The hierarchy of engagement | Sarah Tavel (Benchmark, Greylock, Pinterest)

[00:00] I think a lot of people think about markets almost like these bodies of water. [00:04] It's like, oh, it's this big body of water that we're going after. [00:09] I actually think that the most interesting markets [00:12] You have to think of them like currents. [00:15] where you're just trying to, there's something happening in the market [00:19] That's creating this current. [00:21] where you can have like a plank of wood that you put on the on the river and it's going to pull you forward versus [00:29] a market that doesn't really have that momentum to it, [00:32] You're going to have to build something really big and fancy to make any progress. [00:37] And that's why [00:38] We care less about market size because really what you're looking for when you're looking at a market [00:44] or what are the dynamics of change [00:46] What's the current and momentum that's going to pull the company and make the job easier for the founders to actually build something that endures. [00:55] Today, my guest is Sarah Tavell. Sarah is a partner at Benchmark, one of the most preeminent venture capital funds in the world. [01:03] where she focuses on investing in consumer and marketplace startups. [01:07] Prior to benchmark, Sarah was the first product manager at Pinterest. [01:11] And though I normally have a policy against VCs on the podcast, as you'll see, Sarah thinks very much like a product and growth leader. And I always learn a ton talking to Sarah about startups and marketplaces. We also learned in our conversation she used to play rugby and was apparently one of the best tacklers in her league. In our conversation, we unpack two of Sarah's killer frameworks for building a startup. One, the hierarchy of engagement, which is an incredibly useful lens for trying to figure out how to grow and scale your consumer startup.

[01:41] and then the hierarchy of marketplaces, which is an incredibly useful guide for helping you build your marketplace startup. If you're building a consumer startup or a marketplace, this episode is for you. We get really nerdy and really deep just the way I like it. With that, I bring you Sarah Tavill after a short word from our sponsor. [01:59] This entire episode is brought to you by Gelt, your gateway to smarter tax solutions. Navigating the world of taxes can be complicated and stressful. Gelt is here to change that. They blend advanced technology with expert CPA knowledge to handle your taxes effortlessly. Whether you're a business owner, investor, or executive, Gelt is here to optimize your tax strategy and enhance your financial success. People working at companies such as Notion, [02:29] They've seen significant savings and a transformation in their tax handling. And now, it's your turn. [02:35] Why choose Gelt? Because they offer year-round proactive tax planning and clear, fast communication. With their technology, you'll stay ahead, making the most of every tax benefit. Ready to elevate your tax strategy? Visit joingelt.com slash Lenny today. With Gelt, you'll save more and stress less. Again, that's joingelt.com slash Lenny. Join G-E-L-T dot com slash Lenny. Redefine your approach to taxes with Gelt. [03:04] Sarah thank you so much for being here and welcome to the podcast

[03:11] Super excited to be here. [03:13] So you may or may not know this, but actually normally have a policy of no VCs on the podcast, but you're a very special VC because you're a former product manager. Many people don't know you're the first product manager at Pinterest. [03:25] And to me, you still think like a product manager. And so I'm very excited to break my rule and have you on the podcast. [03:31] Thank you for the exception. [03:33] What I want to do with our time together is dig into two frameworks that you've developed and [03:39] use with founders that you work with to help them build successful companies. [03:43] One is focused around consumer businesses and one marketplace businesses. [03:48] So let's just start with the first framework. [03:50] I think you call it the hierarchy of engagement. [03:53] Just to start, could you maybe just share [03:56] a broad overview of this framework and [03:58] Also, just where it emerged from, where you kind of came up with this concept. Sure. [04:01] Shalom. [04:02] So... [04:04] I think one thing you'll notice about me is that [04:07] I, [04:09] have an allergic reaction to [04:11] vanity metrics, what people talk about as vanity metrics. [04:14] And when I made the transition from Pinterest where I, [04:19] I was leading product for the discovery team, so I was responsible for all [04:24] the discovery surfaces on Pinterest, the home feed, the search, the recommendations, a couple other teams. [04:30] and ultimately what those teams were about, [04:33] was about kind of engagement, increasing engagement of Pinterest. It was helping people [04:40] when they were on Pinterest, find something that they loved enough that they wanted to pin it to one of their boards.

[04:47] And when I started to meet with all these, you know, really talented consumer founders building consumer social products, [04:55] This was during a time when everybody was getting excited about [04:59] a growth hacking. And what you would see is that you would see all these founders coming in, [05:04] And they all had these up and to the right graphs where... [05:08] Whether it was, you know, [05:10] It was sign-ups or downloads or MAUs. [05:14] And. [05:15] It felt to me like it wasn't obvious. [05:18] that those metrics that they were all, [05:22] getting very attached to and focused on and showing [05:26] in these presentations. [05:28] was the wrong thing to focus on. It didn't get to the heart of whether [05:33] they were on the path to building and enduring consumer social product. [05:38] and they were missing at the core the criticality of engagement. [05:44] And and so I just started to feel this and it became like a pebble in my shoe. [05:49] I started just to go through that process that you've gone through many times before of, [05:54] writing and distilling it [05:57] And that's where I came up with this this hierarchy. [06:01] And... [06:03] What you realize when you look at [06:05] social products is that [06:07] There almost always is this action, which I call the core action, [06:11] of that product that forms the foundation of the product when [06:14] When a user completes this action, [06:17] it's clear that they both understand the utility of the product, they understand what that product is all about,

[06:23] And it's an action that if they perform the action, [06:27] they're very likely to come back. [06:29] So for Facebook, the obvious action is friending in the beginning days. [06:35] for [06:36] Pinterest. [06:37] It's pinning. I don't know if you're an Evernote user for Evernote. It's, you know, writing a note. [06:42] When you perform that action, that means you're an engaged user. Of course, there's a lot of other actions that you have to do. You can follow people on Pinterest, you comment on Facebook. [06:52] But at the end of the day, if you're not doing that action, [06:55] you're not really a user to the product. That's why the MAU thing doesn't really mean anything. [07:02] It's really looking at [07:03] I think of users completing the core action. You can look at this as a cohort, weekly, daily, whatever the right kind of cadence is. [07:13] But that's the foundation. That's level one. [07:16] Basically, there's some... [07:17] definition of an active user that a company that a consumer business basically needs to define [07:22] and [07:23] essentially figure out what is that [07:25] What is the action they're taking that makes them an active user versus just opening up the app? [07:29] or [07:30] or whatever it is. Like for Snapchat, it might be sending a snap. [07:34] for what's up. That's right. I'm sending a message. Okay. [07:36] Yes, yes. [07:38] And by the way, this action, [07:39] It's very important to pick the right action [07:43] You want to make sure it's an action that scales to enough users. You want to think about if I optimize for this action, like if I think about my product roadmap, [07:52] and optimized for it.

[07:54] What do we end up doing? Just to give you a more concrete example, [07:58] Actually, in the early days of Pinterest, we weren't sure what it was. [08:01] You know, we had all these things we were measuring. We were measuring [08:05] follows we were measuring you know clicking through liking something [08:10] Pinning, obviously. [08:12] us time on site. And so we would do these experiments, [08:15] and you would get all this different data where some things would go up, some things would go down. [08:21] and what were we optimizing for? There's something that's really, really important about having that clarity of this is the action that is most important for our product. All things are NUCs has to lead to this. If a user isn't doing this, then there's something missing from their experience of the product. It's super, super important to get real clarity and [08:45] and know exactly the one that you're going to be picking to go forward. [08:49] One more question along these lines. How do you think about this? [08:52] milestone versus the activation milestone for a user. [08:56] Do you find they're often the same, like getting your user to that aha moment versus this ongoing... [09:01] Right, and part of it is like, how do you measure the success of your NUCs of the activation? [09:07] To me it is. [09:08] Are you taking those new users and helping them understand the mental model of your product well enough that they start completing the core action? [09:18] Awesome. [09:19] There was a Nux once that we played with at Pinterest where we didn't even teach people what pinning was. It was like their feed magically appeared.

[09:27] That was an example of like, okay, we have to help people understand that they are here to discover something and save it to their board. [09:36] And just in case people don't know, what Nux says, New User Experience, just an acronym for New User Experience. Thank you. Yes. Okay. And then maybe one more just foundational thing that I think we maybe skipped is, what's the best way to think about using this framework? Is this essentially... [09:47] where you should focus your energy on which [09:50] elements of your [09:52] product you should be driving, which metrics to focus on. Is that a simple way to think about [09:55] Basically, we've talked about layer one, and there's three layers. [09:58] What's the best way to think about, as you're talking through this framework, how to apply it and use it? In a way, you have to think holistically when you're building these consumer products, when you're designing it. [10:08] But I think it's very important as once you get the product out and you're starting to optimize, [10:13] to start thinking through [10:15] each of the levels [10:17] And... [10:18] and that's just very focusing to help a founder understand [10:22] What are the levers that I really have to be focusing on to improve? Awesome. [10:27] I want to come back to how to apply it. [10:28] in maybe some examples after we go through the three levels, so I'll turn it back to you. Perfect. [10:33] Let's say you're building your product and [10:37] you're starting to see that you have users completing the core action. [10:41] Then the thing that you have, like the next challenge you have, [10:45] and I've seen this many times before, [10:47] is that then you have to figure out how to get those users to stick around. You want to retain those users. Obviously, [10:53] Even if they do the core action once or twice and then they run out of steam,

[10:57] you're going to be in a really challenged position to build something that endures. [11:02] And so, [11:03] The test for me of whether you're building a product, [11:06] that has the ingredients to create [11:09] a retentive product on a micro level, just at the user level. [11:13] is that the product should get better the more you use it, and you'll have more to lose by leaving it. [11:20] And so I'll give you just a couple examples there, a couple of my favorite products. [11:25] Obviously, Pinterest. [11:28] One of the features that I worked on when I was at Pinterest and we shipped, [11:33] was this idea of a picked for you feed. [11:36] And so the idea was every time you pin something to a board, [11:41] we would take that [11:42] information that the user gave us. [11:45] and use it to create recommendations in their home feed. It may have been the first algorithmic feed [11:51] that was in a social product because [11:53] Suddenly, [11:54] your home feed wasn't just people that you followed. And the truth is, people weren't really following [12:01] other people on Pinterest. So we needed a way to make the experience get better the more you used it. So we started to do these recommendations in your home feed. [12:09] And so it was this experience that the more you pinned, [12:12] The more personalized your home feed got for you, [12:15] And then the more you pinned, you also had more to lose by leaving Pinterest because all of a sudden – [12:22] You had all your favorite books, articles you want to remember, the recipes that you are planning,

[12:28] on cooking one day, the holiday planning that you were doing. And so you wouldn't abandon Pinterest because Pinterest was this repository [12:36] for these different expressions of your identity or these different bookmarks that you want to go back to. So that was kind of this idea and it [12:43] It's very important that the core action is the thing that you use as a product. [12:49] to make the experience better over time. [12:52] Evernote, another example. [12:54] where I don't know if you're an Evernote user. No, I tried it once and it was way too complicated. Okay, people still laugh at me for being an Evernote user. I am just... [13:07] I'm a lifetime user. [13:09] And it's one of those things that the more, you know, I take all my notes in Evernote, I dump documents in Evernote. [13:16] And what it means is that the more I use it, so like now I know that I can do a search in my Evernote and I'm going to find the document I'm looking for. [13:25] and now I can never leave Evernote. It has everything. I have thousands and thousands [13:31] of documents in Evernote. [13:33] And so that's a product that's incredibly retentive. [13:37] Unless someone builds a great exporter and then there goes that piece of friction. I know. Well, people keep telling me I need to move on to Notion or something else, but... [13:45] Not yet. I will remain a dinosaur here. Wow. I love that that's an example, though, of just like someone could break that barrier and make it less retentive by making it easier to get off. Yes. It's like an interesting growth strategy, basically. Yes. Yeah, it's very true.

