CHAMATH PALIHAPITIYA IS THE outspoken and insightful founder of the venture capital firm Social Capital. He looks at the world very differently from most others, which is part of what makes what he says so interesting. He is not afraid to break eggs in order to make a successful omelet. His wealth is self-made, and his goals to improve society are admirable. Palihapitiya was an early member of the Facebook senior management team, and he was Facebook’s vice-president of growth, mobile, and international. Prior to joining Facebook in 2007, he held senior positions at AOL, Mayfield Fund, Spinner.com, and Winamp. He graduated from the University of Waterloo with a degree in electrical engineering in 1999.
1. “Most people when they think about growth they think it’s this convoluted thing where you’re trying to generate these extra-normal behaviors in people. That’s not what it’s about. What it’s about is a very simple, elegant understanding of product value and consumer behavior.”
Core product value means creating a real connection with someone. I think now we all euphemistically call it the “aha” moment with the consumer. But also the power of how these communication networks, when they develop, create real entrenched usage and scale, and how these things can just dramatically accelerate adoption and engagement.
After all the testing, all the iterating, all of this stuff, you know the single biggest thing we realized [at Facebook]? Get any individual to seven friends in ten days. That was it. You want a keystone? That was our keystone. There’s not much more complexity than that.
It’s not just top-line growth. It’s acquisition, engagement, ongoing product value. It’s understanding the core value and convincing people who may not want to use it.
What we did at that company was we talked about nothing else. Every Q&A, every all-hands, nothing was spoken about other than this. Monetization didn’t really come up. Platform came up but again in a secondary or tertiary context. But it was the single sole focus. But because we had defined it in this very elegant way that expressed it as a function of product value, it was something that everyone could intrinsically wrap their arms around.
Knowing true product value allows you to design the experiments necessary so that you can really isolate cause and effect. As an example, at Facebook, one thing we were able to determine early on was a key link between the number of friends you had in a given time and likelihood to churn. Knowing this allowed us to do a lot to get new users to their “aha” moment quickly. Obviously, however, this required us to know what the “aha” moment was with a fair amount of certainty in the first place.
There is no substitute for delivering core product value to the customer, which Chamath says is far harder and occurs far more rarely than most people imagine. He is adamant that metrics measuring factors that do not relate to core product value, like the number of invitations sent to friends on Facebook, can be not only distracting but harmful. For Facebook, Chamath says the keystone was to “get any individual to seven friends in ten days.” Once that keystone was achieved, Facebook customers were receiving enough core product value that they were unlikely to churn and more likely to recommend the service to others because they had experienced their “aha” moment about the value of the service. If the founders of a business do not know what the “aha” moment is for their product or service in the first place, they are highly unlikely to succeed. Getting distracted by theories about monetization, virality, or other factors can be an impediment to creating the scalable connections with customers that create operating leverage.
2. “At Facebook, to generate growth we actually just looked at a lot of data, we measured a lot of stuff, we tested a lot of stuff, and we tried a lot of stuff. Now that masks over a lot of more nuanced understanding, but at an extremely high level that’s really what we did. What’s shocking to me is when I see a lot of products out there, it’s unbelievable to me that people are trying to shroud products in this veneer of complexity. Measure some shit. Try some shit. Test some more shit. Throw out the stuff that doesn’t work. It’s not that complicated.”
Chamath is saying that a business must measure the right things if the process is going to be useful. What a business measures as a keystone must capture its core product value. For example, measuring daily active users is not the right keystone since this measure does not capture core product value. The Internet entrepreneur Justin Kan once tweeted, “Startups mostly don’t compete against each other, they compete against no one giving a shit.” If a business does not deliver core product value, no one will care, and notifications or invites will be viewed as spam.
3. “Most people and most companies can barely get one thing right. We all kid ourselves about doing so many different things, but there is a value to focus, which is that it constrains optionality and it forces you to have clarity of thinking. Because otherwise what happens is you have all these outcroppings of people within a company who can have their own anecdotal point of view about any kind of random thing. If they practice that rhetoric enough, they sound like they know what they’re talking about. Then what happens is you invariably try a bunch of different things, and then you end up nowhere. But if you constrain the problem to say there’s one thing, it forces everyone to be an expert or know that one thing, then speak intelligently and most importantly factually about that one thing.”
Anyone who has worked at an actual business knows there are challenges inside every company. Nothing is ever perfect. Maintaining focus is essential. Clarity of thinking and action is powerful when done right. The famous CEO Jim Barksdale likes to say, “The main thing is to keep the main thing, the main thing.” Every business has a profit engine that lies at its core. And that engine is invariably simple if you strip away everything extraneous. Two former Barksdale colleagues have written about the “main thing” principle:
We loved that expression when we first heard it from Barksdale, who was then the COO of FedEx. That single sentence captures the greatest challenge that executives and managers face today: keeping their people and their organizations centered on what matters most. Every organization needs a Main Thing—a single, powerful expression of what it hopes to accomplish. Without it, it’s not possible to align the four elements that produce organizational efficiency and effectiveness: strategy, people, customers, and processes.
