Invest Like the Best with Patrick O'Shaughnessy - Sarah Tavel - Consumer & Marketplace Investing - [Invest Like the Best, EP.168]

Episode Date: April 7, 2020

My guest this week is Sarah Tavel, a general partner at Benchmark, working alongside past guests Bill Gurley and Chetan Puttagunta. Sarah has a long history as both an investor and as an operator.  She was an early product leader at Pinterest before joining Benchmark. Sarah has become one of my go-to resources for topics like networks, consumer technology, and marketplaces among many other topics. I’ve used her framework for how to think about client engagement, company data, and marketplace liquidity and quality over and over again in my business life. I’m so excited to finally have her on the show.  Please enjoy our conversation. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Show Notes 1:24 – (First question) - Lessons learned from watching the food delivery space 5:44 – Hip camp and how they are thinking about the space rental sector             5:45 - The a16z Marketplace 100 7:47 – Valuing private companies vs public companies 9:37 – Building marketplaces 14:24 – Tipping a market             14:30 – Bill Gurley Podcast Episode 18:09 – How to incorporate reputation scores into a network 19:55 – Search ranking as a tool for marketplaces 21:00 – Size of marketplaces vs their competitors 22:15 – Niching of marketplaces             22:21 - Chetan Puttagunta Podcast Episode 23:26 – State of the consumer social sector 27:50 – The LinkedIn problem and how she would build a social platform 30:42 – Things that are piquing her interest in the consumer space 32:20 – Lessons learned about scaling while working at Pinterest 38:42 – Pricing and the marketplace 41:25 – Identifying and optimizing a Core Action in a digital business 44:18 – Accruing benefits and mounting losses as part of the product design 47:48 – Her investment in Reci 52:18 – How should companies gather the best data from their business 56:03 – Lessons to SaaS investing 56:29 – Kindest thing anyone has done for Sarah 57:45 – Most interesting philosophy lesson             58:09 – Creating a Kingdom of Ends   Learn More For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on Twitter at @patrick_oshag

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Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaughnessy is the CEO of O'Shaunicee Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunsi asset management. This podcast is for informational purposes only

and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions and the securities discussed in this podcast. My guest this week is Sarah Tavill. Sarah is a general partner at Benchmark, working alongside past guests, Bill Gurley, and Chathin Putagunta. Sarah has a long history as both an investor and as an operator. She was an early product leader at Pinterest before joining Benchmark. Sarah has become one of my go-to resources for topics like networks, consumer technology, and marketplaces, among many other topics. I've used her frameworks for how to think about client engagement, company data, and marketplace liquidity and quality over and over again in my business life. I'm so excited to finally have her on the show. Please enjoy our conversation.

So, Sarah, let's start with something that you've been thinking about recently that everyone will understand because they're users of the companies, which is the lessons you've learned from, looking at the food delivery companies and sort of just this space, generally speaking. Why is this interesting? Why is it so incredibly competitive? Obviously, it's a big market. What are the main takeaways that you've learned studying this? Yeah, you know, it's such an interesting space. What a case study. It's been the confluence of so many different things that just been happening in our market more broadly. The first thing that I just, you can't help but reflect on. And I think is something that I think about when founders come to me and they're looking to start a new marketplace and all they can see is incumbents everywhere and not see where should I start a new

marketplace, those types of questions. But you look at food delivery and you had a dominant incumbent, which was Grubhub slash seamless web at the time, that had probably the way that they thought of the market, they had 60% or something of market share. They were the definition of a dominant incumbent. And so why now, I mean, just recently, I think it was Vox that released some data that showed that Doordash had actually eclipsed Grubhub in terms of market share. And so it's a very unusual transition to happen in the market. And so what was a vulnerability? And why did this happen? And I think that there was two things that happened in this market. One of them was actually a self-inflicted wound by Grubhub, and the other was a more macro thing happening in the broader market.

So what was a self-inflicted wound? What Grubhub did was that they conceptualized, the supply. So restaurants were the supply side for those. I'm sure everybody is ordered on Grubhub. So how Grubhub limited their market was that they limited it to really independent restaurants that could do their own delivery. That was how they conceptualized the market. They didn't aggressively go after training restaurants to do their own delivery or actually starting to think about how do we give restaurants that don't have their own delivery a means of doing delivery. They didn't really attack that aggressively. And so what Postmates, and I think Postmates was the first to really realize, was that this was actually an Achilles heel of Grubhub, because if you could learn

from what was happening in, you know, ride sharing space and actually bring a third side of the marketplace into this marketplace, which is the delivery itself, you create this opportunity to onboard all these restaurants that weren't at the time doing delivery. And so you could actually leapfrog the availability of the incumbent with a lot more restaurants and therefore create more liquidity. So that was a real insight that, again, I think it was Postmates that had it. And they, and then DoorDash and then Uber Eats went after this Achilles heel incredibly aggressively. One thing that's interesting is that this is something that's played out, not just in food delivery. It happened in home sharing.

If you think about it, VRBO and Home Away, or started a decade. I mean, I guess VRBO was a decade before Airbnb. But Airbnb did a similar move, which is that they figured out a different atomic unit of supply, which let them leapfrog the liquidity of these dominant incumbents. Booking.com did the same thing to Expedia, where they came in with a different cost structure, a fee structure, which let them dramatically increase the supply of hotels, which again, let them leapfrog. What was that last one? I'm unfamiliar with that last one. So what specifically did booking do? So what booking realized was that they came. came in and let's call it Expedio was charging or Price Line was charging 30% rake, which meant that

if you were a hotel, if you're a small independent hotel, you just couldn't afford to list your inventory on the dominant platforms at the time. And what booking did is they came in and they had a different fee structure, which was a lot lower. Call it 10, 15%. And because it was so much lower, it actually made it economic for all these independent hotels to therefore list their supply on booking. And then again, it leapfrogged the incumbents with more availability, more supply, therefore more liquidity. I was looking at the A16 Z 100 top marketplace things that came out a couple days ago and Airbnb, I think is number one. I was blown away by the market share of the top marketplaces like the concentration is crazy. I'm curious when you were looking at Hip Camp.

