7 Powers with Hamilton Helmer

Transcript from https://podmenti.com/t/d076eb60544b91fb

Yeah, I would say uh we're sorry to blow your cover, but it's sounding like that's pretty well blown as no longer the best kept secret in Silicon Valley.
I was gonna say that the fact that it's a best kept secret says something about my acuity as a good marketer.

Who got the truth?
Is it you, is it you, is it you Who got the truth now?
Is it you, is it you, is it you
Me down
Another story on the way

Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them.
I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.
And I'm David Rosenthal, and I'm an angel investor based
In San Francisco.
And we
Are your hosts.
David and I had a realization.
We talk about seven powers on every single episode. Literally every single episode.
And in March of 2020, we actually interviewed Hamilton Helmer to talk about the framework.
But
We estimate that only about two percent ever actually heard that since it was an LP episode at the time.
So today
to celebrate the LP feed going public, we are releasing the remastered version of that interview.
It's a little like getting in a time machine, since that was the last recording we did before the pandemic hit, but every single lesson holds up and it is a treat to hear
about the seven powers framework and Hamilton's own voice.
And to hear his story behind the book.
When we recorded this well.
A
You're totally right.
Like all of Hamilton's work, it's just timeless.
But you were gonna fly down and we were gonna do it at the Strategy Capital office. Hamilton's
Fund that he manages in Los Altos.
And I drove down and was there and then last minute you
Said hey, this Covid thing I'm a little worried about. I don't feel comfortable getting on a plane right now.
And so you were on Zoom?
Yeah, I've never met Hamilton in person, and you have
Twice? Three times?
At least.
More than that, I think.
Yeah. We should do something with him in early next year. I may be another reason to
Get this out to everybody now to
Get prepared for more coming in the new year.
For sure.
Listeners, if you like this episode and you want more, we also released a book club that we did with Hamilton from September twenty twenty as a follow up, and just like every other previous LP episode
Those are now free and accessible in any podcast player just by searching acquired LP show.
All right listeners.
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All right, listeners, now onto the interview with Hamilton Helmer.
Before and in addition to writing seven powers, you're an active strategy consultant and a public equitior at Strategy Capital, which is a firm you founded
Before that you earn your PhD in economics at Yale.
And after that you worked for Bill Bain at
Bain and company, correct? Yeah. Uh before going out on your own. We'll get into all this, but uh
Thank you so much for being here and joining us.
Yeah, no, my pleasure.
My son Andrew, who's a software guy at Google or had been until recently
told me what an amazing group you were and how everybody at Google listened to your show and that do I know these guys and sure enough David had reached out to me so I'm delighted.
Ah, thank you.
Appreciate it.
Before we get into seven powers and all of your work and strategy and technology.
Can you tell us a little bit about how did you get into strategy and develop a passion for it and go from economics PhD student to working for
Bill Bain.
It's a funny journey, I won't
bore you with too many of the details, but I'd always had sort of an interest in business.
This is audio and not video, but David can look on the floor there and see a rug.
And that rug was my first business.
So my brother and I started a rug business while I was still in graduate school.
Designed in New York and woven in Ecuador and there's long stories behind it.
My wife looks back in that period and she said, Today it would be called a social enterprise back then, it was just called a failure.
It's good to have your spouse be your best critic.
But then when I finish my PhD
In those days it was really odd for somebody with a PhD to go into business, uh PhD in a econ. I mean, you think econ it's about the business world. What it's not.
highly theoretical, mostly math at the time. I loved economics. I still love economics. Fascinating discipline.
But unusual. So I had to kinda scout around and finally I ended up at isolating strategy consulting as the thing that
interested me the most. And there's a long story about how that happened, but I won't go into that. But anyhow I ended up
interviewing a banning company. I think I was the only person at that time to ever cold call the company.'Cause there's all Harvard and Stanford MBAs, basically. They never seen anybody like me.
How big was Bain at that point? Uh a couple of hundred, maybe.
Wow.
And my partner John in Strategy Capital
I think he was the second hired employee.
So he goes back even much further than me.
Wow.
And this was in
Boston?
Yeah, that was their only office at the time.
And they were growing like stink.
And so I had this funny experience where
I had nine interviews of an hour each.
And there is a quite a lot of skepticism. Kind of an egghead, doesn't have an MBA and
So finally.
I my last interview was with Bill Bain.
And I sat down in his office
I thought
You know, I'm really interested in what he's doing. So I just I spent the entire interview asking him about how he got it started. What was his entrepreneurial experience?
Which always has fascinated me.
I forget the name of the folks who founded McKinsey, but they created a whole market. Yeah, yeah, yeah. McKinsey goes back further and then B C G
came in as sort of a strategy focus and then and then Bain spun out of B C.
And then Bill looks at his watch and he says, Oh
Our hours up. I've got to go and I realize, Oh my God, I haven't said anything about myself.
You idiot, Hamilton. And so we're we're literally walking towards the door, he's shaking my hand. I said, Oh, Mr. Bain, I'm sure I can do the work here. I'm really interested and and it's fine.
But everybody here is worried about me not having an MBA, but that's just not a problem. I'm sure I can do it. And he said, Oh, I don't have an MBA either. And that's how I got the job.
So that was in Boston. What brought you out to California and starting to swim in these Silicon Valley waters?
In ninety four I came out here and I was
attracted by the economic vitality, but it's also a family decision. My wife just absolutely adored California from her prior experience.
And then I got more and more involved.