[14:00] So let's say now you actually have a product, it's growing, more people are completing the core action, [14:07] When they complete that core action, the product gets more retentive for them. It gets better. The more they use it, they have more to lose by leaving it. [14:15] Then your tall task, and this is, [14:18] a very difficult, this is like the hardest thing [14:22] to overcome [14:23] is how do you make the product self-perpetuating? [14:26] And this is where I really I love to think with like of. [14:32] Every time a user [14:34] uses your product. Let's say they're clicking on the mouse, [14:37] or they're tapping on their phone, I love to think of it as like this kinetic energy that they're putting into your product. [14:44] You're taking that energy and your job [14:47] with a great product is to take that energy and as much as possible [14:51] convert it back to [14:52] the experience that they're having with your product. [14:55] Now, the biggest thing that you can do is a network effect. [14:59] If the more I pin something on Pinterest, [15:03] the better the experience gets for every user on Pinterest. Every time I add a pin to a board, I'm creating a new edge in Pinterest graph, [15:14] that Pinterest then uses to create recommendations and [15:17] and enrich their understanding of all those objects on Pinterest. So the network effect is the strongest thing that you can do. And obviously, if you have that, which all social products have to in some way, [15:29] you have to spend time

[15:32] as much as possible, just maximizing where that shows up. [15:36] fine tuning it, removing friction so it's a flywheel that spins faster and faster. [15:41] But there's other loops, too, that you have to... [15:45] identify and then maximize. [15:47] These are the growth and re-engagement loops. These are classic loops. You talk about these a lot. They exist in marketplaces and social products. [15:57] How do you get it so that as your users use the product, they want to share it with other people? [16:03] They create [16:05] metadata that you can then use for SEO, [16:07] You have collaborative experiences that pull other people in. There's all different things you can do here. [16:14] Then there's also things that you can do to re-engage a user. As an example, [16:19] in the early days of Pinterest, [16:21] If you pin something, [16:23] You're pinning something that you found on Pinterest that somebody else pinned. [16:28] We would send a push notification [16:31] Hey, Lenny, Sarah just pinned your pin to her artboard. [16:35] Now, [16:36] If you were a dormant user at that point, it's been a couple of weeks since you'd used Pinterest, that notification might pull you back into Pinterest and be like, "Hey, I wonder what other pins Sarah has on her artboard?" It's a great re-engagement loop where, [16:52] Pinterest doesn't have to do anything. They're intentional. [16:55] the users creating the action [16:58] that drives the outcome that Pinterest wants in that example.

[17:03] Now, [17:04] As much as I love [17:05] uh evernote uh this is a place where evernote obviously falls down right there's no [17:11] There's no loops that they can take advantage of. [17:14] that when I use the product, I make it better for you. [17:17] There's no loop where when I use a product, I want to pull you into the product. They tried at some point to do collaborative journals. [17:24] It doesn't work. [17:26] And so, [17:27] That's a place where, because of that, Evernote had to spend money to acquire users. [17:33] They tapped out. [17:34] They kind of miss that level three. [17:38] There's other examples I could speak to of companies that weren't able to transcend to level three. [17:44] that you wouldn't otherwise think. You know, I think of [17:48] companies like Houseparty and Clubhouse. [17:51] You know, what was interesting about both of those products [17:54] is that [17:55] You would think that the more users that came into Clubhouse, [17:59] or house party. [18:01] the faster the flywheel should spin. [18:03] But the challenge was that they relied on push notifications, right? [18:07] And so I don't know if you had this experience, but let's take House Party as an example. [18:14] you know, [18:14] You started to follow a lot of people on Houseparty, and then all of a sudden it was like your push notifications just got overwhelming, right? Because it was a real-time product. [18:24] that you had to use push notifications [18:26] to know the moment to join the product, [18:29] But... [18:30] when you had so many push notifications because the more people you followed,

[18:34] the more notifications you had, [18:36] you just get to this point where you start ignoring them. [18:39] And so it becomes this thing where even though the flywheel should be spinning faster, it starts breaking down. And that's the real tricky nuance. [18:50] in this level three. [18:52] So I think people hearing this are going to be like, okay, [18:55] get people to use your product more often, increase retention, make it viral. Basically, it's like [19:00] It's like stuff they already know. But I think what's powerful about this is this is just a lens, like a clarifying lens on what is most important. There's so many things. [19:09] you can be focusing on. [19:10] to increase your product's success and help it grow. [19:14] And what I love here is just [19:16] It's just like, here's the three most important things, and then here's the... [19:18] the levels, like they build on each other. So if you want to increase your attention, [19:22] get people to use your, do the core action offer. And if you want to, [19:25] Help it grow. [19:26] focus on helping it spread, self-perpetuate. [19:29] Yeah, I know, that's absolutely right. [19:32] It's and the importance of it is like. [19:35] I can't emphasize enough how important focus is when you're building these companies. It's [19:41] It's so hard and there really isn't a playbook, right? Like every company, [19:46] The ones that succeed have to be fundamentally different from anything [19:51] That was before it. [19:52] but there are these first principles of the ingredients that they all share, and you can use those ingredients to really focus you [20:01] when you're going through the inevitable growth curve,

[20:06] and wanting to know like well how do we maximize this moment? How do we [20:10] really focus on the things that will set us most up for success. And that's where I think a framework like this can be really clarifying. [20:17] There's a lot of depth behind each of these things that you... [20:20] you're being modest about. One is [20:23] with the top of this pyramid of making itself perpetuating. The reason that's really important is for a consumer app to work well most of the time. It has to... [20:30] be able to spread really cheaply. The cost of acquisition needs to be very low unless you somehow [20:36] figure out some paid ad. [20:37] strategy where you can make money with paid assets, which is very rare. [20:41] So maybe speak to that just like why that's so important to a consumer product. [20:45] Yeah, I mean... [20:46] What are you trying to build with a consumer product? You're not trying to build something niche, right? You want to build something... [20:53] that can be a mass market, hundreds of millions of users, billions of users. And it's really, [21:00] It would take considerable capital to do that with marketing. There's one example that we have so far, which is TikTok. [21:09] of spending more than a billion dollars, once they figured out, [21:14] actually the first two levels in order to grow. So they didn't actually put money, user acquisition spend behind TikTok until they had a product that was retentive. And then they knew that they really wanted to maximize that. [21:29] But... [21:31] every other social product has grown [21:34] organically.

[21:36] And they've been able to do so because they figured out how to maximize [21:40] these loops, [21:41] And even TikTok got to millions of users before they spent [21:47] all the capital to acquire those remaining users. [21:51] I didn't know that number. So TikTok spent a billion dollars on paid ads to get to there today. [21:57] Holy moly. I knew it was many millions, but I didn't realize it was a billion dollars. [22:04] That just shows you how hard it is to get [22:06] to break in and become a new social network, essentially, or a new social network. It is hard. And at the same time, though, we do see [22:13] exceptions to it where [22:16] I still feel like consumers are hungry for new experiences. [22:21] We've seen a couple over the last few years that have gone into tens of millions of users. [22:27] Nothing that has really... [22:29] created the experience that's sticky enough to kind of, uh, [22:34] pull minutes away from really tick tock and, [22:37] and Instagram, which just are these dominant forces right now. [22:42] You're... [22:43] Message also reminded me of a recent... [22:45] guest post on my newsletter about this app Saturn. I don't know if you read it. [22:49] Oh, I didn't, but I know of the app and it's an awesome founder. [22:52] Yeah, it was really interesting. And they had a really interesting insight about, first of all, very few apps ever make it to the top of the app store that break through what's already there. [23:00] And the ones that do almost always spend a few days there and they're gone because it's like a one shot thing. [23:05] And what they basically talked about is many apps have this viral K factor where they spread like crazy. Everyone starts using them. Everyone's in there.

[23:13] But then there's this, the opposite happens very quickly too. [23:16] where [23:16] if a few people miss using it a few days, [23:20] You go in there and it's like, oh, nothing's happening here anymore, and it quickly crumbles. [23:23] Clubhouse essentially went through this be real [23:26] Started going through this where people stopped posting and then like, all right, forget it. Everyone's gone. [23:30] So most apps have this destructive K-factor that kicks in the same way it kicked in to get it to spread. [23:35] Yes, as people say, [23:37] When something grows really quickly, it also can collapse really quickly. [23:43] Yeah, tough. I guess along those lines, is there anything you've seen or learned? I guess the idea of this framework is to avoid that, essentially. But I guess, is there anything you... [23:52] It comes to mind to avoid that. One other thing that I've seen that runs into a challenge, I find it runs into a challenge particularly with level two is anonymity. [24:04] Anonymity is something where [24:08] Pseudo-anonymity and anonymity are very different concepts, right? [24:13] With pseudo-anonymity, we have it on Twitter, you have it on Reddit, [24:17] You have a persistent identity that you're creating. [24:20] and that identity then can have accruing benefits mounting loss. [24:25] My, you know, my, uh, [24:27] pseudo anonymous account on Twitter that, you know, just flames other VCs. I'm just kidding. I'm not funny enough to make something like that. But, you know, for the people who do have it, [24:42] they get accruing benefits because they get people to follow them.

[24:47] And that's the mounting loss, too, where [24:49] They've grown their identity on a platform even though it's a pseudo-anonymous identity. [24:56] The challenge when you have [24:58] pure anonymity, [25:00] is that you don't have that accruing benefit or mounting loss that happens. I don't know if you ever played [25:06] which is secret, but it's similar to TikTok or something like that. [25:10] These are the types of experiences where [25:13] Over time, [25:15] The network effect doesn't work because [25:20] the anonymity creates the conditions for [25:24] bad behavior. [25:25] And so that starts to pull down the community. [25:28] And then it is also the experience where you use a product, [25:33] and you can delete it and then come back three months later, [25:36] And because of the anonymity aspect of it, [25:39] your experience isn't any different. [25:42] I find anonymity, people keep trying it and super talented founders, [25:48] keep hitting their head against that wall because [25:51] it has the very early [25:54] Fun growth, but it just continues to be a product of [25:59] that isn't able to persist without... [26:02] some persistent identity. [26:04] I'm going to pull on this thread. I've just... [26:06] ways to increase retention. Basically, this is one of the things, maybe the main thing you're telling people about, [26:11] to help increase retention, make it so that it's really hard to leave. [26:15] Before we get there, just to make it clear, is this framework

[26:18] Mostly for social consumer products or do you generalize this to consumer? [26:23] products. I think it's... [26:26] Consumer products in general, but it makes the most sense for consumer social. Okay, got it. It works for Evernote, right? And so Evernote isn't a consumer social product. [26:39] Awesome. Okay. So it's like most helpful for if you're the social... [26:42] Your friends are in it. [26:44] Start a product. [26:45] Right, you have the chance of level three with social. Right, awesome. Okay, so on this thread of retention, [26:51] It's a thing that [26:52] I speak about often, everyone always talks about the most important thing you got to get right is get retention. [26:58] to a good place, because if you can't retain people, nothing's going to work anyway. [27:02] So just to spend a little more time here, [27:04] I guess, is there anything else you recommend to founders to help them [27:08] with increasing retention and getting to a healthy place with retention. [27:12] Number one is actually measuring it. Like I can't tell you [27:16] How many... [27:18] times I suggest to a founder to track cohorts. [27:22] And that's a new thing. [27:24] And so, you know, just being really, really... [27:27] clear and intellectually honest on looking at cohorts. [27:31] I think is number one. [27:33] Maybe just describe that briefly, and then we'll link to an article that I have about how to do that. Perfect. These are the moments when I should probably turn the mic over to you to talk about. [27:46] A cohort, what I always like to look at,

[27:50] is weekly cohorts. [27:52] for these products and you look at them in two ways, which is one, [27:56] for each vintage of cohorts, you're looking at a group of people who signed up in a given week, and that's one cohort. [28:05] You look at it both on an active user basis, like are those people, [28:09] continuing to come back to the product. [28:12] I particularly love to look at that on a weekly active user completing the core action basis. [28:20] of our users completing the core action, [28:23] how is that changing over time for each of the cohorts, and then also looking at activity level. [28:28] within those cohorts. What you love to see [28:32] is the kind of classic smile graph [28:35] where as the network grows, [28:39] and users start to use a product more and more, you start to see that over time, they actually become more retained in the product as opposed to, [28:48] kind of the classic, you know, leaky bucket where the cohort just keeps on [28:52] dwindling down. [28:53] And until you reach a point with your cohorts where there is a plateau, [28:58] you have more work to do on figuring out the retention of your users. [29:03] The second thing is just focus. [29:06] So I can't tell you how many times also you'll meet a founder, [29:11] And they will, you know, there was one example I saw. It was kind of a dating app, friend-making app. [29:18] And he was growing it.

