Pod Insights Lenny's Podcast The hierarchy of engagement | Sarah Tavel (Benchmark, Greylock, Pinterest) About this episode Sarah Tavel is a General Partner at Benchmark and sits on the boards of Chainalysis, Hipcamp, Rekki, Cambly, and Medely. She is a founding member of All Raise, the nonprofit organization working to accelerate the success of women in the venture-capital and VC-backed startup ecosystem. Before Benchmark, Sarah was a partner at Greylock Partners. She joined Pinterest in 2012 as their first PM and launched their first search and recommendations features. She also led three acquisitions as she helped the company scale through a period of hypergrowth. In this episode, we discuss:
• Sarah’s Hierarchy of Engagement framework for growing a consumer startup
• The three levels of the Hierarchy of Engagement: core action, retention, and self-perpetuation
• The importance of measuring cohorts and maintaining focus on the core action
• Examples of core user actions from Pinterest and YouTube
• Sarah’s Hierarchy of Marketplaces framework for building a marketplace startup
• The three vectors of growth for dominating a marketplace
• Advice on “tipping the marketplace” and ultimately dominating the market
• The value of focusing on a constrained market
• How to avoid disruption
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Find the transcript and references at: https://www.lennyspodcast.com/the-hierarchy-of-engagement-sarah-tavel-benchmark-greylock-pinterest/
Where to find Sarah Tavel:
• X: https://twitter.com/sarahtavel
• LinkedIn: https://www.linkedin.com/in/sarahtavel/
• Substack: https://www.sarahtavel.com/
Where to find Lenny:
• Newsletter: https://www.lennysnewsletter.com
• X: https://twitter.com/lennysan
• LinkedIn: https://www.linkedin.com/in/lennyrachitsky/
In this episode, we cover:
(00:00) Sarah’s background
(03:33) Framework 1: The Hierarchy of Engagement
(06:03) Level 1: Core action
(10:33) Level 2: Retention
(14:00) Level 3: Self-perpetuation
(19:32) The importance of focus
(23:54) The challenge of anonymity
(26:04) Advice for founders who want to increase retention
(29:34) What founders often get wrong
(31:43) Examples of core actions
(37:37) Finding your North Star Metric
(38:12) Who should use the Hierarchy of Engagement framework
(38:54) The Hierarchy of Marketplaces framework
(46:09) Level 1: Focus on a constrained opportunity
(50:19) Sarah’s “happy GMV” and “minimum viable happiness” concepts
(54:47) Thumbtack: a counterexample to this approach
(56:36) Signs you’re ready to move to level 2
(58:06) Level 2: Tipping the marketplace
(01:04:15) Tipping loops
(01:10:53) Not all markets are susceptible to tipping
(01:15:55) The challenge of homogeneity in B2B marketplaces
(01:20:29) Signs you’re tipping successfully
(01:21:43) Level 3: Dominating the market
(01:28:29) The opportunity in underestimated markets
(01:30:11) The challenges of chasing GMV and losing focus
(01:36:36) Recognizing currents and momentum in the market
(01:39:20) You can never rest on your laurels
(01:41:03) How to apply these frameworks outside of marketplaces
(01:42:57) Three ways to find marketplace opportunity
(01:45:10 ) Lightning round
Production and marketing by https://penname.co/. For inquiries about sponsoring the podcast, email [email protected] .
Lenny may be an investor in the companies discussed.
Transcript 19,220 words · 2 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Speaker 00 I think a lot of people think about markets almost like these bodies of water. You know, and it's like, oh, it's this big body of water that we're going after. And I actually think that the most interesting markets, you have to think of them like currents. Where you're just trying to, there's something happening in the market that's creating this current. Where you can have like a plank of wood that you put on the, on the river. And it's going to pull you forward versus a market that doesn't really have that momentum to it. You're going to have to build like something really big and fancy to make any progress. And that's why we care less about market size. Because really what you're looking for when you're looking at a market.
0:44 Speaker 00 Or what are the dynamics of change? What's the current and momentum that's going to pull the company? And make the job easier for the founders to actually build something that endures.
0:56 Lenny Rachitsky? Today, my guest is Sarah Tavel. Sarah is a partner at Benchmark, one of the most preeminent venture capital funds in the world. Where she focuses on investing in consumer and marketplace startups. Prior to Benchmark, Sarah was the first product manager at Pinterest. And though I normally have a policy against VCs on the podcast, as you'll see. Sarah thinks very much like a product and growth leader. And I always learn a ton talking to Sarah about startups and marketplaces. We also learned in our conversation, she used to play rugby and was apparently one of the best tacklers in her league. In our conversation, we unpack two of Sarah's killer frameworks for building a startup. One, the hierarchy of engagement, which is an incredibly useful lens for trying to figure out how to grow and scale your consumer startup.
1:41 Lenny Rachitsky? And then the hierarchy of marketplaces, which is an incredibly useful guide for helping you build your marketplace startup. If you're building a consumer startup or a marketplace, this episode is for you. We get really nerdy and really deep, just the way I like it. With that, I bring you Sarah Tavel after a short word from our sponsor. This entire episode is brought to you by Gelt, your gateway to smarter tax solutions. Navigating the world of taxes can be complicated and stressful. Gelt is here to change that. They blend advanced technology with expert CPA knowledge to handle your taxes effortlessly. Whether you're a business owner, investor, or executive, Gelt is here to optimize your tax strategy and enhance your financial success.
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3:07 Lenny Rachitsky? Sarah, thank you so much for being here and welcome to the podcast.
3:11 Speaker 00 Super excited to be here.
3:13 Lenny Rachitsky? So you may or may not know this, but actually normally have a policy of no VCs on the podcast. But you're a very special VC because you're a former product manager. Many people don't know you're the first product manager at Pinterest. And to me, you still think like a product manager. And so I'm very excited to break my rule and have you on the podcast.
3:31 Speaker 00 Thank you for the the exception.
3:33 Lenny Rachitsky? What I want to do with our time together is dig into two frameworks that you've developed and use with founders that you work with to help them build successful companies. One is focused around consumer businesses and one marketplace businesses. So let's just start with the first framework. I think you call it the hierarchy of engagement. Just to start, could you maybe just share a broad overview of this framework? And also just where it emerged from, where you kind of came up with this concept?
4:01 Speaker 00 Sure.
4:03 Speaker 00 So I think one thing you'll notice about me is that I have an allergic reaction to vanity metrics, what people talk about as vanity metrics. And when I made the transition from Pinterest where I was leading product for the discovery team, so I was responsible for all the discovery surfaces on Pinterest, the home feed, the search, the recommendations, a couple other teams. And ultimately, what those teams were about was about kind of engagement, increasing engagement of Pinterest. It was helping people when they were on Pinterest, find something that they loved enough that they wanted to pin it to one of their boards.
4:47 Speaker 00 And when I started to meet with all these, you know, really talented consumer founders building consumer social products, this was during a time when everybody was getting excited about a growth hacking. And what you would see is that you would see all these founders coming in and they all had these up and to the right graphs where, whether it was, you know, it was signups or downloads or MAUs. And it felt to me like it wasn't obvious that those metrics that they were all getting very attached to and focused on and showing in these presentations was the wrong thing to focus on.
5:30 Speaker 00 It didn't get to the heart of whether they were on the path to building and enduring consumer social product. And they were missing at the core, the criticality of engagement. And, and, and so I, I just started to feel this and it became like a pebble in my shoe. And I started, you know, just to kind of go through that process that you've gone through many times before of writing and distilling it. And that's where I, I, I came up with this, this hierarchy. And what I, what you realize when you look at social products is that there almost always is this action, which I call the core action of that product that forms the foundation of the product.
6:14 Speaker 00 When, when a user completes this action, it's clear that they both understand the, the utility of the product, they understand what that product is all about. And it's an action that if they perform the action, they're very likely to come back. So for Facebook, you know, the obvious action is friending in the beginning days. For Pinterest, it's pinning. I don't know if you're an Evernote user. For Evernote, it's, you know, writing a note. And when you perform that action, that means you're an engaged user. And of course, there's a lot of other actions that you have to do. You can follow people on Pinterest, you comment on Facebook. But the end of the day, if you're not doing that action, you're not really a user to the product.
6:58 Speaker 00 And that's why it's, you know, the MAU thing doesn't really mean anything. It's really looking at, I think of users completing the core action. You can look at this on, you know, as a cohort, weekly, daily, whatever, the right, the right kind of cadences. But that's, that's the foundation. That's level one.
7:16 Lenny Rachitsky? Basically, there's some definition of an active user that a company, that a consumer business basically needs to define. And essentially figure out what is that? What is the action they're taking that makes them an active user versus just opening up the app? Or, or whatever it is. Like for Snapchat, it might be sending a snap. For WhatsApp, it might be sending a message. Okay.
7:36 Speaker 00 Yes, yes. And by the way, this action, it's very important to pick the right action. You want to make sure it's an action that scales to enough users. You want to like, think about if I optimize for this action, like if I think about my product roadmap and optimize for it, and what, what do we end up doing? And just to give you a kind of more concrete example, actually, in the early days of Pinterest, we weren't sure what it was. You know, we had all these things we were measuring. We were measuring follows, we were measuring, you know, clicking through, liking something, pinning, obviously, time on site. And so you, we would do these experiments and you would get all this different data where some things would go up, some things would go down.
8:21 Speaker 00 And what were we optimizing for? And so there's something that's really, really important about having that clarity of this is the action that is most important for our product. All things our NUX has to lead to this are, you know, if, if a user isn't doing this, then there's something missing from their experience of the product. And so it's super, super important to get real clarity and, and, and know exactly the one that you're going to be picking to go forward.
8:49 Lenny Rachitsky? One more question, question along these lines. How do you think about this milestone versus the activation milestone for a new user? Do you find they're often the same, like getting your user to that aha moment versus this ongoing?
9:01 Speaker 00 Right, and part of it is like, how do you measure the success of your NUX of the activation? To me, it is, are you taking those new users and getting them into, you know, helping them understand the mental model of your product well enough that they start completing the core action?
9:18 Lenny Rachitsky? Awesome.
9:19 Speaker 00 There was a NUX once that we played with at Pinterest where we didn't even teach people what pinning was. It was like their feed magically appeared and it was a real, you know, that was an example of like, okay, we have to help people understand that they are here to discover something and save it to their board.
9:36 Lenny Rachitsky? And just in case people don't know, well, NUX says new user experience, just an acronym for new user experience.
9:40 Speaker 00 Yes.
9:41 Lenny Rachitsky? Okay, and then maybe one more just foundational thing that I think we maybe skipped is, what's the best way to think about using this framework? Is this essentially where you should focus your energy on which elements of your product you should be driving, which metrics to focus on? Is that the simple way to think about? Basically, we've talked about layer one and there's three layers. What's the best way to think about as you're talking through this framework of how to apply it and use it?
10:02 Speaker 00 In a way, you have to think holistically when you're building these consumer products, when you're designing it. But I think it's very important as, once you get the product out and you're starting to optimize, to start thinking through each of the levels. And, and, and that's just very focusing to help you, to help a founder understand where, what are the levers that I really have to be focusing on to improve?
10:26 Lenny Rachitsky? Awesome. I want to come back to how to apply it in maybe some examples after we go through the three levels, so I'll turn it back to you.
