The Exchanges

Q Didn't you used to call it like gravity?

A I called it gravity. It just would get, it comes down to earth. And then the job of the entrepreneur is to be looking years down the road and say, okay, at some point growth in business A is going to stop. And so I want to keep it going as long as I can. And there's a whole bunch of taxes to do that. But then the other strategy is, okay, I need new layers on the cake of growth. At eBay, the original business was an auction business in the U.S. And so, you know, some of the things we layered on earlier, we layered on fixed price in the U S not revolutionary, but it really did increment growth. Then we went international and then we layered in payment integration. And each time we did that, the total growth of the company would actually accelerate, which is very hard to do at scale.

AI assessment note: “I called it gravity. It just would get, it comes down to earth.”

Q Didn't you used to call it like gravity?

A I called it gravity. It just would get, it comes down to earth. And then the job of the entrepreneur is to be looking years down the road and say, okay, at some point growth in business A is going to stop. And so I want to keep it going as long as I can. And there's a whole bunch of taxes to do that. But then the other strategy is, okay, I need new layers on the cake of growth. At eBay, the original business was an auction business in the U.S. And so, you know, some of the things we layered on earlier, we layered on fixed price in the U S not revolutionary, but it really did increment growth. Then we went international and then we layered in payment integration. And each time we did that, the total growth of the company would actually accelerate, which is very hard to do at scale.

AI assessment note: “I called it gravity. It just would get, it comes down to earth.”

Q to get different Do you take your existing users? One of the things that we covered very early on is that with SAS, you always want to try to take existing users and upsell them because it's way more expensive to acquire a new customer in that context. I mean, of course you want to grow your customers. How does this play out in this context? Like what happens next?

A A lot of companies, it's a progression. So almost all the early activity in a company is, okay, how do I get the users? As you get users, you get more and more leverage from efforts at activation and retention and engagement. Use Pinterest as an example again. A very high percentage of women in America have downloaded Pinterest. Then the leverage quickly goes into, okay, how do I keep them engaged, reactivates the one who disappears, and you know, their acquisition efforts in the U.S. get de-emphasized, and all the leverage is there, except as they're going international, they're still in that acquisition part of the curve. And so I think the leverage changes over time based on the situation of the company. Facebook Hasn't had any users in the U.S. forever because they have them all.

AI assessment note: “A lot of companies, it's a progression. So almost all the early activity in a company”

Q You guys have talked a lot about organic. It makes it sound to me as a lay person that you don't want paid marketing. What's your views on this? Like, is it a bad thing? Is it a good thing? I don't mean to moralize it, but help me unpack more. Where it's helpful and where it's not. Are there any rules of thumb to use there?

A I mean, there have been a lot of great businesses that have leveraged paid marketing. I mean, the OTA sites, the online travel agency, Priceline and Expedia just spends, you know, they spend the GDP of many large countries in the acquisition. And then it's often a tactic in some good businesses, but if it's your primary engine, a couple of things happen. One is the acquisition economics tended to grade over time for the reasons we're saying, and it leaves you wide open to competition. If you need to buy users, I mean, if you're selling, you know, the new breed of mattress, and you need to buy users, and early on, you're the only person competing for that word. Flash forward a year or two, they're like six new age mash manufacturers with virtually identical products competing for the same consumer. The economics are not going to persist over time. And so, you know, one of the key questions in businesses driven by heavy user acquisition is, kind of, how does the play end? You know, it usually looks pretty good at the beginning of the play, but in the middle, it starts getting a little complex and then there's tragedies at the end.

AI assessment note: “if it's your primary engine, a couple of things happen. One is the acquisition economics”

Q You guys have talked a lot about organic. It makes it sound to me as a lay person that you don't want paid marketing. What's your views on this? Like, is it a bad thing? Is it a good thing? I don't mean to moralize it, but help me unpack more. Where it's helpful and where it's not. Are there any rules of thumb to use there?

