20VC: 7 Powers: The Foundations of Business Strategy: Deconstructing Economies of Scale, How To Assess True Market Size, Assessing Risk vs Uncertainty, What “Brand As Power” Really Means with Hamilton Helmer, Managing Partner and Chief Investment Offi

Hamilton Helmer is the Managing Partner & Chief Investment Officer @ Strategy Capital a long-only public equity fund that selects securities for investment based on Power Dynamics, a proprietary model of fundamental value, developed by Hamilton over decades of strategy consulting with clients such as Hewlett-Packard, Adobe and more. Hamilton is also the author of one of my favourite books, 7 Powers. If that was not enough, Hamilton is also an Instructor in the Economics Department @ Stanford University. In Today’s Episode You Will Learn: 1.) How Hamilton made his way into the world of investing from advising some of the largest tech titans on the planet with Adobe and HP? 2.) What is a strategy mental model? What makes the most effective strategic models? What characteristics do they have? How should founders balance between sticking to models and being willing to change them? What are Hamilton's biggest takeaways from working with Netflix? 3.) "All strategy begins with invention", what did Hamilton mean by this? How does Hamilton explain the success of copycats in markets? How does Hamilton separate between first mover and creator? How does Hamilton analyse the transition from startup to pricer with scale economics? 4.) How does Hamilton advise founders to view and approach competition? Why does Hamilton totally disagree with the requirement of being 10x better than your competition? Is product innovation alone enough without brand or business model innovation? 5.) How does Hamilton define "brand"? Is brand an attainable strategy alone or is it the byproduct of something else? How transferable is brand in one category to alternative categories? How does a brand truly know when they have sustainable leverage and power? Items Mentioned In Today’s Show: Hamilton’s Fave Book: The Road to Reality: A Complete Guide to the Laws of the Universe, Stardust As always you can follow Harry and The Twenty Minute VC on Twitter here! Likewise, you can follow Harry on Instagram here for mojito madness and all things 20VC.

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

• 0:00Harry Stebbings?

  Welcome back. You are listening to the 20 Minute VC with me, Harry Stebbings. And I know I'm excited about every episode, but I'm really excited about this one today. Welcoming the author of one of my favourite books, Investors. You should send this to every new founder you invest in. Founders, it will fundamentally change the way you think about building your business. And so with that, I'm thrilled to welcome Hamilton Helmer, Managing Partner and Chief Investment Officer at Strategy Capital, a long-only public equity fund that selects securities for investment based on power dynamics, a proprietary model of fundamental value, developed by Hamilton over decades of strategy consulting, with clients such as Hewlett Packard, Adobe and more. Hamilton's also the author, as I said, of one of my favourites, Seven Powers. It's also one of the favourites of Daniel Ek at Spotify, Peter Thiel and Reed Hastings at Netflix.

• 0:44Harry Stebbings?

  If that wasn't enough, Hamilton's also an instructor in the economics department at Stanford University. And I do also want to say a huge thank you to Daniel Ek at Spotify. For the intro to Hamilton's Day, episode would not have happened without that, so I really do appreciate that. But before we move into the show today, I wanted to take a moment to mention HelloSign. A great example of a company that found success in building a product focused on user experience. HelloSign is an effortless e-signature solution, used by millions to securely send and request legally valid digital signatures and agreements. They raised a total of $16 million in funding and recently got acquired by Dropbox for an impressive $230 million. Check out hellosign.com/20vc to join the thousands of companies and founders who value fast, secure and simple e-signatures.

• 1:27Harry Stebbings?

  And also, everyone knows that building great mobile products is really hard and it takes time. With Headspin, product, dev and QA teams know the exact behaviour and performance of any mobile app running on any device and any network anywhere in the world. Headspin began in April 2015 when founders Manny Shembry and both had painful first-hand experiences as lead engineers building mobile products at Amazon, Zynga and Google. And so, starting from a blank page, they both created a platform to give mobile teams, developers, QA engineers and product managers, the ability to experience their mobile app or site the way users do, running on any device and any network anywhere in the world. And within a year, Headspin had set the new standard for mobile end-to-end testing, performance monitoring and user experience analytics,

• 2:10Harry Stebbings?

  with more than 100 of the top 200 global mobile apps relying on the platform. Join the best in mobile today at headspin.io. That's headspin.io. That's quite enough from me there, and I'm very excited to welcome Hamilton Helmer, Chief Investment Officer at Strategy Capital.

• 2:31Speaker 01

  You have now arrived at your destination.

• 2:34Harry Stebbings?