[29:20] via TikTok, which is not geographically constrained at all. [29:25] And so you're growing, you know, he's growing the user numbers. [29:30] But without focusing on a specific geography, [29:33] it's going to be really difficult to make that type of product a high retention product. [29:39] Coming back to the framework, [29:40] Which layer do you find most [29:43] often is the one [29:45] founders maybe are under investing in slash maybe the most important to focus on if you had to. [29:49] pick one of these or is it super dependent on your situation? [29:53] What I... [29:55] often feel [29:56] is that. [29:58] A lot of times, [30:00] product founders, consumer founders, [30:02] See where they want to get to. [30:04] You know, they see, they compare themselves to the full expression, [30:09] of a product that you see with other products, you know, Roblox, [30:13] Instagram, TikTok, whatever it may be, [30:17] and they want to get there. [30:19] but [30:20] What that ends up meaning when a new user signs up, [30:24] is that [30:25] There's too much in the beginning to take in and understand. [30:31] and you don't then have a very focused [30:36] product that gets the user to the thing that you most want them to do. [30:40] That's actually part of the importance of understanding level one, [30:45] what your core action is, [30:47] is that you want to make sure that when a user comes to

[30:51] your product signs up for the first time [30:53] doesn't have necessarily a lot of context [30:56] on what the product is itself, that they see the thing that they're supposed to do and you get them to do it. [31:03] A lot of times in the beginning, [31:06] There are just so many other things. [31:08] that a product might have, [31:11] that you're diffusing that attention that they, [31:15] would otherwise have had on the thing that's most important. [31:19] And so I feel that that's kind of where I always [31:23] That's the first mistake and it's kind of natural that it would be the first mistake, but maybe the largest [31:29] mistake that I see people make. [31:31] Essentially not getting the activation moment right, not focusing enough on getting people to that aha moment as people describe. [31:38] And then again, that repeating again and again as a correction. [31:42] Yes. To close the loop on this sort of... [31:45] discussion, can you share again a few examples of [31:49] core actions slash activation moments just to make this fresh again in people's minds. And then also just whatever you can share, but helping people decide what that is. I know there's a whole... [31:59] It's a difficult thing to do well, but any advice for how to find that activation? I'll tell you the exercise that we did at Pinterest because, as I mentioned before, [32:08] It wasn't obvious to us in the beginning of Pinterest, like, were we a social network? You know, like, should we optimize for the follow graph? But you have to remember, Pinterest, this was 2011. [32:20] You had Twitter growing like crazy.

[32:23] Instagram was growing, those were both asymmetrical [32:27] follow graphs that they were creating, right? [32:29] And so it wasn't clear at the time [32:31] whether Pinterest was actually just creating a new follow graph, [32:36] But that was about, you know, [32:38] things instead of what Twitter was or what Instagram was. [32:43] It wasn't obvious. [32:44] And. [32:46] What happened actually is that there was two efforts that I think of as like kind of bottoms up and top down. [32:53] that helped really clarify that actually pinning something was the core action. [32:58] was going to be our North Star. We called it Weekly Active [33:01] PINNERS. [33:02] And the two things were, you know, there's always this like, [33:06] you know, [33:07] Bottoms up. [33:09] Um, [33:10] analysis that you do, which is we looked at [33:13] every action that you could do on Pinterest. [33:16] So we had... [33:17] liking, following, clicking through, time on site, [33:21] pinning, repinning, [33:23] Um, [33:24] And we looked at, first of all, what percentage of users complete those actions? [33:28] And, you know, [33:29] If you do that action in a week, [33:33] What's your propensity to come back the following week? [33:36] We basically ranked that and what we saw was that if you pin something, repin something, which is finding something on Pinterest, I'm using those synonymously. [33:45] uh, [33:45] or click through. [33:47] You had an incredibly high... [33:49] probability that you would come back. So if someone's pinning something, they're coming back to Pinterest the next week with a super high

[33:59] you know, more than 90% probability at the time. [34:02] And then there's like the... [34:04] top-down way of thinking about it, which is, well, what is Pinterest for? [34:10] If a user does come to Pinterest and they never add something to a board, [34:15] Do they really understand what Pinterest is? And yes, clicking through makes you want to save. If the click through is valuable, [34:23] you want to save it, so clicking through is obviously really important. [34:27] But at the end of the day, if they don't like that pin enough that they want to save it themselves to their board, then we haven't done our job. [34:35] And so we did this kind of top-down, bottoms-up analysis to make it very clear [34:40] that when we launch an experiment or launch a new feature, [34:43] If the [34:45] probability of the percentage of people [34:48] that [34:49] pin something doesn't go up. [34:51] or the number of pins for that cohort doesn't go up, [34:55] that experiment is not a successful experiment. [34:58] Awesome. There's a post I'll link to in the show notes where there's actually a [35:02] a guide to doing this regression analysis. [35:05] on how to figure out your activation milestone. Basically, what is most causal of retention, as you're describing. And I love this example from Pinterest. [35:13] Any other examples? Again, you shared a few at the beginning of just examples of great activation milestones/core user actions. I'll tell you one other one that I thought was super interesting, which is that when I initially published this post, [35:25] I had assumed wrongly

[35:29] that YouTube's [35:30] core action [35:32] was watching a video. And... [35:36] Then Shashir Mehta, who is the [35:39] kind of CPO of YouTube. [35:41] He reached out to me and he said, you know, that's what it was in the early days. [35:45] But we started to realize that it wasn't actually our core action. And we did a lot of analysis. [35:52] On YouTube, [35:53] And what we realized was that subscribing, [35:56] was the core action on YouTube. [35:58] And it makes so much sense when he said it, right? [36:01] You're a creator. You're uploading content onto YouTube. [36:06] There are a lot of other places at that time that you could have uploaded that content to. [36:11] But you care about YouTube because that's where you're growing your audience, right? [36:16] And so the more people that subscribe to your content on YouTube, [36:20] the more you have the accruing benefits and mounting loss of using YouTube. That was super important. [36:28] On the creator side, which one of the funny things that we'll bridge to our next conversation is that all social products, [36:35] are really marketplaces, right? [36:37] YouTube is a marketplace. You have the creators uploading content and the viewers who are watching it. Supply and demand. [36:45] And so then the subscribe button is also very interesting because then from the demand side, the viewer, [36:51] Why would I come back to YouTube consistently [36:54] versus, again, all the other places I could spend time on, [36:58] If it weren't for me having found creators,

[37:02] for whom their content really resonates with me, so much so that I subscribe to their content. [37:10] And so I loved that example because it also it showed a little bit the evolution that can happen with these companies, but then also just the beauty of like, [37:19] You know you've got something really right. [37:21] with the core action. [37:23] when it's helping both sides of your network. [37:26] Awesome example. And I think it's also a good reminder. People change these things. They come up with your best bet. [37:31] Okay, we tried this for six months. [37:33] Maybe let's try something else. We've learned something new. [37:35] Exactly. I'm also going to link to this post I wrote around finding your North Star metric. [37:40] Which, this is like such a multimedia conversation. We have just links for all these topics to go deeper. [37:46] Essentially, I... [37:47] figured out the North Star metric for 30 companies. And I feel like the North Star metric of a company ends up often being this core user action. [37:56] So like Pinterest sounds like those WAPs. [37:59] Weekly active pinners. In the beginning, we called it weekly active repinners and war, because we felt like we were at war, so it was good. And then it became peacetime maybe. Yes, exactly. Awesome. So maybe just to close, [38:14] the thread on this [38:16] framework. [38:17] Can you just... [38:18] briefly summarize who this is most helpful for and just how they could [38:23] apply it if they're maybe not growing as fast as they want or they're just getting started as a founder building a consumer product. [38:28] Yeah, I just I think about consumer founders, product founders, product leaders in these companies.

[38:35] that are thinking through the roadmap, what are some most important things [38:40] that they need to prioritize the big rocks, [38:43] for the immediate short term. [38:45] And the framework then provides a lens on what to prioritize. And we'll link to the whole framework for people that want to go deeper. [38:53] Awesome. [38:54] OK, so let's move on to your second framework that you call the hierarchy of marketplaces. [38:59] And first of all, I want to give a shout out to Mike Williams, who's the founder of Everything Marketplaces, who gave me a bunch of good question night suggestions to ask. Wonderful. Now I'm nervous. [39:09] He's Mr. Marketplace. Yes. Okay, so let's start with the same question. Just what's kind of the broad way to think about what this framework is and who it's for? And then where did it come from? It's a framework or hierarchy. [39:21] that is for marketplace founders. It could actually be B2B or B2C. [39:27] or marketplace product leaders that [39:31] are [39:32] just continuing like either getting started or scaling. [39:35] their marketplace and helping [39:38] kind of prioritize and focus on the things that most matter. [39:41] and it came out of a similar reaction. [39:46] A very similar parallel to what I was experiencing [39:50] meaning all these consumer social founders like, [39:53] They would talk about MAUs, and I just felt like, [39:56] It didn't get to the heart. [39:58] of whether they were building enduring value [40:01] and I actually started to realize that GMV was very similar.

[40:06] You know, GMV, [40:07] It's a metric that it seems like, you know, of course, you can't build, [40:13] a marketplace without growing GMB. [40:15] in the same way that you can't build a social product without growing MAUs. [40:19] But, [40:20] If you focus, if the race that you think you're running, [40:23] is to grow MAUs or to grow GMV, [40:27] you're not actually going to run the right race. [40:30] It can take you - and actually, marketplace is very - [40:34] Very interestingly, [40:35] it can take you in the wrong direction. [40:38] So what would happen is, [40:40] I would meet all these founders. [40:42] and everybody got fixated on this milestone of a million dollars of GMV. [40:48] Right? [40:48] And I think a lot of people started to feel like you hit a million dollars. [40:53] of annualized GMV, it means you're ready for your Series A. [40:57] But, [40:58] it's kind of self-evident that not all GMV is created equal, right? Like, so... [41:03] Imagine a food delivery company 10 years ago. [41:07] You could have a million dollars of GMV, [41:10] by focusing on LA, [41:14] or a million dollars of GMV by focusing on, [41:17] Boston. [41:18] Or you could have a million dollars of GMV by having $500,000 here, $200,000 here, spreading it out. And so the founders, and I would meet so many founders who would say, "Oh, well, [41:30] I thought we had to prove out [41:33] that the value proposition resonated in these other cities.

[41:36] That's why we're diffusing our focus. [41:39] But what they what I would always feel is like they were just making their job. [41:43] so much harder by doing that. [41:46] The other way you could think of it is like if you're trying to get to a million dollars of GMV as quickly as possible, [41:52] You're actually motivated to go after a really big market. [41:56] It's a lot easier to get to a million dollars of GMV when you're skimming the cream. [42:02] on this big ocean of a market, [42:04] than to be very, very focused on a smaller market and getting to a million dollars of GMV [42:09] in a constrained market is a lot harder, takes longer, [42:13] but is actually the path to building something they endorse. [42:16] And so, [42:17] I was having the same conversation again and again, and I just felt like, [42:21] I needed to crystallize it or synthesize it. [42:24] in a way that would be easier to communicate and that's what led to [42:28] this hierarchy. [42:29] Awesome. Okay, cool. So you've touched on a number of the important elements of this. [42:33] hierarchy. So let's dive in. [42:35] Okay. [42:36] There's probably a couple of core insights, but the first one that I think about [42:41] with this hierarchy is that when you're building a marketplace, [42:45] You actually have to start from the goal and work backwards from there. [42:50] Now, what's the goal? Marketplaces, I mean, you have so much incredible content on this. [42:56] They are... [42:58] They're just... [42:59] incredibly difficult to build. You're basically building two companies at the same time. You have [43:05] product and go-to-market org for the demand side, the product and go-to-market org for the supply side. Somehow you have to make these two line up so that they serve each other's needs.

