Category: Tweetstorms

Tweetstorm: Platforms and the modern means of production

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The Hey vs. App Store dispute is a manifestation of Karl Marx’s ideas about the struggle between capital and labor, updated to a 21st century world in which a platform, rather than a factory owner, controls the means of production and distribution.

If “capital vs. labor” defined politics for the last 150 years, then we are now entering the era of “platform vs. participant.”

The parallels are striking between Marx's ideas and the battles playing out today among platforms vs. developers & platforms vs. workers.

Marx’s recommendations have obviously led to catastrophic outcomes, and I’m not endorsing abolishing private ownership (I’m a VC after all).

But history rhymes, and his work serves as a useful lens for the events and powerful actors of the present.

Das Kapital, published in 1867, remains hugely influential because it seeks to scientifically explain how capitalism works and its role in shaping modern society. It is the most cited book in the social sciences published before 1950.

In it, Marx lays forth an explanation of how capitalism works, based on what he observed from the Industrial Revolution:

The capitalist class—a select number of individuals—controls the means of production (factories, machinery, etc.), and employs workers who make goods.

The worker produces widgets, which the capitalist then sells for a profit. Meanwhile, the worker doesn’t retain any ownership of his output, and feels alienated because he’s merely a cog in the production process and has no agency over his work.

The capitalist’s profit represents the difference between the value of workers' output & their wages.

Capitalism, Marx argues, is inherently exploitative because the capitalist’s lever to extract more profit is to widen that gap: pay workers less than the value of their work.

How do these ideas from Das Kapital relate to today? As the US economy shifts away from manufacturing and to services, and from traditional employment to platform-mediated 1099 work, this struggle between capital vs. labor takes a new form, becoming platform vs. participant.

Instead of a factory owner controlling the means of production, today, platforms are gatekeepers of production and distribution, with developers & workers giving up a portion of their income, as well as some degree of control over their own product and end customer relationships.

Apple’s 30% “tax” is the prominent example currently in the headlines—but there are many more "taxes" all around us. Marketplaces commonly charge a rake: Uber charges >20%, Grubhub 5-15%.
Even SaaS fees can be seen as a limiting factor for accessing means of production.

Bill Gurley discussed platform rakes on his blog: “Most venture capitalists encourage entrepreneurs to price-maximize […] There is a big difference between what you can extract versus what you should extract.” http://abovethecrowd.com/2013/04/18/a-rake-too-far-optimal-platformpricing-strategy/

Today, the clearest form of "rake" in most people's lives is taxes, paid to the government. The issue of how much people should keep is an issue that splits the globe.

With a growing 1099 economy, income increasingly comes from platforms that decide how much workers get to keep. If the passion economy encompasses 100M people in the next 10 years, the question of rake is going to be the “capital vs. labor” dispute of our time.

UK's Labour Party was formed in 1900 to advocate for workers' rights. What will be the 21st century variant in a platform world?

Despite being widely vilified in modern times, Marx’s ideas have left enduring, widespread legacies that many people find welcome. Since the Industrial Revolution, the advancement of workers’ rights stems from his ideas on the struggle between capital vs. labor:

  • Anti-trust laws, first passed in 1890, curb concentrations of power that interfere with trade and reduce competition
  • The FLSA of 1938 created the 40-hour work week and prohibited child labor

These laws address the evolving limitations of the capitalist mode of production.

What is different today from Marx’s mid-1800s world is that the internet has, in many ways, democratized access to means of production, making everyone able to become a micro-capitalist.

Not everyone can own a factory, but everyone can start a blog, launch an e-comm store, etc. Learning to code is one such means of production that modern workers can wholly own. With code, workers can make products that they own and exercise creativity and imagination (an antidote to alienation).

Instead of Marx’s prescription of common ownership of means of production, with surplus value redistributed to society, another path is emerging. Everyone can now have access to means of production, own their output, do work that’s fulfilling, and accrue profits to themselves. Podcasts and email newsletters are examples of gatekeeper-less ways to produce something. Social media platforms democratize the ability to market and find audiences.

The accessibility of new passion-oriented means of production is outlined in my blog:

The Passion Economy and the Future of Work

But just as the capital-controlled system entailed risks for workers, the platform-mediated model does, too. Individuals can get “de-platformed,” workers can be banned from marketplaces, and platforms like Apple can levy a 30% take rate on in-app purchases and subscriptions.

The Apple/Hey case has captured widespread attention due to Apple’s scale: the iPhone has an install base of 200M in the US and the App Store is tightly controlled. Apple is a major gatekeeper of the “means of production” if you want to make something that reaches 45% of the US.

Unlike the capitalists of Marx’s time, platforms’ dominance comes not from access to raw materials or machinery, but from network effects. Developers don’t have to build for Apple: they can sell their software on the internet or on other mobile OSs. But developers want to build for the platform that has the most users, and workers want to be on the platform with the most demand. That means platforms are effectively the new limited means of production.