10:32 Speaker 00 Perfect. So then you go to, so let's say you're, you're building your product and you're starting to see that you have users completing the core action. Then the thing that you have, like the next challenge you have, and I've seen this many times before, is that then you have to figure out how to get those users to stick around. You want to retain those users. Obviously, even if they do the core action once or twice, and then they run out of steam, you're going to be in a really challenged position to build something that endures. And so the test for me of whether you're building a product that has the ingredients to create a retentive product on a micro level, just at the user level, is that the product should get better the more you use it,
11:17 Speaker 00 and you'll have more to lose by leaving it. And so I'll give you just a couple of examples there, a couple of my favorite products. You know, obviously Pinterest. So one of the features that I worked on when I was at Pinterest and we shipped was this idea of a picked-for-you feed. And so the idea was every time you pinned something to a board, we would take that information that the user gave us and use it to create recommendations in their home feed. It was actually, it may have been the first algorithmic feed that was in a social product because suddenly your home feed wasn't just things, people that you followed.
11:58 Speaker 00 And the truth is, people weren't really following other people on Pinterest. So we needed a way to make the experience get better the more you used it. So we started to do these recommendations in your home feed. And so it was this experience that the more you pinned, the more personalized your home feed got for you. And then the more you pinned, you also had more to lose by leaving Pinterest because all of a sudden you had all your favorite books, articles you want to remember, the recipes that you were planning on cooking one day, you know, the holiday planning that you were doing. And so you wouldn't abandon Pinterest because Pinterest was this repository for these different expressions of your identity or these different bookmarks that you want to go back to. So that was kind of this idea.
12:43 Speaker 00 And it's very important that the core action is the thing that you use as a product to make the experience better over time. Evernote, another example where I don't know if you're an Evernote user.
12:57 Lenny Rachitsky? No, I tried it once and it was way too complicated.
13:00 Speaker 00 Okay, people still laugh at me for being an Evernote user. I am just, I'm a lifetime user, right? And it's one of those things that the more, you know, I take all my notes in Evernote, I dump documents in Evernote. And what it means is that the more I use it, so like now I know that I can do a search in my Evernote and I'm going to find the document I'm looking for. And now I can never leave Evernote, right? Like it has everything, I have thousands and thousands of documents in Evernote. And so that's a product that's incredibly retentive.
13:37 Lenny Rachitsky? Unless someone builds a great exporter and then there goes.
13:39 Speaker 00 I know, well, that's, that's, people keep telling me I should, I need to move on to Notion or something else, but not yet. I, I will remain a dinosaur here.
13:48 Lenny Rachitsky? Wow, I love that that's an example, though, of just like someone could break that barrier and make it less retentive by making it easier to get off.
13:55 Speaker 00 Yes.
13:56 Lenny Rachitsky? It's like an interesting growth strategy, basically.
13:57 Speaker 00 Yes, yeah, it's very true. So let's say now you actually, you have a product, it's growing, more people are completing the core action. When they complete that core action, the product gets more retentive for them, it gets better, the more they use it, they have more to lose by leaving it. Then your, your tall task, and this is a very difficult, this is like the hardest thing to overcome, is how do you make the product self-perpetuating? And this is where I really, I love to think with like of, you know, every time a user uses your product, let's say they're, they're clicking on the mouse or they're tapping on their phone.
14:39 Speaker 00 I love to think of it as like this kinetic energy that they're putting into your product. You're taking that energy and your job with a great product is to take that energy and as much as possible, convert it back to the experience that they're having with your product. Now, the biggest thing that you can do is a network effect, right? If the more I pin something on Pinterest. The better the experience gets for every user on Pinterest, right? Like every time I add a pin to a board, I'm creating a new edge in Pinterest graph that Pinterest then uses to create recommendations and enrich their understanding of all those objects on Pinterest. So the network effect is the strongest thing that you can do.
15:24 Speaker 00 And obviously, if you have that, which all social products have to in some way, you have to spend time as much as possible just maximizing where that shows up, fine tuning it, removing friction so it's a flywheel that spins faster and faster. But there's other loops too that you have to identify and then maximize. And these are the kind of growth and re-engagement loops, right? And so these are kind of classic loops. You talk about these a lot. They exist in marketplaces and social products. How do you get it so that as your users use the product, they want to share it with other people? They create metadata that you can then use for SEO.
16:07 Speaker 00 You have collaborative experiences that pull other people in. There's all different things you can do here. And then there's also things that you can do to re-engage a user. As an example, in the early days of Pinterest, if you pinned something, you're pinning something that you found on Pinterest that somebody else pinned. And so we would send a push notification, "Hey Lenny, Sarah just pinned your pin to her artboard." Now, if you were a dormant user at that point, it's been a couple of weeks since you'd used Pinterest, that notification might pull you back into Pinterest and be like, "Hey, I wonder what other pins Sarah has on her artboard." And so it's a great re-engagement loop
16:52 Speaker 00 where Pinterest doesn't have to do anything there intentional. The user's creating the action that drives the outcome that Pinterest wants in that example.
17:04 Speaker 00 As much as I love Evernote, this is a place where Evernote obviously falls down, right? There's no, there's no loops that they can take advantage of that when I use the product, I make it better for you. There's no loop where when I use a product, I want to pull you into the product. They tried at some point to do collaborative journals. It doesn't work. And so that's a place where, you know, because of that, Evernote had to spend money to acquire users. They tapped out. So they, they kind of missed that, that level three. There's other examples I could speak to of companies that weren't able to transcend to level three that you wouldn't otherwise think, you know, I think of companies
17:48 Speaker 00 like House Party and Clubhouse. You know, what was interesting about both of those products is that you would think that the more users that came into Clubhouse or House Party, the faster the flywheel should spin. But the challenge was that they relied on push notifications, right? And so I don't know if you had this experience, but with, let's take House Party as a, as an example, you know, you started to follow a lot of people on House Party and then all of a sudden, it was like your push notifications just got overwhelming, right? Because it was a real time product that you had to use push notifications to know the moment to join the product. But when you had so many push notifications,
18:32 Speaker 00 because the more people you followed, the more notifications you had, you just get to this point where you start ignoring them. And so it becomes this thing where even though the flywheel should be spinning faster, it starts breaking down. And that's the, the real tricky nuance in, in this level three.
18:52 Lenny Rachitsky? So I think people hearing this are going to be like, okay. Get people to use your product more often, increase retention, make it viral. Basically, it's like, it's like stuff they already know. But I think what's powerful about this is this is just a lens, like a clarifying lens on what is most important. There's so many things you can be focusing on to increase your product's success and help it grow. And what I love here is just, it's just like, here's the three most important things. And then here's the, the levels, like they build on each other. So if you want to increase your attention, get people to use your, do the core action more often. If you want to help it grow, focus on helping it spread, self-perpetuate.
19:30 Speaker 00 Yeah, I know. That's, that's absolutely right. And I, it's, and the importance of it is like, I can't emphasize enough how important focus is when you're building these companies. It's, it's so hard and there really isn't a playbook, right? Like every company, the, the ones that succeed have to be fundamentally different from anything that was before it. But there are these kind of first principles of the ingredients that they all share. And you can use those ingredients to really focus you when you're going through this, you know, the inevitable growth curve and, and wanting to know like, well, how do we maximize this moment? How do we really focus on the things that will set us most up for success?
20:14 Speaker 00 And that's where I think a framework like this can be really clarifying.
20:17 Lenny Rachitsky? There's a lot of depth behind each of these things that you, you're being modest about. One is with the top of this pyramid of making it self-perpetuating. The reason that's really important is for a consumer app to work well, most of the time, it has to be able to spread really cheaply. The cost of acquisition needs to be very low unless you somehow figure out some paid ad strategy where you can, you can make money with paid ads, which is very rare. So maybe speak to that, just like why that's so important to a consumer product.
20:45 Speaker 00 Yeah, I mean, what are you trying to build with a consumer product? You're not trying to build something niche, right? You want to build something that can be a mass market, hundreds of millions of users, billions of users. And it's No, it would take considerable capital to do that with marketing. There's one example that we have so far, which is TikTok of spending, you know, more than a billion dollars. Once they figured out actually the first two levels in order to grow. So they didn't actually put money like user acquisition spend behind TikTok until they had a product that was retentive. And then they knew that they really wanted to to maximize that.
21:30 Speaker 00 But every other social product has grown organically. And and they've been able to do so because they've figured out how to maximize these loops. And I, you know, even even TikTok got to millions of users before they spent all the capital to to acquire those those remaining users.
21:51 Lenny Rachitsky? I didn't know that number. So TikTok spent a billion dollars on paid ads to get to where they're today. Holy moly. I knew it was, I thought it was, I didn't, and it was like many millions, but I didn't realize it was a billion dollars. That just shows you how hard it is to get to break in and to and become a new social network essentially, or a new social.
22:09 Speaker 00 It is, it is hard. And at the same time, though, we do see exceptions to it where I still feel like consumers are hungry for new experiences. And so we've seen a couple over the last, you know, few years that have gone into tens of millions of users. Nothing that has really created the experience that's sticky enough to kind of pull minutes away from really TikTok and and Instagram, which just are these dominant forces right now.
22:42 Lenny Rachitsky? Your message also reminded me of a recent guest post on my newsletter about this app Saturn. I don't know if you read it.
22:49 Speaker 00 Oh, I didn't, but I know of the the app and it's an awesome founder.
22:52 Lenny Rachitsky? Yeah, it was really interesting and they had a really interesting insight about, first of all, very few apps ever make it to the top of the app store that break through what's already there. And the ones that do almost always spend a few days there and they're gone because it's like a one shot thing. And what they basically talked about is many apps have this viral K factor where they spread like crazy. Everyone starts using them. Everyone's in there. But then there's this, the opposite happens very quickly too. Where if a few people miss using it a few days, you go in there and it's like, oh, nothing's happening here anymore. And it quickly crumbles. Clubhouse essentially went through this, BeReal, started going through this where people stopped posting and then like, all right, forget it. Everyone's gone. So most apps have this destructive K factor that kicks in the same way it kicked in to get it to spread.
23:35 Speaker 00 Yes, as people say, if when something grows really quickly, it also can collapse really quickly.
23:41 Lenny Rachitsky? Hmm. Yeah, tough. I guess along those lines, is there anything you've seen or learned? I guess the idea of this framework is to avoid that essentially. But I guess, is there anything you comes to mind to avoid that?
23:54 Speaker 00 Maybe the one other, one other thing that I've seen that runs into a challenge. I find it runs into a challenge particularly with, with level two is anonymity. You know, anonymity is something where if without, you know, pseudo anonymity and anonymity are very different concepts, right? With pseudo anonymity, we have it on Twitter, you have it on Reddit. You have a persistent identity that you're creating. And that identity then can have accruing benefits, mounting loss. My, you know, my pseudo anonymous account on Twitter that, you know, just flames other VCs. Uh, I'm just kidding. I'm not, I'm not, I'm not funny enough to, to make something like that.