[43:15] it's it's an incredibly difficult um dance and and [43:20] It really, it, it, [43:22] It's. [43:23] It's one of the hardest types of companies in the software world that I think you can build. [43:29] And you do it because... [43:30] you think about the full expression of these models, [43:35] and you think about companies like Airbnb or Amazon or eBay or Google, where once you have scale, [43:42] and have very dominant market share, you have a product that just is the best place [43:49] Without... [43:50] Question. [43:51] of fulfilling this need. [43:54] and they end up being very profitable, cash-flowing businesses, [43:58] And you see that. [44:00] That's the business that you want to build. That's why you're going through all the hardship. [44:04] of building a marketplace, getting the marketplace off the ground to get to that place. [44:09] And, [44:10] There's very clear analysis. [44:14] In the hierarchy, I have this incredible graph that I remember seeing when I was a board observer for this online classified company called OLX, led by Fabrice Grinda. [44:26] And it is, it kind of shows that, [44:29] the more dominant. [44:31] A marketplace is relative to the number two in its space, [44:36] the more profitable that business is. And so it's just like a very clear, like you don't want to be, [44:41] Obviously, when you're building a marketplace, you don't want to be in the middle of the pack.

[44:45] But even being number one, but just barely number one, [44:49] doesn't give you any of the benefits of a marketplace model. You're fighting for each incremental point of market share. It's not clear to the supply side or the demand side that you're like the main place to be [45:01] And so it only becomes really clear once you have that dominant market position where you're just so much bigger than the number two. [45:09] And the only way to [45:11] get to that place, to get to that moment of real dominance where you have this winner-take-most dynamic, [45:18] is that you have to tip your market. [45:21] And. [45:22] That's the only scalable way to do that and that's what level two is. [45:27] How do you maximize your chance of tipping a market? [45:31] You have to focus on a really constrained [45:35] opportunity, [45:36] and that is level one. [45:40] the broad framing [45:42] which is a really important thing of how when you're building a marketplace, you actually are building towards that point of dominance. And so it's part of the reason why [45:52] being really, really, really focused in level one is so important. Awesome. So you've walked through this backwards just to summarize in case people didn't totally catch it. Basically, layer one is focus, layer two [46:06] Tip the market. Layer three, dominate the market. [46:08] Exactly. Awesome. [46:10] So let's maybe start with layer one of just focus, which I think is the most counterintuitive.

[46:15] step for people building a marketplace where as you said, [46:18] Normally, it's go big as fast as possible, get as much GMV as possible, just make everyone... [46:24] happy as quickly as you can. [46:25] and your advice essentially do the opposite make it very [46:28] You have this great acronym of Thimble that I imagine you'll talk about that I love, I always think about. Part of what's so hard about [46:39] This idea of focus is like. [46:41] I'm lucky to meet with just incredibly ambitious founders. [46:47] And, [46:48] The hardest thing I think about [46:51] building these marketplaces is that [46:53] The ambition can often feel like the sun. [46:57] you know, like the heat of the sun that's trying to warm everything up and you're going after this big, [47:02] big market, warming the ocean. [47:04] And I think that [47:06] Really what the, [47:07] the best [47:08] ambitious founders do. [47:10] is they focus that ambition like a laser beam. [47:13] on a small mark at the thimble. [47:16] And what you do is like you're getting that thimble, you're getting the product market fit really, really right. [47:21] with this small constrained market. And if you heat that up, [47:26] really really hot then it expands from there and [47:29] You know, and part of this. [47:31] is that we have to accept a couple of points of scarcity. [47:35] One is that [47:37] You can't raise hundreds of millions of dollars from the start. [47:41] Right? [47:42] where we, especially today, live in a world where there is a constraint around capital.

[47:48] You have to be able to take that capital in the beginning, [47:51] and make the most out of it. The only way to do that is to be very, very focused. [47:57] The second thing is that the constraint is the founder's attention. [48:01] and [48:02] Again, these things are really, really difficult to get off the ground. [48:06] and the only way that you can do it is by having [48:09] myopic focus on a segment. [48:13] The example that I always think about was a very cool, [48:20] thing that we all got to see, which is when the food delivery wars happened. [48:24] Right. [48:25] where you had companies like DoorDash and Postmates and Uber Eats [48:30] And then the incumbents of Grubhub take very different strategies. [48:35] And, [48:36] What? [48:36] Postmates, I make comparisons to Postmates and DoorDash, both successful companies. [48:44] But Postmates, from the very beginning, had very big ambition. [48:50] and went after [48:52] All the big cities. [48:53] They went after not just restaurants, but restaurants and [48:57] Apple and retail, bicycle. I remember there were so many things that they went after all at the same time. [49:05] Versus and when you're playing that game, [49:08] You're always being compared. [49:10] to whatever other substitutes there are in the market, right? [49:13] When you have constraint of capital and attention,

[49:20] You're spreading yourself thin across a lot of different vectors of preference for the customer and the seller. [49:28] DoorDash, on the other hand, [49:30] famously and very controversially went after the suburbs right in the beginning [49:37] And the beautiful thing about the suburbs is that there is very little competition because [49:41] No one thought that you could do it economically. And they probably weren't wrong in the beginning. Like DoorDash lost a lot of money in the beginning, [49:49] fulfilling delivery in the suburbs just because the delivery times, the driving was so long, [49:56] But, [49:57] By going after a market that other people were focused on, it let them get to a place [50:03] where they were able to really make [50:06] the customers on both sides of their marketplace happy enough that they retained. [50:11] And this word happy I use, I should say, [50:14] I should expand on it a little bit. [50:17] Because... [50:18] The... [50:19] The realization I had as I reflected, [50:23] on this kind of feeling that GMV is really actually [50:27] a vanity metric. It doesn't get [50:29] at the core of whether you're building [50:32] enduring value, [50:33] It's like very clear and there's plenty of examples I could give where, you know, [50:38] There are companies that had incredible scale and still were disrupted by a startup. [50:45] It's because actually customers don't care how big you are. They don't care how many transactions you've accumulated. What they care about is when they have a transaction with you,

[50:57] How happy do you make them? How much better is the experience that you provide than any other substitute that they could use? And if you do a good job, then they're going to keep coming back to you. [51:09] I call it Happy GMV and that's actually the thing that I think you as a founder or a product leader have to focus on, which is what do I think is going to be the experience of a buyer or seller that leads them to retaining. [51:25] and tracking that as like the happy path and therefore the happy GMV. [51:29] Amazing. I love that concept. Happy GMV. [51:32] You also kind of extend this idea, and I think you called it the... [51:37] Minimum viable happiness is what you want to create when you're [51:41] building this marketplace, this thimble of water, [51:43] that you're trying to boil into something incredible that [51:46] What's the minimum? [51:47] version of that that creates really happy customers. [51:51] That's right. Yes. And it's it's and kind of the way to think of it is like, [51:56] Obviously, when you're a marketplace founder, you know that [52:01] In order to build something that endures, you're going to have to grow. [52:04] But in the beginning, you're doing all these things that don't scale. You're working on your product experience. You're taking friction out of the [52:14] of the transaction, [52:15] And you want to get to a point. [52:17] where there's a certain percentage of people, [52:20] that retain after having [52:22] done a transaction. You're kind of doing the work, doing the work, doing the work to get to that minimum threshold.

[52:29] And that's when you know you get to kind of go to the next step of, [52:32] starting to figure out the levers to really scale what you're doing. [52:36] Awesome. And again, it's difficult. It's easy to say. It's difficult to do as a founder. So hard. To tell them, like, you just need to get a small version of this marketplace working. Yes. Versus you go big really quickly. [52:48] And so most of the time, I think it's actually like location, basically start in a city if it's [52:53] if it's location oriented. [52:54] Or if it's all online, pick like one niche to focus on. Like Etsy was like, you know. [52:59] craft fair. [53:00] goods, right? [53:02] Exactly. And sometimes as we saw with Postmates, [53:07] Sometimes it's both, which is geography and category. [53:12] It's again, you just. [53:15] You have to assume scarcity. [53:19] of your capital, of your attention, of your customers' attention. [53:23] And so getting complete clarity of what is the experience that you want to [53:28] really nail what's that happy path you're optimizing for. [53:32] constraining that in the beginning gives you the option, the optionality to grow beyond that. But if you don't constrain, [53:39] You just won't be able to get there fast enough.

[54:09] have already experienced the GELT difference. They've seen significant savings and a transformation in their tax handling. And now it's your turn. Why choose GELT? Because they offer year-round proactive tax planning and clear, fast communication. With their technology, you'll stay ahead, making the most of every tax benefit. Ready to elevate your tax strategy? Visit joingelt.com slash Lenny today. With GELT, you'll save more and stress less. Again, that's joingelt.com slash Lenny today. [54:39] slash Lenny. Join GELT.com slash Lenny. Redefine your approach to taxes with Gelt. [54:47] I want to talk about what it looks like. [54:50] when you've got it working and it makes sense to start expanding. But before I do, [54:54] There's one counter example I found in my research, which is really interesting, which is Thumbtack. [54:58] Were they... [55:00] From the beginning went... [55:01] national and across many categories. [55:04] And the founders... [55:06] Admit, maybe that wasn't the right idea. It took him, I think, a long time to get to something that was really working. [55:11] But on the other hand, their thinking was, [55:14] to create enough of a flywheel for people to keep coming back. [55:17] How often do you need a plumber? How often do you need a DJ? I was just going to say that is the trickiness with Thumbtacks model and it [55:27] persists as the trickiness with their model, which is that [55:30] you don't have a high repeat use case there. [55:34] One of the really important things with building a marketplace,

[55:39] is [55:40] cornering the by side like having a relationship with the by side [55:44] where they don't even think. [55:46] about where they're going to go, they come to you. [55:49] And if it's a plumber, [55:51] You use that so infrequently. [55:54] that every time you are going to look for a plumber, you're going to start at Google. [55:59] You're not going to assume... [56:01] I'm going to go to Thumbtack to find that because you've already forgotten by that point. [56:05] And so you need to have enough touch points with the consumer [56:09] so that they'll have a relationship with you and start to think of you [56:12] as a place to go to. [56:14] And that's probably that was the trickiness with Thumbtack. And by the way, [56:18] when we talk through level two, that also is the trickiness that Thumbtack, you know, the level two will articulate some more of that trickiness. [56:26] Awesome. [56:27] By the way, I do use Sumtac. It's implanted in my head. That's where to go to find plumbers and stuff. That's great. I mean, those fans, I adore Marco. He is an incredible... [56:36] incredible founder. [56:37] As a segue to... [56:39] Layer 2. [56:40] What are signs that you've done a good job at focusing and things are working? You have this term that I love of creating a white hot center. [56:49] So maybe speak to that. Just like what tells you it's like, cool, I think we've got this. [56:53] very focused thimble, how do we know it's time to go? Yeah, I think it's very much that you just start, you see people retaining. You see people [57:03] You just feel that where people are texting you or emailing or whatever it is. [57:09] that they've had a great experience and you see them coming back.

