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Competitive moats and building in public
"Everything Starts Out Looking Like a Toy" (No.25)
This week’s toy: a website that follows your mouse pointer. This is a different version of the 👀 pointer replacement, and makes you wonder whether we could use this tech to make it look like you’re paying more attention on video calls. Edition No. 25 of this newsletter is here - it’s December 19, 2020.
The Big Idea
What does it mean to evolve a product strategy in public? That is, how do you build your main business while simultaneously building a “moat” or a sustainable competitive advantage?
If you look at Square, you have a pretty good example of a company evolving in public to create an interconnected series of businesses. From one idea — taking payment at point of sale, irrespective of where the point of sale is – they are building a financial services giant. Preehti Kasireddy describes it well in this Twitter thread:
Square makes money by charging a small fee on transactions, like a traditional merchant bank. But it makes that service available for people who never have used a merchant bank before, and creates an easy-to-connect financial layer for web and physical merchants. By breaking the traditional model (a credit card swiper - remember those), Square turned merchant banking from a vendor into a microservice offering transactional intelligence along with your 2.9% fee.
Innovate by Connecting
I am big fan of “building in public.” By that I mean that you gain more from publicly signaling what you are working on (sharing both the successes and failures) than you do by building in secret. This means consciously avoiding the kind of models that need secrecy and instead provide consistency and value by connecting your vision from end to end.
By proving that they could enable any merchant to take transactions using a mobile phone, Square built customer loyalty and provided a hedge against the merchant banks who were unwilling or unable to build changes to their legacy terminal machines. By having lower embedded costs in hardware (the customer owns the terminal because it’s a Smartphone), Square was freed to explore a new line of business not possible for its competitors.
Accumulate Small Changes and Compound Value
By building a market for transactions happening in public, Square accumulated enough users to do a few things:
build a market for those transactions (anyone with a mobile phone or a shop)
create an entirely new market for the information around those transactions (that was previously limited to siloed information at merchant banks)
bring new users to a market where previously they wouldn’t have participated (growth in the overall “pie”)
The smallest incremental unit (the transaction) starts to accumulate value by itself, and then Square is able to build new lines of business simply by encouraging their merchants to turn more transactions. But they also have valuable market intelligence for many like transactions.
Gathering Market Intelligence Builds a Market
Now, Square can build a moat not only by being a quality vendor for merchant banking using a credit card, but also by finding the submarkets where this business is most profitable. In marketplaces, for example, there may be an opportunity to offer the buyers a line of credit in addition to the credit card service offered to suppliers. Square will eventually serve as a multi-sided bank (if it doesn’t already) instead of a one way financial clearing house.
With the advent of cryptocurrency, there is a new need to store value and transfer it using a merchant bank-like service. Crypto advocates will probably disagree with me, and I think crypto will only become mainstream if it’s actually easy to use. It won’t be easy to use until a company like Square creates a mechanism to use it, determines how to insure the exposure of normal people to the downside risk of holding crypto (or to indemnify their company), and makes trading in this currency a “normal” thing. Perhaps this will be the next market they build in public.
What’s the takeaway? Building a business around a thesis - a north star idea - makes it easier to pivot into adjacent markets that support this idea. A company that builds that ecosystem in public is constantly creating its own competitive advantage.
We’d like to know …
Companies (small, medium, and large) rely on asynchronous communication to run their business. Now that Salesforce is buying Slack, does that change your choice if you were going to start a company today and needed to communicate to distributed employees? Hopefully you’re not going to rely on just email to get things done.
Click the tweet to tell us how you’re voting.
Links for Reading and Sharing
These are links that caught my eye.
1/ Alone and apart - We spend a lot of time alone these days (especially in the last 9 months). Would it surprise you to see that as you get older, this is the norm? Perhaps the experience of spending so much time apart from people during these last few months will cause a change in this pattern. Watch this space.
2/ Build vs. Buy - When you evaluate a problem at work, should you build or buy a solution? Jake Rotterman (an engineer at a large sportswear company you might know in Beaverton, Oregon) advocates buying because it’s all a form a lock in. Whether you are marshalling resources from a giant company or committing to another company’s view of the world, buying a solution provides a short-circuit to the planning process and allows you to cap (some of) your costs and move forward.
3/ Crazy speed in motion - If you’ve ever wondered why someone (or how someone) would go about building a street-legal, jet-powered car, it happened. If you need even more detail, here’s his site. I’m not really sure why you would need an extra 1350 horsepower in your car, but being able to throw a few flames as you accelerate would be awesome. This is some admirable overkill.
On the Reading/Watching List
I’m looking forward to Uncommon Type - some stories by Tom Hanks. One thing I’ve found in watching great comics is that there is always lots of stuff happening right below the surface as they perform. That “always-on” aspect of their personality is likely to come through as they write as well.
In a similar vein, Steve Martin’s Comedy Masterclass lets you inside the creative process to make things that are funny (and also shares some notes on things that are definitely not funny). I love Masterclass for the way it puts amazing performers front and center and allows them to share what they do in an accessible way.
What to do next
Hit reply if you’ve got links to share, data stories, or want to say hello.
I’m grateful you read this far. Thank you. If you found this useful, consider sharing with a friend.
The next big thing always starts out being dismissed as a “toy.” - Chris Dixon