  Hamilton, I have to say, I've wanted to do this episode for such a long time. I've been a huge fan of Seven Powers. So thank you so much for joining me today.

• 2:41Speaker 02

  Oh, my pleasure. I'm delighted to do it.

• 2:43Harry Stebbings?

  Now, I know you don't know this, but it's actually the gift that we give to all new investments when we make the investment. It's a my must read for all founders. So absolutely love it. And as I said at the beginning, quite a fanboy moment for me, but I do want to start with a little bit on you. So tell me, how did you make your way into the world that we're in today? And what was the impetus for the writing of Seven Powers?

• 3:02Speaker 02

  So I've really intersected strategy from three directions. I advise companies on strategy. I've taught strategy at Stanford and also inside companies. And I invest based on insights that I gain from strategy. And so the initial impetus was advising companies. So that's sort of my empirical part. I just case after case after case. So I probably led a couple of hundred strategy cases. And that made me think about what's really important here and what isn't. The investment side was sort of a truth test. So if I got it right, I did well. And if I got it wrong, it was really painful. So it was sort of a peer review on steroids. And then on the teaching side, which I just loved, I mean, teaching at Stanford was just a great pleasure. It forced me to try to get the concepts in a way that I could communicate them well, and that they were sufficiently refined and well developed.

• 3:51Speaker 02

  And so those three things really drove me to do that. And then just on the book itself, what I realized when I got very deeply into it was there's a crux moment in strategy where you sort of form the thing that develops your strategic source of power, if you will, and that that happens in areas of great uncertainty on the fly. And then hiring somebody like me is not useful. It's actually the people on the ground have to figure that out in real time as it goes along, information's coming in. So they needed a way to think about strategy that powered them in that situation. And that was the impetus to write Seven Powers.

• 4:27Harry Stebbings?

  I would love to kick off today with that as an insertion point. As I said, a huge, huge fan of the book. But you've said before that an effective strategy mental model is valuable. If we start on the foundations, Hamilton, what is a strategy mental model first?

• 4:41Speaker 02

  Yeah, this is basic. So I'm a great fan of Pasteur's dictum. Chance favors only the prepared mind, right? And so a mental model is something that prepares your mind in a useful way so that you're cognitively able to see stuff easily and clearly.

• 4:56Harry Stebbings?

  Got you. Okay, so now we can see stuff easily and clearly. When we think about what makes the most effective strategic mental model, from your experience, what makes the most effective from maybe the not so effective?

• 5:06Speaker 02

  The bar for effective mental models is that they are simple but not simplistic. Because if they're not simple, you can't retain them easily and you can't use them. If they're simplistic, then you miss important stuff. So it's got to be exhaustive, not simplistic, but it has to be easily retained so simple. So simple but not simplistic.

• 5:24Harry Stebbings?

  Can I ask, because I always think that the best founders have this plasticity to very unique and different situations that arise. We're in a very unique environment right now where mental models and strategy may get thrown out of the window in terms of what was planned and prepared for. Can I ask, how do you think about the balance between the discipline of sticking to mental models and sticking to structures and frameworks versus airing away with certain situations that are rather unique?

• 5:47Speaker 02

  So the thing about a mental model is that it is not a strategic plan. So the model is not the strategy. The model is what works generally in terms of strategy. So then if it's simple but not simplistic, you can apply it plastically and adaptively to every situation you face. And so that's the key. You're not trying to say, okay, this is my strategy going forward. You're saying, what is it that a strategy would look like? What characteristics does it have to have? And then when you face these new circumstances, as you always do at an early stage, your new stuff is coming at you, technology's changing, your competitive framework's changing, you're not quite sure which customer segments to write. All that stuff, when it comes in, then you can view it, as Pasteur says, with a prepared mind.

• 6:30Harry Stebbings?

  Got you totally. That makes sense. When you think back to your time in the incredible journey with Netflix, what were some of the takeaways for you on the mental model construction and implementation that you really took away?

• 6:41Speaker 02

  Yeah, I mean Netflix is an amazing company and I'm a big fan of their leadership. I think Reed is amazing and Ted is amazing. There are many other amazing people there. So one of the key things is that when you face a complex strategy challenge like Netflix did, it changes over time. I mean, think of the difference between their competition with Blockbuster and the red envelope business and their competition with Disney and streaming. I mean, these are just entirely different types of situations. You have to be adaptive and culture and leadership really matters. And on the strategy side, I'm a huge believer in fostering a culture of constructive dissonance, which by that I mean is what everybody is after is the right answer, not to prove themselves right.

