[Music] hi this is james currier general partner at nfx capital and you're listening to the nfx podcast [Music] five years ago i wrote an op-ed tech crunch titled defensibility creates the most value for founders i've seen founders make the mistake of focusing too much on their sugary sweet growth and not enough on their long-term durability and on effects we've now written about the four defensibilities available to founders in the modern digital age brand scale embedding and network effects that last one network effects is incredibly strong but not all network effects are created equal and not all great companies need network effects to be durable the key is to study the different defensibilities available and understand which are available to your company right now someone who sees this clearly in ways that others do not is hamilton helmer author of the seven powers in it hamilton defines seven different powers that great companies can use to achieve defensibility iconic founders from reed hastings netflix to patrick collison stripe twilio's jeff lawson have said that the seven powers are one of their core insights behind their companies so our friend jeff lawson who is co-founder and ceo of twilio has built a business now valued at over 60 billion dollars is steadfast that helmer's seven powers framework needs to be in the hands of every great entrepreneur out there and we couldn't agree more so in this special episode of the nfx podcast here are jeff and hamilton to talk through the seven powers so i first met hamilton actually i didn't meet hamilton a package showed up at my door one day and i opened it up and and it was this book and it was called seven powers and it had a little sticky note on the cover and the sticky note said jeff epstein a friend thought you would enjoy seven powers strategy capital is it twilio shareholder scribble scribble scribble scribble and i was like okay and i put the book aside as one does and just you know kind of forgot about it until a few months later i was talking to jeff epstein who happens to be on twilio's board and i remembered that oh apparently he had recommended a book to me basically and i went and found it and i read it and i'm like oh this is signed by the author some guy hamilton all right well let me read it so i started reading the book and i said this is really good and i will tell you i am a big skeptic of strategy like the word strategy and the way business leaders often invoke it yet this book really spoke to me and so i called up hamilton and i wanted to talk to him and that began the process of me really understanding the seven powers getting to know hamilton recommending the seven powers book to my leadership team at twilio and even having several sessions inviting hamilton in to speak to the team at twilio so it's my great pleasure to introduce hamilton helmer to everybody listening today hamilton welcome thanks jeff it's a delight to be here with you i so admire you know what you've managed to accomplish with twilio my whole career has been around thinking about what makes businesses successful and i'm very schumpeterian i think that entrepreneurship and building companies is the lifeblood of the vitality of a society and it's really hard so i just admire what you've accomplished enormously it's a delight to connect up again well thank you hamilton i'm going to start by saying why i think strategy is i usually say strategy is a dirty word and then you can rebut that with the hypothesis of your book how's that sound that sounds good so what i have often told twilio employees through the years is that strategy is a dirty word because it is this idea that the people at the top of the company have developed a strategy and everyone in the company is supposed to blindly follow this strategy whether or not your customers want you to follow that strategy and therefore i've always thought that strategy is basically just a way of telling your people to pay attention to the c-suite and the executives of the company as opposed to the customer so one of the things i've often said at twilio is there is only one true strategy build products and services for which your customers will pay you that is the one true strategy and anything that distracts from that is really preventing us from executing the one true strategy and my example has always been for some reason this always has stuck in my head google plus because if you think back to like the early you know 2018s whatever google clearly had a strategy our strategy is to go beat facebook and the strategy required integration of social across every part of google's properties and from people i've spoken with every product manager every engineer everyone on the front lines of building all those products were like why are we doing this our customers don't want this it's making the products worse but you pretty much had to do it because that was the strategy of the company and sure enough customers hated it nobody wanted it and that was just a lot of lost energy in that and it's not that like they shouldn't have tried something new it was that this quote-unquote strategy was driven by an executive idea of who their competition was as opposed to what customers wanted and that's what has always been my example of why i call strategy a dirty word but then i read seven powers and i started to think a bit differently about it so hamilton why don't i give you a chance to rebut my natural skepticism of strategy yeah it won't be much of a rebuttal because i'm in violent agreement with you i'd say and in fact it's why i wrote the book because i believe that strategic planning is essentially an oxymoron and because what you're talking about is trying to treat strategy as something that's a top-down plan that you impose on people and when you really understand it deeply enough and go back to what strategy is about what you realize is that its root its first cause is inventiveness you know and that shouldn't be a surprise that's the first cause of everything that's really important i think and so the challenge that i tried to take on in my book was what