And more
tech e companies as you saw from my stuff, Adobe was a client and Ray Cem was a big client and so on.
It really is amazing how much timing plays into these things. I mean, people talk a lot about jobs and gates being born within those sort of same few years and it really teed them up for the exact moment to start
Apple and Microsoft and make them be powerhouses, you moving to the Bay Area in ninety four, that is an equivalently perfect time to dive headfirst into that community.
Yeah, yeah, it's true. And at the time I was an actively involved equity investor too. So in a lot of Intel and Microsoft and Dell and Cisco were all big proprietary accounts. And so
That made me think a lot about it, but th those were very formative years, certainly.
Yeah. I mean it was Netscape, but that wouldn't be long until Netflix was founded.
Yeah, I still remember vividly the first time that I saw the the internet, one of my clients back east is sort of a
techno head like me. Yeah, pulled me into his office and fired up Mosaic and said this was before Netscape and said, Hey you gotta see this Hamilton. And I went, Whoa, this is amazing.
Okay. Let's get into the fun stuff.
Seven powers to me at least
the thing that was so
enlightening about it was
I see this mistake all the time in Silicon Valley and in venture investing of like everybody's like, Tell me about the TAM, gotta target a big market.
But that's kinda only half of the equation of what makes for
uh great enduring
company is targeting a big market. Of course you have to have a big market.
But you also have to have
what you call power in the book within that market.
You have to have defensibility. You have to have something that makes
Your company and your business stand out.
Can you tell us a little bit about how you define power and
How you came up with it.
Yeah, sure. So
As I consulted with more and more companies'cause I
ran my own consulting firm for decades.
Three things started to become evident to me.
One was that
Really strong performance is persistent.
If you look at Intel's results this year and Intel's results next year
the fact that they have high profit margins will probably be true next year. And it turns out there's a lot of empirical work that verifies that.
Th there's persistence.
It's like the exact opposite of hedge fund managers year to year.
Yeah, or mutual fund managers. There's no persistence in mutual fund managers. Now, interestingly as you probably know there is persistence in venture capital.
And then the next thing, if you've done a lot of valuation work, I'm sure you've done a ton and I've done a ton and I've even taught it.
What you learn is it's all in the future.
So if you take a company's growing about ten percent to a standard
evaluation model, what you find is
Eighty five percent of the value is after year three.
So persistence
And in the future.
If you can understand
the issues that drive persistence, you're gonna understand what drives value.
But then as I did more and more consulting work, another thing came into focus, which was
the the path to establishing that kind of persistence
It's not linear. There's a step change. So there's a period
When a company can establish that
And that window often closes, if you will.
And it's the kind of business that you are so familiar with. It's in the earlier stage. So if you think of a founder, there's this period
where there's tremendous flux going on. They don't know who the customers are, technologies can't change you like crazy. They have all wide variety of different types of competitors.
And in that
There are all kinds of degrees of freedom.
about how you move.
the fact that people even talk about pivoting.
is just suggesting that it is possible, in fact, to pivot.
Ask Intel to pivot and it won't happen very easily.
And they've certainly been trying for a long time.
So what that says is th there's this moment.
But then the problem is from a strategist point of view is that
All the information is changing so radically that the person or the group that has to process that.
is the founder and his team.
And it's not hiring somebody like me and making a recommendation or strategic planning or something like that. It's actually processing all this time and as you move through space and time
understanding
Okay, this direction looks a little better than that direction.
And so
What that said to me.
was
That what people needed

Advice from an expert.
But rather teaching to fish.
Trying to s assemble.
a way of looking at strategy so that the people on the ground who are really making these decisions
have a way of thinking about it that will it's n never perfect, but guide them in the right direction.
But the problem in doing that for me was that
providing a mental model like that, as I say in the book, it has to be simple, but not simplistic. Simple so that you can retain it.
Not simplistic so that it's relatively complete. You don't miss a lot.
That's a really high bar in strategy. And that's what took me so long. I mean, I wrote the book. It took me twenty years of writing it.
And Hamilton, I'll tell you, having read a bunch of business books and having an even larger pile of business books I've
bought but haven't read. There's so many different mental models. Thank you for taking the twenty years to do it because the fact that there is a one page reference card that sort of assembles this whole thing of grit, it actually does make it so you can
reference the seven powers and sort of make decisions in real time.
It's certainly much more accessible than trying to weave your own fabric of lots of different theories.
What prompted you to decide to write the book? I mean, you've been doing this for so long, you could have just kept this to yourself.
My ideas are my babies. And the greatest compliment for me is other people using them and finding them useful.
So I wanted to get it out there, but I'm not a natural writer and I really hadn't published before anything.
It was a very hard journey because originally I sort of went to people and said, Okay, business book
Well, the advice was
Don't do anything very conceptual. It's gotta be a a lot of stories and stuff. And so
My first efforts I think I wrote a full book this way were
kind of fun stories and then occasionally I kinda slip in a concept.
And I went to publishers and agents, I had a very, very famous literary agent, for example.
And
I could get no traction at all.
I felt like I was hitting a brick wall. And finally
I said, To hell with it. I'm going to write the book that I think needs to be written.
the two of you face this all the time, the issue of want versus need.
So which I've always admired Steve Jobs for talking about.
You don't do breakthrough stuff with market surveys.
You have to understand what the need is and then invent. And if you really meet the need, then it's useful oftentimes you fall flat.
And for me the need here was this mental model.
That was simple but not simplistic.
Alluding to Charlie Mungerisms here.
