We Study Billionaires - The Investor’s Podcast Network - TIP600: Business Durability and Strategy Masterclass with Hamilton Helmer

Starting point is 00:00:00 You're listening to TIP. In today's episode, I'm talking to Hamilton-Helmer about the power of being an educator and how it helped him improve its strategy and investing. The differences between power and operational excellence. How he formulated his seven powers? A deep dive into all seven of his powers. Updated case studies for some of the powers, why barriers are so important when benefits are much easier to find, how intellectual property is and is not a power, and so much more.

Starting point is 00:00:29 I first learned about Hamilton Helmer when researching Michael Porter and his Five Forces. That rabbit hole led me to Hamilton's great book from which I've taken so many great lessons. Part of the reason I decided to write about investing was to learn more about it by sharing my lessons with others. And Hamilton has done this at the highest level possible as a professor at Stanford University's economics department. I asked him how this experience made him a better strategist and investor, and his answers did not disappoint. If you enjoy learning about motes, their competitive advantages, the benefits they provide, and all the subtle nuances that go into what makes them strong, you're going to take a lot from this episode.

Starting point is 00:01:03 Now, without further delay, let's get right into this great conversation with Hamilton Helmer. You are listening to the Investors podcast. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Greve. I'm your host, Kyle Greve, and today we

Starting point is 00:01:38 bring Hamilton Helmer onto the show. Hamilton, welcome to the podcast. My pleasure. Glad to be here. You wrote an exceptional book on competitive advantages called Seven Powers, the Foundation of Business Strategy. I have many questions about this book, as it had a big impact on how I view competitive advantages when I research a business. But I want to start the conversation by discussing a little bit more about your backstory. You taught business strategy at Stanford for a decade. How did this experience help sharpen your abilities in strategy and investing. Teaching is great. And Stanford's great, frankly. It was, for me, the heart of the matter was I just enjoyed my interaction with all my students over the years. They stimulated me and how I thought

Starting point is 00:02:19 about the world, and hopefully I stimulated them. And I think it followed, it was sort of a second career for me because it followed many, many years as a strategy consultant where I had my own, I started my own business strategy and helping companies think through their strategy. And strategy is simple. There's only one question is, you know, what creates durable success, right? And so my life is a little boring in the sense that I've sort of thought, taught, and invested around that issue for, you know, 40 years. And so teaching was if one of the lessons of teaching is that You can't explain something properly unless you understand it really well yourself. So it really forced me back to sort of first principles and trying to explain it.

Starting point is 00:03:11 And if you're sort of trying to think through theory and I'm essentially a theorist, that's just incredibly valuable. And then to have all these very bright, motivated, engaging people to interact with just as very stimulative. So you're the co-founder and chief investment officer of strategy capital, and I know the seven powers concept is a key to your investing strategy. And I'd love to know more about the history of your formulation of these seven powers in regard to how you run strategy capital. If the principal question of strategy is why are companies durably successful, you would think that that would probably have some value in thinking about whether a company's,

Starting point is 00:03:56 company was going to do well. And if a company does well, you would think that's reflected somehow and its price over time. And so that sort of sounds like it has an impact on investing. And so I've been an equity investor longer than I've been a strategist. So I started in my 20s, basically. I won't tell you how many decades that's been said. And so they sort of went hand in glove in a way. And I think investing forces you to a discipline of thinking about what creates value. And so I think that the interaction of working with operating companies and smart business people over a duration of career and strategy consulting of trying to examine companies and how they're doing and interacting with students and writing those things all contribute. be just sort of thinking about these things more carefully. So it's been instrumental, I'd say. So let's move on to The Seven Powers. I really liked the simplicity of power, a benefit and a

Starting point is 00:05:04 barrier. It seems like there is no shortage of businesses with benefits for the short term, but these benefits are able to be arbitraged away due to the lack of a barrier. How did you develop this concept of power that you outlined so well in your book? Well, first of all, I just want to flag the importance of your takeaway from that. I mean, you've reached a conclusion, which is maybe expressed well in the book. I'm not sure, but it is a very important observation, which is that benefits are common and barriers are not. And every cost reduction measure in a business or every measure to improve your product,