i call the mizberg challenge because there was this wonderful strategy thinker way back when wrote this very influential article henry mintzberg that said that strategy you don't sit down and think through a logically designed strategy but you actually craft it which is very similar i think and consistent with what you're saying jeff is that this is something that evolves over time as smart business people responsive to their markets and customers develop and so the question is what could somebody like me whose whole career has been around this topic of what makes businesses enduringly successful offer to anybody like you or your team who's in this exercise of crafting and what i realized is you have to be a lot more modest about it's not that you hire me and all of a sudden i turn you know lemons into lemonade or something like that it's rather that i can provide you a cognitive guide to what builds an enduringly great business and so the key there is the enduring part because that's where strategy comes in and so what i've learned after looking at hundreds of cases of companies i've advised and hundreds of cases that my students have pulled apart at stanford is that businesses there's a durability aspect which is essential to this and so the question you ask yourself what is it about certain businesses that keeps the force of competition away what kind of thing do you invent and if you go back to the google plus thing one of the reasons of course that that nfx would types would be very hip on this is that social is a multi-sided platform and you have to get critical mass and if you don't get there there's no value to customers and they didn't get there and so that was just not worth much so my book is really about what it takes to develop one of these structures that gives you this durability and that's what power is well and i like that you reframed the notion of strategy right because there's so many like i'm always amazed at what people call strategy i'm like i don't think that's strategy i'm pretty sure it's just an idea that you're calling strategy because you want people to pay attention as opposed to really being a strategy i like that you don't really use the word strategy very much in the book but you define what the real goal is which is power and power is a you know kind of a funny word right because it can be perceived as you know control or all sorts of things that maybe anti-trust regulators might not want but power in your definition is essentially the idea of like what are the conditions to create durable returns for shareholders like long periods of outsized returns to paraphrase your language and that struck with me because that is clearly the goal of every business leader and every entrepreneur it's not to have a strategy or to you know align the troops or anything like that like really what you're trying to do is to create outsized return and do that durably and one of the things that strikes me is in the technology world people do get overly rotated like there's only one idea of strategy that seems to have taken hold in the technology world and it is essentially network effects when i was raising money for twilio in our you know series a round you know i'd give my whole pitch and the vcs would say oh that's interesting okay so how do you have network effects i remember saying well i don't that's not exactly business like we're not facebook but there's other ways we're going to build power and look you call out i love the thing that resonated with me about the book is you said well look you know network effects you call them network economies is one such power but there are actually seven powers and great businesses can have any number of these in fact several of them working in conjunction together let's start off with network economies because it is an obvious one that people are pretty familiar with hamilton can you walk us through what network economies are and just give us you know the canonical example of where you've seen it in a great business sure before doing that i want to step back and just talk about building a business and how that relates to network effects and network economy so i'm going to use uber as an example and so think of what they've been through this incredible invention right a multi-sided platform that revolutionizes human transport and then off the chart scaling just incredible and then the investment community goes wild and you would think that in some way that that would be enough as a business person or this incredible accomplishment but the issue there is that you need an economic structure that they would capture some of the value that they've created because they've created enormous value i mean i sit on a board of a company in vancouver and when i go up there they don't allow lift or uber and so the last time i had to go to the airport i'm sitting out on the curb waiting for a taxi that's been called don't know when it's going to arrive eventually after 20 minutes give up and go try and hail one down and so this incredible value and there are a network effects here but the problem is is that more than one company get the benefit of that so lyft can also take advantage of that incredible value and compete with uber you can create tremendous value for customers but you have to be able to keep some of that for yourself and if you don't it will end up being a business that's just not fun to manage your investors will be after you eventually you'll probably attract activists investors whereas if you do find a way to have power you can become an iconic company so in the case of uber if you think of what keeps a competitor at bay it is that there are scale densities in specific geographic scale density so it's actually economies of scale play but the problem here is i'll get a little geeky on you sorry about this if you look at an n-dimensional space and ask the question what happens to the average distance between two entities in that space like a driver and a passenger in over space that varies with the nth route and of course there's a two-dimensional space it's geographical so