• 7:24Speaker 02

  Because there's a lot of uncertainty around these things and you need to have open, frank discussions with differing points of view. And that's how you can arrive at something that is strategically viable.

• 7:35Harry Stebbings?

  Can I ask you a question? It's off schedule, but it's I had a founder on the show the other day and they said that time is the biggest killer of all startups. And so if you have constructive dissonance, it actually is such a delay on time and productivity that although it may be very effective in coming to the right outcome over the long term, actually, in the earlier days, almost kind of effective dictatorship is more efficient from a time perspective. How do you think about constructive dissonance without being an unnecessary delay?

• 8:00Speaker 02

  So remember, getting strategy right gives you the potential for creating value. To realize that, you have to have operational excellence and that's what you spend almost all your time on. So if I looked at a CEO or founder's time, 99% of their time is spent on operational issues. So that's one answer is in those situations, there needs to be sometimes command and control. But I think the deeper point here is that in the early stage, you're often at sort of a pre-power stage where you're trying to scale very rapidly or something like that. And then executing well is very important, but it's not enough. So if you have an operationally incredibly effective company-

• 8:40Speaker 02

  You're very efficient, but you miss the strategy issues and in the end it won't be an attractive business model. So it's not an either or. There are times when being highly efficient and operationally astute is the key thing. But in the background, in those times when you do consider strategy, which is not 20% of your day, but when you do consider it, that needs to be an open discussion with that kind of framework.

• 9:03Harry Stebbings?

  I mean, my word, Hamilton, I'm loving this and continuing to go on schedule. But on the constructive dissonance, having kind of seen it and acted so well in multiple different companies, what can one do to actively encourage constructive dissonance? Is it more all hands? Is it open forums? What's your advice? And should it be everyone? Should it be the C-suite? How do you think about implementing and embracing it?

• 9:23Speaker 02

  Again, culture is very important. In Netflix's case, they try to have people understand what problem is. There's a phrase for it in their culture deck. I can't recall it right now. Where they're empowered by an understanding of what they're actually trying to accomplish as opposed to what they're told to do. And I think that's part of it, is people have a higher level view of what their job really is.

• 9:44Harry Stebbings?

  Yeah, absolutely. No, the kind of overriding north star. I do want to ask, because you spoke about the higher level there. Another thing that you said that really resonated with me before, which is all strategy begins with invention. Talk to me about this. What did you mean by all strategy begins with invention?

• 9:58Speaker 02

  So a lot of the discussion that you hear about strategy is static. It tells you what's an attractive destination. So Facebook with network economies and a huge user base. Boy, what a nice place to be. The pressure is off to an extent. I mean, not to say that they don't feel pressure, but it's a lot different than it was when they started. But that doesn't answer the question about how you get there in the first place. And the how you get there in the first place is that it's a creative act. And every founder knows that in the fiber of their being. They don't go around with this carefully analyzed playbook where they can say, I'm going to do exactly this today and this exactly this tomorrow and have good visibility for the next five years.

• 10:40Speaker 02

  They are having to create a company as they go forward. And if you think of each of the seven powers, each of them depends on creating something. So it might be a product or it might be... Be a brand or it might be a business model, but getting that going is how you get there. But the thing is that if you're in that process, you need to know what attractive destinations are before you can understand what's a good way to get there. So it's not that you start by knowing, oh yeah, I'm going to be a scale economies business right from the start or something. But you need to know the scale economies per se are attractive so that if the opportunity for them arises, you seize it.

• 11:20Harry Stebbings?

  Can I ask, how granular do you have to be in terms of determining the attractive destination? Is it determining the exact economy of scale that you're looking to achieve? Is it determining that it's data network effects as opposed to just network effects that you want to achieve? How granular does one have to be?

• 11:35Speaker 02

  Yeah, so there are two ways of thinking about that. One is in the early stages, when there's a huge amount of moving parts. The granularity at first may not be that great, but ultimately it is extremely granular and idiosyncratic. So when you think about scale economies, just saying that doesn't get you terribly far. You have to know exactly what's going on. So if I had a nickel for every time somebody said to me, oh yeah, we're going to get more data and that gives us more information about customers and that allows us to serve them better. And that gets us more customers or a positive feedback loop. That almost gets you nowhere at all. It has to be way, way more granular than that. For example, is that curve linear or nonlinear?