A I mean, there have been a lot of great businesses that have leveraged paid marketing. I mean, the OTA sites, the online travel agency, Priceline and Expedia just spends, you know, they spend the GDP of many large countries in the acquisition. And then it's often a tactic in some good businesses, but if it's your primary engine, a couple of things happen. One is the acquisition economics tended to grade over time for the reasons we're saying, and it leaves you wide open to competition. If you need to buy users, I mean, if you're selling, you know, the new breed of mattress, and you need to buy users, and early on, you're the only person competing for that word. Flash forward a year or two, they're like six new age mash manufacturers with virtually identical products competing for the same consumer. The economics are not going to persist over time. And so, you know, one of the key questions in businesses driven by heavy user acquisition is, kind of, how does the play end? You know, it usually looks pretty good at the beginning of the play, but in the middle, it starts getting a little complex and then there's tragedies at the end.

AI assessment note: “it's often a tactic in some good businesses, but if it's your primary engine”

Q To be fair, and this is another definition we should tease apart really quickly before we move on to more metrics, that also had the quality of network effects, which we've talked a lot about in terms of these things growing more valuable the more people that use it. Is that growth? What's the difference there?

A Well, the business grew into the network effect. The key tactic to build the network effect was that free acquisition of consumers, that the more restaurants we had, the more attractive it was to consumers, the more consumers who The more attractive it was to restaurants. So there is a wicked network effect. If you're not spending anything on paid acquisition of consumers, how do you start it? And the placements that open table got in the restaurant, both physically in the restaurant, but particularly on the restaurant's website was the key engine that got the network effect started. You had to manually sell some restaurants, come for the tools, stay for the network. But then once the consumers got Enough of a selection and started to use it. It was game over.

AI assessment note: “Well, the business grew into the network effect.”

Q Did you guys tell me the truth? Did you guys have like a magic number in your head before you started those pricing discussions? Like, did you think in your head, you know what, when I go to sleep at night, I want 25 dollars when this thing goes on the market.

A No, we, we, we, we, you didn't. Part of what our strategy was, we're going to do a teeny little IPO. And then if it went well, we're going to do a Pretty big secondary. And so the company was much more focused on make the secondary successful than it was make the IPO successful. Part of making the secondary offers successful is you need a couple deep pocket people in the IPO, even though it was a teeny little IPO. So our, one of our leading shareholders ended up being Will Danoff of Fidelity. And so we say, we'll invest out of your ten billion dollar, whatever it is, fund four million dollars. And he's like, I don't have the time To read your earnings release at that level. But we, we convinced him to come in because then in the secondary, he was able to back up the truck and he got what he wanted, which was a large ownership allocation. His IPO allocation was what? Five percent of 70 to four million dollars. Some number like that.

AI assessment note: “No, we, we, we, we, you didn't. Part of what our strategy was”

Q Yeah. Well, what are some of the other ways that you've seen people stumble on this? Because sometimes people discover the hack by accident, or is it deliberate? I mean, how do they really, I mean, do you actually wake up one day and say, okay, I'm going to figure out the hack for this marketplace?

A Oh yes, you do. No, no. When we're talking entrepreneurs, you're looking for the theory. What's your theory on how you're going to bootstrap? How are you going to get the flywheel spinning? How are you going to solve the chicken, the egg problem? Which side are you going to start on? So OpenTable ended up starting completely on the restaurant side because there was zero utility to the consumer until you had a selection of restaurants. And so how do you get a restaurant to adopt it when no consumers are using it? So you, in OpenTable's case is what Chris Dixon, you know, come for the tools, stay for the network. They build a suite of tools that they charge 200 dollars for and laboriously rolled out one restaurant at a Time, uh, throughout, you know, the country that had enough utility that a restaurant was saying, okay, I'll adopt that in the absence of a network. And as they slowly built that base of restaurants, and I mean, slowly, I mean, they, they, a good salesperson would do three or four new restaurants a month. And, you know, there's, you know, there's 2000 restaurants in San Francisco. That is slow. Um, and then, uh, there was a point where there was enough restaurants on the system. It was a subset of the restaurants in the system. But the utility of making an online order was so great that they'd say, I ignore the fact that you don't have any percent of restaurants be…

AI assessment note: “Oh yes, you do. No, no. When we're talking entrepreneurs, you're looking for the theory.”