And you can describe what Hip Camp is for people that are. unfamiliar, how the thinking around Airbnb, because it seems kind of similar to the story you're talking about, it's like a new unit of supply. So maybe describe your thinking through that investment. So interesting. For those of people who don't know, Hip Camp is building a marketplace and people will describe it as Airbnb for land, which is just the idea that land owners can post their land on Hip Camp and let people who are either hardcore campers. I don't know about you, not me. I'm a glamper. You a shower.

Yeah, I need a shower and a roof over my head. And so they also have people who will post their lodges, their tents, et cetera. One of the searches you can do on Hip Camp is you can find a place to stay near a hot spring. That type of specialized search, when you have a marketplace that's picking off a particular vertical, a particular niche, you can create liquidity in a way that the bigger marketplace can't because, A, you stand for something different. And I can unpack that a little bit. But B, you can create these experiences that are discovery experiences that are more specialized and therefore create more liquidity for this particular use case. Another thing you can do on HIPCamp is find a place that has an RV hookup.

The question that you always ask yourself when you're looking at these types of companies, and I ask myself this for HIPCamp, was, is this going to be a one marketplace kind of market? Is it really just Airbnb? Or can it look like something that happened with Etsy, which was that, you had eBay and Etsy and eBay tried to compete with Etsy, but never was really able to own the niche that Etsy had in people's minds and this engagement model and everything. And so you ended up having these two marketplaces. And Etsy, as you know, is a very successful public company. And so we made the same bet for Hip Camp and their ability to really own this, what feels like a

niche and expand from there. We've got probably three or four verticals that we'll explore in this conversation. Since we're already there, I'd love to begin with marketplaces. I know that this is something you've thought sort of endlessly about. You sort of have this hierarchy in your mind of marketplaces. I'd love for you to lay that out and describe why these make such interesting businesses and therefore interesting investments. Yeah. And if you don't mind, I'd love to go back, actually, to one thing, which is in the food delivery, which is the macro thing that was happening. Because this is such a big thing, which is think about Grubhub, and it's a public company. You know better than anybody. When you're a public company, how you're valued is so different than how private companies are valued. And so you are in Grubhub's position and all of a sudden you have these incumbents coming in your turf and they're playing by completely different rules. They're playing by a set of roles that you would never even think to play by. You know, they're going over the top for all these restaurants. They're spending money without any.

thought of kind of contribution margin. It's all about this raise to growth. And so interesting to see how I can imagine being in Grubhub's position and thinking to myself, all right, well, how much money are these private companies actually going to be able to raise in order to kind of keep doing what they're doing? It just seems so uneconomic. And then you have DoorDash raising $2 billion, postmates raising, I think it's $900 million. I mean, it's just such a different ballgame. And I think the outstanding question, and this will, I guess, segue to the marketplace. The hierarchy that you just alluded to is what equity value is actually going to be created from this incredible amount of spend at the end of the day. I mean, I think we'll see when the public markets vote if they get a

chance to under or dash. But so I raise that because it's interesting to think about one of the things that I see all the time when founders come in is that they're building these marketplaces is that they're running this race to growth. And I think about postmates here for this race to growth, which is postmates went headstrong into San Francisco. They went after big cities. They went after a very, very broad definition of what they were building. And they did build a lot of GMV, but the question is, did they build a lot of liquidity? And that ultimately is what you end up building, why a marketplace is so special is because you're building. liquidity in a market such that the market can one day actually tip to you because you're building

network effects. And so I started to really think about this and just reflect on the boards of a few marketplaces now and just getting to work with Bill and all those things and started to really think about, well, if you are building a marketplace and your product leader at a marketplace company, what should you be focused on and how do you maximize your chances of actually building real equity value in one of these companies. And so the way I ended up thinking about that, well, the first step always for a marketplace, and this is what everybody, there's a lot of fantastic content out there about this, which is kickstarring the marketplace. How do you get something started? You solve that really difficult chicken or the egg problem. And so people like Casey Winters and

Lenny Richiezicki and Andrew Chen have all written really great content out here. But kind of To my earlier point, it's not about racing to grow. If your goal of a marketplace is to tip, then you have to start from there and work backwards. And how do you actually think about growing in a way that creates the conditions for tipping, which is a nuance. And when you think about it that way, what you realize is that there's actually a few things, which is number one, you really have to start with a constrained market. You really, really need a focus. It's part of the reason why at Benchmark, we talk about, we don't really care about how big the initial market is, because there's actually something really, really right about focusing on something really

small from the very beginning, because that gives you the highest probability of getting to network effects really quickly. The second thing is that you want to set yourself up for success to the extent that you can find greenfield opportunity. And so going back to food delivery, you've got Postmates going into San Francisco, grubhub's already there. There's just a lot of competition in San Francisco. It's a really big city. Not as big as San Francisco would like to think, but it's a big city. And then you have DoorDash. And what Doordash did is they went after the suburbs of San Francisco. There was no competition

there. It was a pretty hard market for any restaurant to do delivery. And so it actually made it a better place for DoorDash to start because they could prove out the core hypothesis and get to liquidity much faster because there was nobody else there that was competing with it. And the third is just driving, you can use product and policies to create that liquidity that you're really driving towards. And so have you ever ordered from Goat? No. You're familiar with a goat? I mean, I love this founding story of goat. What was it? I don't know the story. The founders were working on another company and it wasn't working. And I think at this point they were on fumes basically and they were trying to figure out what the pivot was. And one of the first,