Starting point is 00:05:42 there are benefits to all of those. They may or may not be material to the bottom line, but that's the nature of benefits is that. And so they're something that are frequent. And then if you're interested in durable success, you sort of want to do especially well, and that requires having something that you've done that does kind of move the needle and value that way, but that others have a more difficult time mimicking because the world is a tough place. And if it can be, not a bad presumption is if it can be competed away, it will be. you might get lucky and the competition is ill-informed or not very clever, but you don't want to bet your business on that. So it's better to assume that our competitive arbitrage is very

Starting point is 00:06:32 effective. And so that means if benefits are frequent and barriers or not, it means looking at the barrier. And so I think your question was around how did that formulation come out. And it was over a very long period of time to sort of distill it to that level of simplicity. As I mentioned to you earlier, you know, I'm in economic circles out of what you call as a Shumpeterian, which is Joseph Shumpeter, was this very quirky, interesting economist late 1800s and then went through the first half of the 20th century. and he took a different view of what really drives economic growth and his sort of bottom line, this is at least in his earlier views, which his views sort of changed over the period of scholarship, but the early view was that entrepreneurs are the heart of what creates economic growth.

Starting point is 00:07:33 And everything, I was fortunate in grad school to work under one of the most insightful people. in the world about, you know, the origins of growth and so on. And I think I came away with very much that same impression. And so if you're thinking about what I think about is sort of the theory of all this, the question you ask yourself is, okay, well, you've come down that understanding. Why is it useful to entrepreneurs or to founders? And the answer to that ultimately takes you back your heuristics, you know, you have to be able to distill it sufficiently. And so the things that you mention investing and teaching and so on, distilling things properly so that you can get sort of reasonable, reasonably memorable heuristics out of it is sort of the theorist's challenge.

Starting point is 00:08:27 And so that's what's occupied me. So you talk a lot about strategy in this book, but you also make sure to define it in your own way. How do you contrast strategy and power for those who might confuse the two terms? So strategy is, as I say, it has one objective, I think, understanding the elements of durable success, a company success, right? So that's inclusive. And power is a key, an essential ingredient in that, but it is logicians would say independently necessary, but not suvision. So the three elements that create value are power, market size, and operational excellence. And each of those has its own descriptors. And I'd say the thing about power

Starting point is 00:09:21 is that it's the thing that the founder and ultimately the company can create. create and has some control over market size, ultimately not. Operational excellence, they do have control over it, and it's critical for a strategy, but it is also something that from a static's perspective is arbitraged out. So from the point of view of kind of successful endpoints, it's something that you normally can't look to as saying that will make you a better couple It's essential. So if you think of having a great accounting system, if you don't have it, you're toast, but it's also something that's easily mimicked. Now, when you move from statics to dynamics, that conversation gets more complicated because operational excellence actually is fundamental to achieving power and is different over the timeframes of reasonable dynamic timeframes. But power is a great. way to sort of start theory about this because it tells you about that element of durable success, which is sort of controllable by the company.

Starting point is 00:10:40 So now that we have a better understanding of power, let's jump into some of the powers that you outline in your book. Let's start with scale economies. You use the case study of Netflix versus Blockbuster in your book to show how Netflix could leverage its ability in exclusives and originals, which allowed it to utilize scale as a powerful source of leverage. Now that Netflix is a more mature business with lots more competition than it once had, do you think that its barrier is as strong now as it once was? For me, it seems like it hasn't changed much. I think the external environment and people's

Starting point is 00:11:14 awareness of what's going on has changed a lot in the sense that there was a while Netflix sort of experienced this huge stock price run up and every business. but he sort of thought, oh, you kind of get into streaming and it's worth a lot, and that's what you do. And now, and then a lot of people did that sort of hurt, hurt instinct, which is normal in business. That's how arbitrage takes place really. And now I think there's a realization that just because you stream, you know, it doesn't make money. I think Netflix is the only one making money at it. So if you look at Disney Plus or, I don't know, I don't think Amazon Prime's financials are specifically broken out.