Q That is such a golden nugget because it's invisible to the world. When you see the outcome, the process behind the outcome is invisible, which is the whole reason we're doing this. I didn't know that. Why does that relationship that with the capital markets expertise matter so much in the lead up to the IPO?

A We wanted it to be not a black box. One of the things other CEOs had told me who had done IPOs when I reached out. It's like, somehow, you know, you do this road show, you get to the pricing meeting, they say, okay, we recommend the prices, this, and then the shares just magically disappear. And we, we really cared about who got the share. So we wanted to have a vote in who got it, who got the shares. And, um, cause it was such a tiny offering. We wanted to concentrate the shares in that shortlist Much at a much higher level than what's typical at the pricing meeting. You know, we, we, JD shared the spreadsheet and we're like, no, no, no, no. We have to give these guys 10 times more. And he's going, no, no, no, no, no.

AI assessment note: “We wanted it to be not a black box.”

Q Did you guys tell me the truth? Did you guys have like a magic number in your head before you started those pricing discussions? Like, did you think in your head, you know what, when I go to sleep at night, I want 25 dollars when this thing goes on the market.

A No, we, we, we, we, you didn't. Part of what our strategy was, we're going to do a teeny little IPO. And then if it went well, we're going to do a Pretty big secondary. And so the company was much more focused on make the secondary successful than it was make the IPO successful. Part of making the secondary offers successful is you need a couple deep pocket people in the IPO, even though it was a teeny little IPO. So our, one of our leading shareholders ended up being Will Danoff of Fidelity. And so we say, we'll invest out of your ten billion dollar, whatever it is, fund four million dollars. And he's like, I don't have the time To read your earnings release at that level. But we, we convinced him to come in because then in the secondary, he was able to back up the truck and he got what he wanted, which was a large ownership allocation. His IPO allocation was what? Five percent of 70 to four million dollars. Some number like that.

AI assessment note: “No, we, we, we, we, you didn't. Part of what our strategy was”

Q Do you actually advise people then to, like, think about their strategy differently, you know, to go, like, I would think people would stall if you, you can only get a local, but not get global. Like, do you, how do you sort of balance, I mean, I feel like there's a pressure these days to, like, go global fast. How do you make those trade-offs and decisions?

A I mean, different marketplaces have different characteristics. Because the local ones are really hard and really slow, and, but if you build them, they can be really valuable and really tough to overcome. So, you know, it is virtually impossible to, uh, to displace OpenTable at this point. It's the strongest network. I've worked with some great network effects businesses, you know, eBay, PayPal, Airbnb, you know, Pinterest. It's virtually impossible to displace OpenTable from a restaurant right now, but they had to go market by market to do that. I mean, eBay was instantly national, almost global, because if you were a, take, there's 10 antique collectors on the service, it didn't matter, one's in Michigan, one's in Miami, one's in Berlin, if they're collecting the same antique, there's utility there, and so that one was able to spin up much more seamlessly. The notion of the local marketplace, which I know some of you in here are doing, you know, it has that extra, um, extra complexity.

AI assessment note: “different marketplaces have different characteristics. Because the local ones are really hard and really slow”

Q So the data opportunity, do you believe that?

A I mean, yeah, no, we actually have seen a ton of companies trying to do it. And the, the, the, the interesting part is how hard they have to work to get the data. There have been a whole bunch of them that want, Are trying to incent consumers to take pictures of their receipts and submit the pictures and they do optical character recognition on the picture to try to reverse engineer. What did Jeff buy? And we've seen multiple companies trying to do that. There are other approaches too. There's, um, some, you know, there was a, uh, on demand, they'd send armies of people with smartphones to take pictures of shelves so that they know the competitive pricing. Oh, look, Crest is two, 29 and Colgate's three, two, 15. What happened to sales? You know, but they don't know what Colgate and Crest is, and so they don't know, all they know is Michael Ossian in, in the southern region slowed down.