of the founders had ordered a pair of sneakers off of eBay, opened the box off. They were a counterfeit. He was just like, ah, well, this sucks. And that was the insight that drove them to start Goat. And the thing that you can imagine being Goat, starting a company, you look at eBay, God knows how much supply they had, but people didn't trust the marketplace. And so they used this assurance of authenticity to create trust, which ended up opening up this market in a really special way. So it just shows you that it's not actually just about supply to create the conditions for liquidity. It's about trust, the product that you create that's delightful. And so you're doing all these things. You're creating this playbook that is all the hard things to

kickstart your transactions to get that first crank of your flywheel. And then if you figure out enough where basically people aren't leaving you. You're having your cohorts flattened out at some point so that things are starting to make sense. Then you go to my level two, which is about tipping your market. And so I know, I mean, you're a student of this too. How do you tip a market? Can you define what that even means? Sure. So the idea about tipping and Bill talks, my partner, Bill Gurley talks about this quite a bit in the podcast, I believe he did with you, But the idea is that you want to get to a place where, if you imagine a flywheel, that you're able to get this flywheel to start spinning and building momentum

and have a network effect start to kick in so that the market goes from you having to do all the work of pulling people to you to it actually starts to tip towards you. And all of a sudden, instead of you doing all the things that you figured out in your level one playbook that I talked about, they actually start coming to you. And it starts being... Literally tip, like stuff rolling your direction versus it. Yeah, that's exactly right. You're pulling it up the ramp.

Yeah, yeah. And your cack starts going down because instead of having to pay to acquire all your users, they just hear about you. You become the game in town. So you want to... You become a default effect. You want to become the default. That's a really special place.

And so step one, at the core, it's a network effect that kicks in. And you really have to understand that. You know, a flywheel is, in a way, cliche, but it's such a great articulation of a theoretical question for most marketplaces when they're just starting out because they have no network effect. They can see how if this starts to spin, if I start to get more drivers, more consumers, that a network effect will start to drive the flywheel forward. And so what this ends up looking like is that you maximize, what you maximize, what you're

first you have to identify and maximize these tipping loops that I think about. So first type of tipping loop is growth. Everybody talks about this. And it's a really big part of building a marketplace because what you want is to be able to get to a place where you're a bigger and bigger percentage of whatever market that you're in. That's when the market starts to tip in your direction. It's really a function of how big you are relative to the market that you're in. And that's things like buyer-to-buyer referrals. It's people leveraging SEO. It's collaborative features. I don't know if you ever had someone share a Caviar order with you. So you could add, well, Caviar did this great job of I create an order and then I have,

I can invite some friends to order with me and then they collaborate on the cart. It's very smart feature. DoorDash ended up copying it or doing a pretty good job of being inspired by it. And then there's a second type of loop. I think about it as part of kind of the social product background is retention focus loops. And the, The nuance with retention-focused loops that I think about for marketplaces is that they actually improve the liquidity quality of the marketplace. And so you think about reputation in a marketplace, which every marketplace out there has reputation in some shape or form.

As someone has an experience and writes a review or rates the supplier in some way, two things happen, which is number one, good suppliers get more and more of of the marketplaces buyers. So the good ones retain better and the bad ones churn out, which then leads to this virtuous cycle of then more and more buyers end up having a good experience. And so you're both, you're letting the natural transaction kind of improve the liquidity, improve the quality of the suppliers that you have. And at the same time you get this win-win,

which is that the suppliers that you want to retain, retain better. And the suppliers that you don't want to, because they're not leaning in or they're not doing a good job, churn, and you have buyers, more and more buyers having a better experience. Have you had experience with different kinds of reputation scores? So there's the obvious ones, one through five rating or something like this. Anything really clever or interesting that you've seen for how to bake reputation into the system? Yeah. I mean, I think that the most interesting thing is when reputation is in the beginning, it's the marketplace's best guess at what behavior they want to incentivize for their suppliers.

But then what you start to see happen with the more sophisticated marketplaces, and I'll take Airbnb as an example, is that they actually codify what the behavior is that they want with some kind of certification or badge. So a super host on Airbnb as an example. If you're a host and you're responsive, you have an average rate. of whatever, 4.9, or I can't remember what exactly it is. There's some other criteria. They give you, and these are all criteria that Airbnb probably analyze the buyer experience, saw which buyers have good experience so they retain higher, and then use that to create the super host category. And then all these hosts then have very clear feedback of this is what I

need to achieve in order to be a super host. And if I achieve that, then I'm going to have a bad on my profile, which will increase my conversion rate, and I'll also appear higher in search, which will also increase my conversion rate. So you create a behavior that is of the behavior you want and aspirational for the hosts, and then also creates a better consumer experience. It's almost like a power seller or something on eBay. You want to think about the perfect behavior of an ideal supplier and then work backward from what incentive structure would create that behavior. That's exactly it. Interesting. Search ranking is another kind of tool that marketplaces can use. I touched on it there with the super host, but you think about

Uber Eats for food delivery, they actually rank the restaurants in the early days. One of the biggest things was how responsive that restaurant was to the Uber Eats order. And so you create this behavior of fast responsiveness, fast delivery, which was an Uber Eats strength relative to the competitors. You make that the behavior. You help restaurants understand that that's the behavior of Uber Eats takes into account in order to show up higher in search, and it creates that virtuous cycle of better retention for the restaurants that are leaning in because they get more orders. The buyers get a better experience because they're finding things that are faster to receive, which is better liquidity quality.