it's a square root function which is to say they're diminishing returns so the larger area you have the less the advantage an uber would have over somebody like a lift and so you can easily have two competitors in large markets and so they compete against each other and that will be the basis of their competition and they'll both get the benefit of the network economies and so it actually isn't a source of power so network economies is one of those things that's profoundly important as i say for product market fit so for starting businesses it's just a whole new swaths of value are created but it's one that is much rarer in power and that's a confusion that often takes place so hamilton see you throughout another power in that conversation you talked about scale economies which is another power from your seven so talk about how scale economies then might help an uber or a lift to achieve some power in their business yeah so scale economies come from if there's an economic relationship so that as volume increases cost per unit goes down it means the leader's got an advantage right so if you're larger you have a lower cost position that means at the same prices you make more money and so that's a great thing and in the case of uber and lyft the problem is that those scale economies diminish over the relevant range and so they may not be enough so that uber and lyft can actually be pretty similar cost positions essentially in a market but the example i use in my book of scale economies is netflix and netflix went through this incredible transition where so they had this bruising battle with a blockbuster for the red envelope business and eventually they emerged but it had blockbuster taken them on hard a year earlier i'm not sure they would have and i think reid would agree with me on that so here they are merged but it's not enough this just gives you an idea how hard it is to be a entrepreneur it wasn't enough because they knew that physical delivery was eventually a dying technology that would eventually be streaming so they had to go into the streaming business but the problem with streaming business is that if you're just a distribution channel anybody can do that the technology isn't that hard and so if you started to do that there's an issue so netflix went at it the way you would hope is sort of toe in the water they tried it out they did their watch now feature and it it turned out to have a modest success but then they did the stars deal and the stars deal gave them a block on content that was really attractive to a lot of people and all of a sudden their subscriptions just skyrocketed so product market fit all of a sudden they went whoa streaming really does it but the problem was the stars deal was a one-off deal i think it was 30 million or something when it starts or nobody had any idea that would be that valuable so then the question was could they do an at-scale deal where people realized how valuable this was and still do it and so they did the epics deal which i think was for a billion dollars or something and so what happened with that was now all of a sudden they were getting exclusive rights to content and there's scale economies in that because those exclusive rights are a fixed cost and so if you think of the single productions an easy way to categorize to think about that think of when they did that house of cards 100 million dollars if hulu had done the deal hulu is about a tenth their size of the time the cost per viewer would be 10x so the cost of content per viewer went downward scale and so that was the case for the scale of content contents about 50 of their cost structure so it would not diminish the scale economy would continue over time and remains powerful and that's an important source of power and again the key thing here is that they could have prices that would give them very good profitability and maybe hulu not so much and that could go on forever it's those underpinnings that lead to a durable iconic company okay so we've got a good example here of network economies of scale economies and again i'd say those are two that probably a lot of entrepreneurs especially in the technology world are familiar with you know let's talk about some of the other ones that maybe are a little less obvious so counter positioning is another one and i really like this one this one especially often plays into the you know disrupter versus incumbent type story can you tell us a bit about counter positioning yeah counter positioning is frankly my favorite i think you asked about was my favorite earlier and partly because you know i thought up the concept but also because it is rather contrarian and of course from an investment side it's terrific because it's contouring enough that it often represents good investment opportunities and so what it involves is that as a challenger you develop a new business model that creates value so it's better for your customers but for an incumbent to mimic it would cause them serious damage to their business it's like the classic innovators dilemma type story yeah it's a little different than that because and there's some fine points to that because you can be it doesn't always involve technology i mean i'd say in and out is counter positioned against mcdonald's and so on but it's something that you would be very familiar with jeff and i'll ask you kind of a question about this in a minute because sort of software eats the world perspective is that when a company develops a new business model that's based on software and the incumbents are old lines and not software companies to be able to now become a software company often just implies they have to blow up their company they have to have different people different comp structures different organization a whole different perspective on life so my view of for example apple with the iphone versus nokia was that nokia was an incredibly effective hardware company they had supply chains that were finally tuned their product development cycle was masterful and then apple comes along with a product that's basically software driven and all of a