My biggest question I'm dying to ask you.
Reading the book and
learning about power and this model that you've come up with.
How does it relate to motes?
Is power the means by which you create a moat for a business? Or is it something different?
There are two
Necessary and sufficient conditions for power. There's a benefit
So you've gotta come up with something.
That's better than what other competitors do.
But better for you as a business model. It's a better business model somehow. So that's something good.
But that happens every day. Every little improvement you see in Starbucks getting a different kind of coffee cup or something. So that happens often.
But the thing that's rare is when you do that
And it's material, so it is enough to tilt the needle.
But also
Yeah.
satisfies the second condition, which is that not just there's a benefit, but there's a barrier. Which is a barrier means
There are lots of smart people out there.
they're will be aware of what you're doing and they're gonna try and take it away from you. And that's how competitive dynamics works. And so
You have to have something that will prevent that from happening, even if they're motivated and capable.
I'm a huge fan of Warren Buffett's as you might imagine. You know, he's genius, I think. But the word moat to me
Although he means more
with a word than that.
makes you think about the barrier piece.
So
I think it is fair to say that.
the seven powers are for me a very
Careful.
And I hope exhaustive articulation of
The nature of modes.
But I think when you're thinking about competitive analysis and particularly when you're thinking about starting businesses
I always tell people
Don't focus so much on the competition.
You have something unique. And yes, you have to pay attention to them. You don't be stupid, but you don't create a great business by just saying, I'm going to beat the other guy.
So the benefit side is also very important. So it's tightly tied and of course the whole idea of Motz is just was a brilliant concept on their part.
So
There are seven powers in your book. And each of the seven powers is a way to create this power.
How did you distill these seven?
How did you come up with seven? Do you worry that there's an eighth out there that you haven't found yet? Yeah, yeah, yeah.
With great pain and time.
It's completely empirical.
I've probably
led two hundred strategy cases. I've probably had my students like Giselle and Chen Y were sitting here.
Do another two hundred.
And so far
Those seven have covered everything that I've seen.
I'm always looking for an eighth.
'Cause also as an investor
If there is an eight, that's probably really obscure and it probably means it's not on the price, which probably means it's a good investment opportunity. Good source of alpha. Right, exactly.
We won't have time to go through all seven, but maybe a good one to start with since most of our audience is in technology and
most of those folks are entrepreneurs or aspiring entrepreneurs.
Counter positioning. This is such a fun one. I know it's your favorite power. And particularly such a fun one because it's
In many ways, the most relevant for startups and entrepreneurs.
In a lot of markets.
Can you talk to us a bit about
Yeah, yeah, I do have a special place in my heart for counter positioning, I have to say, because it's so contrarian and I'm sort of a contrarian person, I guess.
A counter positioning.
occurs if
A company comes up with a new business model.
And challenge is often a powerful incumbent with it.
but for the incumbent to mimic this model.
they would incur or at least think they would incur
So much immediate financial damage.
that they just say I can't go there.
Even though maybe long term it would be good, they just can't do it.
And that provides
a powerful disincentive for them to respond quickly.
And if something's happening in the kind of flux that you guys deal with very fast
But responding late may mean that you don't do it. So
uh give you some examples. So Netflix versus Blockbuster. Late fees. Yeah, yeah, yeah. Late fees. So late fees accounted for half of Blockbuster's income. Netflix says we're not doing it.
And Blockbuster eventually
Mimicked.
Netflix.
And who knows, but my suspicion is if they'd done it a year earlier, I'm not sure Netflix would exist.
And the place I got to
kinda cut my teeth in this was I was a big investor, big for me, not big for them, a big investor in Dell in the nineties.
And my that's my hypothesis was the compact couldn't respond quickly to them because Dell was going direct.
And Compact had these lucrative arrangements going through stores.
But looking at his investor, I could see that was true, but why?
And so that got me thinking about it from sort of a ground up, and eventually I was able to formalize it. Hamilton, one thing to push on there. So it seems like and I'm remembering from your book
The criterion are basically
This new thing is both a good business and
But
net negative for the big incumbent because of the cannibalization that would occur.
Are there any other things you would sort of add to define that?
Yeah, so
There are a few.
flavors of counter positioning. One is that it's a
A net negative and therefore
because their current model is so lucrative that actually even if they did a net present value, they would end up
Deciding not to do it.
Even though they'll eventually the business will go to the challenger.
And these are not mutually exclusive. It's
Very often true. I'd say almost always true.
that there is cognitive bias involved, which is that the incumbent
They've done just great.
Their model has worked for years. I mean Blockbuster saying, Oh, you know, we got all these stores, you know, people love it. They come in, they can browse
What's wrong with that? And the idea of somebody doing
This rough and ready group sending out red envelopes in the mail, they'd say what the hell, you know, this is just not going anywhere. So they're very cognitively biased towards thinking that their model works.
And then there are also agency issues.
What economists call agency issues. Which means that the person
Who controls the business may not have interest aligned with the long term interest of the business. So for example, CEO comp is often about
This year's performance or the next few years performance.
So to ups the Apple cart for a gain that will happen four years out.
You may say, Uh, you know, I just don't want to go there.
Obviously for startups, counter positioning can be great and Netflix is a fantastic example.
But even I'm remembering a blog post Bill Gurley wrote a number of years ago in the beginning of when Android was starting to take off.
And I think the title of it was
Less than free, the most disruptive business model ever.
You know, you had Android.