24:38 Speaker 00 But, um, but if, you know, for the people who do have it, they get accruing benefits because they get people to follow them. And that's the mounting loss too, where they've grown their, their identity on the, on a platform, even though it's a pseudo anonymous identity. The challenge when you have pure anonymity is that you don't have that accruing benefit or mounting loss that, that happens. I don't know if you ever played with secret, but it's similar to TikTok or something like that. These are the types of experiences where.
25:14 Speaker 00 Over time, the, you know, the self-prop- like the network effect doesn't work because the anonymity creates the conditions for bad behavior. And so that starts to pull down the community. And then it is also the experience where you use a product and you can delete it and then come back three months later. And because of the anonymity aspect of it, your experience isn't any different. And, and so I find anonymity, people keep trying it and super talented founders keep hitting their head against that wall because it's, it has the very early fun growth, but
25:56 Speaker 00 it just continues to be a product that isn't able to, to persist without some persistent identity.
26:04 Lenny Rachitsky? I'm going to pull on this thread of just ways to increase retention. Basically, this is one of the things, maybe the main thing you're telling people to help increase retention, make it so that it's really hard to leave. Before we get there, just to make it clear, is this framework mostly for social consumer products or do you generalize this to consumer products?
26:24 Speaker 00 I, I think consumer, I think it's, it, consumer products in general, but it's most, it makes the most sense for consumer social.
26:33 Lenny Rachitsky? Okay, got it.
26:34 Speaker 00 Like it works for Evernote, right? Like, and so Evernote isn't a consumer social product.
26:39 Lenny Rachitsky? Awesome, okay. So it's like most helpful for if you're the social, your friends are in it, sort of product.
26:45 Speaker 00 Right, you have the chance of level three with, with social.
26:48 Lenny Rachitsky? Right, awesome, okay. So on this thread of retention, it's a thing that I speak about often, everyone always talks about, the most important thing you gotta get right is get retention to a good place, because if you can't retain people, nothing's gonna work anyway. So just to spend a little more time here, I guess, is there anything else you recommend to founders to help them with increasing retention and getting to a healthy place with retention?
27:13 Speaker 00 Number one is actually measuring it. Like, I can't tell you how many times I suggest to a founder to to track cohorts, and that's a new thing. And so, you know, just being really, really clear and intellectually honest on looking at cohorts, I think, is is number one.
27:34 Lenny Rachitsky? And maybe just describe that briefly, and then we'll link to an article that I have about how to do that.
27:38 Speaker 00 Perfect. These are the moments when I should probably turn the mic over to you to talk about.
27:44 Lenny Rachitsky? It's your last.
27:46 Speaker 00 But, you know, a cohort, you just, you, what I always like to look at is weekly cohorts for these products, and you look at them in two ways, which is one for each vintage of cohorts. You're looking at like a group of people who signed up in a given week, and that's one, you know, one cohort. You look at it both on, you know, an active user basis, like, are those people continuing to come back to the product? And I particularly love to look at that on a weekly active user completing the core action basis of like, are users completing the core action? What, how is that changing over time for each of the cohorts? And then also looking at activity level within those cohorts.
28:29 Speaker 00 And so what you love to see is the kind of classic smile graph where as a, as the network grows and users start to use a product more and more, you start to see that over time they actually become more retained in the product as opposed to kind of the classic, you know, leaky bucket where the cohort just keeps on dwindling down. And until you reach a point with your cohorts where there is a plateau, you have more work to do on figuring out the retention of your users.
29:04 Speaker 00 The second thing is just focus. So I can't tell you how, how many times also you'll meet a founder and they will, you know, there was one example I saw, it was a kind of a dating app, friend making app. And he was growing it via TikTok, which is not geographically constrained at all. And so you're growing, you know, he's growing the, the user numbers, but without focusing on a specific geography, it's going to be really difficult to make that type of product a high retention product.
29:39 Lenny Rachitsky? Coming back to the framework, which layer do you find most often is the one founders maybe are under investing in slash maybe the most important to focus on? If you had to pick one of these, or is it super dependent on your situation?
29:53 Speaker 00 What I often feel is that a lot of times product founders, consumer founders, see where they want to get to. You know, they see, they compare themselves to the full expression of a product that you see with other products, you know, Roblox, Instagram, TikTok, whatever it may be, and they want to get there. But what that ends up meaning with the, when a new user signs up is that there's almost, there's too much in the beginning to, to take in and understand. And you don't then have a very focused product
30:36 Speaker 00 that gets the user to the thing that you most want them to do. And that's actually the importance, part of the importance of understanding, you know, level one, what your core action is, is that you want to make sure that when a user comes to your product, signs up for the first time, doesn't have necessarily a lot of context on what the product is itself, that they see the thing that they're supposed to do and you get them to do it. And a lot of times in the beginning, there are just so many other things that a found, that a product might have, that you're diffusing that attention that they would otherwise have had on the, on the thing that's most important.
31:19 Speaker 00 And so I feel that that's kind of where I always, that, that's the first mistake. And it's kind of natural that it would be the first mistake, but maybe the largest mistake that I see people make.
31:31 Lenny Rachitsky? Essentially not getting the activation moment right, not focusing enough on getting people to that aha moment as people describe. And then again, that repeating again and again is a core action.
31:42 Speaker 00 Yes.
31:43 Lenny Rachitsky? To close the loop on this sort of discussion, could you just share again, a few examples of core actions slash activation moments, just to make this fresh again in people's minds? And then also just whatever you can share, but helping people decide what that is. I know there's like a whole, it's a difficult thing to do well, but any advice for how to find that activation?
32:03 Speaker 00 I mean, I'll tell you the exercise that we did at Pinterest, because you know, as I mentioned before, it wasn't obvious to us in the beginning of Pinterest, like, were we a social network? You know, like, should we optimize for the follow graph? But you have to remember Pinterest, this was 2011, you had Twitter growing like crazy, Instagram was growing, those were both asymmetrical follow graphs that they were creating, right? And so it wasn't clear at the time whether Pinterest was actually just creating a new follow graph, but that was about, you know, things instead of what Twitter was or what Instagram was. And so it wasn't obvious.
32:44 Speaker 00 And what happened actually is that there was two efforts that I think of as like, kind of bottoms up and top down, that helped really clarify that actually pinning something was the core action, you know, was going to be our North Star. We called it weekly active pinners. And, and the two things were, you know, there's always this like, you know, bottoms up analysis that you do, which is we looked at every action that you could do on Pinterest. So we had liking, following, clicking through, time on site, pinning, repinning. And we looked at, first of all, what percentage of users complete those actions?
33:28 Speaker 00 And if you do that action in a week, what's your propensity to come back the following week? We basically ranked that and what we saw was that if you pinned something, repinned something, which is finding something on Pinterest, I'm using those synonymously, or click through, you had an incredibly high probability that you would come back. So if someone's pinning something, they're coming back to Pinterest the next week with a, with a super high, you know, more than 90% probability at the time. And then there's like the top down way of thinking about it, which is, well, what is Pinterest for?
34:10 Speaker 00 And if a user does come to Pinterest and they never add something to a board, do they really understand what Pinterest is? And yes, clicking through makes you want to save it. The click through is valuable. You want to save it. So clicking through is obviously really important. But at the end of the day, if they don't like that pin enough that they want to save it themselves to their board, then we haven't done our job. And so we did this kind of top down, bottoms up analysis to make it very clear that when we launch an experiment or launch a new feature, if the probability, if the percentage of people that pinned something doesn't go up, or the number of pins for that cohort doesn't go up,
34:55 Speaker 00 that experiment is not a successful experiment.
34:58 Lenny Rachitsky? Awesome. There's a post I'll link to in the show notes where there's actually a, a guide to doing this regression analysis on how to figure out your activation milestone. Basically, what is most causal of retention as you're describing? And I love this example from Pinterest. And either just examples, again, you shared a few at the beginning of just examples of great activation milestones slash core user actions.
35:19 Speaker 00 I'll tell you one other one that I thought was super interesting, which is that when I initially published this post, I had assumed wrongly that YouTube's core action was watching a video.
35:34 Lenny Rachitsky? Yeah.
35:35 Speaker 00 And then Shashir Mehta, who is the kind of CPO of YouTube, he reached out to me and he said, you know, that's what it was in the early days. But we started to realize that it wasn't actually our core action. And we did a lot of analysis on YouTube. And what we realized was that subscribing was the core action on YouTube. And it makes so much sense when he said it, right? You're a creator, you're uploading content onto YouTube. There are a lot of other places at that time that you could have uploaded that content to. But you care about YouTube because that's where you're growing your audience, right? And so the more people that subscribe to your content on YouTube,
36:20 Speaker 00 the more you have the accruing benefits and mounting loss of using YouTube. And, and so that was super important on the creator's side, which, you know, one of the funny things that will bridge to our next conversation is that all social products are really marketplaces, right? YouTube is a marketplace. You have the creators uploading content and the viewers who are watching it. Supply and demand. And so then the subscribe button is also very interesting because then from the demand side, the viewer, why would I come back to YouTube consistently versus again, all the other places I could spend time on? If it weren't for me having found creators
37:02 Speaker 00 for whom I, like their content really resonates with me, so much so that I subscribe to their content. And so I loved that example because it also, it showed a little bit the evolution that can happen with these companies. But then also just the beauty of like, you know, you've got something really right with the core action when it's helping both sides of your, of your, of your network.
37:26 Lenny Rachitsky? Awesome example, and I think it's also a good reminder. People change these things. They come up with your best bet. Okay, we tried this for six months. Maybe let's try some else. We've learned something new.
37:36 Speaker 00 Exactly.
37:37 Lenny Rachitsky? I'm also going to link to this post I wrote around finding your North Star metric, which this is like such a multimedia conversation. We have just links for all these topics to go deeper. Essentially, I figured out the North Star metric for 30 companies. And I feel like the North Star metric of a company ends up often being this core user action. So like at Pinterest is, it sounds like those WAPs, weekly active pinners.
38:00 Speaker 00 Yes, pinners, yeah.
38:01 Lenny Rachitsky? And YouTube.
38:02 Speaker 00 In the beginning, we called it a weekly active repinners war. Cause we felt like we were at war. So it was good.
38:08 Lenny Rachitsky? And then it became peacetime, maybe.
38:10 Speaker 00 Yes.
38:11 Lenny Rachitsky? Awesome. So maybe just to close the thread on this framework, can you just briefly summarize who this is most helpful for and just how they could apply it if they're maybe not growing as fast as they want, or they're just getting started as a founder, building a consumer product?
38:29 Speaker 00 Yeah, I just, I think about consumer founders, product founders, product leaders in these companies that are thinking through the roadmap. What are some most important things that they need to prioritize, the big rocks for the immediate short term? And it's the framework then provides a lens on what to prioritize.
38:50 Lenny Rachitsky? And we'll link to the whole framework for people that want to go deeper.
38:53 Speaker 00 Awesome.
38:54 Lenny Rachitsky? Okay, so let's move on to your second framework that you call the hierarchy of marketplaces. And first of all, I want to give a shout out to Mike Williams, who's the founder of Everything Marketplaces, who gave me a bunch of good question, suggestions to ask.
39:06 Speaker 00 Wonderful. Now I'm nervous.
39:09 Lenny Rachitsky? He's, he's Mr. Marketplace.
39:11 Speaker 00 Yes.