sudden nokia they're faced with this existential dilemma of accepting somebody else's software or trying to do it themselves which they can't and they would have had to blow up all their existing business and quite frankly this is what vw is facing now against tesla and i get these extremely high marks for how aggressive he's being in understanding that threat but jeff actually let me ask you because i think software driven businesses are canonical examples of this where the incumbent just has this terribly difficult choice and that's a great example of counter positioning so the question is you've developed a software driven company and there are other approaches to what you do that are not software driven have you found that people that you were originally against that tried to adjust to do it the way you do it just it was almost impossible to ask for them well i think oftentimes the counter positioning comes in the form of the economic impact because that's what really causes companies unable to adapt quickly when you're driving at the core economic engine of a company right they see the world through the lens of that engine and they're so hesitant to adapt because a it could mean an existential crisis at the very least it could be disruption in their shareholder base and things like that but it's also just a mindset it's like when you see the world a certain way it almost is unfathomable to see it a different way so i think for us you know the way i thought about the counter positioning that we've done and again i wouldn't have called it that because it was just the obvious thing that our customers wanted but was in how we paid per use or how we charge per use so the pricing model of twilio is you sign up for twilio and you spend your first penny to send a text message or to make a phone call or to do a video session or to have a chat like you just take these embeddable building blocks and you only pay for what you use in an industry where there's so much around in the software side selling of seats and licenses and all this or on the telco side of having a two-year agreement to buy a line that's bundled with voice and messages and it's like if you're a developer building a new service testing out a new idea you don't want to sign a two-year deal and you're not buying seats there's no such thing as seats you just want to start prototyping and spend as little as possible because the more you can reduce barriers and friction the more ideas you can enable because experimentation is the prerequisite to innovation therefore our job as twilio is to encourage as much experimentation as possible and i think it turns out that it's very hard for companies that are accustomed to selling seats and licenses or you know two-year deals and line access and things like that it becomes very hard for them to think of a business where i'm going to sell something for a fraction of a penny right because you're like how do i incentivize my sales team i've got a big sales team i got to feed the sales team and the asp that used to be 100 000 is now a penny i can't feed a sales team like that and so you get this entry point where people don't know what to make of it they can't fathom how could that possibly be a business and they certainly don't know how to execute and they have no will to execute on it and it gives you a many years head start to build value before someone might wake up and say oh wow there's something there maybe we should think seriously about this but it's really hard for them even once they wake up it's really hard for them to do it let alone the fact that they will discount it for long periods of time because they just don't understand it yeah you're so right the heart of it is that it strikes the economic model and again using a netflix example when they first started hbo was a powerhouse and much larger very profitable and hbo went through video providers so comcast and so on and so and netflix went over the top direct streaming and for hbo to contemplate doing that business model you can imagine the reaction that they would get from comcast they say you do that you're off the system and so that prospect of their economics turning so badly on them makes them drag their feed and drag their feet and drag their feet and that's classic of that and as i say it is quite common in software models for incumbents to have that difficulty and again i'll come back to the tesla case the idea that a car is a software platform all of a sudden changes everything because now if you think of a traditional automobile ice manufacturer automobile manufacturers they have these elaborate supply chains and in those supply chains are embedded technology so the distributor has a certain technology or the fuel injection system or this and that and all of those sub components have their own integrated circuits you know my favorite part about the counter positioning of tesla versus auto manufacturers and i'm from detroit originally is the dealer network because you think about so tesla doesn't have dealers right and literally the state of michigan passed a law that said it is illegal to sell a car not through a dealer right so you can't buy a tesla in the state of michigan because they legally require dealers you're like that makes no sense okay but here's the interesting thing you're like okay we're gonna roll out electric cars to all of our dealers and what do the dealers say well they make all their money not by selling the cars but by servicing them and electric cars have like you know five percent the number of moving parts that a ice car does and so therefore they they break less often and so the dealers would make no money is the dealership we don't want electric cars and so that was the more counter positioning because they had to bring their dealers along the dealers are very hesitant because they saw it as it would rode their ability to make their profit but it's fascinating we should move on because we've got seven powers and like we've talked about some of the more obvious ones another one is switching costs let's skip that one for a minute because