Which cost less than free. They would
pay you to use it if you're a hand type manufacturer to put it on your phones.
versus Nokia that's trying to make money or sell their stuff.
even as Google because they had the separate business model of search, they're able to enter this adjacent market with a completely counter positioned
Business model.
Hamilton, listeners who have read The Innovator's Dilemma, this is going to sound vaguely familiar. This would be the power that's most similar to that concept. And the same way that we asked earlier, what's the difference between power and moat? How do you think about
counter positioning relative to that sort of grand theory.
I recommend everybody to read that book, Innovator's Dilemma. That's a brilliant book.
Christianson was just a scholar of innovation and deeply researched.
But it's pretty different. So if you want to get sort of mathematical about it, there's a many to many mapping between the two concepts, which is to say that counterpositioning doesn't imply disruptive technology, and disruptive technology doesn't imply counterposition. Give you some examples.
I would argue that in and out progresses counterposition against McDonald's, there's no technology involved particularly at all.
And it's not disruptive in terms of Christensen's
Philosophy was low end. This is like a
Objectively worse product.
Yeah, so you're going back to Christian's original book, which I think is the more interesting one.
where there's a product that kinda doesn't satisfy everybody. I mean you could argue that
Tesla's first cars were like that.
The other direction is that if something is a disruptive technology, it may not be counterposition. So
That's straightforward. And and the fact that they don't map to each other.
And the fact that power maps directly to value, or there's a one to one mapping between power and value.
means that disruptive technology does not map to value.
And the simple thing about that is
You can disrupt something and it can be a really lousy business.
Happens all the time.
You poison the well, but there's no good endpoint for it.
We may be uh overly quoting girly here, but I think I saw a r a recent tweet something along the lines of there is an infinite amount of product market fit for selling
Dollars for ninety cents.
Yeah, yeah, yeah. So just pricing something so that
people are attracted to it and losing money. There's no power there.
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Okay.
Next one I wanna talk about.
is in many ways classic, and I think many of our listeners already have thought a lot about this and know, but I we wanna ask your perspective
On some nuances of it. Network effects.
Hugely discussed in Silicon Valley, everywhere. Everybody knows what network effects are.
But one of the things you talk about in the book that I think is
So accurate and I've observed.
As an investor.
You can talk about network effects till the cows come home.
But it's the intensity of the network effect that really matters. And it is so hard to know that.
X A and D E.
In a market.
What is the actual
degree to which I care as a participant in the network about other participants in the network.
And how much do I care about which other participants?
The key thing about it is that
They are complex and hard to figure out.
So just asserting them gets you
Point.
Oh oh one percent of the way of understanding what's really going on. And we've seen that when we look at investment opportunities.
First place to start, of course, is to try and create a map.
Because remember they're not
homogeneous, they're not necessarily linear, they're not symmetrical.
So just to give you some examples, so if you think of Uber.
This is a platform.
It connects drivers with passengers. With powerful utility.
much better than taxis and it changes my life.
for the better. I sit on a board of a startup up in Vancouver.
And Vancouver taxi lobbies are strong or what or however it's worked. They don't have it.
And so I finish my board meeting, I go down to the curb, they've called a taxi
I have no idea whether it's coming. I have no idea where it is. And eventually I usually just give up and just go to find some corner to hail a cab. And so very powerful benefits.
But does Uber have power from network effects?
in a way that will translate into meaningful profitability. I would say first order no would be my guess. I'm no expert in this, but first order I'd say no.
And the reason is is if you think about what's going on, it's that if there is a similarly sized or reasonably sized competitor
lift, for example, in this market or others in other markets.
that they can achieve a similar network effect.
And if you look at the
density economics of
as you scale in a region.
What we're saying is it's nonlinear.
At some point it flattens out. And so if the market's large enough for more than one company to exist in that flat spot
Then it doesn't help you. So
You have to look at all those nuances.
One of the unusual things about my book is I've always

to make sure that everything maps back
to value.
So if you said what is the fundamental assumption of this book, it's that strategy and value are mathematically their duals.
And so the mapping function from that desire to join the site.
versus actually being able to monetize it.
Which is based on how much time you spend on it and all that kind of stuff is you have to understand that to understand whether there's power or not.
The last one we're gonna talk about after this is gonna be my favorite, but
Switching costs. I thought this was super interesting because people think about switching costs as I think tend to be like old school industries or whatnot, but I realized
There's a huge amount of switching cost power in a lot of technology companies too. Take Slack, for instance.
Slack has network effects, but
Also switching costs.
We run on Slack. If we were to switch, that would be a huge cost to our organization.
How did you start thinking about that? And have other people in tech since you published this realize like, Oh, this might be a more a sort of power I'm not thinking about.
I don't know. I think people had
Thought about it.
There are a lot of
Subtleties around switching costs that you have to think through. I mean one is that
In general, it creates a win lose situation with your customer.
And so
There's sort of a management problem in that.
And another is that there's a competitive dynamic, which is if you have something that's attractive and a high switching cost
the competition will
try like crazy to create something that mitigates the switching costs. So you'll see
a lesser app have a translator device. But often the imperfection of those so if you look at
EDA, you know, electronic design automation tools.
There are libraries that are associated with those.
But if you move from one tool company to another
The translation never works very well.
Or every CRM system is like Oh, you export your data out of Salesforce, we'll do it for you. Yeah, right, exactly. Or exporting a PowerPoint to Google Slides. A problem that I think all of us probably deal with on a weekly basis.
The translation is never perfect and thus if it's a very important

You're not willing to switch.