• 12:17Speaker 02

  So if that flattens out, the competitors are essentially equal to you, even though they may be smaller. Then it's no longer a scale economy that's important. And just to give you an example, if I were looking at a company to invest in, it would probably take me, and these would be well-known public companies. It would probably take me weeks to try to understand exactly what was going on. And that's with all that information. So you can imagine going forward if you don't even really know. So in the end, it's highly granular.

• 12:45Harry Stebbings?

  Yeah, no, I am pleased to hear that it's so granular. I think that's really important. You mentioned scale economies there and again off schedule, but I'm curious. Economies of scale is one of the seven powers and I've wanted to ask this for quite a few years. So I'm really taking the opportunity here, Hamilton. No startup starts with economies of scale. What's been your Kind of lessons and observations from seeing the transition from startup without that inherent kind of pricing power of economies of scale to your Amazons of the world with inherent and incredible economies of scale today with their power and leverage.

• 13:15Speaker 02

  So when you talk about power, it's a very high bar because it's a, if you think mathematically, it's an inner envelope concept. It has to be an advantage, not just relative to this company or that company, but relative to every single current and potential situation. So it's both direct competitors and functional competitors. So Amazon would have to compete with Walmart, for example, as a functional competitor. It's also potential competitors. So a startup may feel like they have a scale economy relative to a startup down the street that got started a year earlier. But if you play that out versus the larger set of people they have to consider, then it's probably not the case. So really powerful scale economies, there are many instances

• 13:59Speaker 02

  of it, but in terms of being the source of power against all the types of competitors you have to consider, they're much rarer than you would think.

• 14:07Harry Stebbings?

  Absolutely. No, I do agree in terms of their rarity. I do want to get back to the kind of strategy, beginning with invention, though, because the first thing that came to my mind was the success of copycats. And so potentially divisive question, Hamilton, I hope that's okay for me to ask. How do you explain the success of copycats when your Snapchat is so successfully copied by Instagram stories or Netflix's by Love Film, and there is a success with very little change in either product or business model? How does one explain that?

• 14:35Speaker 02

  I think the issue there is that with the creation or invention doesn't mean first mover. So the fact that MySpace came before Facebook doesn't in the slightest, in the way I think about creation, diminish the creative act of all the things that Zuckerberg and others at Facebook have done to make Facebook a great company. So first mover and invention, to me, are not at all synonymous. It's more what I'm dealing with is the ongoing creative act of adapting to what's going on. And you get ideas from everywhere, and those ideas might even be from a first mover.

• 15:11Harry Stebbings?

  Yeah, no, that does make sense. I really like that kind of separation between first mover and the creative act. Often found as a toll when it comes to the creative act and the invention that they're creating, it has to be 10x better. I have no idea where 10 came from, but it has to be 10x better. How do you feel when you hear this, having seen so many innovative companies really creating categories that you have done?

• 15:30Speaker 02

  So I utterly disagree. So as best as I know, the 10x came from Andy Grove, the CEO of Intel. And that's what he observed in the semiconductor business was that for a generation to be different, it had to be 10x. And in his space, that was probably a very reasonable empirical statement, but it is no guide in general. So for example, if you, Harry, came up with a battery that was two times better density and met every other criteria of current batteries, you'd be a billionaire. And we'd have 600 mile Teslas instead of 300 mile Teslas. That's 2x. So the correct measure of this, and you know this as an investor, the correct measure of this is fuzzier, but more general and correct, I think. And the correct measure of this is compelling value,

• 16:15Speaker 02

  which is that when you raise the possibility of this new product or service with a customer, the response is, oh, that's nice. Tell me when you have a beta. It's, oh, my God, I have to have it. And so that's a very fuzzy response, but that's really what we're dealing with here.

• 16:29Harry Stebbings?

  Yeah, no, I totally agree with you, especially in terms of the customer really pulling out of the hands of the provider. Speaking of kind of the differing innovations that one can have, though, I'm interested. Is innovation across one realm enough? So it could be business model, it could be product, it could be distribution. But is innovation across one of those realms enough? Or does it have to be across multiple realms?

• 16:48Speaker 02

  So remember that potential value is equal to power times market size, right? And power comes from the simultaneous satisfaction of a benefit. Something about your business makes you more money, you know, lower cost or higher prices, plus a barrier so that others can't easily emulate this improvement that you've made. So the benefit side, doing something better is absolutely common, essential, and has to be built into the fibre of a company. So Starbucks changing from one coffee cup size to- From three to one, that's an innovation and it saves the money. Is it a source of power? No, of course not, because the barrier side isn't there. Other people can go to one coffee cup too.