i think there's some understanding of that out in the world let's talk about branding because we all kind of intrinsically understand like oh yeah that company has a brand that there's value there's equity in that brand but really thinking about it as a power is interesting can you walk me through why is power a branding and where do you see that like what's your favorite example of branding as a true power yeah so the key thing here jeff is that there is a real difference between branding as power and brand awareness and not that brand awareness isn't important but you can buy an ad in the super bowl and you will have brand awareness but you've paid for it but branding is something that's far more durable than that and what it involves is building up an understanding in your customers so that they are attribute higher value to your product even though the competing product is maybe identical you know objectively and so easy example is when you go into shop you may pick up del monte pineapple just because rather than the walmart brand or the safeway brand just because you have a certain amount of trust that that's going to be a quality product you know what you're getting if scientists open the duplicants they probably find them that were identical but you'll pay more so to build up that perception so that people actually pay more takes a long time of people becoming familiar with something and it can be that it is this expectation of additional quality or it may be that you just have a good feeling about it so that you like to be seen with it so an air maze handbag you might you know some people pay 50 000 for one of them but i think in the tech world it's not that common actually to see branding in this form you've developed this understanding with your customers over time that's something that you trust it more or you want to be seen with it but i think there's no question that apple has it you know but this was the result of very long curation process of steve jobs emphasizing aesthetics and not just talking about it but actually building aesthetics into their corporate culture and the customers now so i think there are many people who would sort of prefer to be seen with an iphone than with a convenient product and not to say the products of themselves aren't great so i think the key thing about it is that it takes this long period of time to develop that and it only works in certain types of products i'd say and i think apple is probably a canonical example of it so let's talk about two of the less obvious ones cornered resource because that's another really interesting one you talk about like employees as a cornered resource for a domain but like give us a sense of the corner resource power and how that plays out what your favorite example is there yeah so if you have rights to certain resources assets of some sort and that those can't be taken away from you and that they are materially valuable and sufficient so that if they were transferred to some another company they would also enjoy the economic benefit of them then that can be a source of value and the place where this play is very large is in patented pharmaceuticals so if you develop a drug that really works and you have the patent on it that's super valuable and if you transferred it to somebody else they would enjoy that same value you know the example i lose in my book is less obvious which is pixar what happened there was in the early stages of pixar there was a girly group that went through the hell of developing toy story 1 and 2 and bugs life and learned how to work together in this incredible creative way and each of those people involved in that became able to direct these amazing movies and so pixar ended up with this incredible string of successes really unparalleled in the movie business in a sense they had a cornered resource on the talent that it took to make these digital films of that group right and individually there are talents like that steven spielberg or somebody like that but a studio pays for those so it's the person that realizes that not the company that hires steven spielberg but in this case they were devoted to pixar if dreamworks wanted to hire the moy they wouldn't go and disney in fact tried to hire back some of the resources they they wouldn't go eventually disney bought them of course so they were a valuable resource that created the success of the company but that pixar in effect wasn't paying all of that away to them and so yeah that's totally non-obvious you know how did pixar just have hit after hit after hit it wasn't like the technology per se it was that team that worked so well together were literally inventing this as they went so that the brain trust of this whole thing literally resided inside those walls that's amazing yeah and i think if you take that a step further and you look at the later directors it wasn't that this guaranteed that anybody that came to work for pixar could make an amazing movie the later directors have more trouble and were replaced more often and so if you think of the strategy question for pixar it's adding to this director pool and i think they're doing it actually i mean they're making great progress in that but there's this initial group that was their corner resource and for them to continue on into the future to be a great company they need to add to that director pool so let's talk we have one more to hit and then i want to close with how people can make use of this framework but process power is another non obvious one so that's your seventh power process power talk quickly about that yeah so process power and the example i use in my book is toyota and the lean production is that if you have an incredibly complicated business processes think of automobile production and all the supply chains and the production itself and over time bit by bit you do a little of this and a little of that and gets embedded and how you do things in the company and often it's what one of my old professors used to call tacit knowledge often it's not even written down and all those things together are enough to be