Right. But then another subtlety is that remember
You can only monetize that.
If there's a repeated
Economic interaction.
So you have to buy more stuff. There's gotta be some kind of razor blades aspect to it, right?
If there's just switching costs
And you never buy anything more. It doesn't matter.
'Cause it's in those additional transactions. Then so that's when you look at ERP companies.
Why they
acquire so many different things because these are different tools they can interact with.
They are real. A a place where they can be especially strong is when they become embedded in a company process.
So we were talking before about there's a company that sells lab equipment. We're talking about 10X genomics before, for example.
where uh a piece of equipment gets embedded in how people do things.
They not only get used to it, but there's a whole process designed around it and switching it out is really hard. How about I'm just curious.
'Cause you've been thinking about this. What do you think about or what would be an example? I mean, Slack's an example and there's a question of whether
It's still sufficiently monetizable. Yeah.
Well I was wondering in particular with this
for SaaS companies.

A business model innovation.
Yeah.
If you have a switching cost.
source of power.
can work really well together because the monetization it's not like old on prem software
You sell a big Cull installation, boom, that's a lot of money up front. Now you gotta sell more stuff in the future. With SaaS.
You're just constantly selling all the time.
Yeah. So if a SAS model has
Really good switching costs.
Boy, does that help. I mean, it really helps.
I actually think the way that these companies are financed are predicated.
on switching costs as a primary source of power. I mean you think about
People are willing to
sell these things at such a low per seat per month price.
Or even let's say annual price. I mean people are
not necessarily hiring field sales reps, but they're hiring
People to do inside sales.
Because
Once you get one of these SaaS systems in, there's just an expectation of repeat. And when you go and you capitalize these businesses and the way that venture capitalists value them,
It's kind of predicated on that.
The expected churn rates are fairly low.
Yeah, the thing you have to be careful about.
in these kinds of businesses.
is customer acquisition cost.
So as it becomes more known.
that there are these high switching costs.
people understand that there's essentially a cash flow
future associated with each customer and they'll start to say, Oh yeah, well we should sign them up for free or actually with a bounty. Or so what happens over time is that actually the value of the switching cost becomes arbitraged out by the acquisition cost.
That's why if you go back to my power progression, that's why
the switching cost is in the takeoff phase.
Because that's the period.
Yeah, which
the true economics are not yet reflected in the acquisition price. And so you have to combine it
with something that gets you the customers in the first place.'Cause you don't have the customers in the first place.
And either you do that through something that's superior
Or you do it when the pricing of it hasn't fully arbitraged out the value. See, there are lots and lots of businesses where people just pay too much for customers.
And it turns out to be a really lousy business, even though it has switching costs. It's interesting. That also really makes me think more of Slack.
Slack came on the scene. They were
the first real innovator in this phase of
Consumer grade mobile messaging is also useful.
in businesses. Let's do this. They acquired tons and tons of customers in that phase.
built a big company that's gonna be enduring now public company. But now
They're competing to the death with Microsoft and Teams.
And the ability to economically acquire customers is at least not what it used to be.
Yeah.
So
The two of you have so much experience. Let me ask you this question. So
On counter positioning.
One of the things that
is really interesting is this whole software eats the world thing.
Do you think that in general companies that are
highly software centric in how they approach a business.
that for a incumbent that isn't that way.
That for them to adopt
has to blow up their model so much that it's counter positioned.
It's not only that software eats the world on the benefit side, but the barrier side is that
If you develop a company from the ground up that's software centric
Is that just a really tough pill to swallow? So a great example is current auto companies.
So versus Tesla.
is the fact that they've thought about software
built things up from that level. And now if you look at the engineering models of a BMW
Boy, it's a tough is that is that generally true, you think?
I've been thinking a lot about this recently, actually as it pertains to a couple of different investment opportunities I'm looking at. And a distinction that I draw
is if the value of the incumbent
can actually
be replaced by
a technology product rather than a technology enabled product.
And to illustrate this, let's say a technology enabled product is something like Redfin, where there's lots of ways they can apply technology to make the process better, but at the end of the day, it's a traditional brokerage with a person who's showing the house and
the to the same business model with
pretty similar fees on the transaction of the house.
And you look at other businesses like a pure technology business like Netflix, where it's a digital service that's
distributed digitally, it's software all the way through.
And
If you're thinking about
Do the existing incumbents stand a fighting chance.
My answer would be
Yes, against technology enabled businesses, because they can tech enable just as easy as these new entrants can start tech enabled. Not just as easily, but it's possible to compete on that vector.
But when it's a pure technology product that's being sold, that is the actual value proposition to the consumer is this unique piece of technology.
That's when I think this
unavoidable feats starts to happen.
Yeah, very, very interesting distinction. Oh, one thing I should have mentioned before about counterpositioning that your listeners should always keep in mind.
Which is really critical.
It's the only one that's a partial source of power.
Which is to say that remember, power
When you think about it and try and figure out if a company has power, you have to look at power versus every type of competitor.
So existing and potential
But also uh direct and functional. So people that satisfy the same need but in a different way.
And in the case of counter positioning
It doesn't answer the power question for potential competitors because other people can mimic the same
So I gave the example of Dell before.
Dell's power went away, of course, because ultimately everybody could do the same. And so if you look at counter positioning
And you want real durability in addition to that, you want to have another source of power.
when we're looking at companies it's very common that
One of the
either potential or existing competitors are
you know, Amazon's trying it out or Microsoft or Google or somebody and often in a vertical integration play and
So then you have to think through
Can they do it? And uh also there can be counter positioning issues involved, something like that.
