Intro
Social Capital is a venture firm I highly respect. It’s full of brilliant technologists and capitalists who are all focused on advancing humanity by solving hard problems.
I admire their willingness to share the mental models they use to view the world and invest in companies.
A mental model they frequently express, and one that I’m fascinated by is the scarcity and abundance framework.
The reason I got interested in technology was because I read the book “Abundance: The Future Is Better Than You Think” so this concept is very close to my heart.
My intentions writing this post are to:
- Gain a better understanding of the framework through research and writing
- Introduce people to the framework and point them to further reading
All praise and admiration should go the Alex Danco and the rest of the Social Capital team.
With that being said, here are 6 lessons I’ve learned from following Social Capital.
1. Humanity progressed by identifying scarcity and creating abundance
The human species wasn’t built for success. We were never the strongest nor the fastest, so why did we thrive?
The answer lies in our need to solve problems. Humans tend to ask:
“What is the limiting resource that is in front of me today and how do I solve it?”
When humans solve problems around a limited resource two things happen:
- The limited resource becomes abundant
- A new limiting resource emerges
This formula is the key to understanding how and why humanity progressed.
Several hundred thousand years ago the human species faced some difficult problems. How do we eat? How do we protect ourselves? How do we thrive as a species? All of those things were scarce and limiting resources.
We solved those problems by organizing into tribes and allocating work among ourselves. This allowed us to protect and look out for one another. As soon as we figured out that we could create safety, it became abundant.
Once we solved the problem of safety, we asked ourselves what’s the next major problem that needs to be solved?
Humans could create things, but we could not document our knowledge. Knowledge was a scarce and limiting resource. So we invented language and created a framework for transferring knowledge and it also became abundant.
With all this knowledge we realized that certain groups had different abilities. One group was good at farming, another group was good at cooking, and another was good at building.
However, there was no trust among groups and trade was difficult. The limiting resource was trust. So we took that problem and abstracted it away by creating money. This allowed us to live in a society where we could trade goods with strangers.
This cycle of making scarce resources abundant continued for centuries, and it eventually led to someone identifying our bodies as a limited and scarce resource. This led to human and animal power being abstracted away into machinery.
We are now at a point in time where the most precious and scarce resource is our brain power, and we’ve have begun the process of abstracting our minds through artificial intelligence.
2. The great technology companies made scarce resources abundant through abstraction
The process of identifying scarce resources and creating abundance has been happening for centuries. However, this cycle is now happening at a faster rate.
This is because we’ve created an entire class of people whose job is to identify a scarce resource, build a solution, and make it abundant. We call these people entrepreneurs. More specifically, those working in the technology industry.
The important thing to realize is that there is always a limiting and scarce resource. Whether it was creating safety, building machines, or creating a smartphone. Someone was always asking what is the limiting resource? What is the thing that is stopping progress?
Answering that question has always been true.
Whether you were in the 1950’s and you were building the first computer, or you were in the 2000’s trying to build the first social network, the rules have always been the same.
At any given time, there is a limiting and scarce resource that is being abstracted away into abundance. Through this process, a new scarce resource emerges, and the cycle continues.
This cycle is made clear when studying some of the great technology companies.
Intel:
- Scarce resource: Computing power on purpose-built chips
- Abstraction: A generally programable chip
- Intel became a large and dominant company
- New scarce resource: PC hardware
Microsoft:
- Scarce resource: PC hardware
- Abstraction: Microsoft’s Software
- Microsoft became a large and dominant company
- New scarce resource: the ability for computers to connect and communicate with one another
Cisco:
- Scarce resource: network access
- Abstraction: selling networking equipment
- Cisco became a large and dominant company
- New scarce resource: the ability to parse through all of the information being passed on the network
Google:
- Scarce resource: indexable information
- Abstraction: Google Search
- Google became a large and dominant company
- New scarce resource: digital relationships for people consuming this information
Facebook:
- Scarce resource: digital friendship and connection
- Abstraction: Facebook’s social graph
- Facebook became a large and dominant company
- New scarce resource: ?????
The ability to identify what will be the emergent scarce resource makes a great investor. It allows one develop a non-linear way of thinking, and spot the opportunities that most “rational” people can’t.
3. A truly novel idea will be met with confusion and skepticism
By definition, if you identify something “scarce” that everyone else has also identified, it’s worthless.
In business, the goal is to create something and sell it for more than it costs in a way that is both defensible and profitable so that even if there are competitors, you have built a moat.