So your job when you're running these businesses is to identify these loops and maximize them. And if you do it right and you kind of get that flywheel's momentum to spin itself, that's when you start to best have a chance of having your network effect come alive. Anything that we've missed in level two of the heart? So then what's beyond that, if anything? So the big thing then is how do you win? And it's about Shipstead did this analysis of how much bigger what leads to profitability of a marketplace. And it's all about how much bigger you are than the number two. And so kind of the strategies that you use when it comes to out running is very dependent on how much bigger you are than the number two. Or if you're

actually not bigger than number two, do you want to fight that fight or do you want to go somewhere else? An example of that is just postmates where they invested, I don't know how much money, trying to win San Francisco, trying to win New York City. But the only place where they really emerged with some market leadership is Los Angeles. And there's a little bit of if you could go back in time, And sorry, I shouldn't say that's the only place, but of the top 15 or so geographies that Vox has, yeah. And so if you could go back in time and your postmates, do you wish you had taken those dollars that you, and not just dollars, your best people, your energies, and instead of putting it in San Francisco double down on L.A., yeah, you wish you had done that.

To generalize all of this, even into a lesson that might be applicable beyond marketplaces, it's almost like in tech and digital businesses, there is no focus that's too narrow to begin. It's so true. So interesting. Even Chathen mentioned that in the podcast talking about software. Even within software and you think about open source projects, there are these little niches that they start with. They grow so much bigger than you expect them to. Like for example, the shoe marketplaces. It's just not something ahead of time. I would have been like, yeah, it's going to be an amazing business. But shocking how big little marketplaces can be. And Uber, starting with Uber black cars in San Francisco. It's just you look back and even Pinterest early days. It's like, I remember,

I remember talking to a bunch of VCs who had confessed that they had passed on Pinterest, and a big part of it was that they thought it was going to be small. And it's always about the takeaway that is starting small, getting something really right, and then expanding from there. You just have a much better track record of success looking at other companies than trying to go big fast. I love Bill's idea that when you go there early on, it has to feel alive. That like if it doesn't feel alive, that's a big problem. And the only way to do that is incredible focus.

Yes. Yes. You mentioned Pinterest and I'd love to get your take on consumer and consumer social specifically. So this is kind of something that maybe nobody's thought a lot about because there's some huge winners in this space that are now 10 plus years old. And everyone spends a lot of time on Instagram and Twitter and Facebook, et cetera. What do you think the state of that part of the venture ecosystem is today? Are there opportunities? Is it again hyper-nitch focus versus trying to be the couple platforms to rule them all?

I'm an optimist on consumer. And I think that some of the lessons that we actually talked about from marketplaces, I can't help but project onto consumer. I mean, you've got these huge incumbents right now. You have obviously YouTube, you have Twitter, Facebook, Big Blue, all the properties that Facebook has. You could even say TikTok is an incumbent now. And of course, Google and Apple. I mean, it's a very tough ecosystem. And yet in the same way that you wouldn't have necessarily seen that eBay was vulnerable in all these verticals right now. They're getting picked off in a lot of verticals. I think we're going to start to see a lot of the same. With YouTube, we actually made an investment in a company that is trying to unbundle some of the beauty

category from YouTube with a different taxonomy and a different way of approaching the problem. We're looking at opportunities and unbundling LinkedIn, disrupting LinkedIn with a more specialized approach. Again, these are all essentially marketplaces. And then, of course, in consumer social, I've written about how I think that Facebook is very much this, the Facebook experience, first of all, isn't going to translate as well to young people. That's why you've got them on Snapchat and Discord and playing a lot of games. But then I also think that there's something that is very isolating about most of the social experiences that we have today, the incumbent experiences, where they're very much about kind of as lean back looking at someone else's life

and so actively participating in something online. And I think that's what people hunger for. And so looking at gaming and seeing, is there the next Facebook actually going to start off as a game? What would that look like? What are the experiences you see Minecraft and Roblox and Fortnite? There's something special happening there. And so always, always looking.

Say more about that participation angle. So how did you come across that kind of thought and idea and what have you learned about people's drive to participate versus observed? I remember reading when I was at Pinterest, this analysis that Facebook did on their own platform and they almost admitted to the fact that people didn't feel good about themselves after they used Facebook. And it was only when they actually participated in a conversation, in a chat, where they started to feel when they would feel better. And you can't help but look at what is online gaming in many ways. It is not all online gaming. It is not all online gaming. but the ones that are social are these active participating experiences where you're not leaning back and watching Netflix, which is actually kind of almost one of those ideas that people think it's

like a sad of someone home alone, binging on a show, whereas when you're playing Fortnite, you're leaning in, you're talking to your friends. There's something that's very connective about that. And all humans, what's a Maslow hierarchy? Like we just want a sense of belonging. And that kind of participation, that engagement creates it. And so you see that with all the gaming stuff. And then you see it with Discord and a lot of, and even TikTok. I don't know if you spent a lot of time in it. It's one of these apps that just...

I had to delete it. It's taking so much freaking time. It is so amazingly done. And one of the things that you just can't help but see is that it is about, it's not YouTube where people are putting videos and then it's like a post. It's actually very participatory because you see what someone else does and you meme it. You do it yourself. And it's about that engagement and about that modding of someone else's dance or whatever it may be. And then everybody has a chance of having their thing go viral.

