something that we can talk intelligently about after the fact. But do you think it's something that can be incorporated early on in a business's strategic thinking?

• 14:03Speaker 02

  I think it emerges organic. Remember now, we're in a different landscape where open APIs, the whole software infrastructure, the whole paradigms that were set by client server have all been kind of overthrown to some degree by cloud and the whole microservices and open architectures and whatever today. So it's much easier today to start a company and draw on an enormous number of resources that are available kind of any day. Where the lock-in starts to develop is when you start creating differentiation. However, you create differentiation. If that differentiation will attract customers to you. If you can build outward from that differentiation, the customers still want to stay with you.

• 14:44Speaker 02

  At some point, that does create a proprietary position and some form of customer lock-in. Now, customers do not, as you know, are not very fond of lock-in. On the other hand, the only thing worse than lock-in is probably not being locked in. Because what lock-in creates is it creates predictability. It's a little bit like fascism, I think. It's like, they hate this political system, but the trains run on time. And I think Salesforce is a good example. You're not locked into Salesforce, but there's so many things that are now compatible with it. There's so many things that plug into it. At some point, you go, yeah, but it's just too hard not to be with it. Now we're back to the nobody ever got fired for.

• 15:24Patrick O'Shaughnessy?

  Yeah, the notion of Salesforce's world building, whether it's its proprietary coding language, the things that hook into it, the annual Dreamforce event. It's interesting how it is both application on the one hand and enabling technology on the other. That's probably the next distinction that makes sense to dive into. If open and proprietary is sort of the most defensible position for a guerrilla. I think you would also argue that enabling technology companies, you can define what that means, are also superior to application technology companies. So maybe just draw that distinction to why it's interesting.

• 15:55Speaker 02

  Well, it's important and it's interesting, yin and yang. The only way the world's going to get value from technology is through applications. Whenever you are evangelizing the new category, it's important to get the applications out before the enabling infrastructure, because otherwise people won't buy into it. But once people start buying into the applications, then they want to start scaling them. And they want to start enhancing them and elaborating on them. And that puts enormous pressure on the enabling infrastructure. And there's more money to be made in the horizontal than there is in the vertical. There's more speed in the vertical. You can go faster by going at the applications. So when you're crossing the chasm, it's all about the application. But as soon as you get to the tornado, it very quickly becomes more about the infrastructure or the enabling infrastructure.

• 16:39Speaker 02

  Microsoft, Intel, Cisco, Salesforce, their platform technologies become their power place. And Oracle had applications and database, but it was always the database. But the key thing is if you're in an enabling technology. You have to be humble about getting the applications out ahead of you. Or else if you just try to go out and say, we're the next enabling technology, it doesn't work. Because people are going, well, yeah, but what's it for? And I don't see that I have to buy it yet. You hook the market with applications and then bring them into the new infrastructure.

• 17:12Patrick O'Shaughnessy?

  What's that been like watching more recently? If we think about the most pure play enabling technologies today, it might be the API companies. So the Stripe, the Twilio, the Octas of the world. Well, how did those companies solve this problem of you need the actual use case, the actual application? Amazon AWS is enabling technology, but it was its own best first customer on the retail side. So that application problem was solved by them. How do you approach these pure play, hire this API for this one function in your application type company?

• 17:41Speaker 02

  It's typically around the use case, like Okta, I think started with single sign on. So people are just saying, this is such a pain in the neck that I have to sign this, have sign it. And Okta says, okay, we'll do single sign on. And then once you did single sign on, you thought, well, wait a minute. And we're kind of sitting at the, we're sitting in a very interesting piece of real estate here. And there's a bunch of highways coming together. Maybe we should have some service stations and a restaurant. We should build some hotels and that's kind of what Okta did. But enabling infrastructure always starts with a problematic application use case that you can't solve with the existing infrastructure. And so initially, first of all, it looks like, well, you've only got, your market is so small. You're only, there's only this one use case and there's only this one application. And you're building all this technology to make that better. Are you sure you want to do that?

• 18:26Speaker 02

  And if that was the only return, the answer would be, well, no, it doesn't make any sense at all. But if you're saying, no, that's my point of entry. And then I'm, I'm going to expand. We call it the bowling alley phase of the technology adoption lifecycle, where you'd say, okay, I've got my first use case in my first industry. Can I get a second use case in that industry? Or can I find that use case in a second industry? So either way, you were going to kind of expand outward. And then at some point, if you can get enough expansion, the world goes, well, hang on. This is the new infrastructure and that's when the tornado starts.

• 18:57Patrick O'Shaughnessy?

  One of the really interesting things, again, going back away from company building advantage towards returns, I'll call them for investors. One of the interesting observations we already mentioned was you should consolidate into the gorilla, not be diversified in a category. But the second interesting observation in the book is that markets, stock markets in general, tend to underestimate the competitive advantage period, the potential returns, like all the things that it would normally care about for a company, for technology gorillas specifically. Why is that the case? Because investors are obviously always looking for things that are mispriced. So if this is a source of mispricing, what is it? Why does it persist?

• 19:32Speaker 02

  I think the source of the mispricing is that they're bringing a mainstream model view of marketplace divisions of power to a tornado influenced investing environment. What I mean by that is, you said General Motors, Ford and Chrysler for 30 years or whatever it was. So you say, well, yeah, by market share, you can almost give them their advantages. If GM's got more than Ford, but Ford's still a good investment, and Fiat Chrysler, you know, they've had their issues, but that's a good investment. But in a tornado world, because the forces of ecosystem pressure on de facto standards for the gorilla, they start disenfranchising the number. First of all, they disenfranchise the long tail. So all the long tail can do is clone the gorilla.

• 20:17Speaker 02

  That is a play, but it's a commoditization play. But the chimps are the ones who have a hard hand to play because they're getting systematically disenfranchised. So we overvalue the chimps and we undervalue the gorillas. It's the same pie, we just divided it wrong. What we're doing is we're using an arithmetic division. We should be using a logarithmic. It's a power law relationship, not a linear relationship. But most investors like lines better than, they understand lines better than power laws. The game is eventually, and by the way, this goes for M&A too, when people acquire a gorilla or a chimp. They're thinking that they're going to be able to compete against the gorilla because no one now I have this asset in my big portfolio and I've got all this access to customers. I can compete against this gorilla.

• 20:59Speaker 02

  Not really, because again, there's so many other companies in the world that are making a living with the gorilla. They just won't invest enough in a second set of standards to make that return on investment work.

• 21:13Patrick O'Shaughnessy?

  One of the interesting analogies in the book, this hearkens back to the idea of architecture, which the gorilla gets to set, builds the rules of the game as you've described. The one I liked was like a country choosing whether it was a left lane or a right lane dynamic and like, once that choice is set, that's it. It's basically good until we get flying cars, at which point it's a new architecture. This thing is set. One of the ideas that I'd love to hear a bit more about is like, once that architecture is set, I think what people don't understand is then for the entire rest of that category's existence, it's very hard to disrupt the winner until there's a new category created. So now we can start talking about what category means and all this fun stuff, but maybe just touch on that idea of duration and architecture's inertia, if you will.