39:11 Lenny Rachitsky? Okay, so let's start with the same question, just what's kind of the broad way to think about what this framework is and who it's for? And then where did it come from?
39:18 Speaker 00 It's a, a framework or hierarchy that is for marketplace founders. It could actually be B2B or B2C.
39:27 Speaker 00 Or a marketplace product leaders that are just continuing, like either getting started or scaling their marketplace and helping kind of prioritize and focus on the things that most matter. And it came out of a similar reaction, a very similar parallel to what I was experiencing, meaning all these consumer social founders, like they would talk about MAUs and I just felt like it didn't get to the heart of whether they were building enduring value. And I actually started to realize that GMV was very similar. You know, GMV, it's, it's a metric that it seems like, you know, of, of course, you can't build
40:13 Speaker 00 a marketplace without growing GMV. In the same way that you can't build a social product without growing MAUs. But if you focus, if the race that you think you're running is to grow MAUs or to grow GMV, you're not actually going to run the right race. It can take you, and actually with marketplaces, very. Very interestingly, it can take you in the wrong direction. So what would happen is I would meet all these founders and everybody got fixated on this milestone of a million dollars of GMV, right? And I think a lot of people started to feel like you can hit a million dollars of annualized GMV, it means you're ready for your Series A.
40:57 Speaker 00 But it's kind of self-evident that not all GMV is created equal, right? Like, so imagine a food delivery company 10 years ago. You could have a million dollars of GMV by getting, you know, focusing on LA or a million dollars of GMV by focusing on Boston. Or you could have a million dollars of GMV by having $500,000 here, $200,000 here, you know, like spreading it out. And so the founders, and I would meet so many founders who'd say, oh, well, I thought we had to prove out that the value proposition resonated in these other cities. And so that's why we're diffusing our focus.
41:39 Speaker 00 But what they, what I would always feel is like they were just making their job so much harder by doing that. The other way you could think of it is like, if you're trying to get to a million dollars of GMV as quickly as possible, you're actually motivated to go after a really big market, right? It's a lot easier to get to a million dollars of GMV when you're skimming the cream on this big ocean of a market than to be very, very focused on a smaller market. And getting to a million dollars of GMV in a constrained market is a lot harder, takes longer, but is actually the path to building something they endorse. And so I was having the same conversation again and again, and I just felt like I needed
42:22 Speaker 00 to crystallize it or synthesize it in a way that would be easier to communicate. And that's what led to this hierarchy.
42:30 Lenny Rachitsky? Awesome. Okay, cool. So you've touched on a number of the important elements of this hierarchy. So let's dive in.
42:35 Speaker 00 Okay. There's probably a couple core insights, but the first one that I think about with this hierarchy is that when you're building a marketplace, you actually have to start from the goal and work backwards from there. Now, what's the goal? Like marketplaces, I mean, you have so much incredible content on this. They are. They're they're just incredibly difficult to build. You're basically building two companies at the same time. Right? You have the product and go to market org for the demand side, the product and go to market org for the supply side. And somehow you have to make these two line up so that they serve each other's needs.
43:15 Speaker 00 It's it's an incredibly difficult dance and and it really it it it's yeah. It's one of the hardest types of companies in the software world that I think you can build. And you do it because you think about the the full expression of these models. And you think about companies like Airbnb or Amazon or eBay or Google, where once you have scale, you and have like very dominant market share, you have a product that just is the best place without question of fulfilling this this need. And they end up being very profitable, cash flowing businesses. And and you see that.
44:00 Speaker 00 And that's the business that you want to build, right? That's why you're going through all the hardship of building a marketplace, getting the marketplace off the ground to get to that place. And and there's kind of very clear analysis. There's I published in my in the hierarchy, I have a this incredible graph that I remember seeing when I was a board observer for this online classified company called OLX led by Fabrice Grinda. And it is it kind of shows that the more dominant a marketplace is relative to the number two in its space, the more profitable that business is. And so it's just like a very clear like you don't want to be, you don't obviously, when you're building a marketplace, you don't want to be in the middle of the pack.
44:45 Speaker 00 But even being number one, but just barely number one, doesn't give you any of the benefits of a marketplace model. You're fighting for each incremental point of market share. It's not clear to the supply side or the demand side that you're like the main place to be. And so it only becomes really clear once you have that dominant market position where you're just so much bigger than the number two. And and the only way to get to that place, to get to that moment of real dominance where you're you have this winner take most dynamic is that you have to tip your market. And and that's the only scalable way to do that. And that's what level two is.
45:26 Speaker 00 And so how do you get, how do you maximize your chance of tipping a market? You have to focus on a really constrained opportunity. And that is layer level one. So that's kind of the, the, like, the broad framing, which is like a really important thing of how, when you're building a marketplace, you actually are building towards that point of dominance. And so it's part of the reason why being really, really, really focused in level one is so important.
45:57 Lenny Rachitsky? Awesome. So you've walked through this backwards, just to summarize, in case people didn't totally catch it. Basically, layer one is focus, layer two, tip the market, layer three, dominate the market.
46:08 Speaker 00 Exactly.
46:09 Lenny Rachitsky? Awesome. So let's maybe start with layer one of just focus, which, which I think is the most counterintuitive step for people building a marketplace, where, as you said, normally it's go big as fast as possible, get as much GMP as possible, just make everyone happy as quickly as you can. And your advice essentially do the opposite, make it very, you have this like great acronym of THIMBLE that I imagine you'll talk about, that I love, I always think about. So, yeah.
46:34 Speaker 00 Yeah. And, you know, it's, and part of what's so hard about this idea of focus is like, you know, I'm lucky to meet with just incredibly ambitious founders. And the hardest thing I think about building these marketplaces is that the ambition can often feel like this sun, you know, like the heat of the sun that's trying to warm everything up and you're going after this big, big market, you know, warming the ocean. And I think that really what the, the best ambitious founders do is they focus that ambition like a laser beam on a small market, the THIMBLE.
47:16 Speaker 00 And what you do is like, you're getting that THIMBLE, you're getting the product market fit really, really right with this, this like small constrained market. And if you heat that up really, really hot, then it expands from there. You know, and part of this is that we have to accept a couple of things, a couple of points of scarcity. One is that You can't raise hundreds of millions of dollars from the start, right? Where we, especially today, live in a world where there is a constraint around capital. And, and so you have to be able to take that capital in the beginning and make the most out of it. And the only way to do that is to be very, very focused. And the second thing is that the constraint is the founder's attention.
48:01 Speaker 00 And again, these things are really, really difficult to, to get off the ground. And the only way that you can do it is by having myopic focus on a mark, on a, on a, on a segment. And the, the example that, you know, I, I always think about, and it's just was a very cool thing that we all got to see, which was when the food delivery wars happened, right? Where you had companies like DoorDash and Postmates and Uber Eats. Uh, and then the incumbents of Grubhub take very different strategies. And what Postmates, you know, I, I make comparisons to Postmates and, and DoorDash, both successful companies.
48:44 Speaker 00 But, you know, Postmates from the very beginning had very big ambition and went after all the big cities. They went after, you know, not just restaurants, but restaurants and Apple and, you know, retail bicycle. I remember there were so many things that they went after all at the same time. Versus, and, and when you're playing that game, you're always being compared to whatever other substitutes there are in the market, right? And you're, it, it, that just, when you have constraint of capital and attention, you're, you're spreading yourself thin across a lot of different vectors of, of kind of preference for the customer and the, and the seller.
49:28 Speaker 00 DoorDash, on the other hand, famously and very controversially went after the suburbs, right, in the beginning. And the beautiful thing about the suburbs is that there was very little competition because no one thought that you could do it economically. And they probably weren't wrong in the beginning. Like, DoorDash lost a lot of money in the beginning fulfilling delivery in the suburbs just because the delivery times, the driving was so long. But by going after a market that other people weren't focused on, it let them get to a place where they were able to really make the customers on both sides of their marketplace happy enough that they retained.
50:11 Speaker 00 And this word "happy" I use, I should expand on it a little bit. Because the realization I had as I reflected on this kind of feeling that GMV is really actually a vanity metric. It doesn't get at the core of whether you're building enduring value. It's like very clear, and there's plenty of examples I could give, where there are companies that had incredible scale and still were disrupted by a startup. And it's because, like, actually, customers don't care how big you are, right? Like, they don't care how many transactions you've accumulated.
50:54 Speaker 00 What they care about is when they have a transaction with you, how happy do you make them? How much better is the experience that you provide than any other substitute that they could use? And if you do a good job, then they're going to keep coming back to you. And so I call it happy GMV. And that's actually the thing that I think you, as a founder or a product leader, have to focus on, which is, what do I think is going to be the experience of a buyer or seller that leads them to retaining and tracking that as like the happy path and therefore the happy GMV?
51:29 Lenny Rachitsky? Amazing. I love that concept. Happy GMV. You also kind of extend this idea and you, I think you called it the minimum viable happiness is what you want to create when you're building this marketplace, this thimble of water that you're trying to boil into something incredible that what's the minimum version of that, that it creates really happy customers?
51:51 Speaker 00 That's right. Yes. And it's, it's, and kind of the way to think of it is like, obviously, when you're a marketplace founder, like you know that in order to build something that endures, you're going to have to grow, right? But in the beginning, you're, you're doing all these things that don't scale. You're working on your product experience. You're taking friction out of the, out of the, of the transaction. And you want to get to a point where there's a certain percentage of people that retain after having done a transaction. And so you're kind of doing the work, doing the work, doing the work to get to that minimum threshold. And that's when you know you get to kind of go to the next step of starting to figure out the levers to really scale what you're doing.
52:36 Lenny Rachitsky? Awesome. And again, it's difficult. It's easy to say it's difficult to do as a founder
52:40 Speaker 00 So hard.
52:41 Lenny Rachitsky? to tell them like, you just need to get a small version of this marketplace working.
52:45 Speaker 00 Yes.
52:45 Lenny Rachitsky? Versus you go big really quickly. And so most of the time, I think it's actually like location, basically start in a city if it's, if it's location oriented, or if it's all online, pick like one niche to focus on, like Etsy was like, you know, craft fair goods, right?
53:02 Speaker 00 Exactly. And, and sometimes as we see, as we saw with Postmates, sometimes it's both, which is, you know, geography and category. It's again, you just, you have, you only have, there's, you have to assume scarcity of your capital, of your attention, of your customers' attention. And so getting complete clarity of what is the experience that you want to really nail, what's that happy path you're optimizing for? Constraining that in the beginning gives you the option, the optionality to grow beyond that. But if you don't constrain, you just won't be able to get there fast enough.
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54:24 Lenny Rachitsky? With their technology, you'll stay ahead, making the most of every tax benefit. Ready to elevate your tax strategy? Visit joingelt.com/lenny today. With Gelt, you'll save more and stress less. Again, that's joingelt.com/lenny. Join G E L T dot com slash Lenny. Redefine your approach to taxes with Gelt. I want to talk about what it looks like when you've got it working and it makes sense to start expanding. But before I do, there's one counter example I found in my research, which is really interesting, which is Thumbtack, where they, from the beginning, went national and across many categories. And the founders admit, maybe that wasn't the right idea.
55:08 Lenny Rachitsky? It took them, I think, a long time to get to something that was really working. But on the other hand, their thinking was to create enough of a flywheel for people to keep coming back. How often do you need a plumber? How often do you need a DJ?
