Maps to Guide Your Way: Virtuous Cycles
“The main thing is to keep the main thing, the main thing.”
-Jim Barksdale, Netscape
Most companies need to have a good product to begin to even have a chance at success. But in the technology world (and sometimes media), real success happens when you create a platform (which you can’t do without a good product).
Some products, like marketplaces, are actually platforms from the start—which makes them even more challenging to get off the ground than other products. This is because the product itself doesn’t have any value until there’s enough mass on the platform for people to use the product for its intended purpose (imagine Craigslist with only 1 item per category).
Platform design can often have a different set of rules than product design. And knowing when to switch between the two is crucial for a team to find their way to success. I’m not going to dive into that here, but what I am going to share is a series of sketches, with light annotation, of the way that very smart people have understood their platform design problem and created a virtuous cycle through business process, pricing, and product to spin that cycle ever faster.
Brad Stone covers the Amazon Virtuous Cycle very well in his book, The Everything Store. What you see here is an understanding of how to transform Amazon into “the Everything Store” by continually reinvesting in lower cost structure, lower prices, and the customer experience. What you only partially see here is that the Internet works a little bit like gravity: the more mass you have, the more gravitational pull you have and that continues to pull other things into your orbit that become a part of your mass—a virtuous cycle. And Amazon is now succeeding wildly as a marketplace because of the mass that they’ve created with a front door for consumers.
David Sacks riffed on the Amazon Virtuous cycle to show the virtuous cycle of Uber. All two-sided marketplaces live and die by liquidity, where Uber is extremely special is how pricing power effects their liquidity. Where Uber gets into a lot of trouble is that many people (drivers, customers, etc) don’t take the time to understand the hyper-rational arguments that Uber makes about total income and surge pricing. It doesn’t change the virtuous cycle, but the complexity of the explanation does damage Uber’s brand (most people aren’t 100% rational).
The Disney “virtuous cycle” is interesting because it shows Disney’s competitive advantage so clearly (and was so prescient). Generally, entertainment companies are not valued highly—the simplified reason for that is that they are often in “hits” businesses where current success is no guarantee of future success or cash flows. What Disney illustrated so well was his plan to break free of being a “hits” business by being able to get a lot more mileage out of the intellectual property owned by Disney. You could argue that this is how or why Zynga was valued so highly initially (in addition to insane revenue growth selling things that had no marginal cost)—but they were never able to fully pull off having intellectual property as valuable as Disney.
This slide is from a presentation created by Twilio to explain their service and published by them in 2008. It’s one of the finest examples I’ve ever seen in narrative market sizing.
They’re telling a story about their market, but as you see in the next slide, what they’re really showing is how they are going to create an even larger market.
Smart investors are always trying to find bets where companies will increase the overall market size, not just take an increased percentage share of an existing market. Whenever a friend asks for fundraising / pitch advice, I ask them if there’s a way for them to frame their universe in a way that creates a virtuous cycle where they can show something akin to what Twilio did. This is also the identical argument that one could make for Stripe—and why it’s valued at a premium to many other payment companies that process similar transaction volume. You can see them continuing to lead in this way by releasing things like Atlas. They’re focused not just on the product of payments—but creating an entire platform that makes it easier for developers to transact. With things like Atlas, they’re even even trying to expand the idea of what a developer is.
So, when you think about creating new products, focus first on the product—but do day dream about what the virtuous cycle around that product and market can become.