[57:12] You're not going to make everybody happy. Let's all accept that. [57:18] but there's a core of users, a persona, [57:23] that you are able to make really happy, [57:26] that's when you know that you're on the right track. Awesome. It's essentially the very fuzzy... [57:31] Product market fit question. [57:32] And I'll link to a few posts I've written that help people get there. I guess, is there anything you want to add there? I mean, I love, you know, the only thing I'll add, those two things... [57:41] Related, I'll add. [57:42] I don't like NPS for this, and I have a whole blog post on this. [57:47] I like Sean Ellis's question of like, how disappointed would you be if this product disappeared? [57:53] And I think it's if you have at least 40% of people [57:56] respond that they'd be very disappointed, then you're on the right track. That's kind of the [58:02] the feeling that should tell you you're on the right track. Awesome. Okay. Let's talk about layer two around tipping the marketplace. [58:10] So layer two, I think, will actually illuminate, again, the importance of that constraint focus. [58:16] for layer one. [58:18] You're doing all these things that don't scale, that you've written so much about, Lenny, about kickstarting the marketplace, all those things. [58:26] that you can't just keep on doing forever. Now, level two is about [58:32] figuring out [58:33] how to do things that do scale. [58:36] And really you're doing it in service of this kind of mythical moment. [58:41] of a tipping point and the tipping point

[58:44] is this idea that [58:46] You... [58:47] often reach some kind of saturation point in the market. [58:52] you've reached an experience, you've kept on working on the product experience, [58:58] You've taken a lot of friction out. [58:59] and you keep on growing, growing, growing, [59:03] And you're doing that in service of increasing happiness. And this is a really important thing, like, [59:08] the growth that you're doing, [59:10] You should have a lot of clarity on your flywheel at this point. [59:15] and know that you're growing in service of accelerating your flywheel. People talk about the flywheel as liquidity. I could think of it as happiness, which is that the more the flywheel spins, [59:28] the more you're able to make both sides of your marketplace happy. [59:33] And, [59:34] What you're doing is you're growing into a greater percentage of your market. As you're doing all these things, again, that don't scale, [59:43] then you reach this moment where things start to get a lot easier. [59:48] you've kind of pushed the boulder up the hill and it starts to slide down. And what you notice first is, [59:54] I think, is you start to see it on a micro level, [59:57] where you might have suppliers that start to tip to you or buyers that tip. [1:00:01] you might see your cohorts get a little bit better. You start to see some organic growth, [1:00:06] Let me give a story or an example of a company that I got to see. [1:00:12] where the marketplace started to tip.

[1:00:14] So we're investors in a company called Recce. [1:00:17] and recce is [1:00:19] a marketplace for restaurants and their suppliers. [1:00:22] Imagine in the beginning this kind of app that you could use. It almost looked like WhatsApp. [1:00:29] that a chef could use [1:00:31] instead of doing a voicemail at midnight when they're leaving the restaurant, [1:00:37] or typing something into WhatsApp and texting it to their supplier or an email, whatever it is, [1:00:44] they could use this Recce app [1:00:46] and it would make it a lot easier for them to do that. [1:00:49] And then, of course, the marketplace element is that then they'll be able to discover other suppliers on Recce if they need them. [1:00:56] Now, in the beginning, Recce had to have their own sales force. [1:01:00] and they were going to London, knocking on the doors of these restaurants, [1:01:05] finding and cornering probably the chef in the kitchen to show them the app, to get them to change to this new app called Recce. [1:01:15] It's a very high cost of sales effort to have, as you might imagine. [1:01:20] But then what started to happen is that every time they got a new chef, [1:01:24] On to recce. [1:01:25] That order would then go to the supplier that that restaurant normally ordered from, [1:01:31] Instead of getting the voicemail, the supplier would start to see a nice order form, [1:01:37] that was from the restaurant, [1:01:39] and kind of provided by Recce, powered by Recce. [1:01:43] What would happen is that as recce grew more and more in London,

[1:01:48] these suppliers started to get more and more of their restaurants ordering via Recce, [1:01:53] And then some of the early suppliers started to be like, well, [1:01:57] this is so much easier for me. I would much rather get this order form [1:02:02] From Reki, [1:02:03] then have to listen to an hour of voicemails from chefs with different accents and different ways of ordering their food. [1:02:10] in the morning when I come in. Then the suppliers would reach out to Reki and be like, "Hey, here's the CSV of all of our customers. [1:02:20] Can you reach out to them? [1:02:22] and onboard them to Recce because I'd much rather have my orders come via Recce than the way I'm getting them. [1:02:29] And so you go from this moment of like, [1:02:32] the hard, high cost of sales, [1:02:35] Like, [1:02:36] pounding the pavement to getting a list on a silver platter. [1:02:41] restaurants to onboard and that's that feeling of tipping, right? Where all of a sudden something goes from being [1:02:48] really freaking hard to so much easier. [1:02:52] It feels a lot like how people describe finding product market fit. Things start to feel like you're [1:02:57] You're not pushing anymore and it's just coming to you. [1:03:00] Yes. In your experience, is this tipping off in [1:03:03] It just happens as you... [1:03:05] become more successful in this thimble [1:03:08] of a marketplace or is it things you have to do [1:03:11] actively to tip. [1:03:12] to get to this place. Because it sounds like in Reki it was like this [1:03:15] feature they built of just

[1:03:18] advice recommending hey you should check out reiki and maybe other [1:03:21] Other suppliers can... [1:03:22] would help you have an easier time if they're joining. [1:03:25] So is it usually like it just happens with scale or is there usually something you have to change to create this tipping point? [1:03:31] I don't think Ronan predicted that that was what was going to happen. [1:03:35] Right. [1:03:36] And your constant, that kind of customer obsession, having the relationships, [1:03:42] with the suppliers, having the relationship with the buyers, so that you have your ear to the ground. And when they start to [1:03:49] lean in a little bit, you're there to receive them. [1:03:54] And so I think this is very much like part of the [1:03:58] what great marketplace founders are able to do is they're able to [1:04:03] start to feel that there's something tipping in their direction and then [1:04:08] Create momentum behind it. [1:04:09] And that's a lot of what this level two [1:04:12] is all about, which is that [1:04:15] I think every marketplace has to figure out [1:04:18] what I call tipping loops and there's two types [1:04:21] of tipping loops. [1:04:23] that work together symbiotically to help a marketplace scale. [1:04:27] The first are the growth loops. And so we just talked about an example with Recce. [1:04:33] There are many examples of this, Hipcamp, another marketplace, [1:04:37] I'm lucky to work with. [1:04:39] If you and I went camping on Hip Camp and I booked a treehouse, [1:04:44] On HipCamp, [1:04:46] and you're going to join me on it, I could then, as part of my checkout flow essentially, invite you to my reservation so that you could see the maps, more information about the treehouse at any of the sites around it. And so I'm the person that Hipcamp acquired, but then I pull you into my experience, and that's a great buyer-to-buyer growth loop.

[1:05:12] There's kind of classic seller to seller loops or buyer to seller, you know, all these directions. And then the great marketplaces see those loops. [1:05:21] and they figure out ways to accelerate them. So classic seller to seller referrals, right? [1:05:28] Uber drivers. [1:05:30] would tell their friend, oh, you should start driving for Uber. It's great. [1:05:35] but then Uber incentivized it with a referral kind of bonus, [1:05:40] and you started to see Uber drivers literally writing blog posts about how much they loved driving for Uber because some of them were making more money, [1:05:49] getting the referral bonus than actually driving. So you're trying to find these growth loops and you maximize them. [1:05:56] Awesome. I'll link to a post that has a lot of these insights from this work that I've done on marketplaces, but a few others that are just interesting. Basically, you're trying to figure out. [1:06:05] How do you create an engine that continues to drive supply? [1:06:08] and also drives [1:06:09] Demand. [1:06:11] So a fun example is when Etsy was getting started, as you know, they went to like craft fairs and pitched sellers. Hey, join, sign up for Etsy. You could sell your stuff online. [1:06:19] And then all their sellers started telling [1:06:21] Other buyers, "Hey, buy my stuff on Etsy!" [1:06:24] Etsy literally gave them [1:06:25] Business cards. [1:06:27] So Etsy gave their sellers business cards that made them feel like, "Oh, I'm a real..." made them feel professional. And the link on it was to their Etsy store. I love that. One of the most magical [1:06:42] growth engines of marketplaces is when your supply brings on the demand so that's a really good example another one is doordash we're basically a restaurant sign is for doordash

[1:06:51] And then they tell all the customers, you want to order? [1:06:53] Our food? Go to DoorDash and order it. [1:06:55] And so all the restaurants were telling everyone about DoorDash, and then they become DoorDash users, and they order from other restaurants. [1:07:01] Yes, and it just shows it shows. [1:07:03] how a creative DoorDash was to both sides of the market in that example. [1:07:08] And then fair is an awesome example, too. It sounds similar to Recky, as you described, where fair is basically a B2B... [1:07:15] artisanal items [1:07:17] marketplace where we [1:07:19] Boutique shops buy nice candles and blankets for their store to sell. [1:07:22] And essentially, they did what you described, where they [1:07:25] signed on a store and they basically told them all your vendors can join for free and not have to pay any fees. They sign up for fair. [1:07:32] and it makes it easy for you to buy their stuff. And then on the other side, [1:07:36] The Candlemaker. [1:07:38] tells all the places they sell to, hey, you should use fair. It's so easy to buy our stuff and we can communicate through there. And they can sign up without any fees. So basically everyone just invites all their [1:07:47] Existing partners unfair and then everyone's unfair. [1:07:49] Thank you. [1:07:50] So yeah, there's a lot of ways to do it. I love it. The second type of loop, and again, this loop works symbiotically with the growth loop, is what I call happiness loops. [1:08:01] I think of them almost as like the kidneys. [1:08:04] for your marketplace as you grow. The happiness loop, [1:08:09] The idea is like you have a lot of new sellers coming in. [1:08:13] And of course, you have new buyers. [1:08:15] But you want to make sure that [1:08:17] you're matching your buyers with the sellers that are going to give them the best experience. Right. And so, you know,

[1:08:25] Normally, like in a consumer social product, [1:08:27] churn is is [1:08:29] is heartbreaking. Once a user churns, they're almost never going to come back, and with a consumer social product, you're trying to get to massive scale. [1:08:38] But when you're building a marketplace, there's a healthy amount of churn [1:08:43] that you want on the supplier side. [1:08:45] Because there are just going to be suppliers who aren't going to create a great experience for the buyer. And you can't do anything about that. [1:08:53] And so we've all had the Uber driver who you give one star to, like that person you don't want on your marketplace. [1:09:00] getting matched with buyers. [1:09:03] and so [1:09:04] You're trying to then make sure [1:09:07] that as you grow, [1:09:09] you have a natural mechanism in your marketplace to reward the suppliers that you want to reward. [1:09:15] and to churn out the ones that you don't. And of course, your job is to do your best to set all the sellers up for success, [1:09:22] but it's an inevitability. There's two great examples I think of in these happiness loops, which is around search ranking and then reputation. [1:09:32] You know, search ranking is just a very obvious one, which is like you're trying to understand [1:09:37] what creates a happy experience for the buy side. [1:09:41] and then reward the sellers that provide that experience. [1:09:46] So. [1:09:48] I think a kind of an interesting example that ended up [1:09:51] actually changing but still, [1:09:53] is illustrative is that

[1:09:55] Uber Eats in the very beginning of their journey, [1:09:59] thought that [1:10:00] their advantage in the market was going to be about having really fast delivery, right? Because they already had this network of drivers and so [1:10:08] they thought that that's where they were going to really lean in and have an edge over any competition. [1:10:14] In the search ranking, they rewarded restaurants that, [1:10:19] prepare the food quickly. [1:10:21] And so answer the Uber Eats request. [1:10:24] and then actually got the food out as fast as possible, so that Uber Eats became synonymous with the quickness [1:10:31] by which you got the delivery. That restaurant that takes 40 minutes to prepare the food, they would get, [1:10:39] ranked low in the experience for Uber Eats, even if the food was really, really great. [1:10:45] Okay, so we've been talking about [1:10:47] tipping of the marketplace, [1:10:49] Is there anything else there that you want to share before we move on to the third layer? Yeah, there's kind of two other things that come to mind. [1:10:56] One just as a reminder, [1:10:59] And then... [1:11:00] one as a caution. So the reminder that [1:11:04] is... [1:11:05] In order to tip a market, [1:11:07] you have to reach a saturation point in that market, right? [1:11:12] You can't tip a market before you've penetrated it [1:11:15] to some saturation level. [1:11:18] And it goes back to level one of why you want to focus on a constrained market. [1:11:23] Let's take growing a food delivery product.