55:20 Speaker 00 I was just going to say, that is the trickiness with Thumbtack's model. And it persists as the trickiness with their model, which is that you don't have a high repeat use case there. And so you have to, you know, one of the really important things with building a marketplace is cornering the buy side, like having a relationship with the buy side, where they don't even think. About where they're going to go, they come to you. And if it's a plumber, you use that so infrequently that every time you are going to like, look for a plumber, you're going to start at Google, right? You're not going to assume I'm going to go to Thumbtack to find that because you've already forgotten by that point.
56:05 Speaker 00 And so you need to have enough touchpoints with the consumer so that they'll have a relationship with you and start to think of you as a place to go to. And that's probably, that was the trickiness with Thumbtack. And by the way, when we talk through level two, that also is the trickiness that Thumbtack, you know, it, the level two will articulate some more of that trickiness.
56:26 Lenny Rachitsky? Awesome. By the way, I do use Thumbtack. I've, it's implanted in my head of that's where to go to find plumbers and stuff.
56:32 Speaker 00 That's great. I mean, those found, I adore Marco. He is an incredible, incredible founder.
56:38 Lenny Rachitsky? As a segue to layer two, what are signs that you've done a good job at focusing and things are working? You have this term that I love of creating a white hot center. So maybe speak to that, just like what tells you it's like, cool. I think we've got this very focused thimble. How do we, how do we know it's time to?
56:57 Speaker 00 Yeah, I think it's, it's very much that you just start, you see people retaining, you see people, you, you just, you just feel that we're like, people are texting you or emailing or whatever it is, that they've had a great experience and you see them coming back. And that's, and you see a greater, you know, you're not going to make everybody happy. That's, that's like, let's all accept that. But there's a core of users, a persona that you are able to make really happy. That's when you know that you're on the right track.
57:28 Lenny Rachitsky? Awesome. It's essentially the very fuzzy product market fit question. And I'll link to a few posts I've written that help people get there. I guess, is there anything you want to add there?
57:37 Speaker 00 I mean, I love, you know, the only thing I'll add, those two things related I'll add. I don't like NPS for this, and I have a whole blog post on this. I like Sean Ellis's question of like, how disappointed would you be if this product disappeared? And I think it's if you have at least 40% of people respond that they'd be like very disappointed, then you're on the right track. That's kind of the. The feeling that you that you that should tell you you're on the right track.
58:06 Lenny Rachitsky? Awesome. Okay, let's talk about layer two around tipping the marketplace.
58:10 Speaker 00 So layer two, I think, will actually illuminate, again, the importance of that constrained focus for layer one. You're doing all these things that don't scale, that you've written so much about, Lenny, about kickstarting the marketplace, all those things that you you can't just keep on doing forever. Now, layer two, level two, is about figuring out how to do things that do scale. And really, you're you're doing it in service of this kind of mythical moment of a tipping point. And the tipping point is this idea that you often reach a some kind of saturation point in a market.
58:52 Speaker 00 You've reached the experience, you've kept on working on the product experience. You've taken a lot of friction out where and you keep on growing, growing, growing. And you're doing that in service of increasing happiness. And this is a really important thing, like the growth that you're doing should be, you know, you should have a lot of clarity on your flywheel at this point and know that you're growing in service of accelerating your flywheel. And and I think of that, people talk about the flywheel as liquidity. I could think of it as happiness, which is that the more the flywheel spins, the more you're able to make both sides of your marketplace happy, right?
59:33 Speaker 00 And what you're doing is you're growing into a greater percentage of your market. And as you're doing all these things, again, that don't scale, then you reach this moment where things start to get a lot easier. You've kind of pushed the boulder up the hill and it starts to slide down. And what you notice first, I think, is you start to see it on a micro level where you might have suppliers that start to tip to you or buyers that tip. You might see your cohorts get a little bit better. You start to see some organic growth. And let me kind of give a story or an example of a company that I got to see. Where the marketplace started to tip. So we're investors in a company called Recky.
1:00:17 Speaker 00 And Recky is a marketplace for restaurants and their suppliers. And it's, it's, imagine in the beginning, this kind of app that you could use. It almost looked like WhatsApp that a chef could use instead of doing a voicemail at like midnight when they're, when they're leaving the, the restaurant or texting, you know, typing something into WhatsApp and texting it to their supplier or an email, whatever it is. They could use this Recky app and it would make it a lot easier for them to do that. And, and then of course, the marketplace elements is that then they'll be able to discover other suppliers on Recky if they need them. Now, in the beginning, Recky had to have their own sales force.
1:01:00 Speaker 00 And they were going to London, knocking on the doors of these restaurants, finding and cornering probably the chef in the restaurant, in the, in the kitchen, to show them the app, to get them to change to this new app called Recky. And it's like a very high cost of sales effort to have, as you might imagine. But then what started to happen is that every time they got a new chef onto Recky, that order would then go to the supplier that that restaurant normally ordered from. And so instead of getting the voicemail, the supplier would start to see a nice kind of order form that was from the restaurant and kind of provided by Recky, powered by Recky.
1:01:43 Speaker 00 And what would happen is that as Recky grew more and more in London, these suppliers started to get more and more of their restaurants ordering via Recky. And then some of the early suppliers started to be like, well, this is so much easier for me. Like I would much rather get this order form from Recky than have to listen to an hour of voicemails from chefs with different accents and different ways of ordering their food in the morning when I come in. And so then the sellers would, the suppliers would reach out to Recky and be like, hey, here's a CSV of all of our customers. Can you reach out to them and onboard them to Recky?
1:02:25 Speaker 00 Cause I'd much rather have my orders come via Recky than the way I'm getting them. And so you go from this moment of like the hard, high cost of sales, like. Pounding the pavement to getting a list on a silver platter of restaurants to onboard. And that's that that feeling of tipping, right? Where all of a sudden, something goes from being really freaking hard to so much easier.
1:02:52 Lenny Rachitsky? It feels a lot like how people describe finding product market fit. Things start to feel like you're you're not pushing anymore and it's just coming to you.
1:03:00 Speaker 00 Yes.
1:03:00 Lenny Rachitsky? In your experience, is this tipping often it just happens as you become more successful in this thimble of a marketplace? Or is it things you have to do actively to tip to get to this place? Because it sounds like in Rekki, it was like this feature they built of just it's recommending, hey, you should check out Rekki and maybe other other suppliers would help you have an easier time if they're joining. So is it usually like it just happens with scale? Or is there usually something you have to change to create this tipping point?
1:03:31 Speaker 00 I don't think Ronan predicted that that was what was going to happen, right? And your your constant, that kind of customer obsession, having the relationships with the suppliers, having the relationship with the buyers, so that you have your ear to the ground. And when they start to, you know, lean in a little bit, you're there to receive them, right? And so I think this is very much like part of the what what great marketplace founders are able to do is they're able to start to feel that there's something tipping in their direction and then create momentum behind it. And that's that's a lot of what this level two is all about, which is that
1:04:15 Speaker 00 I think every marketplace has to figure out what I call tipping loops. And there's two types of tipping loops that work together symbiotically to help a marketplace scale. The first are the growth loops. And so we just talked about an example with Rekki. There are, you know, many examples of this. Hipcamp, another marketplace I'm lucky to to work with. If you and I went camping on Hipcamp and I booked, you know, a treehouse on Hipcamp. And you're gonna join me on it, I could then, as part of my checkout flow essentially, invite you to my reservation so that you could see the maps, the more information about
1:04:59 Speaker 00 the treehouse, any of the sites around it. And so I'm the person that Hipcamp acquired, but then I pull you into my experience and that's a great buyer-to-bought growth loop. There's kind of classic seller-to-seller loops or buyer-to-seller, you know, there are all these directions. And then the great marketplaces see those loops and they figure out ways to accelerate them. So classic seller-to-seller referrals, right? You know, Uber drivers would get, you know, would tell their friend, "Oh, you should start driving for Uber. It's great." But then Uber incentivized it with a referral kind of bonus.
1:05:40 Speaker 00 And you started to see Uber drivers like literally writing blog posts about how much they loved driving for Uber because some of them were making more money getting the referral bonus than actually driving. And so you're trying to find these growth loops and you maximize them.
1:05:56 Lenny Rachitsky? Awesome. I'll link to a post that has a lot of these insights from this work that I've done on marketplaces, but a few others that are just interesting. Basically, you're trying to figure out, how do you create an engine that continues to drive supply and also drives demand? So a fun example is when Etsy was getting started, as you know, they went to like craft fairs and pitched sellers, "Hey, join, sign up for Etsy. You could sell your stuff online." And then all their sellers started telling all their buyers, "Hey, buy my stuff on Etsy."
1:06:24 Speaker 00 Etsy literally gave them business cards. So Etsy gave their sellers business cards that made them feel like, "Oh, I'm a real..." Like made them feel professional, but the, and the link on it was to their Etsy store.
1:06:39 Lenny Rachitsky? I love that. One of the most magical... Growth engines of marketplaces is when your supply brings on the demand. So that's a really good example. Another one is DoorDash, where basically a restaurant sign up for DoorDash. And then they tell all the customers, you want to order your food, go to DoorDash and order it. And so all the restaurants are telling everyone about DoorDash and then they become DoorDash users and they order from other restaurants.
1:07:01 Speaker 00 Yes, and it just shows, it shows how accretive DoorDash was to both sides of the market in that example.
1:07:08 Lenny Rachitsky? And then Fair is an awesome example too, which sounds similar to Recky, as you described, where Fair is basically a B2B artisanal items marketplace, where we boutique shops, buy like nice candles and blankets for their store to sell. And essentially, they did what you described, where they signed on a store and they basically told them, all your vendors can join for free and not have to pay any fees. They sign up for Fair and, and it makes it easy for you to buy their stuff. And then the other, on the other side, a candle maker recommends, tells all the places they sell to, hey, you should use Fair. It's so easy to buy our stuff and we can communicate through there and they can sign up without any fees. So basically, everyone just invites all their existing partners on Fair and then everyone's on Fair. So yeah, there's a lot of ways to do it.
1:07:52 Speaker 00 I love it. And so the, the second type of loop, and again, this loop works symbiotically with the growth loop, is what I call happiness loops. And I think of them almost as like the kidneys for your marketplace as you grow. The, the happiness loop, the idea is like you have a lot of new sellers coming in. And of course you have new buyers, but you want to make sure that you're matching your buyers with the sellers that are going to give them the best experience, right? And so, you know, normally like in a consumer social product, churn is, is, is like, is heartbreaking. Like, once a user churns, they're almost never going to come back.
1:08:34 Speaker 00 And you're with a consumer social product, you're trying to get to massive scale. But when you're building a marketplace, you actually, there's a healthy amount of churn that you want on the supplier's side. Because there are just going to be suppliers who aren't going to create a great experience for the buyer, and you can't do anything about that. You know, and so we've all had the Uber driver who you give one star to. Like, that person you don't want on your marketplace getting matched with buyers. And so you're trying to then make sure that as you grow, you have a natural mechanism in your marketplace to reward the suppliers that you want to reward and to churn out the ones that you don't.