• 21:54Speaker 02

  One of the things that's interesting when you talk about investments is people will often use the word category and market interchangeable. And for us, it was really important to say, no, these are two different concepts. The simplest way to do it is a category is defined by a set of competitors and a market is defined by a set of customers. The category is competitors who offer products and services that address the same issue. A market is customers who have the same use cases and talk to each other. And they talk to each other, by the way, is a really important dimension of market. We made the point earlier, I guess, we're crossing the chasm. A doctor in Japan is not part of the same market as a doctor in the United States because they don't talk to each other. Setting that aside, now back to this issue of category.

• 22:35Speaker 02

  Category has a useful life until somebody comes along and says, that category, which when it came to power... Actually released trapped value in our business. By the way, I'm a B to B guy more than a consumer guy. So let's stay with the B to B mindset for a second. So why did somebody adopt the category in the first place? Well, because we had a set of business processes that were inefficient. And this category allowed us to somehow redesign and re-engineer the process to make it more efficient. So we said, okay, let's go get a bunch of that. Let's go get a bunch of SAP ERP because we need a back office system for enterprise resource plan. We did that for like 20 years. It's so successful, you come to a point where you go, you know what? That category is now the value trapping thing.

• 23:20Speaker 02

  We're all trapped in data centers. We all have to have our own data centers. We're all trapped in, in these applications that are unique and very hard to maintain. We all have these huge IT departments that are doing the same thing in our different companies. This is crazy. So then the cloud guy comes along and says, well, hey, we can do cloud. And so now all of a sudden, that's when the new category wins because the old category has gone from being the hero to becoming the villain. That's when category creation. But until that's happened, there's no point in trying to disrupt the category. In other words, people don't want to disrupt categories. People will cling to categories as long as they can, but they will cling to them up until the point where they realize, oh, that's the thing that's holding me back. And that's when they're willing to change.

• 24:02Patrick O'Shaughnessy?

  This is a great bridge into first the strategy behind category creation in the first place. This is for very early, young technology companies. And that'll give us an excuse to talk about the chasm and the adoption lifecycle and all the nuance there, which is just such a fascinating set of topics. So I always tell startups that we're investing in, you want to be able to complete the sentence, company XYZ, the global leader in blank. You want that to be true even when the company is very young. And so the category can start very, very small. What advice would you give early companies as they think about creating and dominating a category, even if it's a 10 person team or something very young?

• 24:39Speaker 02

  The first sentence I would work with, and by the way, in a venture capitalist, I'd want the venture capitalist to have the same sense. Where's the trapped value? Who knew that we had trapped value in the backseat of our cars? Well, Travis Kalanick figured out, oh, who knew that we had trapped value in our spare members? Oh, Brian Chesky figured out that we had trapped value. Okay, so the first is, where's the trap not? Because that's what's going to reward. If there's no trapped value, there's not going to be any category. The second thing then is, what is trapping the value? So Travis said, well, it's a dispatch system for taxicabs. And Brian said, oh, it's the hotel reservation system for travelers. Oh, well, I can use. Both took essentially

• 25:20Speaker 02

  the same strategy of a mobile overlay. So you have to have trapped value meets disruptive technology. That's it. The third variable is you need an entrepreneurial leader, because actually, this is not a journey for the faint of heart. But those are the two critical things. I'm going to redefine the hospitality space. I'm going to redefine the transportation space. The global leader, I think what you would do is take whatever the category you're going to disrupt, and you say, we're going to be the global leader in the next generation of that category.

• 25:51Patrick O'Shaughnessy?

  What's really interesting about the idea of trapped value is that it sort of implies that there's nothing new under the sun, meaning the trapped value is always in an existing thing. The things that humans do don't really change all that much, I guess, over time. And that trapped value is really just about like a suboptimal, or something that's become suboptimal in a prior category. Maybe say more about what you've learned about identifying the features or characteristics of trapped value.

• 26:14Speaker 02

  Until such point as we think that we've now reached perfection, if I read the papers in the morning, I'm not saying, I think we're a little shy of perfection. So as long as we're not at perfection, that means value is trapped somewhere. There's always trapped value. This gets important, because by the way, it relates to this current generation of entrepreneurs, who are very interested in trapped value in social issues as well. Climate change, health issues, educational issues, whatever. So trapped value is, it doesn't have to be just cash value. But the point is, you have to be inspired to say, I want to change the world. And it can't be, I want to change the world so I can become a billionaire. That's a really bad motive. I mean, if you become a billionaire because you change the world, that's one thing. But to change the world to become a billionaire,

• 26:58Speaker 02

  it doesn't work. So the issue is, where's the trapped value? How urgent is it to address the trapped value? The urgency is also an important issue. And at some point you say, well, yeah, I mean, this is what we want to go after. This whole thing with vaccines, mRNA vaccine approach to building vaccines was built on the fact that it was taking us 15 years to build a vaccine and that that's a lot of dead people. That's a version of trap value.

• 27:24Patrick O'Shaughnessy?

  What kinds of questions do you enjoy asking people to get at the understanding of the value that may be trapped that they're addressing? Like if you had to turn this into a set of questions for, let's say you were a venture investor and all you cared about was identifying like, there's got to be trap value ergo, I want to know what it is here. What kinds of questions do you think would help the entrepreneur that may have never heard that term before, understand what you're after?

• 27:47Speaker 02

  The way I evaluate an entrepreneur often is to say how well they answer that question. And some people go, they're like, particularly people who've had business experience and who've lived the trap value. I was a CIO for 10 years. This is a nightmare. Okay, those are pretty easy. And I'll give you an example of one where, for example, the trap value doesn't actually work. There's been enormous interest among a number of young entrepreneurs around taking a Fitbit like approach to health or to diabetes or to dieting or whatever. It turns out that that trap value is so diffuse, it's like worse than shale oil. Trap value wants to be like those huge well, those huge reservoirs of oil in the Gulf of Mexico. That's what you want, so you get a gusher.

• 28:29Speaker 02

  And the opposite of that is, well, yes, you grind every single piece of shale in the Canadian Plateau, you can extract oil, but it's very, very long and it's slow. So you're looking for concentrated trap value, that there's a kind of a sense of release. If they don't have a sense of that, they can often, by the way, you invest in two people. The other person's a technologist who says, I don't even know what this is for, but it's amazing. And so what they're doing is going quantum computing or cryptocurrency. I don't know what it's for. Now, by the way, you know what we're discovering? Cryptocurrency might be for Turkey, for Thanksgiving turkey, for hyperinflationary economies. They've used the dollar historically. Maybe it's kind of like gold, maybe it's a placeholder for gold. But the problem right now is still, I think cryptocurrency still hasn't crossed the chasm

• 29:13Speaker 02

  because I don't think there's been a compelling use case other than speculation, which is, I think is in early markets.

• 29:20Patrick O'Shaughnessy?

  One of the amazing things about the trapped value examples of the backseat of your car and the spare bedroom is that they're like tangible unused assets. Concept just makes perfect sense there. How would we apply that idea to like developer tools? I'll just go back to Twilio and Stripe. What's the trapped value? Is it time?