material in other words enough to move the profit needle and it turns out that a competitor who wants to do it has a terribly difficult time because either complexity there's so many little things they have to do or opacity that nobody even really knows exactly what's going on the time constant being able to do that is so long you end up like toyota gaining a lot of market share and being highly profitable but jeff there's an important caveat about this which is you know this is ceo that most of your time is spent on operational excellence let's make this organization as great as it can be and you're not spending all your time thinking about strategy you're thinking about how to make this a great organization but most of the time that's not power and most of the time it's something that can be emulated and it's absolutely appropriate that that's what you spend your time on but it's most the time is just something that another company that can hire away the people you get look there's armies of consultants that teach people best practices it's usually something that can be imitated over time and so process power is extremely rare toyota's an example i'd say maybe indetex with fast fashion as an example but most of the time operational excellence in the end isn't power but one more caveat which is that in getting to power operational excellence is unbelievably strategic so i'll give you an example of that which is the early days of apple they had this incredible lead in personal computers and they owned the operating system so they would have had power network economies from that and yet when it went from the apple ii to the apple 3 there's an execution issue completely dropped the ball you know very costly didn't work well his pricing was wrong and it just opened the door for the ibm pc and microsoft standard and almost caused the company to end and so in getting to power operational excellence is absolutely critical but in terms of establishing a position of power or of having a position of power it's typically not enough but there are those rare cases where it is like toyota where it's so complex and takes so long that you can do it it's an uncommon form of power okay so hamilton one of the things that i heard you say apply to almost all of these powers is they take a long time and a lot of discipline and a lot of focus to achieve you don't get them overnight you usually don't get them accidentally it is a long period of focusing and repetition and culture in a lot of the cases too to achieve these powers and so you know just to close out here how do you think that an entrepreneur listening today should think about the journey to developing power and like none of the things that we talked about are necessarily brand new things we've heard a lot of these words before we've all heard about brand we've heard about network effects we've heard about economies of scale but seeing them all sit there together like a menu that you can look at your business through and decide what is the best way for us to achieve power and then methodically focus on it for long periods of time how do you think an entrepreneur should start that journey yeah great question jeff and it really gets to the heart of the matter so the key thing here is that first of all getting to a position of power is a creative act you're figuring out something that hasn't been figured out before probably and that takes place as you say over time as you react to what customers want how the technology is progressing those sorts of things you create this over time and the message that i would like to convey here is that the overall types of power the genotypes if you will are simple there are seven of them as far as i know there are only seven but the phenotypes the specific instantiations of them for each company are incredibly complicated so actually we're doing this interview for nfx and so their business is based on the incredible complexity and subtlety of network effects right and that's true across all the powers so as a business person you have to go into this environment and ask yourself how can i create one of these seven powers and look at what's coming at you over time this is a hard thing to do and after you've had this amazing experience of getting product market fit you know you sort of go oh god the journey's not done you know but that's the challenge is over time you have to figure these things out and it's very different than product market fit and so you have to think in a different way and what my book is about is just giving entrepreneurs and business people an understanding of what those structures are as sort of for pattern recognition as they're going through that process thank you so much for joining us today hamilton it's been great talking to you i feel like this is the you know we've just skimmed the surface of the seven powers framework so for anyone who's interested in really diving in there's the book out there i'd suggest you read it i found it to be very useful tool of organizing the toolkit that we as entrepreneurs and leaders have to build durable businesses that are going to create value for long periods of time and having that menu so it's not just like words sitting out there and it's certainly not just hey strategy everybody but actually an organized framework of the various ways you can go by building power is enlightening so check out the book thank you hamilton for giving us a window into your brain and into your thinking today my pleasure jeff and again congratulations on the phenomenal thing that you've done in building twilio i mean as you say i just in awe of things like that that you've just done such an amazing accomplishment so been my pleasure to be interviewed by you thank you hamilton i'm flattered all right everybody have a great day [Music] you've been listening to the nfx podcast you can rate and review this show on apple podcasts and you can subscribe to the nfx podcast on apple podcasts spotify google podcasts or wherever you get your favorite podcasts for more information on building iconic technology companies visit nfx.com you