I mean, it's very, there's something really special to what they've done. I'd love to hear more about this idea of the LinkedIn problem. I've heard a few people mention this where there's an opportunity to, again, get more specific underneath a very general purpose, professional identity layer that LinkedIn successfully captured. I know they had the same chicken and egg problems early in their day and had interesting tactics and strategies to get that network effect going. How would you suggest people attack, let's pick a random niche, anything that pops to mind. How would you attack a specific industry vertical if you wanted to build sort of a LinkedIn like network effect business that was sort of social or identity

based. Yeah, I mean, as a VC, I feel like the product market fit that LinkedIn has for me is perfect. It's everything I could. I mean, it's not a perfect product. There's so many things that you see and you wish you could shake whoever is leading the charge there on the product side, but they've done an exceptional job and it's incredibly useful to me. But as you start to peel away and look at the penetration that LinkedIn has in other categories, it doesn't really make sense of your real estate broker to be on LinkedIn. It's just not useful to you and it's not your network. You're not reaching out cold emailing other brokers. It doesn't make a lot of sense. And so let's take real estate brokers as an example. What do real estate brokers do? Well, first of all, they're always sharing the

latest listing that they're working on, new clients that they have, they're engaging with each other. They're getting a lot of leads from Zillow or wherever it is, many of which they've paid for but they're not actually going to use. And there are these things that happen amongst real estate brokers where they actually do share leads with each other. And one of them converts. They like get a share of the commission. But there's no network.

Formal system that enables that. Yeah. And so wouldn't you rather, if I had a great lead, but I can't take it because it's in Marin and I work in San Francisco, wouldn't I rather give it to a friend of mine who I know, who gives me good leads and have a really frictionless experience to do that? Yes. I'd say there's opportunities in sales.

There's opportunities in a lot of vertical industries. We believe in nursing as one of those. There's what you saw RigUp do. They created rich profiles, actually, for all of the workers. So it became their LinkedIn. We have a company, Instawork, that has a similar concept around how do you create profiles for these people that don't really have a place for their profile.

And so absolutely think there's going to be something there and we're always on the hunt. It sounds like this idea, we were talking about Zach Cantor before. Yes. A great way to think about software is to just observe the world and find activities that are already happening but are not yet smoothed over by efficient vertical software and attack those spaces. Yes.

It's all that's a generally good idea. Yeah. Yeah. What is the most interesting or exciting to you in the consumer space right now? A lot of what we discussed before, which is I do think YouTube is vulnerable, that LinkedIn is vulnerable, that Facebook is vulnerable. And I love the people who are attacking it with different vectors. And there's some things that are starting to happen in social and consumer that are interesting to see. And I don't know whether they remove more friction for people or create new

catalyst. But even just the simplest, the new Apple feature where you can register for an app with Apple's sign-in credentials, I don't know if you've tried it. It's so much easier. Same with the Apple Pay. The mobile commerce experience has gone from being just impossible to all of a sudden actually working that makes me feel like, okay, there's some technical catalyst that might start to make an opportunity work here when it was just too painful before. Even things like it's kind of wonky, but deep learning, there's this apt sway that came out recently where you could dance in front of the camera and then it would form fit you to a dance. And it's just like these kind of fun. funny things where it's just interesting than me to see how founders and entrepreneurs are just

experimenting on the margin of the new things that are possible. There's another deep learning example was that app that was the Russian startup. Face app or whatever. Yeah, the face app, right? I mean, but it's all using these same techniques. And so does that end up creating a new experience that actually gets people to really want to download it? One of the things I was excited to talk about with you is the scaling experience at Pinterest. This is something that I've started to really think a lot about. Hopefully, I'll have the problem of having to scale a sort of a software organization, enterprise one, not a consumer one. But I'm sure a lot of the lessons are similar. You have this awesome quote I saw an analogy somewhere about like an army veteran smoking a cigarette. I'd love you to tell that little story and sort of describe the primary lessons you learned about scaling while operating within Pinterest. Oh, there's so many. But I'll start with the analogy, which is when you've been lucky enough to be at a company that goes through hypergrowth, there's so many lessons that you learn from that experience. And one of the biggest lessons I think is most directly applicable to being a board member for a company is that it's just not always up into the right. And that every company, even once that from the outside seem like everything's working, actually when you know how the sausage is being made, there are these moments of intense doubt. And I remember, I mean, I can give countless examples. I remember

when we were growing exponentially at Pinterest and then Facebook shut us off on the news feed and acquired Instagram. And all of a sudden, our growth went from being exponential to being really linear. And it was this, oh, shoot, what do we do now? And it took us, I know, six, nine months to figure out a new way to grow. But there are these moments who are just like, well, that could be it, folks. I remember. remember another time where we had no head of engineering. And the engineer, it was morale for engineering was so low. And you just have these moments. And it feels like when you're inside that, oh, it's existential. It's existential. You learn over time that if you just keep focused on your first principles, the vision, and you execute through it, you'll get to the other side. And my analogy to

that. It almost felt like by the end of my time at Pinterest, I felt like one of those veterans that you see in World War II or Vietnam movies where the veterans are in the trenches and they're smoking a cigarette. And then a bomb goes off. And yeah, all the like the new recruits, then rush for cover, grab their guns and the veterans are barely moving. They're just smoking the cigarette because you realize that the small things aren't big things. And when I think about what makes a great board member, it's being a stabilizing force. to your founders during these moments where it may feel to them that this small thing, this bump in the road is existential.

And sometimes they are existential. I mean, when we stopped growing at Pinterest, that was an existential threat to the company. But you can just execute. You have to stay focused and you have to execute through it. And I think that that's the benefit of having one of the biggest benefits probably of having an operator, someone who was a former operator on your board is that, they're less sensitive to those bumps in the row and they know how to how to execute through them. So when you think back on your time at Pinterest, what are some of your favorite interesting

examples of maybe things that matter more at the hyper-scaling part of a business's era or life cycle versus maybe the very early days when you're just trying to find something that people would care about in the first place? Is it very different? Yeah, I mean, the problems do change in so many different dimensions. I mean, even just thinking organizationally, When you read about a reorg, it sounds like, oh, this company had a reorg. It can sound like it's this, oh, something's not working. But actually, I think about reorgs as it's kind of like sometimes you have to break a bone to reset it so it grows in the right way. And there were so many times at Pinterest, I remember where we would reorg in some way and we would actually execute better after it.