• 29:37Speaker 02

  It's time plus complexity plus error. It's a productivity play. But what's happened with, because we've gone to this digital transformation economy, the pressure on people to deploy software-enabled processes faster at scale has never been higher. The traditional tools become the bear. The very tools that enabled us to get this far are now holding us back from getting to the next place. There's always a trade-off because it's like, oh, God, I have another set of tools? What is the shelf life of this category? When you see category, category, category, it's like, okay, this is not really going to be more productive because I'm going to spend all my time learning the next technology and I'm going to have this very short, useful life of it. So you have to be careful with that.

• 30:21Patrick O'Shaughnessy?

  It reminds me of the Jeff Bezos undifferentiated heavy lifting concept. If everyone's engineering their own checkout, pay portion of their website, that's just stupid. It's just happened in one centralized place. Like you said, less error, probably because they're doing it at scale. There's an aspect of trapped value that could be all about addressing that undifferentiated heavy lifting, like horizontal, common use cases across other applications, which make no sense to all build in-house because it's like subscale.

• 30:49Speaker 02

  But except that, the reason why people still do it, by the way, every software group in the world would say, why do we have four different people writing the same subroutine? Why don't we write it once and use it everywhere? And the answer is because I need it now, or because I think about things this way and they think about things that way and I don't want to cover my brain with it. So we will always proliferate lack of productivity and then centralize. So what you do is you do the heavy lifting in spite of the fact that it's long-term unproductive because in the short term it is productive. And then you create what they call tech debt, technology debt. And then at some point you have to think, oh, crap, I have to pay down my technology debt. And that's when you say, I'm going to commoditize these things into a standard platform.

• 31:30Speaker 02

  So platforming, the first goal of platforming is actually just to internally create a more productive workspace by essentially doing the heavy lifting once and not many times. But once you do that, if you then open that platform to your customers... Now you're beginning to create this ecosystem where this guerrilla game ecosystem. And then when you open it up to third parties, and if there's enough customers, you've attracted enough customers, the third parties will want to come to work with your customers. And now you're playing the guerrilla game. Now, now you're bringing people into your. And that's how the little company gets to be the big company. We call it strategic acts of generosity, where you essentially give away something. It's a little bit like a drug dealer.

• 32:12Speaker 02

  Give away something in order to get people to a certain amount of addiction. You're able to monetize downstream. So then obviously, that's what Facebook did, it's what Google did, it's what digital media guys did initially.

• 32:23Patrick O'Shaughnessy?

  In B two B, do you still see that? Is that still a common strategy? Like, it seems like a lot of technology is zero marginal cost is such an interesting part of technology companies, software especially, that it allows you to give stuff away for free without crazy financing problems. Is that true in B two B? Like, how do you think about that generosity in B two B? And whether or not that's a unique strategy people should think about?

• 32:43Speaker 02

  In B two C, it's proven to be really the only way. Yeah, yeah, you just have to play that game. The problem with doing it in B two B is there is an opportunity. There's a total cost of ownership issue that the B two B, an exposure to risk and a bunch of stuff. Having said that, the notion of saying try before you buy, and then also the notion of consumption based pricing. So you can buy it for a hundred people and then extend. So it's led to something called the land and expand sales motion. And it certainly led to something called customer success. We used to call customer success customer support. In that model, the customer had already bought the product. So they'd taken on the risk now of getting value out of the product. And customer support says, well, we'll make the product work.

• 33:27Speaker 02

  It's your problem to be successful with it. It's our problem to make the product work. In a subscription land expand model, it's like, no, no, no, no, no. If you stop using my thing, my business model collapses. So customer support became customer success. And now the issue is, well, how are you trying to get value? Well, how can we work with you? It's created a much healthier relationship between the vendor and the customer than ever existed before. Because it basically, the customer now has more power. And therefore, the vendor has to collaborate more with them. In the nineties, it was drive by selling. You sold, you promised them anything. As soon as the deal closed, you went out of town and you did not want to come back because they were going to lynch you if you did. But now it's like, no, the power is much more equally distributed.

• 34:11Patrick O'Shaughnessy?

  Well, I'm proud of us for having gotten almost 45 minutes in and not yet talked about adoption life cycles, but now is the appropriate moment. I mentioned we'd start at the end, which is where we want to get to if we're an entrepreneur and investor is building or owning the gorilla for all the great things we've talked about, open architecture and horizontal enabling technologies, all these great features. But now we've got to rewind back to the beginning. And obviously, I was completely shocked to see that Crossing the Chasm came out in 1991 because we think about it as this canonical technology book, and yet it came out pre-internet, which is very, very interesting. Bring us back to your first discovery of this lifecycle of adoption, maybe break it into the five categories for us for some language definitions, and then we'll talk through what's important sales and marketing wise at each stage.

• 34:54Speaker 02

  In 1986, I joined a company called Regis McKenna Inc. Regis was the premier marketing guru of high tech by far. And he'd written a book called The Regis Touch. And in that book, it was the technology adoption lifecycle was, that's where I learned about the book. And I was a client of Regis and I joined the company, which is great. So in that model, there are these five strategies for adopting technology that evolved linearly, meaning the first strategy is called the technology enthusiast. And they just, they're interested in the technology for its own sake. The visionaries who are interested in taking this disruptive technology and being the first to go after the trapped value that they want to go after. And they're going to do that for first mover advantage and frankly, just to put their mark on the world. Then the

• 35:37Speaker 02

  next group are the pragmatists. And what they say is, well, I'll do it when I see other people doing it. I think it's a good idea, but I'm not sure when. So when everybody else is doing it, I'm going to do it. I'm interested in the productivity of my business. I'm not trying to change the world. I'm just trying to make my world better, faster, cheaper on a day by day basis. And then the fourth group were the conservatives who are going, oh my God, not another technology. Please don't do this to me. So I will do it under duress. After all the pragmatists tell me I have to, I will do it. And the skeptics who are saying this is never going to work in the first place. And you guys are instruments of the devil and forget it. What I added to that model, I was at Regis for a while, and I thought, we had all these really great clients that were just crushing. They had these incredible PR events.

• 36:19Speaker 02

  Everybody was saying this is the next big thing. And then they go off the radar. What the hell happened? That led to was a realization that there was a chasm, a gap in that lifecycle between the technology enthusiasts and the visionaries who were both willing to go early. They believe what you believe, they buy into what you want. And the pragmatists who are not willing to go early, but who would go when, once they saw others go. Well, that created kind of a junior high dance problem. Like, well, I'm not going to go out there until you go out there. And that's what the chasm was. The chasm was just, I'm waiting, you're waiting. This is when we became so important to define a market segment is people who talk to each other. Because the way these people make the decision is through word of mouth. They talk to each other. Are you doing this yet? No, no, no. Okay, me neither. And then that was the chasm.