[1:11:27] in Des Moines, Iowa. [1:11:29] versus LA or New York, right? [1:11:33] When you're growing in a small city, [1:11:36] and you're focused on restaurants, [1:11:39] you're going to be able to get to this tipping point a lot faster and more efficiently, [1:11:44] than if you're going after a very big market. [1:11:47] And so there's a real advantage to. [1:11:50] Being able to prove out the playbook [1:11:52] as quickly as possible and as efficiently as possible, [1:11:56] before you move on to bigger challenges. [1:11:59] And so I love, I think it kind of underscores again why, [1:12:04] It's so valuable in the beginning to focus on something [1:12:07] that is that is constrained and again [1:12:10] Postmates focusing on San Francisco, the city, DoorDash focusing initially on the suburbs, much smaller opportunity, but one that they could really knock the cover off the ball on. They had no competition. They had a customer that was desperate for attention, and so they can make them happy, and that just sets you up for real success to go from strength. [1:12:35] to the adjacent market. [1:12:38] This the second thing that I'd say is, uh, [1:12:42] And this is so important. [1:12:44] is that not all markets are susceptible to tipping. [1:12:47] Right? [1:12:48] Like there are, we've all experienced this, I'm sure, Lenny, with your, with the companies that you work with, companies I work with.

[1:12:57] Where. [1:12:59] There are conditions. [1:13:01] of a market. [1:13:02] that make it vulnerable to tipping. [1:13:05] I have six in my post just to name a couple classic ones. [1:13:10] The first obvious one is just concentration on the supply side. [1:13:15] In order to be able to tip a market, [1:13:17] You need suppliers to want to lean in on your marketplace, right? [1:13:24] My partner, Bill Gurley, talks about how [1:13:26] great marketplaces, [1:13:28] Create the new incumbents. [1:13:30] So you basically have [1:13:32] suppliers, [1:13:33] who aren't the incumbents. The incumbents aren't going to lean in on your marketplace. They're already fat and happy, but you want to have these hungry, [1:13:41] Suppliers who lean in. [1:13:44] Right? [1:13:44] But if there's already concentration in your marketplace, in the ecosystem, the market that you're playing in, [1:13:51] Then, [1:13:52] you're not going to have sellers lean in. [1:13:55] And you're not going to be able to create [1:13:58] a flywheel that spins where the more sellers you bring on, [1:14:02] the better the pricing or experience is on the demand side because the sellers are happy, [1:14:07] and there's nobody that's hungry or fighting, [1:14:10] And so that's just like a critical, critical point. [1:14:14] Bill Gurley and I actually had a little Twitter debate once about supply versus demand and which one's more important. [1:14:19] And he had this... [1:14:21] Basically his pitch was like, all that really matters in the end to build a successful marketplace is can you find the demand? Can you bring the demand to your marketplace?

[1:14:28] makes all the sense in the world. Everything in the end is, can you find customers? [1:14:33] In the work I've done looking into marketplaces, what I find is the hardest thing to do to bring [1:14:39] People tier. [1:14:40] marketplace is to. [1:14:41] find the supply and bring it to people basically aggregate it and your point here is exactly [1:14:47] Right. Is that basically like the value of your marketplace is to [1:14:51] Find this. [1:14:52] non-concentrated demand that's all over the place and bring it together and make it easy to [1:14:56] transact with. [1:14:57] So I think that is really important, just to double down on this point that [1:15:02] What makes the marketplace valuable is [1:15:04] supply that is hard to find [1:15:06] that you make easy to find and transact with. And I feel like that's almost the core of what makes a marketplace work. I think you're both right. Yeah, I think we're both right. We're both right. Because in the beginning, in the beginning, [1:15:18] The only way you get to [1:15:21] The only way you get started with a marketplace, obviously, is you're bringing the supply online. [1:15:26] And that's what opens up the opportunity. [1:15:28] and the only way then for you to have a chance at tipping the market [1:15:32] is if there's enough fragmentation on the supply side, [1:15:36] to create a differentiated experience for the demand side to care. [1:15:41] about your marketplace. [1:15:42] But the only way to build long-term enduring value with a marketplace is to corner the demand side. And so it's kind of a little bit that evolution of a marketplace that ends up changing [1:15:53] who you focus on. I don't know if you've experienced this, [1:15:57] In my experience with the marketplaces that I work with,

[1:15:59] It's a constant. [1:16:01] Like I have to focus more on the demand side right now. Okay, now we got to focus more on the supply side. And it's just back to how difficult these businesses are to build, especially when you have limited resources, that it's like the forever battle of building a marketplace. Yeah, especially if it's a geographically oriented marketplace like... [1:16:19] door dash. Sometimes you have more customers than restaurants. Sometimes you have too many restaurants, not enough customers. It's very city dependent. Airbnb, we had basically [1:16:27] many attempts at [1:16:28] a dashboard of which market is supply constrained, which is demand constrained. [1:16:32] Along the same lines, I think it's also something I think about with B2B marketplaces. The reason they're challenging, in my experience, to work, there's so few of them, is... [1:16:41] the supply is rarely fragmented. Usually there are very few suppliers [1:16:45] So it's pretty easy. I'm just going to pick one of these 10 and I don't need you. [1:16:49] Is that true? Is that how you think about the challenges of B2B marketplaces? There's definitely that. I think actually the bigger challenge would be to be marketplaces. [1:16:58] is on the homogeneity of the supply. [1:17:01] You know, when you think about a lot of labor marketplaces and like, let's take a classic example of like mechanical Turk. [1:17:08] Right? [1:17:09] Thank you. [1:17:10] What you need? [1:17:12] in a marketplace for that flywheel, [1:17:15] I have a graph in my slides where [1:17:19] you kind of show that the more you penetrate the market, [1:17:22] the happier you're able to make your customer. You should have an exponential experience where [1:17:29] The flywheel doesn't slow down.

[1:17:31] Now you take Airbnb as an example. [1:17:34] You can't, there isn't a limit. [1:17:37] to how valuable it is to have more supply. [1:17:41] on Airbnb. [1:17:43] Because everybody has their own special, you know, [1:17:47] preferences and there probably is a theoretical limit but it like you just feel like [1:17:52] There is always going to be. [1:17:54] There's such heterogeneity in the supply for Airbnb [1:17:58] that, [1:17:59] That's what has let Airbnb really close and escape competition. [1:18:04] With B2B marketplaces, what sometimes happens like a labor marketplace, [1:18:09] is that [1:18:10] you have this homogeneity in the supply where it's not clear that adding the next incremental unit of supply actually changes the experience for the demand side. [1:18:21] And so at Mechanical Turk, [1:18:23] Whether a Mechanical Turk has 100,000 Turkers or 5 million Turkers, [1:18:28] it probably doesn't really change the experience for somebody who is using Mechanical Turk. [1:18:34] That's why in the early days of Mechanical Turk, you saw a lot of other [1:18:39] copycats or clones of Mechanical Turk doing something similar, [1:18:43] because it didn't take that much supply. [1:18:46] for them to be able to create an experience for a segment of the market that was as good [1:18:52] as the already scaled mechanical Turk. Awesome. I'm glad we got into that. We're getting real dirty about marketplaces, exactly what I was hoping for. [1:19:00] You said they had something else you wanted to share along these lines. There's so many other examples of reasons why a marketplace won't tip competition.

[1:19:09] Like, you know, again, [1:19:11] You go after... [1:19:13] New York's your door, you're a food delivery company. [1:19:16] and you go after the suburbs where there's no competition, that makes your job really easy to tip the market. [1:19:22] You go to New York City where you have an entrenched competitor, [1:19:25] of Grubhub plus Seamless Web, a different culture around delivery where the restaurants mostly have their own delivery fleets and it's just going to be so much harder for you to tip that market. [1:19:38] I think you have to be really context aware. [1:19:41] when you're building a marketplace of what your competition is going to be, [1:19:45] so that you see if there is a path for you to actually tip the market. [1:19:51] And even if you've tipped a market, it may get untipped, like Uber comes in and starts to eat your lunch. [1:19:56] No pun intended, right? It doesn't last forever. You have to keep fighting for it. [1:20:00] Well, and that's, it's such an important point, which is that, [1:20:04] you can never rest on your laurels when you're building a marketplace. The history of marketplaces is one in which [1:20:11] You have a marketplace that feels dominant. [1:20:14] and then gets disrupted by a competitor. HomeAway, VRBO, being disrupted by the likes of you at Airbnb. I wish I could take credit for all that. [1:20:25] Yeah. [1:20:26] So one way I think about it as you're talking about this idea of tipping... [1:20:29] is a simple way to think about if tipping is happening, if you're tipping it successfully is [1:20:34] percentage of your growth that's starting to come from organic word of mouth people just becoming like this is the default way I'm going to order food

[1:20:41] travel. [1:20:42] Book a ride. [1:20:43] I think you see two things. You see one. [1:20:45] the cohort's getting better. So, [1:20:48] people start using you more, right? As the supply side gets more diverse, [1:20:58] you have more and more use cases that you start to be able to serve. And so that, you know, you get the demand side leaning in more, the cohorts get better. And then to your point, [1:21:08] you have the organic growth that happens where you don't have to fight [1:21:13] to get each new participant on both sides of your market. [1:21:17] there's something that starts to happen where the value proposition is just so strong relative to any other substitute, [1:21:25] that the market starts coming to you. Awesome. So essentially, cohort retention starts going up because it's more and more valuable and more people are coming to you just word of mouth. [1:21:34] or through some loops that you've built. Exactly. [1:21:37] Awesome. Anything else on this layer slash level of the hierarchy before? Okay, cool. [1:21:42] Let's talk about dominating the marketplace and what that looks like and how you do that. How do you dominate a marketplace and win? Sarah Tavel. [1:21:51] So yes, level three. And this is the one I feel like every founder who starts a marketplace, they're chomping at the bit to be able to really focus now on growth. Because all along, I feel like we've been holding you back of just like focus, focus, focus. [1:22:09] And what you're doing through level one and level two as you're honing

[1:22:14] what you're building, [1:22:16] is that, [1:22:17] You're basically building a playbook. [1:22:19] You don't yet know whether this playbook is repeatable. [1:22:23] Right? [1:22:24] Like it's not always the case that the dynamics of one market [1:22:30] is the same elsewhere, I'll take Reki as an example. [1:22:34] In the London food scene, there's significant fragmentation. [1:22:39] of suppliers. [1:22:41] In the Berlin world, [1:22:42] food scene, that's not the case. [1:22:45] and so it's not always the case that whatever you did in one market works in another market but [1:22:50] Usually there's something that rhymes. There's a hint of what is going to work. [1:22:55] So what happens now? [1:22:57] is [1:22:58] You... [1:22:59] you have a market that's tipping. [1:23:01] And the question then is, [1:23:05] Are you ready to take your eye off the ball and start to diffuse your focus into other markets? [1:23:10] So there's kind of three vectors then that any marketplace can grow at this point. [1:23:17] The first vector is within the existing market where you already are tipping that market. [1:23:23] You as a founder then have to make a very [1:23:26] kind of, [1:23:27] very personal decision that's [1:23:30] that what you're looking at is the context of your competitive situation. [1:23:34] So if you're tipping a market and you have no other competitor going after that market, you're the first one to see this opportunity. [1:23:44] then I think you have two things that you want to do at the same time to grow.