• 17:30Speaker 02

  And so, of course, you have to have many types of innovations, hopefully across every functional aspect of your business all the time, as much as you can. But almost all of those will either be able to be emulated by others or don't materially move the bar, their minor improvements. But in the ones where there is a barrier and they are significant, it is possible to have those in just one area, that particular one. So if you look at Netflix, the idea of not going to stores, but doing it with red envelopes, that would have been the innovation. And that's one, and that was very important. Or if you look at their current business model, the notion of going to original content and going international.

• 18:14Speaker 02

  Those were huge business model innovations. But every day, Netflix is an enormously innovative culture. Every day they're innovating in a million, probably almost not exaggerating ways. But those are separate from the strategic piece, which are the innovations that are associated with a benefit. And it's those two things together that create durably attractive business models.

• 18:35Harry Stebbings?

  I love that in terms of the example. I think Netflix is incredible in terms of that translation to original content. I do have to ask, you mentioned market size there. And honestly, Hamilton, I've had many investors on the show and you get very divergent opinion. Peter Fanton said he laughs when people say they look for big markets. Then the majority of others say you've got to have a huge TAM. Where do you sit in terms of market size analysis? And how would you advise my thinking? Because often I honestly oscillate.

• 18:59Speaker 02

  My view is that if you can pretty carefully estimate your market size with great confidence, you're probably too late. So I'm probably not giving you much solace here. And this comes back to, one of the things I loved about Steve Jobs is, I think he formed it in these words, but is the distinction between wants and needs, right? So what you'd like to do when you create something is to understand a need that somebody has, but is not yet really expressed in a want. And so that's why markets are. They fail in really new stuff because customers don't know what you're talking about. But you, as a founder, can look at a space and say, you know, with this technology emerging and our expertise and stuff,

• 19:42Speaker 02

  we can do this thing that will really make people happy, even though they don't really have the thought in their mind right now that they want it. What does that tell you about market estimation? It tells you that nobody really knows. But you can look at big things. So you can look at, does the need that you're satisfying, does it sort of have a character of being rather large? And so I'm talking large error bars here, but kind of order of magnitude estimates. And I believe that is a reasonable thing. Sort of look at this space and say, you know, this kind of seems like it's a big deal. So Amazon shopping, you know, but even that's a moving target. So Amazon started books, right? But I think that order of magnitude sense is a good thing to keep in mind.

• 20:24Speaker 02

  But precise estimation, I, as somebody who's sort of a numerical analytic type, I don't have a lot of confidence in it. And if you can do it, it probably means that things are so well thought out and documented so far that you're probably too late.

• 20:37Harry Stebbings?

  Well, I'm very glad to hear that I'm not the only one that struggles with it. And I like the element there of kind of picking the macro trend and trying to kind of eyeball that from that perspective. Do you want to ask us, with the trend itself and with the market itself, there's always competitors in the market. And I have to ask, in terms of competitive mindset, what mindset do you advise founders take when it comes to assessing their competition?

• 20:55Speaker 02

  If you don't mind, I'll use a personal analogy here, and it will betray my own view of life for better or worse. So I think when you think about your own career, you can pursue it from the inside out or the outside in. And the inside out is that you have your own creative core and dispositions. So for me, I'm kind of an idea person and kind of a large scale concept person, not great on details and very interested in sort of economic relationships and that kind of thing. And so you have these inner drives that are you. And then if you can figure out a way to earn a living from that, not only will it be enormously satisfying

• 21:38Speaker 02

  because it will touch what is really you. And your own creative core. But ironically, you actually will be more successful because since it touches that creative core, you can be an original. And so when you go to work, it's just you. And that's incredibly powerful. Whereas the outside in is, oh, well, let's see now I've got to get into a great school and then I should get a job with this kind of company. And then I should do that. And then I should get my advanced degree and then collect all these markers. And then everybody will think I'm brilliant and blah. So you're driven by what the expectations of you of others and what is normally considered success. And the problem with that approach is it drags you away from what's uniquely you.

• 22:23Speaker 02

  You try to become what others think you should be. And so it's very similar with companies. So if you're a company that focuses just on competitors, it's an outside in type of situation. You lose touch with your own creative core. Your culture is not unique. You don't have that ability to tap into something that really makes you different and valuable. Now, having said that, if I'm an inside out person, I also have to think about what careers are out there. You know, maybe I really like doing something that won't make any money. So there has to be an envelope of realism that constrains that. And the same with if you have a company, you have to know very well what your competitors are up to. If they go down a direction that's threatening to you, that's important to know about.