• 37:04Speaker 02

  The opposite of that is when you go and talk to each other, you are, you are, you are. Oh, my God, me too. That's what created the tornado. So venture investing was all about, we want to get to a tornado. We have this really cool disruptive trap value, it's going to warrant it, it's going to fund a tornado, this is going to be great. But the problem is between the early market and the tornado, you have to cross the chasm. Crossing the chasm, this is when we learned the applications lead before enabling infrastructure. You have to find that first use case and that first industry segment who will go ahead of the herd, not because they believe what you believe, but because they need what you have. But what you have to do is bring what we, what a guy named Ted Levin called the whole product. You have to bring the complete solution to their problem or they can't play with you.

• 37:48Speaker 02

  But if you do bring the complete solution to their problem, they will adopt the new technology because frankly, they're stuck. They really are in a bad place, they need to get out. Crossing the chasm was like a very unnatural act to the venture capital community and a very unnatural act to entrepreneurs because they were going, well, wait a minute, we're horizontal for everybody and you're telling me this one use case in this one segment? What are you talking, the TAM is, what are you talking about? I mean, I can remember Steve Jobs with the Macintosh, that was the computer for everybody, right? So when it became desktop publishing in corporate art departments, he was furious. We did not create the Macintosh to be, but in fact, that was cross the chasm from the Mac. That's how they originally crossed the chasm because at that time, people were making 35

• 38:33Speaker 02

  millimeter slide presentations. And when you wanted to change one, you had to go down to Walgreens to get the new color, I think it was a Mets, okay. So the point was it was a very tough problem, they solved it. So this crossing the chasm thing became important to the venture community. In fact, so I'm associated with a new venture team called Wildcat Ventures, we're raising a crossing the chasm fund. Basically, the deal is going to be, we're only going to invest in companies who have reached the chasm. In other words, they've had success with early market, they have product, but they don't have a winning position with Pragmatist yet. The purpose, and by the way, with a single round of funding, you should be able to get across the chasm and dominate a use case in a single market within probably 18 to 24 months is kind of the normal timeframe

• 39:18Speaker 02

  for that. And there's a crossing the chasm playbook and you can run the whole playbook. What I love about it is it's probably one of the best risk reward plays in all of venture. It's not the biggest reward. The biggest reward is to be the gorilla on the terrain. That's the game changer. But if you talk about the change in valuation between people who aren't getting traction, we sometimes call it the traction gap, the chasm and the traction gap are virtually synonymous, to, no, I have traction. I have a real company. By the way, I'm growing at double digit rates in admittedly a small market, but I am the gorilla in that niche and I'm expanding through bowling pins. That play is, I think, a real cool opportunity in venture that we've always talked about. I don't think anybody's ever raised a crossing the chasm fund. So I'm kind of excited to be part of that.

• 40:03Patrick O'Shaughnessy?

  So obviously, to cross the chasm, you got to get to it first. And you've described two earlier segments, the sort of pure tinker technologists and the visionaries who are more commercial, I'll call them, but just earlier and more willing to, I guess, take the risk. What do you suggest companies think about in those first two stages? So from a cold start, you're not going to get to the chasm for a while. What's important in that first segment?

• 40:26Speaker 02

  Well, first of all, you've got to create a pitch that will get you some venture capital. What that will fund, and by the way, venture capital is designed to give you a little bit of money at a time. And by the way, the way you should think of venture funding is every round in funding is intended to get you to a new valuation level. We just think about it from a venture capitalist's point of view, because if you don't get to a new valuation level and you have to raise more money, you're going to dilute everybody who's in so far. But if you can get to a new valuation level, we're all real happy. So you should think of those, it's almost like quantum levels in an atom. And one of the mistakes that people make at venture capitalists, they call it the sucker round, where you invest in the second, you have to have a two steps to get to a new valuation thing, and you get completely, you don't get completely diluted, but you get painfully diluted. So

• 41:10Speaker 02

  then the question is, what are the valuation quanta of this journey? Well, the first one then is, you have to create a very compelling demo. You often have the entrepreneur in residence model to answer that. Now you have to create the minimum viable product. And in business, that's going to be a product that you can sell to a customer. But you know that when you sell it to a customer, the customer is going to need a bunch of handholding and you're going to have to do a bunch of extra work because the whole product doesn't exist at all. And even your product frankly has issues. So you now, but they pay for it and they give you feedback. So you're now in this alpha beta like world. When you get to something that's now a viable product, then the next thing you've got to do, still in the early market, is you've got to get your first flagship customer. This is particularly important for B2B.

• 41:55Speaker 02

  A flagship customer is a known brand name customer. Oh, American Express. Oh, JP Morgan. Oh, Disney. Okay. They've taken your product with you, with a ton of extra help from you and done something amazing with it. So it puts you on the map. And by the way, it isn't just an experiment. It's actually more important than that. They actually used it for competitive advantage. So they were able to do things that you were like, holy smoke, these guys are really jumped ahead of their Tesla. They jumped ahead of the automobile industry. My understanding is that Tesla's market cap exceeds that of the other American car companies combined.

• 42:30Patrick O'Shaughnessy?

  Oh yeah, by a lot.

• 42:31Speaker 02

  Talk about category power, company power, guerrilla power. Once you have one of those, now you're at the chasm because you're known and you have a product, but you still don't have a market position that has any meaning. So the next step now is to cross the chasm by identifying a market segment that we call them pragmatists in pain,

• 42:52Speaker 02

  who desperately need a solution. The conventional infrastructure just simply can't provide it. And you look at what their needs are and obviously you're a great fit for some of them because you wouldn't have picked them otherwise. But there's a bunch of stuff they want that you think, oh my God, really? But the answer is, yeah, really. For that first segment, I don't care what it is they need. You don't have to do it all yourself. You can bring another company with you. You can bring two other companies with you, but you have to take that problem off their plate. By the way, once you do, they tell their friends. So everybody in that segment who has that use case goes, Really? There's a vaccine? You're kidding. Pfizer, Moderna, which one? Okay, it's like, okay, we're all gonna do this together. And very quickly, you get this acceleration in sales. I mean, like, you can grow 200, 300%.

• 43:36Speaker 02

  We often call it a double, triple, and then a triple double. So you go 3X, 3X, 2X, 2X, 2X. And that's because of the law of small numbers. But now you're somewhere between 35 and 70 million dollars at the end of that journey. Now you're a going concern. You're a real company. You have predictable sales. You have a sales force. One of the things you gotta learn, by the way, is don't hire this. So there's three sales forces. This is a mistake that entrepreneurs make a lot. In the early market, the only real salesperson, Cecilia. You need a salesperson. They've gotta be kind of a buffalo hunting, pioneering kind of salesperson, right? When you're crossing the chasm, you need a vertically focused go-to-market thing engine, where it's product marketing, product management, product marketing, sales,

• 44:20Speaker 02

  and customer success, all focused on that one domain and that one use case. People don't make careers in sales to do that, but that's who you need. Once you get to the tornado, now you need the conventional, coverage-oriented sales force. But hiring a tornado sales force when you're crossing the chasm will cause you to lose your company. That's probably the single most common source of venture failure.

• 44:44Patrick O'Shaughnessy?