1:09:17 Speaker 00 And of course, your job is to do your best to set all the sellers up for success, but it's an inevitability. And so there's two kind of great examples I think of as in these happiness loops, which is around search ranking and then reputation. You know, search ranking is just a very obvious one, which is like you're trying to understand what creates a happy experience for the buy side, and then reward the sellers that provide that experience. So I think a kind of an interesting example that ended up actually changing, but still is illustrative, is that Uber Eats, in the very beginning of their journey,
1:09:59 Speaker 00 thought that their advantage in the market was going to be about having really fast delivery, right? Because they already had this network of drivers. And so they thought that that's where they were going to really lean in and have an edge over any competition. And so in the search ranking, they rewarded restaurants that prepared the food quickly. And so answered the Uber Eats request, and then actually got the food out as fast as possible, so that Uber Eats became synonymous with like the quickness by which you got the delivery. And so that restaurant that takes 40 minutes to prepare the food, they would get ranked low in the experience for Uber Eats, even if the food was really, really great.
1:10:45 Lenny Rachitsky? Okay, so we've been talking about tipping of the marketplace. Is there anything else there that you want to share before we move on to the the third layer?
1:10:53 Speaker 00 Yeah, there's kind of two other things that that come to mind. One, just as a reminder, and then a one as a caution. So the reminder is, in order to tip a market, you have to reach a saturation point in that market, right? You can't tip a market before you've penetrated it to some saturation level. And it goes back to level one of why you want to focus on a constrained market. Let's take, you know, growing a food delivery product in Des Moines, Iowa versus LA or New York, right?
1:11:33 Speaker 00 When you're growing in a small city and you're focused on restaurants, you're going to be able to get to this tipping point a lot faster and more efficiently than if you're going after a very big market. And so there's a real advantage to being able to prove out the playbook as quickly as possible and as efficiently as possible before you move on to bigger challenges. And and so I love, I I think it kind of underscores again why it's so valuable in the beginning to focus on something that is that is constrained. And again, you know, Postmates focusing on San Francisco, the city,
1:12:14 Speaker 00 Door Dash focusing initially on the suburbs, much smaller opportunity, but one that they could really knock the cover off the ball on. They had no competition. They had, you know, a a customer that was desperate for attention. And so they can make them happy. And that just sets you up for for real success to go from strength to the adjacent market.
1:12:38 Speaker 00 The second thing that I'd say is, and this is so important, is that not all markets are susceptible to tipping. Right? Like, we've all experienced this, I'm sure, Lenny, with the companies that you work with, companies I work with, where there are conditions of a market that make it vulnerable to tipping. I have six in my post, just to name a couple classic ones. You know, the first obvious one is just concentration on the supply side. In order to be able to tip a market, you need suppliers to want to lean in on your marketplace.
1:13:23 Speaker 00 Right? My partner, Bill Gurley, talks about how great marketplaces create the new incumbents. So you basically have suppliers who aren't the incumbents. The incumbents aren't going to lean in on your marketplace. They're already fat and happy. But you want to have these hungry suppliers who lean in. Right? But if there's already concentration in your marketplace, in the ecosystem of the market that you're playing in, then you're not going to have sellers lean in. And you're not going to be able to create a flywheel that spins where the more sellers you bring on, the better the pricing or experience is on the demand side. Because the sellers are happy,
1:14:07 Speaker 00 and there's nobody that's hungry or fighting. And so that's just like a critical, critical point.
1:14:14 Lenny Rachitsky? Bill Gurley and I actually had a little Twitter debate once about supply versus demand and which one's more important. And he had this, basically his pitch was like, all that really matters in the end to build a successful marketplace is can you find the demand? Can you bring the demand to your marketplace? Makes all the sense in the world. Like, everything in the end is can you find customers?
1:14:34 Lenny Rachitsky? In the work I've done looking into marketplaces, what I find is the hardest thing to do is to bring people to your marketplace is to find the supply and bring it to people, basically aggregate it. And your point here is exactly right, is that basically like the value of your marketplace is to find this non-concentrated demand that's all over the place and bring it together and make it easy to transact with. So I think that is really important, just like to double down on this point that what makes a marketplace valuable is supply that is hard to find, that you make easy to find and transact with. And I feel like that's almost the core of what makes a marketplace work.
1:15:12 Speaker 00 I think you're both right.
1:15:13 Lenny Rachitsky? Yeah, I think we're both right.
1:15:15 Speaker 00 Because in the beginning, in the beginning, the only way you get to, the only way you get started with a marketplace, obviously, is you're bringing the supply online. And that's what opens up the opportunity. And the only way then for you to have a chance at tipping the market is if there's enough fragmentation on the supply side to create a differentiated experience for the demand side to care about your marketplace. But the only way to build long-term enduring value with a marketplace is to corner the demand side. And so it's kind of a little bit that evolution of a marketplace that that ends up changing who who you focus on. And I don't know if you've experienced this.
1:15:57 Speaker 00 In my experience with the marketplaces that I work with, it's a constant, like I have to focus more on the demand side right now. Okay, now we got to focus more on the supply side. And it's just back to how difficult these businesses are to build, especially when you have limited resources, that it's like the forever battle of building a marketplace.
1:16:15 Lenny Rachitsky? Yeah, especially if it's a geographically oriented marketplace like a DoorDash. Sometimes you have more customers than restaurants. Sometimes you have too many restaurants, not enough customers. It's very city dependent. Airbnb, we had basically many attempts at a dashboard of which market is supply constrained, which is demand constrained. Along the same lines, I think it's also something I think about with B2B marketplaces. The reason they're challenging, in my experience, to work, there's so few of them, is the supply is rarely fragmented. Usually, there are very few suppliers, so it's pretty easy. I'm just gonna pick one of these 10 and I don't need you. Is that, is that true? Is that how you think about the challenges of B2B marketplaces?
1:16:53 Speaker 00 There's definitely that. But I think actually, the bigger challenge with B2B marketplaces is on the homogeneity of the supply. You know, when you think about a lot of labor marketplaces, and like, let's take a classic example of like Mechanical Turk, right?
1:17:10 Speaker 00 What you need in a marketplace for that flywheel, you know, I have a graph in my, in my, in my slides where you kind of show that the more you penetrate the market, the happier you're able to make your customer. That's, you, you should have an exponential experience where the flywheel doesn't slow down. Now, you take Airbnb as an example. You can't, there's, there isn't a limit to how valuable it is to have more supply on Airbnb. Because everybody has their own special, you know, preferences. And there probably is a theoretical limit, but it like, you just feel like there is always gonna be the benefit.
1:17:55 Speaker 00 There's such heterogeneity in the supply for Airbnb that that's what has let Airbnb really close and escape competition. With B2B marketplaces, what sometimes happens, like a labor marketplace, is that you have this homogeneity in the supply where it's not clear that adding the next incremental unit of supply actually changes the experience for the demand side. And so at Mechanical Turk, whether Mechanical Turk has 100,000 Turkers or 5 million Turkers, it probably doesn't really change the experience for somebody who is using Mechanical Turk. And that's why in the early days of Mechanical Turk, you sell a lot of other...
1:18:39 Speaker 00 Copycats or clones of Mechanical Turk doing something similar, because it didn't take that much supply for them to be able to create an experience for a segment of the market that was as good as the already scaled Mechanical Turk.
1:18:55 Lenny Rachitsky? Awesome. I'm glad we got into that. We're getting real dirty about marketplaces. Exactly what I was hoping for. You said that you had something else you wanted to share along these lines.
1:19:03 Speaker 00 And there's so many other examples of reasons why a marketplace won't tip competition. Like, again, you go after New York, you're a food delivery company, and you go after the suburbs where there's no competition. That makes your job really easy to tip the market. You go to New York City where you have an entrenched competitor of Grubhub plus Seamless Web, a different culture around delivery where the restaurants mostly have their own delivery fleets. And it's just going to be so much harder for you to tip that market, right? And so being, I think you have to be really context aware when you're building a marketplace of what your competition's going to be,
1:19:45 Speaker 00 so that you see if there is a path for you to actually tip the market.
1:19:52 Lenny Rachitsky? And even if you've tipped a market, it may get untipped. Like Uber comes in and starts to eat your lunch. No pun intended, right? Like, it doesn't last forever. You have to keep fighting for it.
1:20:00 Speaker 00 Well, and it's such an important point, which is that you can never rest on your laurels when you're building a marketplace. Like, the history of marketplaces is one in which you have a marketplace that feels dominant and then gets disrupted by a competitor, HomeAway, VRBO, being disrupted by the likes of you at Airbnb.
1:20:23 Lenny Rachitsky? I wish I could take credit for all that. Yeah. So one way I think about, as you're talking about this idea of tipping, is a simple way to think about if tipping is happening, if you're tipping it successfully, is percentage of your growth that's starting to come from organic, word of mouth, people just becoming like, this is the default way. I'm going to order food, travel, book a ride.
1:20:43 Speaker 00 I think you see two things. You see, one, the cohort's getting better. So people like, people start using you more, right? Like, as your, as the supply side gets more diverse, you have more and more use cases that you start to, to be able to serve. And so that, you know, you get the demand side leaning in more, the cohorts get better. And then to your point, you have the organic growth that happens, where you don't have to fight to get each new participant on both sides of your market. There's something that starts to happen where the value proposition is just so strong relative to any other substitute, that the market starts coming to you.
1:21:27 Lenny Rachitsky? Awesome. So essentially cohort retention starts going up because it's more and more valuable. And more people are coming to you just word of mouth or through some loops that you built.
1:21:36 Speaker 00 Exactly.
1:21:37 Lenny Rachitsky? Awesome. Anything else on this layer slash level of the hierarchy before? Okay, cool. Let's talk about dominating the marketplace and what that looks like and how you, how you do that? How do you dominate a marketplace and win? Sarah Tavel.
1:21:51 Speaker 00 So yes, level three, and this is the one I feel like every, you know, every founder who starts a marketplace, like they're chomping at the bit, right? To be able to really focus now on growth. Because, you know, all along, I feel like it's been, we've been holding you back of just like focus, focus, focus. And, and what you're doing through level one and level two, as you, as you're honing what you're, you're building, is that you're basically building a playbook. You don't yet know whether this playbook is repeatable, right? Like, it's, it's not always the case that the, the dynamics of one market is the same elsewhere. I'll take Rekki as an example.
1:22:34 Speaker 00 In the London food scene, there's like significant fragmentation of suppliers. In the Berlin food scene, that's not the case. And so it's not always the case that whatever you did in one market works in another market. But usually there's something that rhymes. There's a hint of what of what is going to work. So what happens now is you you have a market that's tipping. And the question then is, are you ready to take your eye off the ball and start to diffuse your focus into other markets? You know, so there's there's kind of three vectors then that any marketplace can grow at this point.
1:23:17 Speaker 00 The first vector is within the existing market where you already are tipping that market. You, as a founder, then have to make a very kind of very personal decision that's that what you're looking at is the context of your competitive situation. So if you're tipping a market and you have no other competitor going after that market, you're the first one to see this opportunity, then I think you have two things that you want to do at the same time to grow. The first thing is that you want to take the existing market that you're in and you just keep doing what you're doing.