Because as you go through hypergrowth, you're growing teams. And it's a little bit like that. You have to defragment after a while and see, okay, which teams are having to do a lot of meetings with other teams? Where are we having a breakdown in communication? Which teams aren't really aligned with the key OKRs that we're focused on and how do we realign them? And that's all about execution as either a wrong person on the job or wrong org structure, assuming you have the right vision. The second that kind of, that's just thinking about organization, on the product side, there's always this temptation to build for your users. I sometimes got into trouble when I talked about at Pinterest when I would insist on ignoring our power users, because if you want

to build a company that is really big, if you build all the things that your power users are emailing you about, and your power users are just like your most vocal users are the ones that may you be so lucky to have these people because they're your early adopters are the biggest believers in what you do. They're the ones who are the evangelists. But they also, because they love your product so much, they're always making requests to your team about new things to build, new features that only they would use themselves. It's a little bit why Excel has become the many, many, many, option product that it is

because it's a power user feature. And the challenge is that if you build for those power users, the product gets more and more complex. And that makes it harder and harder to have that next new user come into your product and understand it. And so there's that constant temptation of you want to build for the next 100 million users, not optimized for the users that you have right now. Yeah, it's a fascinating conundrum because it feels like with power users you can get faster wins. because you know they're going to be happy. They're asking for something. Just a classic example is one of the power user feature of requests we always had

was people wanted to rearrange pins on their board. Every time this came up, because it was the number one requested feature from our users, which is a silly thing to say because it was probably 0.1% of our users were making this request. But it's still a lot, but it was like a symptom of something else not working in the product, which was that we didn't have the ability to search your boards. And when they finally did release it, I think 0.1% of users used it. And it was a really hard feature to build. What have you seen, if anything, I'm always interested in pricing in digital businesses as well. Consumer socials, surely Pinterest and companies like that have never typically charged their users.

They've indirectly charged them with ads or whatever. Have you seen successful companies, especially in the more niche vertical you mentioned rig up as an example, that are more explicitly charging, even if it's just basically a network, collecting a network of people who may or may not transact in certain ways, What are your thoughts on that as a business model? It's interesting to see things like the athletic and ringer that are actually charging subscription models and having subscription models and charging people for content that you would otherwise think is free. I mean, there's so much sports content out there.

I kind of can't believe how much sports content there is. And yet here are two very successful businesses that have done so with subscription revenue models. And you see, I see more and more of that happening in consumer. There's another kind of social, private network. Maybe I shouldn't mention the name because I don't know if they want to talk about this, but imagine your social company trying to charge a subscription too for that. Kind of recognizing, hey, you don't want to do ads in this business, members only. And will that become something that's big enough? I think it's interesting because you do see more. more and more people are willing to pay for things, especially Apple, again, has made it so easy

to do that, removing friction, removing friction, removing friction, removing friction. But it does that end up still capping the opportunity? It certainly hasn't stopped Netflix. So there may be some real opportunity there. Yeah, it's interesting. The payment friction concept with Stripe and Apple Pay and everything else opens up a lot of opportunity. Yeah, yeah, yeah.

This is kind of the history of consumer is that there's usually a technical catalyst. that precedes the opportunity, your platform change, a new camera on your phone, whatever it may be, it opens up a new vector for a company to create a new experience. One of the thing I've been thinking about, I'm curious if you've got an opinion on this, is the role of search costs in all of this. So in some ways, these marketplaces and networks, all these things we've been talking about are nothing more than ways of just making it easier to find the stuff you want and do so in a high-quality fashion. Do you think that that's a good or useful mental model just to think about where search costs exist for someone finding someone

else or something else? Yeah, well, what you're articulating is really about liquidity. And so, yeah, I absolutely think that whatever you can make easier, we're all lazy. Whatever you can make easier, whatever you can remove friction for, you're making a more efficient transaction and that always opens up an opportunity. Can you mention what you mean by the concept of a core action in a software or digital business? It ties back into a lot of what we've talked about for sure. But I think this is such a compelling, clarifying idea for business builders out there to identify and then optimize around a core action. Can you describe what that means? Yeah.

I mean, so all the time when you have a product, whether it's a social product or a SaaS product, there's so many things that a user can do in your product. And the way I think about is anytime a user clicks or taps on their phone or the computer, you know, engaging with your product, they're using energy. And you want to direct that energy in a way that creates the most value for the system that you have. And usually there's an action that's a special action because there's a single thing that you can do in your system that is most correlated with our user retaining. And also creates what I think about as like the accruing benefits and mounting loss of your product. It creates a sticky product. It creates something that people want to engage with. and stick with. It makes the experience better. And ultimately, if you're in a really good position,

actually creates your network effect. And so to give a couple examples of it, in Pinterest, look, you could do so many things on Pinterest. In the beginning, we were tracking them all. We were tracking them equally. You could like a pin. You could repin. You could create a board. You could follow someone. You could comment. You could just spend a lot of time scrolling through pins. But what was the most important action? What we realized was that it was someone pinning something onto a board. Because if you focus on that action, if you complete that action, there's like a 98% chance you're going to come back to Pinterest the next week. You're making our discovery graph even richer because you're creating a new edge in our graph between the pin that you pinned and all the pins on

your board. So that helps the discovery experience get better on Pinterest. And you're also leaving part of yourself on Pinterest, so you never want to leave it, a new recipe on your recipe board or a place you want to go for a vacation. And so this single action gets all these flywheels, these virtuous loops in motion. And so you as a product owner then or as the founder want to be hyper-focused on how you effectuate that metric and make the trade-offs of, okay, if you're Pinterest and follows go down for an experiment, but repins go up, pins go up, then that's the right tradeoff to make. And so, again, as you know, getting a product right is all about focus and how do you reduce to the very core what's important? And this kind of