Starting point is 00:11:57 out, but in general, it's the one that's doing well. And so I don't think that's changed you, but you can see the normal cycles of competition. So Netflix sort of initiated this and did, and executed very well and took advantage of that initiation, which isn't always the case. It's first in doesn't guarantee that you end up the winner, right? I'd say it's kind of 50-50. And that ties back to that earlier comment of mine about operational excellence and the importance of establishing power because you companies break down. You know, sort of the poster child example of that is the Apple 3, right? Apple was poised to own the PC market. But to do so, they had to have great products and efficiently designed factories and all that and appropriate pricing.

Starting point is 00:12:48 And they dropped the ball in all those fronts. and the Apple 3 was just a disaster and it created a window of opportunity that the IBMPC jumped into. And that's an example, sort of operational in excellence, making it not the first in be the winner. But Netflix wasn't like that. They were, I would say, operationally excellent. And they had just phenomenal leadership and built up an incredibly good team were very, very attentive to all the lovers of their business. And so they built a lot of market share in that business. And I think the competition has been dramatic. I mean, these huge companies jumping in, if you had to think of the competitors you probably wouldn't normally want to have. Think of,

Starting point is 00:13:34 you know, Amazon, Apple, Google, Disney, right? And that's who Netflix has been up against. But they've done very well. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is.

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Starting point is 00:17:55 So you give an excellent case study of a business I've never heard of called Branch Out in your chapter on network economies. The end of this business was due to its inability to maintain its barrier as it attempted to scale. Branchout was unable to draw customers off of LinkedIn and Facebook at the time because users of these social networks liked having their personal and professional lives separate. Once Branch Out realizes, their inability to reach a tipping point spelled out their end. What are some key traits that you look for in earlier stage businesses that have potential power in network economies?

Starting point is 00:18:26 Well, the key thing is the value proposition, right? There's a feedback mechanism that basically means if you're on the network, I'm better off. And then that has to be, and that happens with some frequency. But then the second thing is materiality is there are lots of we sort of laugh in our business sometimes that people always talk about flywheels, you know, which is sort of like this. You do something and make something better and you get better and so on. And there are a lot of those around, but often they're not material. And so what you'd look for is the character of the demand being satisfied in a way that where there is this feedback mechanism that if you're on the network, I'm better off. So you have a telephone, I'm better off with having a telephone because I can now reach you. You're on Facebook and I'm on Facebook and that makes it more valuable to me because you're my friend. And so you look at that and then you try to determine or try to understand whether that's a material effect or a rather minor effect. Yeah, I really like that because flywheel is such a

Starting point is 00:19:39 buzzword now and so many businesses use it. But I really liked how you brought into the material portion of that because that's kind of what tells you that the flywheel is actually doing something versus just saying some words. Yeah, that's very important. I find that You mentioned earlier the construction of barrier and benefit, which I think is useful, but oftentimes when I'm talking to people, I use a alternative construct, which is identical in the sense that it maps one-to-one to barrier benefit, and that's sustainable, superior, and significant. And so with superior and significant, that's the benefit and sustainable barrier.

Starting point is 00:20:25 And the reason I call 3S formulation, and the reason that's useful is it calls out significant materiality. So in a podcast episode with Patrick O'Shaughnessy, you mentioned that the earlier stages of network effects can look unattractive on a profit and loss statement as profits are hard in the early endings of a business. What are some businesses that navigated this path very well that you admire? Well, sort of big ones. I mean, Facebook, obviously.

Starting point is 00:20:52 You know, Facebook's P&L was kind of ugly before they went public. look, right? And even, I think, and before they sort of figured out the ad model and put it into effect, Google's another one. You know, I think one of the things that drives Google is, it's attractiveness, as network economies, and the initial aspect of learning how to follow what prior askers of a particular or question did once they got certain search results, using that to enable superior search results for others as they asked the same question later on as wasn't evident. And so I think, and I'll make a hypothesis. I don't know if it's true, but I'll make a hypothesis. You identify any network business, a network business is powered by that. And the early stage will

Starting point is 00:21:50 be fraught with these decisions. about trying to get the network up and running, and that that's daunting and often has ugly B&Ls. So counter positioning was probably my favorite power that you discussed in your whole book. I know it's your favorite as well. It was one that was a little hard for me to understand at first, but the more I read and reread your book and listened to you talk about it, the more I started understanding it. I like this model as it can be used in high-flying tech names like Amazon or boring simple businesses like In-N-Out. Can you briefly discuss the power? and what incumbents' best strategies are in order to combat incoming businesses with radical