• 23:07Speaker 02

  Maybe they come up with stuff that you can easily imitate that helps you as well, but doesn't interfere with. That's all fine, but you have to have that central commitment to be your company. And so my advice is pay a lot of attention to competitors. Ultimately, power is about being better than them, but never give up that uniqueness and focus on your own creativity and moving the ball ahead yourself. Is that helpful?

• 23:33Harry Stebbings?

  It's super helpful. I love that balance between inside out and outside in. And it made me think of me doing the show with this, you know, me just loving doing the show and having these conversations. So it made me very happy when I heard that. It was a good moment for me. I do want to say, because we chatted before about Daniel, obviously, at Spotify, who made the introduction. And I spoke to him before the episode. I was saying, what should I ask Hamilton? Where would you really kind of dive in? And he gave me some suggestions. And so the next bit is largely Daniel. I have to give him full credit for this, but his first one was when you look at seven powers today and the incredible impacts that it's had, how would you encourage founders to use seven powers? When they build out their MVP and their initial go to more.

• 24:10Speaker 02

  I think that when you're building out a company, you very often don't really know what your power is going to be. You have some maybe hypotheses and so it's not like you're going to say, oh, okay. Five years from now, we're going to have scale economies and so we're going to do it. It's more that you want to be aware of what it is that creates a durably attractive company. And that's what the seven powers are and just have multiple people in the company have that as a useful framework. Then you can have intelligent conversations about it as you go forward. But keeping in mind that in early stages, it's so important to be adaptive. There's all kinds of stuff that you simply can't anticipate.

• 24:51Speaker 02

  Way back when, maybe a hundred years ago, Frank Knight and Seminole Work had made this great distinction between uncertainty and risk. So risk is when you know the probability distribution, like flipping a coin. And uncertainty is things that you just don't know. And I think Keynes used the example of what's the copper price going to be 15 years from now or something like that. And no amount of analysis or anything can narrow that down. And so you're facing uncertainty. So that's why I come back to the first question you asked about mental models. You want a number of people in the company to have a solid mental model of strategy so that they can have ongoing discussions about it. And when they're making decisions about do we go this way or that way, it helps. Remember, strategy isn't everything, but it is something that if you don't get it right, in the end, it won't be good.

• 25:35Harry Stebbings?

  Now, one of the seven powers is brand and brand is such an overhyped and overused word in many cases, which in some cases kind of has lost its meaning in certain cases. So I'd love to hear your thoughts on how do you define brand first? Let's start with that.

• 25:48Speaker 02

  So it's very important, and this is just a choice of vocabulary. It's very important to distinguish between brand as power and brand awareness. So for my investment business, I could run a Super Bowl ad. Of course, the SEC would probably. Put me in prison, but aside from that, I would then have brand awareness. But that's not power. I paid for that. Other people could do it. It's as the academics say, it's imitable. So there is no barrier associated with that, and it's just a marketing expense. So brand as power is that somebody will pay you more for a good or service that's objectively identical, and the reason that they'll do that is either it makes them feel good.

• 26:30Speaker 02

  So for example, in the US, there are many people, I haven't helped me, and probably one of them, that if I pull out an iPhone in front of somebody, I feel a little bit better about that than if I pulled out a Samsung. And Apple can charge more as a result, even though they're probably, for all intensive purchase, objectively identical. Apple would argue that, of course, but that's probably the case. So it makes you feel good, or there's an uncertainty reduction. So when IT manager in an enterprise is buying a computer service from somebody, it's the old thing about you buy IBM and you can't go wrong. It's that they can purchase something that is probably identical, but there hasn't been a history that gives them this assurance that it's probably fine.

• 27:15Speaker 02

  And the thing is, for somebody to develop that sense, either a feeling good or assurance, takes time. If it doesn't take time, then there's no barrier because it's imitable. Somebody else can build up the same assurance. So it's those situations where that takes a long time. So if you think about Hermes bags, if you pay $50,000 for a Kelly handbag, it's not because it's better than another handbag, particularly in functionally. It's that it has all those affective associations. You bring it out and other people go ooh and ah, and you feel good about it. And for it to have gotten that way, they had to be in business, whatever it is, 150 years or something. So there's a very long time span, and that is the barrier,

• 28:00Speaker 02

  that it just takes a long time to build up those expectations from customers.

• 28:05Harry Stebbings?

  Absolutely, and if my mother is listening, please erase the Hermes bag from your memory, mother. That is not how.

• 28:12Harry Stebbings?

  I do want to ask though Hamilton, in terms of the brand itself, is it an attainable strategy alone to target, or is it a by-product of something else, of social validity, of customer adoption? Is it a sole strategy, or is it the by-product?