This is an important concept to grasp. When most people think of an idea, their initial inclination is to have other people validate that idea. They want to hear how great their idea is and how smart they are.
This is not the right mental framework to have.
When you identify a truly scarce resource, most people will think that you are crazy. This is because most people are motivated to think about the present and not about the future.
When you discuss your idea and the signal is overwhelmingly positive, that’s a sure sign that other people have already thought of it as well. But if its some combination of negative and confusion, that’s a good sign. That means you’ve probably identified something that is unique and no one else has thought about.
This concept manifests itself whenever you hear derivative ideas (Uber for dogs, Facebook for personal trainers, etc.). These sort of ideas will never become large and important businesses.
4. Each new level of abstraction allows smaller groups to create more value and extract higher profits
It used to require a significant amount of capital and technical knowledge to start a technology company. Today you have companies that are abstracting away the complexity of starting a business. If you need to set up servers, you can use Amazon Web Services. If you need payment infrastructure, you can use Stripe. Technology is allowing smaller teams to create more value and capture higher profits.
- Intel: 106k employees, 59B revenue, 184B market cap
- Microsoft: 120k employees, 89B revenue, 594B market cap
- Google / Alphabet: 75k employees 90B revenue, 691B market cap
- Facebook: 17k employees, 27B revenue, 501B market cap
5. We are moving from a world where we owned objects to a world where we access functions
One of the most obvious examples of this phenomena is car ownership versus ride-sharing services like Uber and Lyft.
The conventional approach to transportation is object-oriented. If you want to access to transport, you purchase a vehicle and hire an object (the car).
Ride sharing is a functional approach to transportation. In a function based world, you hire a function (Uber ride) to get you to work, deliver a package, or pick up your kids.
Owning objects is quite inconvenient. They are expensive, usually have high switching costs, and are complicated. Purchasing a vehicle requires careful consideration since you’re spending a significant amount of money and will be stuck with that vehicle for quite some time. If your car breaks down, it’s on you to deal with its complications.
Accessing functions is the exact opposite. Functions are easier to consume since they are cheap and have low switching costs (you can take an Uber today and decide to take a Lyft tomorrow) and the complexity is invisible to the user. When an Uber shows up to pick you up, you don’t need to spend any time thinking about how it got there, what route you’ll take to get to your destination, or if there’s enough fuel. It just works.
Since accessing functions is cheaper and more convenient than purchasing objects, they can be consumed at a much larger scale. This is an important concept to grasp when assessing a business. Is it selling an object (General Motors) or access to a function (Uber)?
6. The most attractive customers are those who are simultaneously over served and underserved
The over served customer is one who is using a product that exceeds their needs. The underserved customer is one who has a specific pain that isn’t being solved.
An interesting thought experiment would be to ask what happens if someone was simultaneously over served and underserved.
Let’s take the example of Uber and owning a car.
A large group of customers are overserved by owning a car. The majority of the cars life is spent parked and unused.
That same group of customers can be underserved in terms of getting from point A to B. They can’t drive when they go out drinking, they have a hard time finding parking downtown, they want to spend time on their phone during their commute, etc.
Uber’s success can be attributed to the fact that both these conditions are true. If users weren’t over served, they would have no reason to seek out an alternative solution. If they weren’t underserved, the only way an alternative solution would be attractive would be if it were dramatically cheaper (this isn’t a great business model).
If you identify a customer base that’s only underserved, it’s likely because there’s a problem that is too hard to solve, or the customer isn’t aware of the pain point. It will be difficult to build an initial solution and gain customers.
If you identify a customer base that is only over served, then it’s likely that customers are just searching for lower priced alternatives. You can get a lot of traction and early adopters, but it will be difficult to extract any significant profit.
Whenever you see the demand for a specific product/service explode very quickly, it’s likely because someone identified a group that was simultaneously overserved and underserved, and built an attractive solution to solve both needs.
Resources:
I’ve learned so much by following and researching the work put out by the Social Capital team.
If any of these concepts have peaked your interest, I suggest you do a deep dive and go through all of the source material:
- Chamath Palihapitiya, CEO of Social Capital, giving a talk about the scarcity and abundance framework
- Paradigm Shift Machine
- Emergent Layers Series
- Understanding Abundance Series
I also recommend subscribing to Snippets. It’s a collection of essays, links, and notes from Social Capital. The newsletter is curated by a fellow Canadian and Alex, Alex Danco.
(Note: This post is merely a reflection of what goes on in my weird little head)