  I want to come back to the difference in the two types of sales forces and maybe even literally the characteristics of the people that are good at one versus the other. But before we do that, I need a clarifying question on pragmatist and pain. What have you learned about searching for what that pain point might be or could be? Like, what does a good pragmatist in pain look like? Because I imagine the Macintosh, there could have been tons of those examples. They went with one in particular. What does good versus bad look like when searching for this beachhead, if you will?

• 45:12Speaker 02

  The way you typically find it is during the early market, you've kissed a bunch of frogs. You had customer contacts. The sales force in the early market is always gonna be thinking about use cases, although they tend to think of them as projects, meaning we could solve that use case. We just assign some people to it on a one-off basis. But at the same time, the person who's the general manager who's sort of taking the longer view is which use case had the most urgency and you want it to be contained trapped value. It's not a big reservoir, but it's not shale oil. In other words, there is a real trapped value in a really nasty spot that if you could get it out, it would work. You get that by essentially either prior experience in other companies or your own sales force just talking to people in their prospects and in your actual sales.

• 45:57Speaker 02

  It's a use case based dialogue. So you sort of say, well, what are the use cases people have? Whether you're using our product or our competitor's product or the prior technologies product, and then what use cases have that sort of flashing red light quality? Because people will complain. I mean, people will say, look, I need help. But you need that signal from the market. Then you want to validate the signal. So then you go back and you say, was that just you? Or is that endemic to the use case? In the case of document which was in the first Crossing the Chasm book, it was Syntax who was saying, in order to submit a proof of proposal to the FDA, they had a 500,000 page document, 500,000 page document. This was in an era where we actually printed things and they were assembling

• 46:42Speaker 02

  it in the FedEx truck on the way to the FDA. So that was like a private this.

• 46:48Patrick O'Shaughnessy?

  I love the Apple example because I think everyone knows the Macintosh, everyone knows Jobs. Probably a lot of people didn't know the specific niche that they went after to begin. Is there one or two more recent examples that kind of every listener might appreciate and go, oh, aha, I get what that means now?

• 47:04Speaker 02

  Microsoft had SharePoint and SharePoint was an enterprise secure document repository, much lighter weight document. Frankly, most purposes, you didn't need document, SharePoint was great. But it was, it was hard to use. So then this guy Drew Houston did Dropbox. So Dropbox was like, well, this is incredibly easy to use. It was a little bit insecure. It was kind of like out there and you know, we said, anybody, hey, I'll show you my photos and some of my photos, maybe you shouldn't even look at. But it was going on. So what Box did was they came along and said, look, For people who are dependent on sharing documents as part of their core getting things done and need a secure place to do that, but who really cannot abide the ease

• 47:48Speaker 02

  of use of Dropbox, that hit and it resonated with every CIO on the planet because they were all getting pressure to have a really simple file share, but they're also getting pressure to be secure. So that was an example of a pain point that they were able to go right after.

• 48:03Patrick O'Shaughnessy?

  So, understanding the pragmatist in pain as a critical thing to understand and then target, talk now about that sales motion that you've seen be successful. So to build a vertical use case, sales motion completely, really focus your efforts and your man hours and everything else on one thing. What does that look like in contrast to the more broad horizontal future sales plan?

• 48:24Speaker 02

  So the first thing is, when you're in the early market, your marketing communication is about the technology breakthrough. It's about all the possible amazing things that could happen with this new technology. You're trying to attract people who believe what you believe. And then they say, yes, it is amazing. Let's work together and let's make something happen. When you cross the chasm, it's like these people do not believe what you believe. They're suspicious of what you believe. But so now we're looking for what they need, what you have. So the first thing then is your marketing campaign has to identify, you have to strategically commit to a use case. Then your marketing is, you actually go out, first of all, it's very economical because you just go to the segment you're targeting. You're actually targeting a job title in that segment. The process owner who

• 49:08Speaker 02

  owns the NDA submission inside of Syntax, who's not been getting a lot of attention, you can imagine. But then all of a sudden you say, no, we're here for you. The PeopleSoft guys went to the HR people, the HR people wept because nobody had ever called them before. You show up at their door and you say, we know your problems. You qualify the customer. Do you have this problem? Because if you don't, we're both in the wrong room. Oh, you do have this problem. Now, when you bring the sales force, you still need a salesperson and you still need a technical person, but you need a domain expert person. And this is the person who is an expert in the domain and the use case from the customer's side of the table. They've lived this use case. They know it. Customer just goes, oh, my God, a kindred spirit. And you're on the other side of the vendor. Wow, come on to my side of the table. By

• 49:51Speaker 02

  the way, you don't use discounting to cross the chasm. These are high value use cases. You charge full up for them, but you deliver 100% on them. So that's the third piece of the go to market. You need a customer success motion, which says failure is not an option. Because if you fail in that situation, they also tell all their friends. And now you're screwed. Once you pick this thing, failure cannot be an option. That's a pretty big check to write at the beginning of a category. But if you can find the segment tight enough, and the use case is important enough, the customer will lean in. They'll help you as much as they can. That's how you get through it. That's how you knock over your first bowling pin. Once you've knocked over one bowling pin, it's much easier to then expand into

• 50:34Speaker 02

  adjacent use cases and adjacent segments and going forward.

• 50:38Patrick O'Shaughnessy?

  How do you guard against the problem of the product and the team getting overly specialized in the niche that you're attacking first and then having it not be extensible to the other areas?

• 50:49Speaker 02

  We call those the bowling alley forever. By the way, that's not a bad outcome. It's just not a tornado outcome. Because there are things like you say, no computational fluid dynamics. I don't have it on my PC. Don't know if you have it on yours. I'm thinking probably not. But it's a valuable thing. Computer aided design. There's a bunch of stuff that's highly specialized. It's high value. It's ultimately at risk of getting commoditized at some point because Google mind or Amazon, something or other will maybe make it go away at some point. But for the time being, it's bowling alley forever. Bowling alley forever companies can get a really good return. They create millionaires. They don't create billionaires.

• 51:26Patrick O'Shaughnessy?

  In preparation for our discussion, I was trying to read adjacent books. I went back and reread The Diffusion of Innovations, which is one of my favorites. And two stories stood out. My reason for bringing these up is like, I'm curious about what you've learned around language and marketing messaging and positioning in this crossing the chasm problem. And the two that stood out were, one, the scurvy example, where when scurvy was killing people on ships by the truckload, they figured out that citrus, if you had just ate some oranges, you wouldn't have this problem. But it took 200 years from that discovery to when it actually became like a mandated protection, which is ridiculous. We've solved the problem. We've built it. Like, why don't they come? There was a second writer, along with Paul Revere, named William Dawes, who did the

• 52:09Patrick O'Shaughnessy?

  exact same thing, but he just hadn't built the network nodes inside the towns to have those people then go tell everyone else to, you know, raise the militia or whatever. I loved those two examples. Weird little things can affect the diffusion of an innovation. How do you think about that problem of the way a message or a meme works its way through a market and whether companies can like do something about that?