• 28:25Speaker 02

  I think it depends on the stage you're at. So if you're an earlier-stage business, it's not a thing that you would want to pin your entire future on. It's certainly something to aspire to, that's perfectly reasonable. But if that's the only aspiration that you have, you better be careful. And the reason for that is, one, it takes a long time. How long? I don't know, at least 10 years, I'd say. Maybe it can be done, in some cases shorter, but if it gets much shorter than that, you worry about whether there in fact is a barrier, because others can do it, and then it's no longer a source of power. And the other is that establishing a brand is hard. It's fraught with all kinds of uncertainty.

• 29:06Speaker 02

  So if that were your only strategy to begin with, the likelihood that you'd get there is, because we're back to creative acts again, building a brand involves enormous number of correct creative acts over a long period of time. Think of all the decisions to go into what products, and how you advertise them, and which celebrities you use and don't use, and which segments of the market you go after, and how far you extend the brand. And they're hard. I mean, I'll give you an example. I have in my cabinet at home a bottle of Hermes cognac. And the story behind that is, a friend of mine is one of the Hermes family, and he was over for dinner one night and brought this bottle with him. And Hermes tried to do cognac, and it didn't work. And so there is no such thing as Hermes cognac

• 29:50Speaker 02

  anymore. So these are not easy decisions about what to, and that's with already established incredibly powerful luxury brand. And so it's something you can aspire to, it's a good thing to aspire to. But a different situation is if you already have brand, then it's a very legitimate strategy. So if you are LVMH, then of course, your strategy discussions are so much about brand, because you already have it. And then those are discussions about how to reinforce it, how not to destroy it, you know, all those things. But as an early-stage company, great to aspire to it if that's the only thing in your cupboard, watch out.

• 30:24Harry Stebbings?

  That's fascinating when you said about the Hermes cognac there and they thought about the transferability of brand across segment and what works and what doesn't. Final question before the quick fire there that I do have to ask, and it's a lot of people look to Fang when they think of these seven powers today. When you think of Fang and the seven powers associated, which are you most impressed by and why do you think that is?

• 30:43Speaker 02

  Yeah, I have to say this is one I won't make a choice on because the reason people thought up that acronym is they are all impressive. So these are all companies that are triple digit or quadruple digit billion market cap. So these are durable market caps. So they're all phenomenally successful. They're at the top of the heap and they absolutely are explainable in terms of power. So Facebook, obviously network economies, Apple is their variety, brand, switching costs, scale. Amazon is primarily scale, Netflix is primarily scale, Google is probably network economies. And if you took away those sources of power, they would not be the companies they are. And so there are very good examples of exactly what I'm talking about.

• 31:27Harry Stebbings?

  Yeah, no, I totally agree and very fair answer on that one. I do want to dive into the quick fire there, Hamilton, which is essentially I say a short statement and you hit me with your immediate thoughts. About 60 seconds or less, does that work for you?

• 31:39Speaker 02

  Okay, fair enough.

• 31:40Harry Stebbings?

  Okay, so as I said, one of my favorite books is Seven Powers. What's your favorite book and why?

• 31:45Speaker 02

  On fiction, I'd say Neil Gaiman's Stardust is probably my favorite book. And on nonfiction, maybe Roger Penrose's Road to Reality.

• 31:55Harry Stebbings?

  Wow, I haven't read Road to Reality. Can I add that one to the list? What case went against your framework most vehemently and succeeded and why did it succeed?

• 32:03Speaker 02

  So seven powers, as far as I know, is complete and I'm, of course, I'm always looking for the eighth power.

• 32:10Harry Stebbings?

  That's a new book, Hamilton.

• 32:12Speaker 02

  It is. Actually, I am working on an extension, which is quite interesting. But so I can't say that they're durable if they're companies that have durable, fundamentally attractive models that don't satisfy seven powers. But what I can say is that this may violate your time limit, but I think you'd be interested. What I can say is that there are companies in the invention stage that do things that are so unbelievable that if you'd asked me when they were starting out if they could do it, not from a seven powers framework, but just from a probability framework, I would have said it was almost impossible. And the award I would give on that one would be to Tesla. So if you asked me 10 years ago, could these three things all be true?

• 32:54Speaker 02

  Fully electric cars would become what every automobile company in the world thought was going to be the future. That another firm would actually join the ranks of world scale automobile companies and that a US company would become the undisputed world auto technology leader. If you asked me the joint probability of that 10 years ago, it would have been so close to zero, you wouldn't have known the difference. So just absolutely extraordinary.