Starting point is 00:22:26 new models that are attempting to succeed by breaking the mold? Yeah, it's a fairly simple proposition. It's just that if you're starting up a business, you'll often, some of the most daunting combination are behemoths that are much larger than you are, but they have an advantage and a disadvantage. So they have all their resources and all their capabilities. But a potential disadvantage is they already have an established business. And there are a lot of what economists call agency effects of that.

Starting point is 00:23:05 You won't want to give that up. And the distribution of authority in the business, the way decisions are made is very shaded by that. You can imagine a boardroom meeting saying, let's do this. And somebody said, no, no, no, that's not going to work. And so not work is tied to that it damages our current business. So you think of, you talk about Netflix before you think of a blockbuster and Netflix. You can imagine

Starting point is 00:23:33 a boardroom meeting at Blockbuster saying, well, let's just start doing what Netflix says. No, no, no, we have all these stores out there. And we don't want to take away from the traffic to our stores. That's just going to upend our business. And so those considerations, considerations are very real and frequent and make good business sense. And so incumbents are inhibited from competitive reaction of mimicking the new business model by a reluctance that's created by the impact on their current business. And remember, when you're making economic decisions, your uncertainty affects you. So you're trading a certain profit for an uncertain an outcome. And so that makes it extra hard even. And that turns out to be a very important thing

Starting point is 00:24:24 that happens often, I'd say. And so it is, as you mentioned, it is my sort of favorite sort of power. I mean, partially maybe because I invented the concept, but also it is frequent, I'd say. And the barrier is very, very significant. So what's a good example of a business that was able to overcome counter positioning by a competitor? This is a statement about the barrier. You sent me that question to ask me. I couldn't think of one. I asked there are other people in my company

Starting point is 00:24:59 that are also extremely thoughtful about this kind of stuff. They couldn't think of one either. And that speaks to the intensity of the power of that. And I could give you sort of a recent example of someone who, it appears to me, did all the right things and still wasn't successful. So if you look at the dethroned CEO of Volkswagen, who I don't know personally, but admire his thoughtfulness, he did all the right things. He basically said the EB revolution is coming. This completely upends our business model. if we don't become great at that, we will really have a problem.

Starting point is 00:25:44 Becoming great of that, that means that we have to become really good at software because an integrated software platform is essential for EVs. And so we have to invest a lot in that and make a commitment in company trajectory that we're going to do this. And he was thoughtful about it, outspoken. and lost his job. And that's not atypical. So that just gives you an idea of the intensity of that type of power.

Starting point is 00:26:15 And you can imagine all the things going on. I mean, you know, there are powerful labor unions that sit on his board, you know, and they would say, oh, well, this new direction that it won't be as many jobs. It is an intense form of power. Yeah, it seems with that example you just gave, too, that there's so many different second order effects of, making a change for the incumbents that looking in you might not even really account for, and unless you...

Starting point is 00:26:43 It's very daunting. It's not a comment about how badly they run their business. It's just how daunting. I mean, you could see it. I don't know if you're maybe too young to remember the days that Nokia was a great business. And the iPhone came along. They, is completely observable.

Starting point is 00:27:02 They could see loss of market share. And it was a similar situation is that. that the iPhone is a software-centric product and that Nokia is a hardware-centric product. And they had all these supply chains and their huge business that was all based on their engineering model. Moving that to a software engineering model is very hard. I mean, you can see it in Sony, they managed to overcome that, but only by the skin of their teeth because the PlayStation was a digital business, and they were an analog company.