AI assessment note: “yeah, no, we actually have seen a ton of companies trying to do it”

Q to get different Do you take your existing users? One of the things that we covered very early on is that with SAS, you always want to try to take existing users and upsell them because it's way more expensive to acquire a new customer in that context. I mean, of course you want to grow your customers. How does this play out in this context? Like what happens next?

A A lot of companies, it's a progression. So almost all the early activity in a company is, okay, how do I get the users? As you get users, you get more and more leverage from efforts at activation and retention and engagement. Use Pinterest as an example again. A very high percentage of women in America have downloaded Pinterest. Then the leverage quickly goes into, okay, how do I keep them engaged, reactivates the one who disappears, and you know, their acquisition efforts in the U.S. get de-emphasized, and all the leverage is there, except as they're going international, they're still in that acquisition part of the curve. And so I think the leverage changes over time based on the situation of the company. Facebook Hasn't had any users in the U.S. forever because they have them all.

AI assessment note: “A lot of companies, it's a progression. So almost all the early activity in a company”

Q Do you actually advise people then to, like, think about their strategy differently, you know, to go, like, I would think people would stall if you, you can only get a local, but not get global. Like, do you, how do you sort of balance, I mean, I feel like there's a pressure these days to, like, go global fast. How do you make those trade-offs and decisions?

A I mean, different marketplaces have different characteristics. Because the local ones are really hard and really slow, and, but if you build them, they can be really valuable and really tough to overcome. So, you know, it is virtually impossible to, uh, to displace OpenTable at this point. It's the strongest network. I've worked with some great network effects businesses, you know, eBay, PayPal, Airbnb, you know, Pinterest. It's virtually impossible to displace OpenTable from a restaurant right now, but they had to go market by market to do that. I mean, eBay was instantly national, almost global, because if you were a, take, there's 10 antique collectors on the service, it didn't matter, one's in Michigan, one's in Miami, one's in Berlin, if they're collecting the same antique, there's utility there, and so that one was able to spin up much more seamlessly. The notion of the local marketplace, which I know some of you in here are doing, you know, it has that extra, um, extra complexity.

AI assessment note: “different marketplaces have different characteristics. Because the local ones are really hard”

Q So the data opportunity, do you believe that?

A I mean, yeah, no, we actually have seen a ton of companies trying to do it. And the, the, the, the interesting part is how hard they have to work to get the data. There have been a whole bunch of them that want, Are trying to incent consumers to take pictures of their receipts and submit the pictures and they do optical character recognition on the picture to try to reverse engineer. What did Jeff buy? And we've seen multiple companies trying to do that. There are other approaches too. There's, um, some, you know, there was a, uh, on demand, they'd send armies of people with smartphones to take pictures of shelves so that they know the competitive pricing. Oh, look, Crest is two, 29 and Colgate's three, two, 15. What happened to sales? You know, but they don't know what Colgate and Crest is, and so they don't know, all they know is Michael Ossian in, in the southern region slowed down.

AI assessment note: “we actually have seen a ton of companies trying to do it”

Q To be fair, and this is another definition we should tease apart really quickly before we move on to more metrics, that also had the quality of network effects, which we've talked a lot about in terms of these things growing more valuable the more people that use it. Is that growth? What's the difference there?

A Well, the business grew into the network effect. The key tactic to build the network effect was that free acquisition of consumers, that the more restaurants we had, the more attractive it was to consumers, the more consumers who The more attractive it was to restaurants. So there is a wicked network effect. If you're not spending anything on paid acquisition of consumers, how do you start it? And the placements that open table got in the restaurant, both physically in the restaurant, but particularly on the restaurant's website was the key engine that got the network effect started. You had to manually sell some restaurants, come for the tools, stay for the network. But then once the consumers got Enough of a selection and started to use it. It was game over.