• 33:19Harry Stebbings?

  Yeah, I think the takeaway there is never bet against Elon. But an ultimate question, what's the single biggest challenge of your overall strategy today?

• 33:28Speaker 02

  So I think for me, I'm always looking for what are ways to extend the concepts in an interesting way. And the thing that I'm really interested in now is granularity around the issue of what really comes under a power umbrella. Because when I talk to founders and they're always thinking, should we go into this product? Should we go into this market? Should we add this feature? All these things. And power, as you can guess from this conversation or from reading the book, is really hard and it's really valuable. And so if you get it, it is so important to fully exploit the advantage of it. And so what does it include? And so I'll give you one quick example, which is a question's often asked to me, should I go international?

• 34:13Speaker 02

  And so this comes back to your question about granularity of power. So for example, if you ask that question of Uber and you asked it of Netflix, you get Completely different answers. So if you look at Uber's source of power that they might have versus, for example, an upstart, it would be the scale density, physical scale, regional scale density economies. In a particular region like the Bay Area, if they have enough riders and enough customers, they can have far more efficient takes of ride, which for a customer translates into a cheaper ride that arrives sooner. If you then take that model to Ulan Batur in Santa Clara County, it doesn't help you at all. You have some software stuff and so on, but the basic source of power isn't there.

• 34:57Speaker 02

  So it is a regionally specific type of power. For Netflix, on the other hand, if they go into another market, if there is sharing across markets, and I suspect there is, say you go into India and the Indian audience likes, say, 20% of your catalog in the US is something that Indians like to watch. That's a gigantic advantage versus somebody who does just India. All of a sudden, you get this huge bump of content, basically for free. So it's international business. So for me, the challenge right now is thinking deeply about all the ways in which you can extend power and which cases it applies and which case it doesn't. So that's just something I'm working on.

• 35:38Harry Stebbings?

  Well, I can't wait to see that articulated in the new book. I will be the first one in the store buying it, but I do want to finish today, Hamilton, on a very tough one. What advice do you wish you'd been given 20 years ago?

• 35:49Speaker 02

  Yeah, when you mentioned this question before, I told you for me, you probably should make it 40 years. Engage my age. So I think for me, it's probably the importance of mentors. I'm an introvert and sort of radically independent. And so I don't naturally go to others for advice or even help. Even so, I've had some amazing mentors who sort of willy-nilly have tagged along with me and helped me out. And those people have been life-changing for me. And I think if I'd understood how important that was, I probably could have been more proactive about it. I think mentors can be incredibly valuable.

• 36:26Harry Stebbings?

  That's incredible to hear. And absolutely, I mean, they've shaped so much of my career and thinking. So I couldn't agree more with you there. But Hamilton, as I said, this is one I wanted to do for such a long time, huge, huge fanboy. And thank you so much for joining me today.

• 36:37Speaker 02

  Such a pleasure, Harry.

• 36:41Harry Stebbings?

  My word, I so enjoyed that one. And as I said, Seven Powers is an absolute must-read, so do go and check it out. And if you'd like to see more from us behind the scenes, you can on Instagram at HStubbings1996 with two Bs. I always love to see you there. But before we leave you today, I wanted to take a moment to mention HelloSign, a great example of a company that found success in building a product focused on user experience. HelloSign is an effortless e-signature solution used by millions to securely send and request legally valid digital signatures and agreements. They raised a total of $16 million in funding and recently got acquired by Dropbox for an impressive $230 million. Check out hellosign.com/20vc to join the thousands of companies and founders who value fast, secure, and simple e-signatures.

• 37:24Harry Stebbings?

  And also, everyone knows that building great mobile products is really hard and it takes time. With Headspin, product, dev, and QA teams know the exact behaviour and performance of any mobile app running on any device and any network anywhere in the world. Headspin began in April 2015 when founders Manish and Brian both had painful first-hand experiences as lead engineers building mobile products at Amazon, Zynga, and Google. And so, starting from a blank page, they both created a platform to give mobile teams, developers, QA engineers, and product managers the ability to experience their mobile app or site the way users do, running on any device and any network anywhere in the world. And within a year, Headspin had set the new standard for mobile end-to-end testing, performance monitoring, and user experience analytics, with more than 100 of the top 200 global

• 38:09Harry Stebbings?

  mobile apps relying on the platform. Join the best in mobile today at headspin.io. That's headspin.io. As always, I so appreciate your support and I can't wait to bring you a fantastic Founders Friday this coming Friday.