• 52:29Speaker 02

  So we see four stages in the lifecycle. The early market, the bowling alley, that's when you cross the chasm, the bowling alley, the tornado and Main Street. And I would make the claim that foundation for messaging in each of those four stages is radically different. The challenge that technology companies has is can I migrate my mindset to keep up with the categories evolution and through the adoption lifecycle? So in the early market, it's all about amazingness. If you've ever listened to Marc Benioff at a dream force, something is always amazing. That kind of stuff. Amazing demos and breakthrough incredible, and these wonderful stories. Some of them are apocryphal, but who cares? They're great stories.

• 53:11Speaker 02

  And I think it is about inspiration and creating excitement around this thing. The second set of messaging is the predators don't care about you. That's the hardest thing for the entrepreneur to realize. I've just scored talking about myself for the last two years. And now, nobody wants to hear about me. So what do they want to hear about? They want to talk about themself. So that second set of messaging is the other way around. This desktop publishing problem, this is a really tough problem. So tell me again what you have to do? And then he changed it at the last minute? And then what did you have to do? Oh, my God. So you have a bunch of empathy and psychological counseling. After which we say, well, you know, we could actually make that problem go away. Here's what we would do. But you bring in the solution late in the dialogue. You send out your marketing materials.

• 53:55Speaker 02

  It's not about what features and functions you have. It's about this horrible problem. Then in the tornado, it really is about feature function. Who's going to be the girl on the chip? Who's going to have the bragging rights of the thing? And so in a tornado, it is about coverage and it's about competing for budget that's in the market that year. So you'll do price discounting. You'll do feature function comparisons. Anything you can do, bundling, whatever you can do to capture as much market share as you can, because that's what's going to determine your fate on mainstream. It's product centric, it's sales centric, it's coverage centric. This is when you do spiffs for your sales force. And this is, this is when you're doing all this thing to just literally accelerate the transactional velocity in the category for that.

• 54:38Speaker 02

  Tornadoes might last from anywhere from, depending on how fast the diffusion from, say, three to six years, something like that. It's a long time, but it's not forever. And then the fourth one is mainstream, which is now, particularly now with the subscription model, now retention and attrition and expansion are the critical variables. And now, actually, customer success is actually your best connection to the customer, not your accounting. You still need the accounting to do the deals and do it. But your most intimate relationships are actually in your post, in your customer success world. And the messaging now is about, how can we help now? Here's some best practices. You share best practices across the community of install base. Here's what we're learning over here. What do you think about this?

• 55:22Speaker 02

  But it feels much more like a interest group on one of these social media things, where we're all trying to help each other together and we've become a village. But four very different messaging platforms, if you will.

• 55:33Patrick O'Shaughnessy?

  How extensible are the ideas we've talked about to non-technology businesses, do you think?

• 55:39Speaker 02

  If they're being disrupted, what's happened is like retail's been disrupted by Amazon and automobiles disrupted by Tesla. Microsoft is disrupted by cloud. And so you have all these situations where if your industry is being disrupted by a digital transformation, you have to take your thing to that lifecycle. Now, what you want to do is say, the relationships that we developed under the prior categorical infrastructure, we want to keep those relationships. Our strength is not technology leadership. Our strength is customer intimacy and potentially we had operational excellence under the old paradigm. So the problem that General Motors has is it doesn't have to be Tesla being Tesla. It has a General Motors brand affiliation, JMC or Ford F-150 truck guys.

• 56:24Speaker 02

  They have to see if they can move their operational excellence from a combustion engine world to EV world. If they can, the customers will stay with them. Customers don't want to change vendors, but if they can't, then they will change them.

• 56:38Patrick O'Shaughnessy?

  You remind me so much of my friend Alex Trampell's idea of the races between whether the incumbent can get innovation before the startup gets distribution. And it's like,

• 56:47Speaker 02

  Oh, that's perfect.

• 56:48Patrick O'Shaughnessy?

  That's the perpetual race.

• 56:49Speaker 02

  The thing that the incumbent has to realize is you don't have to leapfrog the innovator. All you have to do is be good enough fast enough. By the way, that's a really interesting challenge for an engineering group because no engineer wakes up in the morning thinking, well, I want to be good enough fast enough.

• 57:05Speaker 02

  I'm going to be the best. But for an incumbent's point of view, all your customer base says is just don't miss the boat. Get on the goddamn boat. But as you know, that turns out to be a showstopper for a lot of people.

• 57:18Patrick O'Shaughnessy?

  I feel like we've done a really good job of starting at the end with gorillas and obviously that being the competitive position and the market returns position that you want to be in. And this incredible lifecycle and the diffusion of innovations, these are ideas you've developed over a long 30 plus years. What have been the ideas that you're most playing with more recently? Another way of asking the question might be, what about the world has changed that make you question some of your paradigms, your frameworks for thinking or your ways of evaluating companies? Like, what are the more recent ways that you're changing your thinking or expanding your thinking?

• 57:47Speaker 02

  The latest book is called Zung to Win. And Zonduwin is really crossing the chasm for public enterprises. Meaning you have an established franchise, you're multi-billion dollars of global businesses. But the next wave is coming. And either you want to catch it first and be the first mover. Or more statistically, more probably, if you don't catch this wave, it's going to catch you. But in both cases, you now have to take your organization through a technology adoption lifecycle, where your installed base potentially is the trapped value. So now think about that problem. Oh crap, I'm General Motors. You mean my core franchise has now become the trapped value? Not yet, but yes.

• 58:30Speaker 02

  And of course, if you're a publicly held company, your investors are used to having your earnings get better and better and better. And now you're going to say, well, actually, we're going to go through a J-curve and they're going to get worse. The value investors say, "Wing!" Okay. The first moment you hit that, "Boom, you're gone." Okay. So then the question is, can you attract growth investors to come into your world? And there's a period where you're frankly, you're very awkward and people, it does help at that point to maybe get private equity people who get what's going on. Investors like that kind of specialize in this transition. But Zonduwin, so what that tells me is the first 10 to 15 years, it was all in service to startups. I mean, it was all in service to the venture world.

• 59:12Speaker 02

  The last 10 to 15 years has actually been more in service to publicly held companies because basically, we can't keep reinventing the entire inventory. We've got to create a certain amount of renewal. We can't just have carnage. Schumpeter's creative destruction bleeds an awful lot in this wave. It would be better if these companies could catch the next wave. And Zonduwin was written with Salesforce and Microsoft, with Satya's team and Mark's team. And you know, it's led to work with Intel and Cisco. And companies that say, "Look, as long as you guys can keep up, you've earned our trust. We don't want to divorce and get married again. We'd like to stay married." But by the way, this little bit like messages I get from my spouse, "Geoffrey, you gotta keep up."

• 59:51Patrick O'Shaughnessy?

  I mean, those are two such interesting companies, maybe just to double click on them, which is when you think about Microsoft, like something like Azure, where AWS was first, but Azure is huge, and I think growing faster than AWS. And that's a homegrown solution. They didn't acquire another, think another cloud provider to build on, whereas Salesforce has got this incredible M and A history of very successful M and A, Slack more recently or whatever. What are those two models? What do they teach you about how big juggernauts can stay competitive in big emerging categories?