Founders today typically discover their main thing through data science. They look at their business and search for the core product value that Chamath is talking about. One example comes from Pinterest, which the venture capitalist Sarah Tavel describes on her blog as follows:
The growth team then created and executed on a product road map that poured new users into the top of our sign-up funnel. The problem was that while monthly average users (MAUs) did increase, we had a leaky bucket. While the growth team was pouring people into the top of the funnel and the product teams were focused on increasing engagement of existing users, no one was responsible for making sure those new users became engaged, productive users. Realizing this, the team shifted their focus from MAUs to increasing the number of new weekly active pinners (the people who use Pinterest to pin or repin something new on the site that week — Pinterest’s core action).
4. “Users are only ever in three states: they’ve never heard about it; they’ve tried it; and they use it. What you’re managing is state change. So the framework is, what causes these changes? The answer should be rooted more in preference, choice, and psychology than in some quantitative thing.”
What I want to hear about are the three most difficult and hard problems that any consumer product has to deal with. How to get people in the front door? How to get them to an “aha” moment as quickly as possible? And then how do you deliver core product value as often as possible? After all of that is said and done, only then can you propose to me how you are going to get people to get more people. That single decision about not even allowing the conversation to revolve around this last thing in my opinion was the most important thing that we did.
I hate the term “growth hacker.” There are a lot of snake-oil salesmen in this field. Let’s not create some wizard-behind-the-curtains thing about this concept called growth hacking. It existed well before me. It’s called product and marketing.
One of the more interesting things happening today is how businesses generate these three phase changes Chamath describes (they’ve never heard about it, they’ve tried it, and they use it). Slack CEO Stewart Butterfield has said,
I think we can get away with not having a sales team in any kind of traditional way probably forever. This is how we have grown so far, and we’d like to continue this forever, which is that people really like it and so they tell other people about it, and then other people start using it. And that’s by far the best because when someone you trust tells you that this thing is good, then you’re much more likely to be inclined to use it.
5. “(1) Approach with humility; (2) have strong opinions but weakly held; (3) change your mind a lot; and (4) experiment and iterate.”
Encountering high levels of risk, uncertainty, and ignorance is inevitable, especially when it comes to anything related to technology. Being humble is a great way to stay within your circle of competence and avoid dysfunctional heuristics like “person-with-a-hammer syndrome” and overconfidence. Having strong opinions is important since they tend to mean you have developed strong arguments to your views. But at the same time, those strong views should be weakly held, because otherwise you may become a victim of dysfunctional thinking approaches like confirmation bias. The justification for changing your mind a lot has to do with being able to profit from convexity.
6. “Success begets more success.”
Cumulative advantage is everywhere in the world today if you know how and where to look for it. This “success-begets-success” phenomenon has always existed, but not in terms of the magnitude of its impact. Once the world went digital and was increasingly connected by networks, the impact of cumulative advantage accelerated. Chamath’s life is particularly interesting in no small part because he was involved in one of the most striking versions of cumulative advantage in business history (i.e., Facebook) and is funding many other firms through Social Capital that benefit from the phenomenon. Even the Golden State Warriors benefit from cumulative advantage since the more success the basketball team has, the more great players (particularly great team players who want to win) want to play there. Additionally, the more success a team has, the more revenues rise, which enables more success (the cycle of which repeats). A business can generate benefits from cumulative advantage in just the same way as a basketball team.
7. “How to pick a VC: (1) Must be a good picker; (2) must create interest from others for follow-on; (3) can help you grow; and (4) is morally aligned.”
A founder can’t afford to be in a situation where, in the absence of operational help, you could run out of oxygen.
You want to have a situation where your venture investors have the benefit of the doubt with other investors.
The reputation of a venture capitalist has significant signaling effects for other venture capitalists and potential employees. When uncertainty and fear are high, humans have a tendency to form herds and follow pack leaders. The signaling power of a great venture capitalist can get a business through a rough patch. If a business has raised money from a motley crew of investors and there are no leaders, or if times for that business get tough or uncertain, there may be no leader to step up and inspire confidence among the other existing investors or potential new investors. Founders essentially enter into partnerships with the venture capitalists investing in their businesses, so it is important to choose well. Chamath has said many times that if a founder is not morally aligned with his or her venture capitalist, big problems can result.
8. “The business model of the future is to serve individuals, because individuals are now relatively smarter. That’s not correlated with education, by the way—they are smarter because they have access to tons more information. And so we are all more connected, we are all more engaged, and as a result we are all more cynical. And we all see that the emperor has no clothes. That’s true of banking, that is true of people who run educational institutions, and it’s true of health care. So the model of the future is to basically deconstruct all of that and empower the edges. That is the way you build a multi-gajillion-dollar company. Give people individual power.”
Providing consumers with information that was formerly locked up in proprietary information systems means that consumers are at less and less of a disadvantage when purchasing goods and services since they no longer have less information than the provider. Quality goes up. Service levels go up. The bar is set higher. A big enabler of all of this is the mobile phone. Nearly everyone now has access to high-quality product information at all times, and the result is phenomena like showrooming (looking at the prices of other vendors online while you are in a brick-and-mortar store). Chamath is saying that the platform businesses that empower individuals are businesses with the potential to create huge value for investors and improve societal welfare.