Starting point is 00:27:38 And there was a lot of pushback about doing the kinds of things they were thinking of doing. And they had some amazing leaders, a couple of different levels at Sony that pushed this through, but they almost didn't do it. But that was an example of counterpositioning exactly because it was a new business. It didn't threaten their old business. So that isn't an example of successfully fighting counter positioning. It's more an example of success. example of transforming, which is successfully starting another business, but some of the

Starting point is 00:28:12 elements are similar in that there was, you know, in the corporate resistance. So another great power that you discuss is switching costs. You give the example of Apple in your book and how it used iTunes on its customers to prevent them from switching to another platform, otherwise they'd forfeit their prior purchases. This type of switching costs no longer exists specifically with Apple, but I would say Apple definitely still has switching. costs. Can you briefly discuss this power and explain how Apple is able to continually utilize switching costs, even though its products are in some rapidly changing industries? Switching costs is an interesting one. And I'll give you a story that's that sort of fits with

Starting point is 00:28:53 Apple. I was on a plane to Hawaii, and we got near landing, and I'd been listening to something on my phone, you know, had some downloaded music, and I went to get my phone, and I couldn't find it. And I thought, where is it? You know, I need to find this before I land and I, and I just couldn't find it. And so I eventually thought, well, it must have fallen down in the seat somewhere. So I got up and I actually ended up taking the seat apart on the plane. And I still couldn't find it. But fortunately, I guess it's because the plane was from San Francisco. I had another sort of techie type person behind me. And he started helping me take the seat apart as well. I mean, we really, the stewardess was getting a little irritated.

Starting point is 00:29:38 We were just assembling this thing. But he had his another iPhone with him, and so he had a very intense light that he could shine on the innards of the chair. And we discovered that the phone had actually fallen down between in the chair mechanism. And then all those attempts that I had made to recline the chair, that seat that I was a little irritated. because the seat wouldn't recline properly. I actually was destroying my iPhone. So I crushed it and not in the good sense of crush. And so I got off the plane knowing I had to get a new phone.

Starting point is 00:30:17 And there was a question, well, do I want to get an iPhone? And the answer is everything for me was set up on an iPhone. I even had, you know, it saved many of the things and all the accounts and everything. And so would I get a Google pixel or something? No, the cost to me of switching was extremely high. And the price they charge, which is phenomenal. I mean, Apple's hardware margins are astonishing. It capitalized on that and not a thing I could do about it.

Starting point is 00:30:53 You know, I think that continues to be true for Apple. I love that example. I did get a phone. I did get a new item. And it was up and running and immediately. Yeah, that's the beautiful part about it. I talk about counter positioning. The only hard part of the process was I had to persuade the salesperson that was an ATT store that was doing it,

Starting point is 00:31:17 that they could simply give me a replacement and bypass all the normal commissions and choose the plan nonsense and all the stuff that they try and put you through when you go on for a phone. That was the friction in the process. That's AT&T's switching costs. So one of the most powerful effects of switching costs is the ability, like you just mentioned, for the business that pricing power for its products. But this can have the second order effect of making customers angry if they feel they're being overcharged for a specific product, even though switching would be even more painful. How do you view switching costs in relation to a business's relationship with its customers?

Starting point is 00:31:54 Yeah, it is fraught with that. And one of the pleasures of my work is that I get to interact with company founders who I find imaginative, intelligent, fun to deal with, and I love what they're doing. And so I'm often asked this question about switching costs about can I initiate them somehow. And the response that I often give is that the wrong way to think about this is I'm going to lock in my customers. The right way to think about this is what can I do for my customers that creates value that then has a lock in characteristic rather than sort of how do I retro lock them in? And that is the correct perspective, I think, how you do it in the first place. And then later on, so you can somewhat but not

Starting point is 00:32:47 completely avoid this difficulty by always thinking about value creation for your customer and that that goes hand in hand with it. Now, for super intense switching cost companies like ERP, like Oracle or something, it's a little difficult. I mean, they do it by offering more and more services and stuff. But there is that, that conflict is kind of built in and you have to deal with it. There's a balance as a business person. You want your customer's but you also want to make what money you can from them. And so there is that conflict and you have to manage it. But that's one way to sort of at least help a little bit.

Starting point is 00:33:29 I like that. That's kind of reframing the question and that that's a great insight. So I loved your definition of branding through the lens of Tiffany's. Tiffany's uses branding as an asset that confers positive emotions to the customer, which leads to an increased willingness to pay up for a product. This is a tougher power to identify in terms of durability. because many retailers are in highly competitive industries. You point out that the 10-year brand has displayed signals at strength.