• 1:00:21Speaker 02

  The distinction we made between them was zone defense and zone offense. But Microsoft is playing zone defense. And by the way, Microsoft historically has been maybe the best zone defense player ever. They didn't invent any of their categories. The original operating system they got from Seattle operating system, right? Then it was WordPerfect, not Word. It was Lotus 123. It was not Excel. It was all this persuasion. It was not PowerPoint. It was Novell Network. It was not Windows NT. It was Netscape Navigator. It wasn't Internet Explorer. So it's like, whoa, you guys are really, really good at playing catch up. This one goes back to, I'm trying to think how far back, maybe 2007. I can't remember when Satya, what happened was Ray Ozzy came in as a CTO at Microsoft

• 1:01:03Speaker 02

  and he said, guys, this internet thing, it's going to disrupt you. Well, Microsoft didn't want to listen to Ray at all, but Satya listened to him. And so Satya began saying, I can't remember what year it was. He said, look, I'm not going to fund any R and D project going forward, net new R and D, that isn't internet centric, cloud centric. And then when he took over, he remembered when he took over Microsoft, he said, cloud first, mobile first. He made it really, really clear. But that was Microsoft catching up. And I would say that most management teams in most industries are playing zone defense. That's the kind of courage you need. The zone offense tends to be founder led because only founders can voluntarily put their company in play. Elon Musk has put his company in play at least twice. It's like, really? Yes, yes, he did.

• 1:01:47Speaker 02

  Bezos, you don't like my performance, sell my stock. Mark, read Hastings when he went from DVDs to streaming, but it's founder led. If you're not founder led, it's awful hard to say to board of directors who hired you to manage for shareholder value. My intent is to reduce our shareholder value about 35%.

• 1:02:08Patrick O'Shaughnessy?

  Don't worry, it'll come back later.

• 1:02:10Speaker 02

  Exactly, exactly. But wait, let me get to the good part.

• 1:02:14Speaker 02

  But that's very, very hard. The founder can carry those days, but I don't think things very hard for. And then, of course, you see, look at Facebook, which is an interesting situation. So the Google guys and Facebook guy and Mark and those people figured out, well, if we have a two-tier stock system, then we can preserve our right to do Jaker, which is true. I'm not sure it's healthy. I think Facebook is now in a very unhealthy position, actually. I'm not sure Alphabet's in a great position either. Facebook's the one who's getting all the criticism right at the moment, some of which is fair, some of which is unfair. At some point, I think you graduate from, you have to sort of acknowledge that you're just a citizen in the world. You can't have this private franchise that you can run solely by yourself. We'll see. We'll see where that comes. We'll see.

• 1:02:57Patrick O'Shaughnessy?

  Do you have a single company that you've most enjoyed studying that you think teaches the lessons that you espouse most holistically through time that you would encourage people to go study?

• 1:03:08Speaker 02

  I would say that the company that's had the most influence on me is Salesforce, but that's largely because of the personalities of the people involved. And it starts with Mark, but it's, I mean, it's like in the middle of COVID, we have a offsite, I guess we're like forty-five or fifty executives in the room. I probably wanted to hug half of them. That's not a normal place. Consultants should not hug their clients. This is not a good idea. Doctors don't hug their patients. Not normal. Part of it is, I love what they do, but more importantly, I think this notion that Mark and Parker developed this thing called D2MOB, which was their little management.

• 1:03:45Patrick O'Shaughnessy?

  Operating system manual, whatever.

• 1:03:46Speaker 02

  Yeah, yeah. It's called Vision Values, Methods, Obstacles, and Measures. And first of all, I internalized it for myself and I watched them use it and I thought, the key to it ultimately is prioritization. At a key point, you use this system to stack rank everything you do in a single order of priority. And that is incredibly powerful. The bigger the company is, the more powerful it is. Because what it does is it tells the rest of the company where their initiatives are in this pecking order. And if you don't do that, and most executive teams just will not do it because it's it's like, oh, my God, you're more important than I am. No, I'm more of that kind of problem. But when you don't do it, then and you delegate down into the company,

• 1:04:31Speaker 02

  everybody in the middle of the company, anytime there's a conflicting priority, they got to sit together and try to negotiate. Well, who's comes first? And the amount of time you waste in meetings doing that is just enormous. And so the need to do that, I think, is a big deal. So prioritization is what I learned from them. I also had a wonderful session with, I mean, there was a time with John Chambers got me involved with Cisco. That was terrific. And that's what I learned about weekly commits and customer first culture. So that was a

• 1:04:58Patrick O'Shaughnessy?

  What's weekly commits? I've had John on the show before and we didn't talk about that.

• 1:05:01Speaker 02

  Weekly commit starts as a sales team. If you have weekly sales meetings with your team and it's like, well, okay, so when are you going to get done? And you have a week to get it done. But at Cisco, weekly commits infiltrated the entire thing. So every organization had this weekly commit skates. And what was cool about a weekly commit is you couldn't get more than a week behind without it becoming visible. And if you're a consultant, you go into company after company where things stay invisible and under the rugs, like people suppress them and try not to face them and kick cans down the road and all that kind of stuff. And so the third company I was in, the individual was when I worked with Microsoft, Chi Lu was the guy that I worked with the most. And Chi came in with the Bing acquisition. And then he ran all of office for for Steve Ballmer and then for Satya, and then he moved on.

• 1:05:46Speaker 02

  But these are level five leaders who you just go, I would follow this person in the battle anywhere. And so I think there's an emotional side to a company, which I think I think has had more impact in some ways on me than maybe the intellectual side.

• 1:06:00Patrick O'Shaughnessy?

  My second to last question then for you is inspired by that and by something you said earlier, which is one of the key ingredients is the right kind of entrepreneur and maybe later on, it's the right kind of CEO and leadership. And you said level five leader. Maybe just riff a little bit as we wind down here on what that means to you, the emotional side of it, like what has been shared in common across the exceptional leaders that you've encountered or talked to?

• 1:06:21Speaker 02

  Well, it's interesting. It's the ability to galvanize an organization to go beyond its comfort zone. And I think there are two sources of that galvanization. I actually think that Microsoft and Salesforce are a good example of each one. What you have to do, especially as an established enterprise, but even a startup, it can't be about you. I mean, at the end of the day, it's got to be about something more important than you. So classically, the one that I think I've responded to the most are the customer centric organizations. So people say, look, we have a mission in the world. We're going to do something that is going to make the world a better place and we're going to make money doing it. And the way you galvanize that organization to get out of its comfort zone is we say, you say, we're letting our customers down. We said we were going to do this in the world and we're not doing it. It's not happening. This is not okay. We have to change

• 1:07:05Speaker 02

  our behavior and enlist people in that mission. And people come to work to work on that mission. The other one, which is equally powerful is competitor centered. This is, we're not going to let those guys beat us. The 49ers are going to be playing the Dallas Cowboys this Sunday. We're not going to let those Cowboys beat us. And by the way, they're getting ahead of us and they're catching up with us. So yeah, you're in your comfort zone, but this is not okay. And I can remember, by the way, once working with HP, when HP had its printer franchise and it was just the laser printer franchise was crushing it. But the guy said to me, he said, you know, for the last three years, we've crushed our plan and lost market share. It's like, ooh. So in a competitor centric world, that's not okay. So competitor does is it draws you out of yourself to beat the competitor.