1:23:56 Speaker 00 And and you may even find ways to stretch beyond that initial market that you're going after within within the same market. And so what I mean by that is, you know, Uber went from black cars to Uber X to Uber Pool. You know, they kept on finding ways in the geographies where they were already dominant to keep on getting stronger by expanding the use cases that they serve. So you have continuing to grow and penetrate the market.
1:24:26 Speaker 00 Find ways to sort to kind of answer more use cases in that market that you can do, especially if you don't have a lot of competition. And then the third vector of growth is you want to then try to get as many plates spinning in as many markets that you can handle as quickly as possible. And this is like the blitz scale, right? This is the land grab. And again, your equity value that you're going to create is going to come from dominating the market. And so you don't want to plant a thousand flags in a thousand markets at the same time, spread yourself too thin and not decidedly win any one market.
1:25:11 Speaker 00 You're trying to put, you know, you always want to put more wood behind fewer arrows. The more scale that you have, the more cities or categories where you have, you know, the flywheel starting to spin and you're starting to see tipping point happen, the stronger your company will be, right? Each market that you get, you have scale in where you're, you'll have contribution profit. You take the contribution profit, you invest it in new markets. The more markets and contribution profit you have, the more venture capital you'll be able to raise, which you then reinvest in growing. And so this is really the place where you are as aggressively as possible, while at
1:25:56 Speaker 00 the same time not losing sight of the fact that your goal is in each market individually to dominate that market, you're trying to grow into as much possible market opportunity as you possibly can.
1:26:09 Lenny Rachitsky? And again, the reason this is so important is most founders that are ambitious start with this, right? They're just like, go big immediately, blitz scale. We need to win fast before anyone catches up. And so again, it's a reminder, that's the third, like that's the final step, once you've done these other two steps.
1:26:26 Speaker 00 Yes. And it's like such an important point because don't forget like. You're always going to be vulnerable to competition, right? And so let's say you have a million dollars and you spread that million dollars of go to market costs across 10 cities, spreading yourself really thin. You have a competitor come in and guess what? They put a million dollars into one city. They're going to win that city and that's going to set them up for greater success down the road to keep on going, you know, being able to get more, more capital and more, more, you know, expense that they can put to, to work to grow those cities. And, and of course, we never have one competitor, always have a lot of competitors.
1:27:09 Speaker 00 And so focus on, on, on these steps is just, it's, it really is such an important thing to have discipline around.
1:27:17 Lenny Rachitsky? And this is the reason that Uber went big and raised so much money, invested so much to scale so fast versus Lyft, same with DoorDash versus Uber. Basically, they're, they're both trying to dominate. Neither one, I guess Uber, I don't know if it's safe to say seems to have one in the market. DoorDash versus Uber, it's still very one and two-ish. So I think a lot of people look at these companies, they're like, they raised so much money, they're losing so much money, they're never going to work. But they do this because to build a durable business and to get the benefits of the idea of what the marketplace they built, they need to dominate, they need to be number one by far. And doesn't mean always works, like, you know, DoorDash, even though they're bigger than Uber, from what I understand, they're not like, I don't know, would you consider
1:28:01 Lenny Rachitsky? they're, they're dominant or is it still like a big challenge?
1:28:05 Speaker 00 You know, I don't, I don't know. I don't know. What is clear is that they've built an incredible company, right? Like it's just an incredible, they've done an incredible job of doing what they do and it is a crowded market still.
1:28:20 Lenny Rachitsky? Yeah. So you could still build like a great business, even if you don't dominate, dominate. It's just, you won't make as much money, nearly as much profit, basically, or cash flow.
1:28:28 Speaker 00 That's right.
1:28:29 Lenny Rachitsky? Something that you all at Benchmark are really big on, which I think would be interesting to talk about, is the TAM not being as big a deal as people think.
1:28:39 Speaker 00 Yeah.
1:28:40 Lenny Rachitsky? So a lot of times, there's a lot of marketplaces that start very small and there's a fear that the market is just not going to be big enough for them to build a massive business long-term. And you all don't worry about that as much as a lot of other investors where the market itself isn't a huge killer of investing.
1:28:57 Speaker 00 I would underline it even, which is that we get excited about the markets, the opportunities that might seem small from the outside.
1:29:05 Lenny Rachitsky? I love it. Can you speak to that and help people understand?
1:29:07 Speaker 00 I mean, I mean, do you remember the early days of Airbnb? Like, how big could this get?
1:29:13 Lenny Rachitsky? It wasn't there that early.
1:29:14 Speaker 00 Yeah, but like you knew of it. And like Etsy also underestimated for years and years and years. Hipcamp, like that was part of what excited us is that it was this market that was actually much bigger than people would have thought from the outside. And the wonderful thing about going after these underestimated markets is that they don't have competition in the beginning. And so you have more of the elements of being able to operate into a market and tip the market towards you when you don't have competition. And so we're, you know, we love these types of markets and we always say to the founders out there, if other people are telling you that the market's too small, we would love to get to know you.
1:30:00 Lenny Rachitsky? I think a lot of founders will love hearing this. I think it's also important to add something you've shared with me is it's important for there to be adjacent markets that are big for you to have the potential to expand it.
1:30:10 Speaker 00 Right. And, and yeah, it's just, it's such an important point. Like the market itself, it can't be a cul-de-sac. Like you're, you need to start somewhere that has the potential to grow beyond that. But in the beginning, it's going to look small. Let me give you the example of Hipcamp. Hip Camp when we invested was literally land. You know, it was land where people, um, I don't know, Lenny, if you're a camper, I unfortunately-
1:30:37 Lenny Rachitsky? Yeah, love Hip Camp, by the way.
1:30:39 Speaker 00 Okay, amazing. Well, if you have a tent and a sleeping bag and you know, you're not afraid to put your, you know, thermos in a, in a running river and, and clean the water, then like that was the early days of Hip Camp. It was for the hardcore camper, which itself feels like a very small market, right? It's not actually that small, but it is a smaller market than other people might themselves get comfortable with. But then what would happen is that hosts on Hip Camp, and I stayed at one of these Hip Camps, and it was just such an incredible experience. The hosts started to make a little bit of money from Hip Camp.
1:31:20 Speaker 00 And they took that money and they started to invest in structures on their land. So in the beginning, maybe it was a fire pit or a bathroom or shower. And then it became a treehouse or a yurt. And so what happened with Hip Camp is that in the beginning, it was going after this like very different market segment. But as they became successful, made their landowners money, those landowners invested that money back into their land and started to open up the market opportunity for Hip Camp into people more like me that are glambers that want that experience in nature, but maybe don't want to pitch a tent to have it.
1:32:04 Speaker 00 And so that's kind of one of those examples of an underestimated market that ends up growing beyond that. There's, there's warning stories here too. Uh, I always think of Etsy. So like Etsy, I remember- Actually, when I was at Pinterest, being driven crazy by Etsy, because Etsy was all about handmade goods, right? But as they were running up to going public, they started to chase GMV. And what that looked like is that they started to have a lot of mass-produced goods on Etsy. It drove me crazy at Pinterest because there was this one seller of these scarves that was
1:32:44 Speaker 00 clearly a mass-produced scarves, and they were spamming Pinterest constantly with the pins of those scarves. And it was just very clear that Etsy had kind of lost its way in that moment. They started to chase GMV growth. They were going beyond what they actually stood for, and they ended up having a real reaction from the sellers that were making handmade goods and the buyers. It was this big erosion of trust. And they ended up, I don't know if it was related, but it ended up precipitating, I think, a CEO change to the CEO that is there now and who has obviously done an incredible job building Etsy from there.
1:33:26 Lenny Rachitsky? Yeah, we had the VP of Product from Etsy on the podcast, and we talked about that, actually, what that transition was like, because it was pretty dramatic. They went from very warm, fuzzy, cozy vibes to like, we need to build a business that lasts. Let's change the way we operate. While we're on this topic of what gets you excited about marketplaces, this is something Mike suggested I ask you. So I love that you get excited when it's a small market, very contrarian. What else, when founders are pitching you, let's say with a marketplace, what else do you look for? Whatever you can share off the top of your head that you look for that gets you excited about a marketplace?
1:33:59 Speaker 00 It's a couple of things. One is, and I'm thinking actually of one founder I met recently, where there's that earned secret where they see a market opportunity that other people are overlooking that hasn't been addressed. Maybe there's a reason why it hasn't been addressed in the past, but now is the moment. There's something changing that's creating a current in the market. I always, we can talk about currents later if we want to, but that there's something that's creating momentum in the market that's opening up an opportunity for this marketplace to exist. And for whatever reason, that founder is the person who sees it. And when it's kind of one of those things that once you see it, you're like, how does it still work this way?
1:34:44 Speaker 00 And it makes so much sense for somebody to come in and do something about it. And then the second thing that always just deeply resonates, and it's kind of obvious at this point, why this would be true, is a founder then that really has focus. And it's kind of back to focusing their ambition like a laser beam, as opposed to this like broad sun trying to do everything. And so you really feel like they're focused on the right things. And that actually leads to the third thing, which is like, you really feel when a founder is either trying to fool you
1:35:23 Speaker 00 or fool themselves with vanity metrics versus like the true intellectual honesty and the intellectual rigor of like, what's really working in my business? What's not working? Where are we focused to make that the best it can be? And man, like, that is always, you know, that's how you build long-term enduring value. And it's something that I think it's consistent across all the founders I'm lucky enough to work with.
1:35:52 Lenny Rachitsky? What I love about this answer is something I often say about marketplaces is that most of your problems are not marketplace problems or questions. It's just what every startup has to deal with. So what you shared is basically an earned secret, which will apply to any business, which maybe emerges a current in a wave that you can ride, having great focus and also focusing on the right metrics. Like, I 100% agree. And it's also interesting, like, it could be a marketplace, it could not be. And I think people often overweight how much, like, I am building a marketplace and I need to think of everything from this marketplace perspective versus like, 95% of your challenges, questions, hurdles are going to be just what every startup has to deal with. And then there's a bit of like specific to marketplace.
1:36:36 Speaker 00 And I want to just double click on the current thing because it's very related. Just like a lot of people, and this is back to... Or maybe our contrarian take on markets. I think a lot of people think about markets almost like these bodies of water. You know, it's like, oh, it's this big body of water that we're going after. And I actually think that the most interesting markets, you have to think of them like currents. Where you're just trying to, there's something happening in the market. That's creating this current where you can, you can have like a plank of wood. That you put on the, on the river and it's going to pull you forward versus a market that doesn't really have that momentum to it.
1:37:18 Speaker 00 You're going to have to build like something really big and fancy to make any progress. And that's why we care less about market size. Because really what you're looking for when we, you're looking at a market. Or what are the dynamics of change? What's the current and momentum? That's going to pull the company and make the job easier for the founders to actually build something that endures.
1:37:40 Lenny Rachitsky? Essentially a why now is a lot of, was how a lot of people think about this, right?
1:37:43 Speaker 00 Yes, yes.
1:37:44 Lenny Rachitsky? I love, I love just the visual of a current. There's a startup I invested in as an example of the opposite. That got in, that's a crypto marketplace sort of thing. And they started it when crypto was really great. And they continued building it as crypto winter emerged. And they just realized our timing, this is not the time to build a crypto company. That's new, that's trying to compete with who's out there. And it's so, it's an example of the op, like you gotta recognize when the wave is going the opposite direction. And everything is pulling you away from success. It's not the opposite of what you're describing.