And of course Slack is straight up against that kind of stuff, you know.
So there's something else that I've been thinking about. I'm curious to get your take on or if you've seen good research on it or if it's come up in your career at all.
In general, when I'm looking at the competitive landscape for a company that we're starting at Pioneer Square Labs in the studio,
I'm trying to figure out who are we going up against
The ideal situation is
There's incumbents, big companies that are twenty plus years
You know, they're mature companies.
And there's maybe one or two other startups.
that are in our vintage, but there's not somebody that's like three or four years old.
And my logic on that is always
were competing on a completely different playing field than
However, to put it in your language, however that incumbent
got power and whatever that opportunity was for them to create something new and novel.
And I'm perfectly fine competing, maybe either with a different strategy or to try and out execute someone that has the same resources I do, but I don't want to compete against someone that's three, four years ahead of me in approximately the same technology vintage with the same
sort of world available to them who just has a lead and may actually be
started something at the beginning of the window that is now closing.
Does that square with how you would think about that?
Completely resonates. Completely resonates. So what happens in the takeoff phase of a business
Think about what's going on.
There's more customers than product.
nobody knows exactly what the right model is.
And in certain markets.
That means that there can be quite a few competitors that are kind of viable.
And in some markets actually, if they're really incredibly robust, they're can be wildly profitable
company. So I thought were there three hundred automobile companies and there were probably I don't know a hundred P C companies or something. I remember hi this great experience. This was back in let's see, must have been nineteen boy, this will really date me.
I think it was nineteen eighty.
Four or five.
Silicon Valley'cause at that point I was back in Boston.
And I'd already started my own business and I was visiting a company called Chromeco.
And they were on this incredible trajectory as a P C company.
Cash positive.
Growing triple digits, I think.
And doing really well. They just cut a big deal with Sears for distribution and so one of their founders toured me through their facility out here.
And we finished and I said, Well, Roger, thanks very much. That was really enjoyable. I appreciate that.
But what are you going to do when there's a shakeout?
And this cloud came over his face.
He almost threw me out of his office. I mean it was that bad. He said, There'll never be a shakeout. It's not gonna happen.
Because they were in this period when the rising tide was raising all boats. And you have this tremendous feeling and yet their claim to fame was that are the largest S one hundred bus
computer comp I means who cares. Right. More PCI slots than any situation you're describing, Ben, is that their companies are doing just fine. They're getting customers.
But competitive arbitrage hasn't really taken place. And what you're worried about, which makes sense, is that if somebody is several years ahead of you
And it's one of the middle phase
types of power, which is most common in tech. Network economy, scale economy, switching costs. Those are the three most common ones. If it's one of those
Then your size matters.
And so if they're ahead of you.
when push comes to shove, when the market settles down, you will not be in good position.
And so I'd say an exception to that is that
If you have a company like that
And you see that they're just gaining enormous relative market share.
There might be some other company that's earlier.
But there's something about their business model that just doesn't work as Google versus excited or whatever. Right, right. And so if that's the case, then there's the second order question, which is why is that happening and will it continue? But that's more of an edge case. And so I agree with the basic idea that that's kind of a watch out. I'll go one step further.
Which is
That
An even more an interesting investment opportunity they don't come along very often, but is one where it's almost a category of one. Where a competitor somehow there's something about
The way they are, that there's nobody really quite like them.
That's reassuring in a lot of ways, if it's working, if it's cash flow positive.
Uh this is the perfect transition to my favorite part of your book.
In cases like that, often a power is a cornered resource.
And as you say, I think this is actually quite rare in tech, yet.
I think people in tech think it's not rare.
A classic example is a patent. You know, you're in biotech, you have a patent.
You have a cornered resource. You have it. Nobody else can have it.
I'm curious. Well, your thoughts on corner resources in general, but in particular, something that just really spun around in my mind reading this is
Lots of people in tech, especially lots of VCs.

Executive talent and founders are a cornered.
Resource.
And you make the point in the book that executives are not cornered resources because their value can be arbitraged by the market.
I think that actually.
The value of founders gets arbitrage too in Silicon Valley.'Cause if you have a superstar
founder, they're gonna raise money at such a high price. Yeah.
Just to sort of a comment on leadership. So
Leadership is unbelievably important.
And it's unbelievably important in strategy because as I said in the book, all strategy starts with invention.
and building up something around that.
And there really is a difference between companies with truly great leaders and ones that aren't as great. And so it matters.
But the question you're dealing with is sufficiency.
Is it enough?
And the example I start my book with is a perfect example for this. It's a little old for you guys, but it's Intel.
So they had two businesses. They started as a memory company.
They started with the best of the best. I mean they had Gordon Moore, Bob Doyce, yeah. Right, right. And and then it brought in Andy Grove. And so on the invention side
Bob Noise on the execution side, Andy Grove and on the process uh manufacturing side, Gordon Moore. I mean this was the all stars.
And yet.
Their memory business.
was not working. Because they had no sources of power.
And other people could come after them and despite their great leadership and probably being first in and all kinds of financial resources, it just wasn't enough.
And that ended up having basically a massive race to the bottom with tons of new entrants who were able to spin up you know everything that that Intel had and compete against them. But then if you go to what they did eventually have power in, which is CPUs
Again.
Leadership really mattered.
So they have come up with this idea for central processor and

Is this a big deal? Do we back this? You know, and most of the board was against it.