Starting point is 00:33:54 But as an investors, how do you determine when a brand is getting stronger versus weaker? It's important to distinguish between brand as power, branding as power, and brand awareness. So I can buy a super bowl ad and get brand, but I paid for it. Brand awareness, I paid for it. So that doesn't work as brand power. So I think for me, the key thing that you would look at would be if loss of that would be loss of market share in your target segment. So let's say you were A remase and were able to sell handbags to a certain segment for $25,000 a pop, right? You wouldn't look at Walmart selling a $20 handbag.

Starting point is 00:34:40 But if you saw that that segment that you were selling to, that you were losing market share in that segment to an unbranded competitor, then that would indicate that there's the warm feeling that your customers get who are willing to pay for that warm feeling from having your product has been lessened. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are range. ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC or running an enterprise GRC program, VANTA keeps you

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Starting point is 00:38:37 This is an advantage that is less discussed by most investors. Why do you think most investors aren't actively searching for this power in potential investments? Yeah, to come back to your question before about how teaching helped that, very careful articulation of that. One of my students, David Shoe, wrote, paper on trying to very explicitly define a cornered resource. And so I have to give him some attribution there and it is a very thoughtful, sort of careful definition of it. So I would say that in sort of the large scale places where cornered resources are evident in value, I would say they're easy to identify and the market prices them. So, for example, probably the most prevalent

Starting point is 00:39:26 The most prevalent example is pharmaceuticals. Patents are a way in which you take advantage. That's the barrier for, you know, there's a formal barrier and legal barrier. So if you took a blockbuster drug and you, one pharma company bought it from another one, you still get the same cash flow from it. And so it's, so that's a cornered resource. And so I think historically patents have kind of only worked in two areas, chemicals and pharmaceuticals. I think I've got the research of the area.

Starting point is 00:40:05 You know, and so I think investors don't need to call a counter resource. They just know that there's an asset there that's valuable and protected. And I think they price that. Look at what's happened with these weight loss drugs and what that's done to the market gap of the companies that are doing it. They price it very quickly. And so I think that it's an area that although they may name it differently is well understood. You mentioned pharmaceuticals there and obviously how they could sell one drug to another drug and they would get the same cash flow. And that made me think about intellectual property and how that isn't necessarily a corner resource.

Starting point is 00:40:42 But I guess it kind of could be depending on its makeup on a case-by-case basis. So the key things there are materiality and immatibility, right? So there's lots of IP that you can get it. You can do it a different way. I mean, I've never seen a business that has power based on algorithms, for example. And if you think of sort of that may be tested by generative AI, but so far I've never seen it. And the reason, and so that's very important IP, central to the company, necessary condition for their success, but largely imitable. It's the inimitable IP that is material.

Starting point is 00:41:26 So that's a high bar, right? And in the case of a molecule for a pharmaceutical, that you meet that bar. And the non-immatability part is not because it's not easy to do a generic. It's because you have a patent. And so the barrier there is fee it. And IP is unbelievable. important to companies, but it's a necessary condition for success, but not even close to sufficient. So the final power that you outline in your book is process power, which I think might be the rarest of all the powers that you outlined. He wrote extensively about Toyota's use of processing power in your book, but I'm interested

Starting point is 00:42:05 in a more recent example of this power at work. What is a well-known business today that is utilizing processing power at a high level? So it's very rare. I think many, many companies fall into the trap of saying, we run a tight ship and that's power. And the funny thing about it is, is that running a tight ship is incredibly important. It's just not power. It can be imitable, you know, basically. And as I said before, in terms of the dynamics of strategy of getting too,

Starting point is 00:42:43 power. It is even has vital role. Apple 2 example I gave earlier. So I continue with my statement that it's extremely uncommon and easy to fall into the trap that you have. A current business maybe into techs, you know, fast fashion, Zara, there's a lot of the bar for it is so high because the business has to be very complex so that it can have many, many steps. making it hard to imitate and that there's a certain opacity to understanding what those steps. So complexity and opacity are the two requirements for it. And so maybe that, I mean, I can think of extremely complicated businesses, but I wouldn't say that they have processed power. So think of Apple's supply chain in China. I mean, that's really hard to execute, right?