1:38:16 Speaker 00 Yes, I, I might have a nuance there because I think crypto is too broad of a, of a way to describe it. Like if you said it was a DeFi crypto company, then yes, definitely. Like no one, you know, the, with treasuries where they are. The opportunity in DeFi isn't, isn't as material as it once was. With stable coins, I'm a huge believer in stable coins. And I think that's a market where you have a, we have a real current with inflation. And so many local currencies, there's real demand for stable coins, the US dollar stable coin. That it comes in many different shapes and forms. That is something that I believe has a very strong current right now that I'm actually quite excited about.
1:39:01 Lenny Rachitsky? Oh, interesting. Yeah, I should have been clear. It's like a very specific part of crypto that's just not happening too much.
1:39:07 Speaker 00 I get it.
1:39:07 Lenny Rachitsky? Versus what it was. Okay. We've gone totally off track, so let me come back to our track and see what else you wanted to share around the hierarchy of marketplaces, either on the top.
1:39:18 Speaker 00 That's it.
1:39:18 Lenny Rachitsky? Okay, we did it. Amazing.
1:39:20 Speaker 00 Yes.
1:39:20 Lenny Rachitsky? I have a couple more questions, sort of related, but I guess, is there anything else that you wanted to say about the hierarchy of marketplaces?
1:39:27 Speaker 00 Maybe just this kind of the coda, which is like,
1:39:29 Lenny Rachitsky? Yeah.
1:39:30 Speaker 00 you can never rest on your laurels. And we talked about this already, but the history of marketplaces is one of disruption. And you know, the idea with happiness is that, and you know, Amazon and Bezos talk about this, which is like, expectations, consumer expectations are constantly going up. And so if you ever stagnate in the experience that you give to the consumer, guess what? You're going to get disrupted. And the examples of, we talked about with Airbnb and HomeAway, DoorDash and Grubhub, you know, Grubhub wasn't able to, for, for different reasons, they were a public company.
1:40:11 Speaker 00 And so they couldn't, couldn't access capital in the same way that the private markets could. But they were too slow to change the atomic unit of their supply to have delivery that they fulfilled. And so they got disrupted by the, you know, DoorDash, Uber Eats of the world. And so you just can't rest on your laurels. Expectations constantly go up and it's part of what's so exciting about this, this market that we play in.
1:40:40 Lenny Rachitsky? I think Grubhub is a great example of that, where they were the first really successful food delivery company. And then
1:40:45 Speaker 00 Yes.
1:40:46 Lenny Rachitsky? even with network effects, by far the best way to order. And then DoorDash comes around and wins because
1:40:52 Speaker 00 Yes.
1:40:52 Lenny Rachitsky? they go bigger and spend a lot of money that Grubhub wasn't willing to spend. Awesome. So I guess the advice there is just don't, don't take for granted your success, even if you have amazing network effects.
1:41:02 Speaker 00 That's right.
1:41:03 Lenny Rachitsky? Okay. So as we were chatting about this conversation, something you mentioned is that even if you're not building a marketplace, these lessons are actually still useful. So say you're building an open source product or a social network, or even a SaaS startup. A lot of these sort of lessons can still apply. What advice would you have for people that have heard what you just shared but aren't necessarily building a marketplace? What are some of the takeaways as well?
1:41:26 Speaker 00 At Benchmark, I'm lucky that I have partners who look at very different types of companies that I look at. And we meet such an incredible breadth of founders. And what you just realize again and again is that these same lessons hold with open source. It's about solving like a specific developer's need in the beginning and solving it really freaking well. And then expanding from there with SaaS. You know, I think maybe the fascinating exception, kind of similar to your thumbtack exception. I think what Parker Conrad's doing with Rippling and this idea of a compound startup is very different. And actually, he has a level of ambition that is both like the sun and a laser at the same time.
1:42:11 Speaker 00 And so, you know, that's kind of a rare founder. You can have that level of execution. But again and again, what you see, and I think a lot of this for new companies kind of leveraging large language models to build products is that focus on a constrained market to start is the way to win.
1:42:34 Lenny Rachitsky? I like that. Like basically, it's happy developer in the case of DevTools or happy enterprise user. Just like get happy people using your product and coming back to it. So I love that as a reminder. One other question is, you wrote this post on finding white space in building marketplace. Basically, someone that wants to build a marketplace, trying to figure out where is there an opportunity for a new marketplace? Do you have any advice for people, say founders, potential founders that are looking for ideas and opportunities to build a marketplace? For how to find one, where do you think there's opportunity?
1:43:05 Speaker 00 It's kind of fun to ask the question like whether LLMs change the game and or open up new surface area. So like I, you know, in my post, I wrote about three ways that you can kind of look for a new opportunity. And I think it was like, number one, you always find a horizontal marketplace and you find the kind of low NPS part of that segment and you create a marketplace around that. eBay being a horizontal marketplace, the sneakers being a low NPS part of that, and you get GOAT, right? The second is finding a niche that no one else is paying attention to. And like, you know, the Etsy examples we gave, the hip camp stories,
1:43:50 Speaker 00 and, you know, bringing that online, taking friction away and showing that it's actually a bigger market than you think. And then the third is changing the atomic unit of the supply. So that, you know, kind of like Grubhub, the atomic unit there was a restaurant that has its own delivery fleet. And then Postmates, DoorDash, Uber Eats came in and said, actually, it's any restaurant will provide the delivery fleet. And so they opened up the available supply. Now, when I think about LLMs, I think there's a real opportunity for the third one, right? Like, LLMs may make it possible to bring on a supply type that maybe the long tail, that was just, it was too much effort
1:44:34 Speaker 00 to reach out to them, onboard them. But maybe if you automate that work, you actually create an opportunity to expand the supply in a way that none of us can anticipate right now. And then who knows whether there's an opportunity with LLMs to create a better experience in one of these kind of low NPS segments of a market or a niche market itself that that makes it possible to bring it online. So I haven't seen anything yet, but I am definitely on the hunt.
1:45:05 Lenny Rachitsky? Very cool. Turned into AI corner, which I love. Okay. Well, with that, we reached our very exciting lightning round. Are you ready?
1:45:15 Speaker 00 I'm ready.
1:45:16 Lenny Rachitsky? What are two or three books that you've recommended most to other people?
1:45:22 Speaker 00 Pachinko is one of the best fictional books I've read in a while. I just loved it. And so I highly recommend that. And then to founders, I am a sucker for The Five Temptations of a CEO and The Five Dysfunctions of a Team. It's kind of like, you imagine those books like in the grocery store aisle, but they're fast reads that are incredibly insightful, and I highly recommend.
1:45:46 Lenny Rachitsky? Is there a favorite recent movie or TV show that you really enjoy?
1:45:50 Speaker 00 I'm not a, I don't watch stuff. So I'm not a good, a good candidate there.
1:45:55 Lenny Rachitsky? Highly respect that. Is there a favorite interview question that you like to ask candidates, which usually we can transform into when you're talking to founders and trying to decide if you want to invest?
1:46:06 Speaker 00 I always love hearing the journey people take and specifically how they've made decisions along the way, like what drives them from each step. I think that's always very illuminating.
1:46:19 Lenny Rachitsky? Do you have a favorite product? You've recently discovered that you really love, whether it's an app or physical product that you use often, anything real cool or fun?
1:46:31 Speaker 00 I'll say we are late joiners to Tesla, my family. And man, it is one of those products that you use it for the first time. And usually I could see why I'd want to own equity in this company. Not financial advice, obviously, but it's just an awesome experience.
1:46:53 Lenny Rachitsky? I completely agree. I've gotten so used to it. We have a regular car and a Tesla. And the fact that you don't need a key anymore, you just walk up and open it because it has your phone next. I just, my wife forgot, she left the key in the, in our Subaru just because she's like, oh shit, I need to take the key out. It's just sitting there running. Yeah, you're so used to just the casual, just walk up, open, you're good to go.
1:47:15 Speaker 00 Yes.
1:47:16 Lenny Rachitsky? Awesome. Do you have a favorite life motto that you often repeat to yourself, share with people, either in work or in life, that you find useful?
1:47:25 Speaker 00 My partner at Greylock, Reid Hoffman, had this line of every strength has a corresponding weakness and vice versa. And there's so much wisdom there, like we always make, you know, we see our own strengths and we see our weaknesses, but not realize that they actually come, go together. Like you can't have one without the other. Similarly, like strengths, you know, in organizations, like a decentralized organization can move really quickly. And the corresponding weakness of that is that it can feel chaotic and disorganized. On the other side, a centralized organization can feel really slow, but it is, you know, very intentional in the decision-making and the control of the experience.
1:48:10 Speaker 00 And so everything has trade-offs and realizing that more often than not, these, they come together. It's just so, so useful to be aware of that.
1:48:20 Lenny Rachitsky? Awesome. Final question, I believe you played rugby at some point, is that right?
1:48:24 Speaker 00 Yes.
1:48:25 Lenny Rachitsky? Okay, is there a rugby story that would be fun to share from your time playing rugby? And if not, what should people know? What would surprise people about rugby that they may not be aware of?
1:48:36 Speaker 00 Well, what people might be surprised of, especially if they meet me, is that I was actually a really good tackler. And I think I broke my nose a couple of times and have more injuries that I would care to remember, but I definitely inflicted more injuries on other people than I received. And I think the rugby is, it's just, there's a camaraderie that comes with rugby. And the one thing I'll confess is that we always joke that the rugby team is, it's not a rugby team, it's a drinking team that has a rugby problem.
1:49:18 Lenny Rachitsky? Amazing.
1:49:18 Speaker 00 Those times are behind me.
1:49:20 Lenny Rachitsky? Oh, man. It sounds like an awesome person to have in your court when you're a founder, the best tackler in town.
1:49:26 Speaker 00 Yes.
1:49:27 Lenny Rachitsky? Amazing. Sarah, I'm not surprised this went as long as it did. Thank you so much for being here. Two final questions. Where can folks find you online if they want to reach out and maybe ask follow-up questions? And how can listeners be useful to you?
1:49:40 Speaker 00 I appreciate that. I'm Sarah at Benchmark. I'm on Twitter, SarahTavell, and I have a Substack, sarahtavel.com. If you're a founder, you're working on something, don't be shy. I were in the business of meeting with people like you. And so I love, I always love to get stimulated by new ideas and people.
1:50:03 Lenny Rachitsky? Just to focus people even more there, is there a stage you like? Is there markets, anything people should know of, like what's right for you?
1:50:09 Speaker 00 We at Benchmark, we're early-stage, we're an early-stage firm. We aspire to be first board member. Usually it looks like the Series A. And that's, that's really where our sweet spot is.
1:50:22 Lenny Rachitsky? Awesome. Sarah, thank you so much for being here.
1:50:26 Speaker 00 Thank you for having me.
1:50:27 Lenny Rachitsky? Bye, everyone. Thank you so much for listening. If you found this valuable, you can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. Also, please consider giving us a rating or leaving a review, as that really helps other listeners find the podcast. You can find all past episodes or learn more about the show at lennyspodcast.com. See you in the next episode.
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