[1:23:48] The first thing is that you want to take the existing market that you're in and you just keep [1:23:54] doing what you're doing, [1:23:56] And you may even find ways to stretch things. [1:24:00] beyond that initial market that you're going after within the same market. And so what I mean by that is, [1:24:07] Uber went from black cars to UberX to UberPool. [1:24:11] you know, they kept on finding ways in the geographies where they were already dominant, [1:24:17] to keep on getting stronger by expanding the use cases that they serve. [1:24:21] So you have. [1:24:23] continuing to grow and penetrate the market, [1:24:26] find ways to kind of answer more use cases. [1:24:30] in that market. [1:24:32] that you can do, especially if you don't have a lot of competition. And then the third vector of growth, [1:24:37] is you want to then [1:24:40] try to get as many plates spinning in as many markets that you can handle as quickly as possible. And this is like, [1:24:47] the blitz scale, right? This is the land grab. [1:24:50] And, [1:24:51] Again, your equity value that you're going to create [1:24:56] is going to come from dominating the market. [1:24:59] And so, [1:25:00] You don't want to plant [1:25:02] a thousand flags and a thousand markets at the same time, [1:25:06] spread yourself too thin and not decidedly [1:25:09] when anyone markets. [1:25:11] You're trying to put, you know, you always want to put more wood [1:25:14] behind fewer arrows, [1:25:16] The more scale that you have, the more cities...

[1:25:19] or categories where you have [1:25:22] the flywheel started to spin. [1:25:24] and you're starting to see the tipping point happen, [1:25:28] the stronger your company will be, right? [1:25:30] Each market that you get, you have scale in where you'll have contribution profit. [1:25:36] You take that contribution profit, you invest it in new markets, [1:25:40] the more markets and contribution profit you have, the more venture capital you'll be able to raise, which you then reinvest [1:25:47] in growing and so [1:25:49] This is really the place where... [1:25:52] You are... [1:25:53] as aggressively as possible. [1:25:56] while at the same time not losing sight of the fact that your goal is in each market individually, [1:26:02] to dominate that market. [1:26:04] You're trying to grow into as much possible market opportunity as you possibly can. [1:26:09] And again, the reason this is so important is most [1:26:13] Founders that are ambitious start with this, right? They're just like, go big immediately, blitz scale. [1:26:18] We need to win fast before anyone catches up. [1:26:20] And so again, it's a reminder, that's the final step once you've done these other two steps. [1:26:27] Yes. [1:26:27] And it's like such an important point because don't forget, like, [1:26:30] You're always going to be vulnerable to competition. [1:26:34] Right. And so let's say you have [1:26:36] a million dollars and you spread that million dollars of go-to-market costs across 10 cities, [1:26:43] spreading yourself really thin, you have a competitor come in, [1:26:47] And guess what, they put a million dollars into one city,

[1:26:50] They're going to win that city. [1:26:51] and that's going to set them up for greater success down the road to keep on being able to get more capital and more, [1:26:59] more expense that they can put to work to grow those cities. Of course, we never have one competitor, always have a lot of competitors. [1:27:10] focus on these steps, it really is such an important thing to have discipline around. [1:27:17] And this is the reason that [1:27:20] Uber went big and raised so much money, invested so much to scale so fast versus Lyft. [1:27:25] Same with DoorDash versus Uber. [1:27:28] Basically, they're both trying to dominate. [1:27:30] Neither won. I guess Uber, I don't know if it's safe to say, seems to have won in the market. DoorDash versus Rebrief is still very... [1:27:38] one and two-ish. So I think a lot of people look at these companies are like, they're wasting so much money, they're losing so much money, they're never going to work. But they do this because to build a durable business and to [1:27:48] get the benefits of [1:27:49] the idea of what the marketplace they built they need to dominate they need to [1:27:53] be number one by far. [1:27:55] And doesn't mean it always works, like DoorDash, even though they're bigger than new breeds. [1:27:58] From what I understand, they're not like, I don't know, would you consider they're dominant? [1:28:02] Or is it still a big challenge? [1:28:05] I don't know. I don't know. What is clear is that they built an incredible company. It's just an incredible... [1:28:15] They've done an incredible job of doing what they do. [1:28:18] And it is a crowded market still. Yeah. So you can still build a great business, even if you don't dominate, dominate. It's just you won't make as much money, nearly as much profit, basically, your cash flow.

[1:28:28] That's right. [1:28:29] Something that [1:28:30] You all at Benchmark are really... [1:28:33] big on, which I think would be interesting to talk about, is [1:28:36] the TAM not being as big a deal as people think. So a lot of times there's a lot of marketplaces that start very small and there's a fear that the market is just not going to be big enough [1:28:46] for them to build a massive business long-term. [1:28:49] and [1:28:50] you all, [1:28:51] Don't worry about that as much as a lot of other investors where the market itself isn't a huge killer of... [1:28:56] investing. [1:28:57] I would underline it even, which is that we get excited about the markets, the opportunities [1:29:03] that might seem small from the outside. I love it. Can you speak to that and help people understand? I mean, do you remember the early days of Airbnb? [1:29:12] How big could this get? - It wasn't there that early. - Yeah, but you knew of it. And like Etsy also underestimated for years and years and years. [1:29:20] hip camp like that was part of what excited us is that it was [1:29:23] This market [1:29:24] that was actually much bigger than people [1:29:28] would have thought from the outside. [1:29:30] The wonderful thing about going after these underestimated markets is that they don't have competition. [1:29:37] and the beginning. [1:29:38] And so you have more of the elements [1:29:41] of being able to operate into a market and tip the market towards you, [1:29:46] when you don't have competition. [1:29:49] We love these types of markets and [1:29:52] We always say to the founders out there, if other people are telling you that the market's too small, [1:29:57] We would love to get to know you.

[1:30:00] I think a lot of founders will love hearing this. I think it's also important to add something you've shared with me is it's important for there to be adjacent markets that are big. [1:30:08] for you to have the potential to expand it. Right. And yeah, it's just it's such an important point. Like, [1:30:13] The market itself, it can't be a cul-de-sac like you're, [1:30:17] You need to start somewhere that has the potential to grow beyond that. [1:30:22] But, [1:30:23] In the beginning, it's going to look small. Let me give you the example of HipCamp. [1:30:27] Hip camp when we invested. [1:30:29] was literally land, you know, it was [1:30:33] land where people, I don't know, Lenny, if you're a camper. I unfortunately- Yeah, I love hip camp, by the way. Okay, amazing. [1:30:40] Well, if you have a tent and a sleeping bag, [1:30:43] and you're not afraid to put your thermos in a running river, [1:30:49] and clean the water. [1:30:50] Then like that was the early days of hip camp. It was for the hardcore camper. [1:30:56] which itself feels like a very small market, right? It's not actually that small. [1:31:00] But, [1:31:01] It is a smaller market than other people might themselves get comfortable with. [1:31:07] But then what would happen is that hosts on HipCamp, and I stayed at one of these HipCamps, and it's just such an incredible experience. [1:31:16] the host started to make a little bit of money from HipCamp. [1:31:20] and they took that money [1:31:22] and they started to invest in structures on their land. [1:31:26] So in the beginning, maybe it was a fire pit or a bathroom or shower, and then it became a tree house or a yurt.

[1:31:34] What happened with HIPCAMP is that in the beginning, it was going after this very different market segment, [1:31:41] But as they became successful, made their [1:31:44] landowners money, those landowners invested that money back into their land and started to open up the market opportunity for Hipcamp into people more like me, there are glampers that want that experience in nature, but maybe don't want to pitch a tent to have it. [1:32:04] And so that's kind of one of those examples of, [1:32:06] an underestimated market that ends up growing beyond that. [1:32:10] There's there's warning stories here, too. [1:32:13] I always think of Etsy. So like Etsy, I remember... [1:32:18] Actually, when I was at Pinterest, [1:32:20] being driven crazy by Etsy. [1:32:22] because Etsy was all about handmade goods, right? [1:32:26] But as they were running up to going public, [1:32:29] They started to chase GMV. [1:32:32] What that looked like is that they started to have a lot of mass-produced goods on Etsy. [1:32:38] It drove me crazy at Pinterest because [1:32:40] There was this one seller of these scarves [1:32:44] that was clearly a mass-produced scarves and they were spamming Pinterest constantly. [1:32:50] with the pins of those scarves. [1:32:53] It was just very clear that Etsy had lost its way in that moment. They had started to chase GMV. [1:33:01] They were going beyond what they actually stood for,

[1:33:05] And they ended up having a real reaction to, [1:33:08] from the sellers that were making handmade goods and the buyers. It was this big erosion of trust and they ended up, I don't know if it was related, but it ended up precipitating, I think, [1:33:18] a CEO change to the CEO that is there now and who has obviously done an incredible job building Etsy from there. [1:33:26] Yeah, we had the VP of product from Etsy on the podcast, and we talked about that, actually, what that transition was like, because it was pretty dramatic. They went from very warm, fuzzy... [1:33:34] cozy vibes to like, we need to build a business that lasts. Let's change the way we operate. [1:33:39] While we're on this topic of what gets you excited about marketplaces, this is something Mike suggested to ask you. [1:33:45] So I love that you get excited when it's a small market, very contrarian. [1:33:49] what else when founders are pitching you let's say with a marketplace what else do you look for whatever you [1:33:55] can share off the top of your head that you look for that gets you excited about marketing. [1:33:59] It's a couple things. [1:34:01] One is, and I'm thinking actually of one founder I met recently, [1:34:05] where there's that earned secret where they see a market opportunity that other people are overlooking. [1:34:12] that hasn't been addressed. [1:34:14] Maybe there's a reason why it hasn't been addressed in the past, but now is the moment. There's something changing that's creating a current in the market. We can talk about currents later if we want to, but there's something that's creating momentum in the market that's opening up an opportunity for this marketplace to exist. [1:34:34] And for whatever reason, that founder is the person who sees it.

[1:34:38] And it's kind of one of those things that once you see it, you're like, [1:34:42] How does it still work this way? [1:34:44] And it makes so much sense for somebody to come in. [1:34:48] And do something about it. [1:34:50] And then the second thing that always just deeply resonates, and it's obvious at this point why this would be true, is a founder then that really... [1:34:59] has focus and it's kind of back to, [1:35:03] focusing their ambition like a laser beam as opposed to this like broad, [1:35:09] a son trying to do everything. And so you really feel like they're focused on the right things. [1:35:14] And that actually leads to the third thing, which is like, [1:35:17] You really feel when a founder is [1:35:21] either trying to fool you or fool themselves. [1:35:25] With vanity metrics, [1:35:27] versus the true intellectual honesty and the intellectual rigor. [1:35:32] of like what's really working in my business, what's not working, [1:35:36] Where are we focused to make that the best it can be? And man, like that, that, that is always, you know, [1:35:43] That's how you build long-term enduring value. [1:35:46] And it's something that I think it's consistent across all the founders I'm lucky enough to work with. [1:35:52] What I love about this answer is something I often say about marketplaces is that most of your problems are not marketplace-based. [1:35:59] problems or questions. It's just what every startup has to deal with. So what you shared is basically [1:36:04] and earn secret, which will apply to any business. [1:36:07] which maybe emerges a current and a wave that you can ride.

[1:36:11] having great focus and also focusing on the rate metrics. [1:36:15] I 100% agree. [1:36:16] And it's also interesting, like it could be a marketplace, it cannot be. And I think people often overweight how much, like, I am building a marketplace. [1:36:24] And I need to think of everything from this marketplace perspective versus like 95% of your challenges, questions. [1:36:31] hurdles are going to be just what every startup has to deal with. And then there's a bit of like specific to marketplace. And I want to just double click on the current thing because it's very related. [1:36:39] just like a lot of people and this is back to [1:36:43] maybe our contrarian take on markets. [1:36:45] I think a lot of people think about markets almost like these bodies of water. [1:36:50] It's like, oh, it's this big body of water that we're going after. [1:36:55] I actually think that the most interesting markets [1:36:58] You have to think of them like currents. [1:37:01] where there's something happening in the market that's creating this current, [1:37:07] where you can have like a plank of wood that you put on the river and it's going to pull you forward versus, [1:37:15] a market that doesn't really have that momentum to it, you're going to have to build something really big and fancy to make any progress. That's why, [1:37:24] We care less about market size because really what you're looking for when you're looking at a market, [1:37:30] Or what are the dynamics of change? What's the current and momentum that's going to pull the company and make the job easier for the founders to actually build something that endures? [1:37:40] Essentially, why now? That's how a lot of people think about this, right? Yes. I love just the visual of a current. There's a...