• 1:07:49Speaker 02

  By the way, most athletes are inspired by the competitor model. By the way, I don't resonate very well with competitive leaders. In general, I would say, most of my successful work has been with the customer centric organizations. But I don't want to in any way diminish the power of being a competitive centric leader. Bill Gates, a Steve Ballmer, a Scott McNeely. Some of these people were incredibly competitive. John's more customer centered, to be fair. Andy Grove, amazing leaders. I think you gotta kind of pick one to be your style. I don't think you want to say I'm 50 60.

• 1:08:22Patrick O'Shaughnessy?

  I love that. What a cool model for thinking about the leaders. Well, Geoffrey, look, I've got one more question for you, but before getting to that traditional closing question, one of the things that got me inspired to spend more time in technology was your writing in your early books. So it's cool to have been able to go back and review my notes and then have this conversation with you. I encourage everyone to read at a minimum guerrilla game and crossing the chasm and go from there. Two things that have shaped me a lot. So I appreciate that you wrote them and share the ideas with our audience here today. My closing question for everybody is to ask, what is the kindest thing that anyone's ever done for you?

• 1:08:54Speaker 02

  Oh, well, other than just like put up with me for 53 years, like my wife.

• 1:09:01Patrick O'Shaughnessy?

  Good one.

• 1:09:03Speaker 02

  No, seriously, I think if I go to business, I think the kindest thing that anybody ever did for me was I'm 32 years old. Ray and I decide we need to live in California. I've been an English professor at Olivet College in Michigan, and we really needed to live on the West Coast. And so we said, okay, I didn't have any job and I knew I was not going to get a job in academics because there were no, there were no openings. So I was applying for a job at a company called Rand Information Systems. Guy named Don Parr, who was looking for a training director. And I said, well, I don't know anything about software at all, but I think I know something about training and I can do this. And he said, well, I'm going to hire you. If you looked at my resume, any artificial intelligencing

• 1:09:47Speaker 02

  would have spit a thousand miles away. I think he just saw somebody thought a good mentor and he did. But I would think maybe one of the kindest things.

• 1:09:55Patrick O'Shaughnessy?

  Fantastic. Well, Geoffrey, this has been so much fun, one that I'll revisit often as I'm looking at companies and thinking about their futures. Thank you so much for your time.

• 1:10:02Speaker 02

  My pleasure. Thank you.

• 1:10:04Speaker 03

  Stay tuned to hear more about Catalyst's new quant product, Candace.

• 1:10:09Patrick O'Shaughnessy?

  Maybe, Jed, just real quick, just to get it on the record, it would be great to hear you just describe Candace. We got to it organically here, but just literally, if you're meeting a counterpart at an investing firm for the first time, and just saying, let's assume familiarity as the audience has with Catalyst, what does Candace actually literally do? And then, Roger, I want to hear how you've engaged with the product and implemented it.

• 1:10:30Speaker 04

  There's a long tradition of puns in computer science. C++ is, in the language C, if you want to increment an integer, you'll say integer++. So C++ was the next step from C, and that's a bit of a pun. Catalyst itself is, I wouldn't say it's a pun, but it's a play on words. And when I was interviewing, I saw what they had done with the guide, and I realized they needed a panel data solution, which is to say, serve the data like you would look at it in Excel, super easy. I said, you should call this thing Candace, because it's a pun on the very popular Python library Pandas, which stands for panel data, which was invented at AQR in 2007 by the great Wes McKenna. And it's the most popular open source library for data manipulation.

• 1:11:12Speaker 04

  So I named Candace in homage to Wes, and to my surprise, Catalyst said, yeah, that's a great idea. Didn't really think that they would go for it, but they did. And what's good about it is when I talk to clients and I say, we have this data science library, we call it Candace, if they laugh, I know that they know about it.

• 1:11:29Patrick O'Shaughnessy?

  You got somebody. It's like a bat signal.

• 1:11:32Speaker 04

  Absolutely. And I tell the sales staff this, is if they don't laugh at Candace, then we probably have a lot more work to do with getting them on board with Iban.

• 1:11:40Patrick O'Shaughnessy?

  So Roger, I would love to hear how, back to that concept of rubber meeting the road, and using Candace as a part of that process, how you've engaged with this product and actually made real the intersection between data science and fundamental investing.

• 1:11:54Speaker 03

  At Newburger, the role of the data science team is to work with the investing teams to deliver, I'd say curated output from data analysis. While some of the teams here have people on them who actually are interested and want to work with some of these tools, most of them, I would say, are More interested in getting our read of the data, the interpretation of the output and how it's relevant for them. We typically engage with PM teams on single names. They'll come to us with a question. We're trying to figure out something that we're not finding an answer to anywhere else. Or maybe it's more open ended. What trends are you seeing in Nike?

• 1:12:38Speaker 03

  And we can then go back to our new analysis across our data sets, credit card data, web traffic, et cetera, and put together basically a presentation of the trends we're seeing. And the key there though, and this is where I've spent a lot of time, is to tie it back into what matters for that company. So our job is to actually dig into the investment thesis of the company we're looking at, just like the fundamental analyst would. So it's not just all about automation and data analytics. We need to understand what's relevant because there's a lot of data we can look at. Some of it matters, some of it doesn't. Or some of it might be relevant to a small 5% of the revenue. It's not going to move the needle. We want to focus on where there's really insights that are worth sharing.

• 1:13:22Speaker 03

  Now, when it comes to the Candace product, I'll actually give you an example. It was over a year ago. I think it was before Jed joined, but we were working with one of the teams here to look at some of the consumer names. Probably a basket of like 45 tickers. And want to look at earnings sensitivity, basically operating leverage in the businesses, where you would see with a working sell model, how much earnings or operating income would change with a given change in revenue, right? For a dollar, a 1% change in revenue, how much of that falls to the bottom line? Different companies have different levels of fixed structures. That ratio is going to differ. So without the benefit of Candace at the time, we were using Canalys.

• 1:14:03Speaker 03

  We downloaded these 45 models and basically manually had to go through and tinker with the inputs to make those revenue changes and then capture the earnings change and then manually copy paste that into another sheet and basically build this up. Probably took close to three days to do that. Since Jed came on board and we talked about this use case of earnings sensitivity, he built functionality into Candace via Python. Now we can basically throw a list of tickers in and get back earnings sensitivity to a 1% change in revenue. And that Jed runs in probably a couple of minutes.

• 1:14:41Speaker 04

  Yeah, it's slower than I like, but yes.

• 1:14:42Speaker 03

  Three days, right?

• 1:14:44Speaker 04

  And we're working on it.

• 1:14:45Speaker 03

  And there's no mistakes either. The manual process had plenty of mistakes in it. We had to go back and do it twice to make sure we got it right. That's just, to me, a very, very clear example of the power.

• 1:14:57Patrick O'Shaughnessy?

  To hear the rest of our discussion on Candace, you can find the full interview at the end of my episode with Ricky Sandler. If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.