Their head of sales was adamant that this would never turn into anything that was and he was a sharp guy, I don't mean to me him, adamant that this would never turn into anything. Andy Grove was dead set against it, I believe is correct.
And Bob Noyce went out and kind of talked to people and this is the nature of invention.
high uncertainty bars, very large bandwidth.
Deep insights and he finally said, No, I really think this eventually is gonna go somewhere and and then the chairman of the board, what was his name I can't remember. No, uh Rosen or something, I can't remember. Anyway he
Back.
Bob Noyce and they committed to it, even though they really didn't have the cash and uh it was a very
Hard thing for them. And so there's a case where
Leadership really mattered.
But it wasn't enough.
And so the question here is sufficiency.
If you take a great leader
and put him in a different business.
That doesn't
massively reduce the uncertainty bars that the business is going to be success. Yeah. That makes a lot of sense.
How do you square that with Pixar, which is another example in your book in the cornered resources segment where the combination of John Lasseter, Ed Catmull, and Steve Jobs being sort of the best
visionary and source of capital with Steve the best animator and
storyteller with John and then the best technologist with Ed
the Pixar Brain Trust and you look at all the directors on down that they did recruit really was
their main or a big source of power for them.
Cornering those.
People resources.
Am I missing that there's another big source of power for Pixar?
No, no, no. I think there's some subtleties to that story.
I just have my own view about this. And I talk about this a little bit in the book.
You have to come up with
Great stories for good animated films.
The brain trust itself.
was insufficient to guarantee that.
And the marker for that is how many
Directors.
Had to be replaced.
that were into their projects. And so then you go back and then ask
What
was in common with the directors that weren't replaced.
And with the exception of Brad Byrd, who's uh a whole story by himself, uh brilliant guy, the answer is that it was this core group of people
That work together.
that came up with the original Toy Story movie and that they were sort of a band of brothers.
And together.
they had an experience of what it meant.
To create
really compelling animated films.
And that was their string of successes that followed from that. And that the fact that there is a brain trust
At that time.
they weren't able to transfer that into other directors.
But then later on what happened was you saw when Disney acquired Pixar
Some of that sensibility they did revised Disney animation.
And more recently with Pixar
Yeah.
prospects for a new pool of directors is very good.
But I think the original corner resource and it wasn't arbitraged out because
Those people wanted to stay together. So certainly those directors offered jobs in other animated studios. I'm sure they all were.
But they said no no, I'm staying with Pixar so if Bob Iger could have just hired Ed and John, uh he wouldn't have bought Pixar. Yeah, yeah, exactly. And I'm a a huge fan of Iger's, I mean, I think as a strategist and you know, he made three
Critical
Disney decisions, all of which I thought were brilliant.
And I think his Pixar decision.
was he realized
that at the heart of Disney was animated films.
And that even though the price
an investment banker would say, this is really expensive.
He realized that actually they had to revive that or the whole Disney franchise was at risk and so it was worth a much bigger price.
We are huge agar fans on this show, as all of our book is incredible.
And we try to be
A little less partial, but both of us, whatever we get going on anything Disney related, we'll be here for a few hours.
All right listeners.
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The potential for power, you know, often comes in that sort of flux and change of takeoff state in the market.
I'm curious as we you kinda move move towards the end here.
Have you come up with any good mechanisms for identifying when
Opportunities for power exist, like in given markets.
Do you just kinda keep a radar screen operating and be like, Hm, okay, well these are interesting
Areas of flux that are happening and new companies can be built or uh
I'd say there's a little bit of secret sauce in that from our from my investment perspective. That'll be the next button. Yeah, right. So you have to subscribers have to pay more. Yeah. So
It's kind of what you would imagine. I mean, you're in the thick of it. It's
A rapidly advancing
technical frontier that's seeming to change the possibilities in all space.
So
I was mentioning to you before I started, genetics is very interesting to us. Of course we have no
insight into therapeutics, but that whole field you can tell that
the incredible cost decline of sequencing and other aspects of it creates the possibility of doing
Things that were never cost justified before or or time justified.
You look for things like that that are step changes. And then I think there's an awareness of how technology
flows through an economy.
last Friday I had lunch with one of my old professors at Yale, Dick Nelson, who's his
genius level person on technical change. He's one of the
Deep thinkers on it.
And I think
What you see.
is that you start
with a technology with sort of its most
gross or
macro application and then it works its way through. So if you think about Moore's Law or Silicon as being one of the drivers of everything.
So first you go straight to where
It's chips. It's the chips themselves. And then the chips work the way into devices. And then devices work their way into applications. And so if a technology is fundamental, it moves through
different phases where it actually becomes or the businesses around it become economically viable. So think of Netflix, for example, again, so if they tried to do streaming
When they had started their red envelope business, you had to have storage.
You had to have the internet
All that stuff. And so there's a time as technology moves through
that it becomes commercially viable. And then there's a course of
precursors to this, which are scientific stuff. So think of quantum computing.
So first of course you gotta figure out quantum mechanics, then you gotta deal with entanglement and all the stuff. We're probably not ready for applications just yet. But hopefully there will be a time or people are now reviving hopes again about uh fusion based on different models.
I like that.
That's a good transition too.
Last question.
What are you working on now? What's next for uh the seven and maybe more powers to come. Yeah, yeah, yeah. Uh well, first of all, I'll I would love to find another power so far I haven't so
Every company that we deal with
faces this question eventually is that okay, if I'm successful, I've established a company with power.
What's next?