AI assessment note: “Well, the business grew into the network effect.”

Q That is such a golden nugget because it's invisible to the world. When you see the outcome, the process behind the outcome is invisible, which is the whole reason we're doing this. I didn't know that. Why does that relationship that with the capital markets expertise matter so much in the lead up to the IPO?

A We wanted it to be not a black box. One of the things other CEOs had told me who had done IPOs when I reached out. It's like, somehow, you know, you do this road show, you get to the pricing meeting, they say, okay, we recommend the prices, this, and then the shares just magically disappear. And we, we really cared about who got the share. So we wanted to have a vote in who got it, who got the shares. And, um, cause it was such a tiny offering. We wanted to concentrate the shares in that shortlist Much at a much higher level than what's typical at the pricing meeting. You know, we, we, JD shared the spreadsheet and we're like, no, no, no, no. We have to give these guys 10 times more. And he's going, no, no, no, no, no.

AI assessment note: “We wanted it to be not a black box.”

Q So throughout this entire episode, there seems to be this interesting dance between architecting and discovering. Like you might know some things up front because you're trying to be intentional and build these things. And then there are things that you discover along the way as your product and your views and your data evolves. How do you advise people to sort of navigate that dance?

A You iterate. You develop hypotheses, you put it out there, and you test the hypothesis. You know, I think my product's gonna behave this way, and then did it. Probably the most important thing is, for me, marketing can be art, marketing can be science. In the consumer internet, it's more science. Some companies can effectively do TV campaigns, large media budgets, things like that. For me, the better companies typically just rip apart their metrics, understand the dynamics of their business, and then figure out ways to, Improve the business through that knowledge, and that knowledge could feed back into new product executions, or new marketing strategies, or new something. It's constant iteration, but it's informed by the data at a level that, you know, on the best companies is really, really deep.

AI assessment note: “You iterate. You develop hypotheses, you put it out there, and you test the hypothesis.”

Q So to be clear though, it's growth and value, but what's the difference between that value and engagement? Is it enough to just say we've got a lot of engagement and therefore we have a network effect? How do you actually know there is a network effect?

A I mean, we, we brawl over this concept because the easy observation is businesses with network effects typically are very defensible and often are prone to monopoly, you know, and we're trying to get in early in the company. So that's not completely apparent when we're investing. So, you know, you're brought, you know, we'll have people standing on the table. There's a network effect. Here's why. And no, there's not. And here's why. And so, I mean, it is one of the key drivers of the investment decision on a whole bunch of our consumer side businesses and some of the business side businesses. No, I mean, we actually told it, put a slide up for our please last year, network effects equals moats, and you know, the, if you, if you can achieve it, you're defensible, you're less susceptible to price pressure, you're less susceptible to pressure of, uh, you know, consumer acquisition economics and things like that, because if your service is more valuable than the other, you can accrete that value, um, throughout the entire process.

AI assessment note: “we brawl over this concept because the easy observation is businesses with network effects”

Q So to be clear though, it's growth and value, but what's the difference between that value and engagement? Is it enough to just say we've got a lot of engagement and therefore we have a network effect? How do you actually know there is a network effect?

A I mean, we, we brawl over this concept because the easy observation is businesses with network effects typically are very defensible and often are prone to monopoly, you know, and we're trying to get in early in the company. So that's not completely apparent when we're investing. So, you know, you're brought, you know, we'll have people standing on the table. There's a network effect. Here's why. And no, there's not. And here's why. And so, I mean, it is one of the key drivers of the investment decision on a whole bunch of our consumer side businesses and some of the business side businesses. No, I mean, we actually told it, put a slide up for our please last year, network effects equals moats, and you know, the, if you, if you can achieve it, you're defensible, you're less susceptible to price pressure, you're less susceptible to pressure of, uh, you know, consumer acquisition economics and things like that, because if your service is more valuable than the other, you can accrete that value, um, throughout the entire process.

AI assessment note: “So that's not completely apparent when we're investing.”