[1:37:47] startup I invested in as an example of the opposite that got into that's a crypto [1:37:52] marketplace sort of thing. [1:37:54] And they started it when crypto was really great and they continued building it as CryptoWinter emerged. [1:38:00] They just realized our timing [1:38:01] This is not the time to build a crypto company. [1:38:04] that's new, that's trying to compete with [1:38:06] who's out there and it's so it's an example of the op like you got to recognize when the wave is going the opposite direction [1:38:12] and everything is pulling you away from success. It's not the opposite of what you're describing. Yes. [1:38:17] I might have a nuance there because I think crypto is too broad. [1:38:22] of a dist of a way to describe it like if you said it was a defy crypto company then yes definitely like no one you know [1:38:30] with treasuries where they are, [1:38:33] the opportunity in DeFi isn't as material as it once was, [1:38:38] With stablecoins, I'm a huge believer in stablecoins. [1:38:41] I think that's a market where we have a real current with inflation, [1:38:46] and so many local currencies. [1:38:49] There's real demand for stablecoins, a US dollar stablecoin that comes in many different shapes and forms. [1:38:55] That is something that I believe has a very strong current right now that I'm actually quite excited about. Oh, interesting. Yeah, I should have been clear. It's like a very specific part of crypto that's just not happening too much. [1:39:07] versus what it was. [1:39:08] Okay. [1:39:10] We've gone totally off track, so let me come back to our track and see what else you... [1:39:14] wanted to share around the hierarchy of marketplaces, either on the top... Okay, we did it. Amazing. I have a couple more questions, sort of related, but I guess, is there anything else that you wanted to...

[1:39:24] say about the hierarchy of marketplaces. [1:39:26] Maybe just this kind of the coda, which is like... [1:39:30] You can never rest on your laurels. We talked about this already. [1:39:34] But the history of marketplaces, [1:39:37] is one of disruption. [1:39:38] And, you know, the idea with happiness, [1:39:41] is that Amazon and Bezos talk about this, which is like, [1:39:47] Consumer expectations are constantly going up. [1:39:51] And so if you ever stagnate, [1:39:54] in the experience that you give to the consumer, [1:39:57] Guess what? You're going to get disrupted. [1:39:59] and the examples we talked about with Airbnb and HomeAway, DoorDash and Grubhub. You know, Grubhub wasn't able to, for different reasons. They were a public company, and so they couldn't access capital in the same way. [1:40:14] that the private markets could [1:40:16] but they were too slow. [1:40:19] to change the atomic unit of their supply, [1:40:21] to have delivery that they fulfilled. And so they got disrupted by the DoorDash, Uber Eats of the world. [1:40:29] and so you just can't rest on your laurels expectations constantly go up and it's part of what's so exciting about this this market that we play in [1:40:39] I think Grubhub is a great example of that, where they were the first really successful... [1:40:44] food delivery company. And then even with network effects, by far the best way to order. And then DoorDash comes around and [1:40:51] wins because they go bigger and [1:40:53] Spend a lot of money.

[1:40:54] that Grubhub wasn't willing to spin. [1:40:56] Awesome. So I guess the advice there is just don't take for granted your success, even if you have amazing network effects. [1:41:02] That's right. [1:41:03] okay [1:41:04] So as we were chatting about this conversation, something you mentioned is that [1:41:07] Even if you're not building a marketplace, [1:41:09] these lessons are actually still useful. So say you're building an open source product or a social network or even a SaaS startup, [1:41:17] A lot of these sort of lessons can still apply. [1:41:20] What advice would you have for people that... [1:41:21] have heard what you just shared but aren't necessarily building a marketplace. What are some of the takeaways as well? At Benchmark, I'm lucky that I have partners who look at very different types of companies that I look at. [1:41:33] and we meet such an incredible breadth of founders. [1:41:37] And what you just realize again and again is that these same lessons hold. With open source, it's about solving a specific developer's need. [1:41:46] in the beginning and solving it really freaking well, and then expanding from there. With SaaS, I think maybe the fascinating exception, kind of similar to your thumbtack exception, [1:41:58] I think what Parker Conrad's doing with Rippling and this idea of a compound startup, [1:42:03] is very different. And actually, he has a level of ambition that is both like the sun and a laser at the same time. [1:42:11] And so, you know, that's kind of a rare founder. You can have that. [1:42:17] that level of execution. [1:42:19] but [1:42:19] again and again what you see and I think a lot of this for new companies kind of leveraging large language models to build.

[1:42:28] products is that focus on a constrained market to start [1:42:32] is the way to win. [1:42:34] I like that basically it's happy [1:42:36] Happy developer in the case of DevTools or happy... [1:42:39] enterprise user just like [1:42:40] Get happy people using your product and coming back to it. [1:42:43] So I love that as a reminder. [1:42:45] One other question is, [1:42:48] You wrote this post on... [1:42:49] Finding white space. [1:42:51] in building marketplace basically someone that wants to build a marketplace [1:42:54] Trying to figure out where is there an opportunity for a new marketplace? [1:42:57] Do you have any advice for people, say founders, potential founders, that are looking for ideas and opportunities to build a marketplace for how to find one? Where do you think there's opportunity? [1:43:05] It's kind of fun to ask the question, like whether LLMs change the game and open up new surface area. So like I, you know, in my post, I wrote about three ways that you can kind of look for a new opportunity. And I think it was like, [1:43:20] Number one, you always... [1:43:22] find a horizontal marketplace and you find the kind of low NPS, [1:43:26] part of that segment and you create a marketplace around that. [1:43:30] eBay being a horizontal marketplace, [1:43:33] the sneakers being a low NPS part of that and you get GOAT, right? [1:43:38] The second is finding a niche that no one else is paying attention to. [1:43:44] And, uh, [1:43:46] like the Etsy examples we gave, the Hipcamp stories, [1:43:50] And, you know, [1:43:51] Bringing that online, taking friction away and showing that it's actually a bigger market than you think. [1:43:56] And then the third is changing the atomic unit of the supply so that,

[1:44:01] kind of like Grubhub, [1:44:02] the atomic unit there was a restaurant that has its own delivery fleet, [1:44:07] and then Postmates, DoorDash, [1:44:10] Uber Eats came in and said, actually, it's any restaurant will provide the delivery fleet. And so they opened up. [1:44:16] the available supply. [1:44:18] Now, [1:44:19] When I think about LLMs, I think there's a real opportunity for the third one. LLMs may make it possible to bring on a supply, [1:44:29] Type. [1:44:30] that maybe the long tail that was just [1:44:33] It was too much effort to reach out to them, onboard them, [1:44:38] But maybe if you automate that work, [1:44:40] you actually create an opportunity to expand [1:44:43] the supply in a way that none of us can anticipate right now. [1:44:47] And then, [1:44:47] Who knows whether there's an opportunity with LLMs [1:44:50] to create a better experience in one of these kind of low NPS segments of a market or a niche market itself. [1:44:59] that makes it possible to bring it online. [1:45:01] I haven't seen anything yet, but I am definitely on the hunt. [1:45:05] Very cool. Turned into AI Corner, which I love. [1:45:09] Okay. [1:45:10] Well, with that, we've reached our very exciting lightning round. Are you ready? [1:45:15] I'm ready. [1:45:16] What are two or three books that you've recommended most to other people? [1:45:22] Pachinko is one of the best fictional books I've read in a while. I just loved it, and so I highly recommend that. And then to founders, I am a sucker for...

[1:45:31] the five temptations of a CEO and the five dysfunctions of a team. [1:45:36] It's like you imagine those books in the grocery store aisle, but they're fast reads that are incredibly insightful and I highly recommend. [1:45:46] Is there a favorite recent movie or TV show that you really enjoy? [1:45:50] I'm not a, I don't watch stuff, so I'm not a good, [1:45:53] A good candidate there. Highly respect that. [1:45:57] Is there a favorite... [1:45:58] interview question that you like to ask candidates, which usually we can transform into when you're [1:46:03] talking to founders and trying to decide if you want to invest. [1:46:06] I always love hearing the journey people take and [1:46:09] specifically how they've made decisions along the way, like what drives them from each step. I think that's always very illuminating. [1:46:19] Do your favorite product you've recently discovered that you really love, whether it's an app, [1:46:24] or physical product that you've [1:46:27] use often anything real cool. [1:46:29] Okay fine. [1:46:31] I'll say we are late now. [1:46:33] joiners to Tesla, my family. [1:46:37] Man, it is one of those products that you use it for the first time, [1:46:42] and [1:46:43] He was like, I could see why I'd want to own equity in this company. [1:46:47] Um, not financial advice, obviously, but, uh, [1:46:51] It's just an awesome experience. [1:46:53] I completely agree. I've gotten so used to, we have a regular car and a Tesla. [1:46:58] And the fact that you don't need a key anymore, you just walk up and open it because it has your phone next.

[1:47:02] My wife forgot. She left the key in there. [1:47:05] in our Subaru just because she's like, "Oh shit, I need to take the key out." It's just sitting there running. [1:47:11] Yeah, you're so used to just the casual, just walk up, open, you're good to go. [1:47:16] Awesome. [1:47:17] Do you have a favorite life motto that you often repeat to yourself, share with people, either in work or in life, that you find useful? [1:47:25] My partner at Greylock, Reid Hoffman, had this line of, [1:47:29] Every strength has a corresponding weakness and vice versa. [1:47:33] And, [1:47:34] There's so much wisdom there. We always... [1:47:37] We see our own strengths and we see our weaknesses but not realize [1:47:42] that they actually [1:47:43] come go together like you can't have one without the other [1:47:47] Similarly, strengths in organizations like [1:47:51] a decentralized organization can move really quickly, and the corresponding weakness of that is that it can feel chaotic and disorganized. [1:47:59] On the other side, a centralized organization can feel really slow [1:48:05] but it is very intentional in the decision-making and the control of the experience. And so everything has trade-offs and realizing, [1:48:14] that more often than not, they come together. It's just so useful to be aware of that. [1:48:20] Awesome. [1:48:21] Final question. I believe you played rugby at some point, is that right? Yes. Okay. [1:48:26] Is there a rugby story that would be fun to share from your time playing rugby? And if not, [1:48:30] What should people know? What would surprise people about rugby that they may not be aware of?

[1:48:36] Well, what people might be surprised of, especially if they meet me, is that I was actually a really good tackler. [1:48:43] and I think I broke my nose a couple times and have more injuries. [1:48:49] that I would care to remember. [1:48:51] But I definitely inflicted more more injuries on other people than I received. [1:48:58] And I think the rugby is... [1:49:01] It's just... [1:49:03] There's a camaraderie that comes with rugby. [1:49:05] And the one thing I'll confess is that [1:49:08] We always joke that the rugby team [1:49:11] is it's not a rugby team it's a drinking team that has a rugby problem. [1:49:17] All right. [1:49:17] Amazing. Those times are behind me. Oh, man. It sounds like an awesome person to have in your court when you're a founder. The best tackler in town. Yes. Amazing. Sarah, I'm not surprised this went as long as it did. Thank you so much for being here. Two final questions. [1:49:34] where can folks find you online if they want to reach out and maybe ask follow-up questions, and how can listeners be useful to you? [1:49:40] I appreciate that. I'm Sarah at Benchmark. I'm on Twitter, Sarah Tavill, and I have a sub stack. [1:49:46] sarahtavill.com. [1:49:48] If you're a founder, [1:49:50] you're working on something [1:49:52] Don't be shy. I were in the business of meeting with people like you. And so I love I always love to get stimulated by new ideas and people. [1:50:02] Just to focus people even more there, is there stage you like? Is there markets? Anything people should know of like what's right for you?

[1:50:08] We at Benchmark were an early stage firm. [1:50:13] We aspire to be first board member. Usually it looks like the Series A. [1:50:18] and that's really where our sweet spot is. Awesome. [1:50:23] Sarah, thank you so much for being here. Thank you for having me. [1:50:27] Bye, everyone.