So act two. And
What I'm trying to figure out is do we have anything that's
Interesting.
and valuable to say about that. And I think from
The first step of it, I think we do have something, which is to be a little more forthcoming.
About some of the subtleties
about what really comes under a power umbrella.
Uh give you an example.
A natural place to go would be geographic expansion.
Oh, let's go into another market.
Well, it turns out if you think of that in power terms, you get very different answers.
So if you think about Uber going into a different geography, it doesn't matter.
Because the economics are a physical density scale economies. And if it turned out there was high branding and there were a lot of foreign visitors, it mattered, but it doesn't matter. Or like impossible to build that fixed cost technology asset.
To be honest, their mission statement of transportation for everybody around the world doesn't really map to power.
And I think they probably know that now. They're smart and able.
Now if you look at Netflix, it's a different matter.
And so if you think of
Netflix going into a different geography.
The question there
is
Remember the key competitive advantage there is scale economies. That there's fixed content that they can drive across more subscribers and so the cost per subscriber is less.
And the content's a big part of cost, so that's a big big advantage. So if you go into a different geography
For them.
The question then is
Does a reasonable percentage of our content from geography A
apply to geography B. And even if it's only twenty percent. So let's say you're going into England
and twenty percent of your US content applies.
If you're versus a English only competitor.
twenty percent is times that large amount is a gigantic deal.
And then the dynamics of it become even more interesting because if they're unbelievably granular data.
They can then
Actually
tilt their content development.
to have more crossover.
So thinking that through of how to extend power where the power umbrella fits is something that's
That's really interesting and it's important economically, of course, because
Getting power is really hard.
And if there any place that you can take advantage of your brand and it's sometimes unusual. Think of Disney going into theme parks.
Back to Disney again. Here we are. As you were mentioning, it made me think of Disney. We talked about this a little bit on our Disney Plus episode.
Fox actually, I think, did this really well, what you were describing with geography and power.
Of over the last ten years or so.
It's only been around for ten years.
I believe Fox locked up all the streaming rights to Indian Premier League cricket.
And you would think like, Oh, well, that's relevant in India. Well, no, that's actually relevant all around the world.
And so that was a big part of the Disney acquisition of Fox. So the fact that if you
Get a high probability of power.
It's a step change in the certainty about the value of the company.
And so any time you can extend that to more customers or uh more situations, then the question after that is okay.
What's beyond that. And that's uh
Deeply researched area. There's a lot in that. I'm not convinced yet that we have a lot to add to that. That's book three.
Yeah. We'll think about it.
Well, Hamilton, where can listeners find you? If they're interested in seven powers, where should they go?
Seven Powers is for sale on Amazon.
So I suggest you go there.
Is that your preferred uh method of acquisition of the book? Yeah, yeah, yeah. Just that that's the right place to go. And as we started the interview off saying that was this best kept secret, which means I'm just terrible on marketing questions. So maybe that's the wrong question to ask it for that.
Well agree. Well, listeners
Everybody should be.
Check out and read Seven Powers. It is well worth your time. Or listen. I listen to the book and the thing that makes that doable because it is
An economics book. A very nicely distilled economics book, but boy, there's some formulas in there. I love the insert. There's this great PDF that comes with it that gives you the sort of handy dandy uh filled in seven powers card along the way and sort of writes out the formulas so it makes it
Very digestible.
I'll just end with a funny a anecdote which is
There's a question of whether I put any math in the book at all to speak of, and then in the end I put it in the appendix so that you don't have to read it.
But it is there. And the reason I use it is just for sort of precision of logic.
It makes things very clear exactly what you're talking about.
But
The reader response has been
Utterly bimodal.
God, that's great. I had one well, Daphne, for example, you mentioned Daphne Coller. She said that was the one the best thing she read was the mathematical appendix to counterpositioning. She said that she didn't really understand it until and then other readers say
The complete waste. I don't know why he did it. Tell me more stories. Right. So I guess you're I know where you stand now, Ben. Well, thank you.
Well, the best readers like both.
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Well listeners.
As mentioned, if you liked
this interview with Hamilton and you're like, I need more Hamilton Helmer in my life. Good news in the now public LP feed.
You can find a
recording that we did of a book club with a bunch of people on Zoom, all of our LPs at the time.
on asking questions. We led most of the discussion and then opened it up to the group.
pretty fun to get to have that discussion with Hamilton. So you can just search acquired LP show in any podcast player and find that.
Other than that, I'd say uh if you want to come talk and hang out with the rest of the group, join at acquire.fm slash slack.
And if you're looking for that next great thing that you want to go do.
We have personally curated some great jobs that we think are interesting at acquire.fm slash jobs.
And you can go there too if you aren't looking for something, but you think you might be in the future, we have a place to raise your hand and say, Hey.
look for something cool for me. So you can drop it in there too.
Oh, and last thing though, before we go.
We have to say.
Everybody's still listening at this point. If you haven't already, go buy the book. Buy seven powers. I literally have about a hundred copies of it sitting in my garage. I've read every single one. Quite the super fan. I am a huge super fan. Buy the book and also leave a review on Amazon. I think you're the first review or the top review. I think I'm the top review. I at least was.
We'll have to go back and check. But seriously, Hamilton's work is just incredible. We can't wait to do more with him going forward. Uh huge thank you to him for joining us here.
For sure.
Well, listeners, we'll catch you next time.
We'll see you next time.
Who got the truth?
Is it you, is it you, is it you Who got the truth now?
Oh.