9. “This is the time when people should be building really big, crazy things.”
It really comes down to a very simple thing, which is the principle of n of 1 versus 1 of n.
Chamath has a strong view that neither the venture capital industry nor founders are swinging for the fences enough with their investments of time and capital. In short, he thinks they are not being ambitious enough. He believes this so strongly that it is part of the investing thesis of his firm. He tries to find businesses that will become “foundational layers in society that can develop something discontinuous. When you put those things together, that allows a company to separate themselves from the pack, and eventually, everything falls away, and they’re an n-of-1 company.”
10. “We’re trying to coach our CEOs that the window dressing is both expensive from a cash perspective and tremendously expensive from a culture perspective. It distracts the team from building what they need to build. Don’t waste money on things that get away from your mission, which confuse employees about why they’re actually there. Meaning, the quality of the office and the quality of the food are all part and parcel of a lack of discipline, which speaks to the fact that the mission isn’t compelling enough.”
It’s fine to fail. But if you fail because you didn’t have the courage to move to Oakland and instead you burned thirty percent of your cash on Kind bars and exposed brick walls in the office, you’re a fucking moron.
The company builders are just cheap, they’re just grimy, and just, shitty office space, and they’ve got to keep it under 8 or 9 percent of their total burn, and they find people who really, really believe in the thing they’re making, and they decide to just live in Oakland and pay for Lyft, and it’s still cheaper. They do all kinds of creative things that deserve capital so they can build. So it forces us to ask those questions like “How are you really company building?” And that’s how we get the truth on who’s going to stand the test of time.
Every penny not spent on achieving a business’s objectives is not only wasted, but a potential contributor to a cash deficit that can kill the business. The only unforgivable sin in business is to run out of cash. People driven to build a business (i.e., missionaries) do not spend on fluff like free Kind bars since those expenses increase the risk that they will not achieve their goals.
11. “Poker is a microcosm of my own life.”
Michael Mauboussin likes to refer to the cigar-chomping gambling legend Puggy Pearson to illustrate a point about how there are similarities between playing poker and investing:
Born dirt poor and with only an eighth-grade education (“That’s about equivalent to a third-grade education today,” he quipped), Pearson amassed an impressive record: He won the World Series of Poker in 1973, was once one of the top ten pool players in the world, and managed to take a golf pro for $7,000—on the links. How did he do it? Puggy explained, “Ain’t only three things to gambling: knowin’ the 60–40 end of a proposition, money management, and knowin’ yourself.” For good measure, he added, “Any donkey knows that.”
Charlie Munger attributes no small amount of his financial success in investing to the time he has spent playing poker and bridge. Munger has said, “The right way to think is the way Harvard professor Zeckhauser plays bridge. It’s just that simple.” At a fundamental level, investing is just one form of making a bet. It’s essential, however, that the bet be made in a way that is investing (where net present value is positive) rather than gambling (where net present value is negative).
Investing is inherently a probabilistic exercise, and experience with other games of chance can be helpful. Richard Zeckhauser, who is a great bridge player, points out:
Bridge requires a continual effort to assess probabilities in at best marginally knowable situations, and players need to make hundreds of decisions in a single session, often balancing expected gains and losses. But players must also continually make peace with good decisions that lead to bad outcomes, both one’s own decisions and those of a partner. Just this peacemaking skill is required if one is to invest wisely in an unknowable world.
Warren Buffett also believes that bridge shares many characteristics with investing:
Every hand is different and yet what has happened in the past is meaningful. In investing you must make inferences about every bid or card and cards that are not played. Also, as in bridge, you can benefit from having a great partner and having strong interpersonal skills. Understating probability and statistics is essential in card playing, business and investing.
12. “The qualities to look for in a founder include very high IQ; strong sense of purpose; relentless focus on success; aggressive and competitive; high-quality bar bordering on perfectionism; likes changing and disrupting things; new ideas on how to do things better; high integrity; surrounds themselves with good people; cares about building real value (over perception).”
We try to find businesses that are technologically ambiguous, that are difficult, that will require tremendous intellectual horsepower, but can basically solve these huge human needs in ways that advance humanity forward. Those things don’t necessarily take lots of money, but they generally do take lots of time. And they require really mission-driven people.
Chamath’s list of attractive founder qualities speaks for itself. On the last point, this book repeatedly makes the point that mercenary founders are not as likely to care about building real value as missionary founders. Why repeat the point? Because it is so important and universal. You do not hear any venture capitalists say, “Wow, I really like to invest in mercenary founders who are starting a business to get rich.” People like Chamath believe that missionary founders are naturally aligned with the interests of their investors and customers. Creating a startup is such a challenging endeavor that having missionary founders significantly increases the probability that the company will prosper, and that is because of this alignment. Chamath puts it this way: “What you value is what you achieve.”