Starting point is 00:43:39 But I wouldn't say that's Apple's sources of power. I mean, Apple has lots of power, but that's not it. But it is absolutely vital for the success of their business. And maybe I just don't understand it well enough. Maybe it is. Maybe it isn't imitable. I mean, it is outsource. So you would think that others could dial into that outsource. And so it wouldn't end up being material. But maybe it is and I just don't understand it well enough. But there's something that's really, really complicated, really important, but it's not power. So I'm sort of digressing to avoid your finding an example because they're just so few. One of the questions I had about processing power that you outlined as well was that it requires a lot of time to develop that power. Now you probably don't have, there's probably no correct answer to this, but what like what amount of time do you think a company would need, for instance, like Toyota, like how long did it take them to develop? up their processing power, decades?

Starting point is 00:44:41 Yes, decades. And I'd say that's the right time concept. It's not single years. It's decade or more of decades. That's the right time concept for that. If it can be developed in a year, almost by definition, it's not power because you're basically saying it's imitable within reasonable time frame, right? You have a really simple power progression graph that moves through the origination,

Starting point is 00:45:06 takeoff and stability phases. Can you break down these three areas and describe where you like to spend most of your time analyzing? As I said, my interest is helping founders, really. And so that's more in the takeoff phase. And that has particular strategic significance because that's when you have the most degrees of freedom and strategy. So it's when my advice is sort of most useful, I'd say. And it's not completely true because the other phases have their own challenges and so on. But that's the area that interests me the most.

Starting point is 00:45:43 So from your experience, are you noticing that more businesses, depending on which phase they're in, are staying private past this takeoff period? And why do you think the reasoning is for this? Yeah, for sure. You know, I think before the change in interest rates, I don't know what the number is now, but there were a thousand, unicorns, right? Now, you could argue that that was overdone a bit, but that's an astonishing statement about companies that, you know, two decades ago probably would have gone public already. And so, yeah, and I think it's a capital market phenomenon. I don't think there, you know, there's some pundits that would say that regulatory requirements have made being public just too

Starting point is 00:46:28 onerous. And it has gotten a bit tougher and there are scale economies and going public. And it's a bit of a nuisance. But I'd say it's more just that the late stage private equity is now, there's an incredible availability of capital in that that didn't exist before. I mean, there's this book that came out recently. I can't remember its title. Maybe the title was BC by a guy from Harvard sort of going through the history of the venture capital business. And it was very instructive because it wasn't that long ago, depending on how old you are, I guess, it wasn't that long ago when policymakers in this country were worried that there was no venture money. And to try and answer it, they created tax incentives and they did these

Starting point is 00:47:19 set up small business investment companies and all this stuff. And that was a really concern, and I'd say one of the great strengths of the U.S. economy is the amount of risk capital that's available to people. Think of the big successful companies that provide so many jobs of the future, you know, like Amazon, Google and Microsoft and all those. They all, almost all of them, had a risk capital component that was very important. And we're very, so I'd say that that is, that's really a driver in that. And that's been huge. beneficial for our economy. Hamilton, thank you very much for joining me today.

Starting point is 00:48:00 Before we say goodbye, where can the audience connect with you and learn more about your book and your fund? Yeah, so just you might mention the title of the book and just, you know, the place, the easy place to get it is just to get it on Amazon. It's available now in foreign language editions, but I don't, you know, Korean and Japanese and Chinese and so on, but I assume that most of your listeners, or English speakers for that. Just go on Amazon and look for seven powers

Starting point is 00:48:30 and they'll get it to quickly. If you enjoyed this episode of We Study Billionaires and have a passion for discussing business strategy and competitive advantages, you'll love the TIP Mastermind community. Just a few weeks ago, the community had a wonderful discussion on MOTS where Hamilton's concepts were brought up regularly.

Starting point is 00:48:47 You can find out more about it at the investorspodcast.com slash mastermind. Okay, folks, that's it for today's episode. you enjoyed the show and I'll see you back here very soon. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before

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We Study Billionaires - The Investor’s Podcast Network - TIP600: Business Durability and Strategy Masterclass with Hamilton Helmer

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