David Rosenthal: evaluation

Transcript context

…The key thing about it is that they are complex and hard to figure out. Just asserting them gets you 0.001% of the way of understanding what's really going on. We've seen that when we look at investment opportunities. First place to start a course is to try and create a map. Because remember, they're not homogeneous, they're not necessarily linear, they're not symmetrical. Just to give you some examples, if you think of Uber, this is a platform. It connects drivers with passengers with powerful utility, much better than taxis, and it changes my life for the better. I sit on a board of a startup up in Vancouver, and Vancouver taxi lobbies are strong or however it's worked. They don't have it. I finished my board meeting, I go down to the curb, they've called a taxi. I have no idea whether it's coming, I have no idea where it is, and eventually, I usually just give up and just go to find some corner to hail a cab. So very powerful benefits. But does Uber have power from network effects in a way that will translate into meaningful profitability? I would say, first order, no. It would be my guess. I'm no expert in this, but first order, I'd say no. The reason is, if you think about what's going on, if there is a similarly-sized or reasonably-sized competitor—Lyft, for example—in this market or others in other markets, that they can achieve a similar network effect. If you look at the density economics as you scale in a region, what we're saying is it's nonlinear. At some point it flattens out. If the market is large enough for more than one company to exist in that flat spot, then it doesn't help you. You have to look at all those nuances. One of the unusual things about my book is I've always tried to be very careful to make sure that everything maps back to value. If you said what is the fundamental assumption of this book, it's that strategy and value are mathematically, their duels. The mapping function from that desire to join the site versus actually being able to monetize it, which is based on how much time you spend on it and all that kind of stuff, you have to understand that to understand whether there's power or not. The last thing we're going to talk about after this is going to be my favorite. Switching cost. I thought this was super interesting because people think about switching cost as (I think) tend to be like old school industries or whatnot. But I realized, there's a huge amount of switching cost power in a lot of technology companies, too. Take Slack, for instance. Slack has network effects, but also switching cost. We run on Slack. If we were to switch, that would be a huge cost to our organization. How did you start thinking about that? Have other people in tech, since you published this realized like, oh, this might be more a source of power I'm not thinking about? I don't know. I think people had thought about it. There are a lot of subtleties around switching cost that you have to think through. One is that, in general, it creates a win-lose situation with your customer. There's sort of a management problem in that. Another is that there's a competitive dynamic which is if you have something that's attractive and a high switching cost, the competition will try like crazy to create something that mitigates the switching cost. You'll see a lesser app have a translator device. Often the imperfection of those, you look at EDA (electronic design, automation tools), there are libraries that are associated with those, but if you move from one tool company to another, the translation never works very well.…

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