focusing on the core action is one of those ways. Can you say more about these beautiful ideas of accruing benefits and mounting losses as being baked into a product design and how you think about that as an investor. So one that comes immediately to mind is Evernote. I was so relying on on Evernote for a long time. But then, I now use it something called Notion. And Notion made it remarkably easy, just literally just poured over the architecture. I'm like a huge Evernote Power user. This is a great example of like I would have said they have enormous accruing benefit, mounting loss. Like I rely on it more and more. It's more and more valuable to me. But then this other company came along and made it basically trivial to port my structure over and then give me new

benefits on top of that. So how do you think about that as like a company moat or what are the weaknesses to this accruing benefit idea? It's super interesting in me that you said that about Notion. I might have to try it. I'm also, I'm a huge Evernote user and it's the type of thing where as you articulated, the more I put into Evernote, the better the experience gets for me because I do a search now on Evernote and I'd be curious actually whether Notion's search is as good as Evernotes. Because that to me, that's where if I were an Evernote product manager, I would just be making the search. I mean, the search experience is already good, but it could get even faster. It could get even better in the OCR.

And I would just be spending all my energy getting that feature right. And I think when people complain about Evernote and think about moving onto something else, it's because Evernote has gone really heavy. And they didn't just keep, it's all about getting just something, one thing really, really right. and it was just too heavy. It kind of created friction in the experience, and then whenever you create friction, reduces essentially your liquidity with the experience

and creates another opening. What Notion did so right that Evernote was never able to figure out was that notion is more intrinsically collaborative. And Evernote tried to shoehorn collaborative features into the experience with collaborative journals, but it never really worked. felt too heavy. And because of that, it just stopped growing as a company. I still think the notion of building into your product, something that makes it harder and

harder to leave because you're building up an asset. Basically, in any consumer product, think about what asset the user is building or creating. That's the concept I get from your writing. How do you optimize so that that asset of theirs is growing, is compounding? Does that seem like a good rule of thumb? The two tests that I always suggest is, will you, your users say that the product gets better, the more they use it? And will they say that the more they use the product, the more they have to lose by leaving the product? And if you pass those two tests, then you're going to create a really sticky product for those users. I'll contrast that with an example of a company that haven't been able to do that as anonymous companies. Think about

secret or whisper or yikyak. And there are a lot of reasons why those companies have. haven't succeeded. But part of it is that you had no accruing benefits or mounting loss because of anonymity. There's no identity. There's no followers that I accrue. There's nothing that's persistent. And so you could delete, I remember having secret when I was at Pinterest and I would delete it and someone would say there's some gossip on it. You open it up and it's exactly the same experience. And so that makes it really hard to have sticky users. I'd love to explore. We can release this such that it's no longer a stealth company, but you mentioned by email that there's a new company that you're an investor in. I'd love to hear the story there, what they're doing, and what got you

interested. I'm on the board of a company called Recki, and it's a London-based company. It's actually a wonderful story where the founder, his name is Ronan Given, was maybe masochistic enough to run a homoose chain in London with a couple of his siblings for eight or ten years. And the guy was, was actually a computer science undergrad and was always these restaurants are really, really tough businesses and was always trying to figure out ways to improve the profitability of their restaurant. And because he was a computer engineer by trade, like in training, he built all these systems to automate as much of their variable cost as possible. The ordering, whatever they could automate, they built it themselves. They didn't use third parties. But it was still really,

really hard to generate consistent profitability. And finally, they realized that it was actually their supply chain. That was the big reason why they weren't able to be profitable. And there were these little tricks that they figured out where if you order six lemons instead of five lemons, it actually ends up being cheaper because you get a crate of lemons instead of buying them individually, working with different suppliers to figure out the best pricing. There were all these tricks. And once they started to work on that, they were able to build real profitable margins in their business and ended up deciding that that was a core insight. It's one of those earned secrets that people talk about, which is how do we help restaurants by recasting their cost structures in some way and help them find suppliers for their goods that are better for them? And this is one of those incredibly opaque markets.

Rich Barden from Zolo, who was a venture partner with us at Benchmark, talks about how there's some generation of marketplaces that they're not necessarily transactional, although I believe Rekhi will be, but they're actually what they do is they set information free that was once opaque. Power to the people. Power to the people, amen. And so that's what the opportunity that Rekke is going after, which is that they start, it's classic solving the chicken or the egg, started with a tool for the,

the restaurant, the chef in the restaurant. I don't know if you familiar with this, but really what happens right now when a restaurant owner needs to replenish their supplies is that for the most part, they're calling up a supplier 11.30 p.m. after the kitchen's clean, and they've taken stock of all the things that they need, and they're leaving a voicemail on a supplier's voice message machine so that in the morning, someone at the supplier will listen to all the voicemails transcribe the order into their PO system and then their inventory system and do the order. And that's, you might imagine, not the best way to do things. There's a lot of friction with that process. And so they are,

by going after the buyers, which is the restaurants, and they start to use Recky to place their orders for their products. And it lets Recky then actually crowdsource the catalogs of all these suppliers. And they're now a double-digit percentage market share in London and growing quickly in other cities and other countries. And it's just been super interesting to see because it's one of these places where there have been a lot of companies that have gone after this opportunity, but they've all started with the supplier side instead of the buyer side. And so it just shows you that there's still such greenfield opportunity out there. Just because other companies have failed, doesn't mean that there isn't an opportunity. It's just about figuring out the right angle of attack.

I love this idea of legibility and setting information free as the method to create something valuable in an ecosystem. It seems like you could do that in any of the things we're talking about. And look at Rich Barnan's career. I mean, Zillow, Glass Door, like there will be others. It's a real, an open table you'd even say was that too. Meaning the information being what's available in terms of the reservation. Yeah. I mean, you would have to call a restaurant up to see if there was a reservation available. and OpenTable just set that information free and may reduce all the friction to getting it. One other thing that I've struggled with a little bit personally is kind of knowing what data inside

of a business to capture and act upon. And I'm curious how this relates in your view to this idea of the core action. How have you seen companies, so many tech companies, gather a huge amount of proprietary information, beauty of software or digital as you can track stuff? You kind of know what people are thinking by their actions. How would you encourage people at different stages of a company to think about using their own data that they've generated? Yeah, it's, I think of it as like these phases for data. And so in the beginning, data is useful to track. But when you're just getting started and you're trying to find where that fireburn is really bright and finding the product market fit, data isn't going to show you the way, really. It's about your first principles,

or user research. And I think you want to have a dashboard, but you definitely don't want to be governed by it. But then what happens once something starts working is that you start to have to build a data muscle. You have to go from being that founder or product leader that's gut-driven to being one that knows how to make decisions with data. And that actually starts with exactly what you articulate, which is that usually the problem that happens is that you've got too much of it. these dashboards, I'm always amazed by how much data people look at right now. And I find it to be not useful because really what you need to figure out is what is sometimes it's the single thing that matters. What is that single thing? As you allude to, like if it's your core action,

then what's your weekly active users completing that core action on a cohort basis? And how is that trending over time, everything else is secondary to that single thing to focus on. I love that idea that you have of everything else being empty calories of growth. Yes, yes. It's such a good idea. And it's just the idea that, again, there's so many things. And people, I think the most dangerous thing for a founder, and it's contextualized by everything we talked about before, which is just how important focus is, is that if you end up

connecting your ego in any way to a metric, that isn't actually the most important metric for your business. It's so dangerous because you want that metric to go up when really you invest time and energy to make it go up. You report it to people because you think it's the metric that you want to go up. But you're missing. It's just a tax on your system when really you should be focused on the thing that's most core to your business. And so often those numbers are bigger absolute numbers than the core action thing. And that's kind of back to this liquidity thing, that's what I see so many marketplace founders do, is that they think GMV is a number.

They want GMV to go up, but Postmates had really big GMV numbers for a while, but if you're not building leading liquidity, it doesn't matter. You have to get to that core of what is important, and then you're building the muscle of learning how to make decisions with data, not just your gut. And then that kind of gets you to, so you're figuring out what the most important thing is, and then you start to really be able to make decisions. And almost you have to make decisions using data because your gut as a founder no longer actually scales to the user base that you have

because you're not catering to the power user anymore. You're catering to this broader group. And how do you, there's always nuance. That's a difficult thing to balance for a lot of companies, which is using data to make decisions, but not being blinded by that data either because you don't want to end up in a local maxima. What, if anything, are lessons that you apply or ideas that you apply to SaaS-specific investing that we haven't already talked about? Or is it kind of a lot of the same concepts? There are so many concepts that are definitely connected to SaaS, because as we've talked about, it's about getting something really right. It's about making, you know, a great experience for your users and solving a real need. It ends up being a lot of what we talked about already.

Yeah. Yeah. Makes sense. My closing question for everybody, I think you know, which is to ask for the kindest thing that anyone's ever done for you. I think anybody who's taken a bet on me, thank you. And it probably, I mean, to the person, we actually were talking about this earlier, Jeremy Levina, Bessemer was the first person who really took a bet on me. And I was coming out of college. I was at a strategy consulting firm that was a startup. And then decided, thanks to a friend of mine who mentioned venture capital to me and I read a book about it, I was like, oh, that sounds really interesting. And yet I was this person, I was the philosophy major in college.

I had always been interested in investing, but had had no experience in investing. And somehow, for some reason, Jeremy took a bet on me and hired me at Bessemer Venture Partners. And not only did he take a bet on me and bring me in, but then he ended up taking a very active role in mentoring me through my six years at Bessemer. And so I, as an investor, know now, how precious all your time is, and you're always making these decisions on how do you allocate that marginal hour? And to invest that in someone, as opposed to meeting another founder,

it was a very generous thing to do, and I feel very grateful for that. I cannot resist the philosophy bait since I studied philosophy too in college. What, looking back, was the most interesting either philosopher that you studied or philosophical idea that you explored? That's so easy for me. I mean, I was a huge Kantian. Okay. And in particular, actually, Christine Korsgaard was my thesis advisor. And she has this essay. This is the essay that got me to focus on philosophy, which was creating a kingdom of ends.

I recognize the title, but can you describe it? I mean, the idea of Kantian ethics, it's about respecting each person as an end in themselves and never as a means. and that if you choose an end for yourself, your own goal, that I respect that. And what Christine Korsker talks about is actually that what a friend is, is adopting your ends as my own. So that if you achieve the goals, the ends that you have for yourself, it actually makes me as happy as if it was my own goal that I achieved it. Reading this essay is what got me to focus on philosophy. I had been doing economics before and then it just gave me a framework for understanding people and life and so many ways that were

important to me. And I actually think about all the time now as a board member because really what is an early stage venture investor doing, they're adopting the ends of the founders that they work with and working to make those ends happen, which is hopefully and usually the success of the company. What an awesome, interesting idea to end on. I love it. I can't wait to go read I'll send it to you. I really appreciate all your time. Every time we talk, I learn a ton from you. So thank you so much. Thank you, Patrick. Hey, everyone. Patrick here again. To find more episodes of InvestorFieldguide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month.

You can also follow me on Twitter at Patrick underscore Oshag, OSHAG. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.