The Austrian school of economics’ critique of Marx is that profit represents capitalists’ compensation for sacrificing present consumption for future gain—they deserve to capture the surplus value. It’s unquestionable that those who built and own platforms and marketplaces have taken on risk, created important infrastructure, and created value for society:

  • There are 2.2M apps on the App Store, and Apple paid out $35B to developers in 2019. That’s tremendous value creation for consumers AND developers
  • Uber enabled 1.7Bn trips to be taken in Q1 ’20. These are transactions that would not have occurred without the platform

There are many more examples where platforms created massive value for society. But the perennial question (which harkens back to capital vs. labor) is: how much platforms should take vs. participants? How consistently should rules be applied?

Marx’s work neglected to focus on the end consumer, and instead hones in on the capitalist and the worker. But the struggle between platforms and participants ultimately spills over into consumers’ lives, manifesting in the prices they pay and the services they can access.

Various people have conjectured that one of the invisible consequences of Apple's policies is the universe of apps that don’t exist because they can’t profitably operate under a 30% rake.

The marketplace counterpart is all of the non-producers that never sign up—that consumers can’t access—because of the platform’s take rate. More on how new means of production enable non-producers to become producers in my blog: https://li.substack.com/p/how-the-passion-economy-will-disrupt

Given our new digital paradigm, we need to re-think platforms’ powers and responsibilities.

In a way, Apple is acting like a government—it enacts a tax. But with the power to govern, there also needs to be transparency around a set of rules and benefits for workers & consumers.

As we shift to earning more income online—mediated by platforms, SaaS tools, and marketplaces—we need to re-think what mutual protections and responsibilities look like for platforms, workers, developers, and ultimately, end users.

Not all communities are created equal

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Building a community can indeed provide a moat. But–I find many companies/brands/creators profess to have community, when they really just have customers or followers.

To have a truly defensible community, I believe the following need to be present: high intentionality, P2P interactions, & UGC content.

Hallmarks of “real” community:

1) Intentionality: Members seek out the community as a destination, not just as part of a broader platform’s feed

2) P2P interactions: Strong engagement and ties between members

3) UGC content: Members contribute content vs. just engaging w/ what’s broadcasted to them

More thoughts on community:

Future of Social

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I like this article by Sam Lessin on the future of social, but think there’s a big omission. Namely, one of the major opportunities in social is to first focus on helping creators monetize and own their audiences, then layering in social elements on top.

Companies here may not look like social products at first, but evolve in that direction. Take Substack, for instance: first launched as a paid newsletter tool, then added community features so that readers can engage with the writer & with each other: https://on.substack.com/p/new-on-substack-build-your-community

Creators are the ones that possess user attention & trust, and will be the central players for the next wave of social.

Community-as-a-Service, or how to monetize access

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As consumers desire greater control over how they spend their attention, an emerging biz model will be paying for ongoing access to *people*–or what I’ll call “Community-as-a-Service.”

There’s now lots of subscription services for high-quality premium content (Substack for newsletters; Knowable & Luminary for audio, etc). But for creators who lack the ability to sell something tangible, Community-as-a-Service enables monetizing *time* and *access*.

Examples of Communities-as-a-Service:

– Tools like InviteRobot & LaunchPass enable paid Slack groups

– Knowledge Planet in China allows KOLs to create paid groups & interact w/ subscribers

– Video games: people pay for status & attention in communities like Twitch, Fortnite, etc

The Community-as-a-Service model can combine paid subscriptions for access to the community itself, and tipping to express support/appreciation (including admins tipping community members for valuable contributions!).

Not every community can successfully charge for access. The paid model works best when there’s high intentionality (the community is a destination), desire for recognition within the community, peer-to-peer affinity & interactions, and potential for ongoing exchange of value.

For fans, the value prop is meaningful conversations and connection with each other and deeper engagement w/ someone they have affinity for. For creators, the benefit is being able to earn money and engage with fans, without having to produce something.

Deeper trends driving this:

– Creators have amassed audiences but lack ways to monetize it in a value-aligned way (not ads)

– Desire for creators to own user relationships directly

– Move towards curated micro-communities

– Value of experience over things

Paid Groups & The Passion Economy

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In the next few years, we’ll see more large communities moving off major social platforms where they originated + setting up their own independent properties, with built-in direct monetization models.

This is a fascinating example of the Passion Economy at work.

Some notable recent examples:

– Earlier this year, the 800k+ member subreddit Change My View–which promotes discourse around opposing viewpoints–launched its own website with custom features that go beyond Reddit’s capabilities

– The Woolfer, a FB group for women over 40 with 30K members, moved to a paid app/website. The reason? “This is a volunteer-run organization that has gotten too big, and we can’t sustain it anymore unless we make money” (h/t @juliey4’s great thread https://twitter.com/juliey4/status/1184264248874061824…)

The themes behind these moves to a dedicated property are:
– Outgrowing existing social platforms and needing additional product features specific to their community
– Lack of monetization options/viable business model for group creators on existing ad-driven social platforms
– In addition, various models have de-risked that consumers are willing to pay for curated, high-quality content/community (e.g. Substack, The Wing, etc).

The challenge will be to leverage existing horizontal social platforms for discovery & distribution, while giving a compelling enough value proposition so that power users move to a narrower, premium community.

It’s the 1000 True Fans idea in action.

What are other examples you’ve seen of this?

Pros and Cons of Managed Marketplaces

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Thread: We all know managed marketplaces (where the platform provides additional value-add in terms of intermediating the service delivery) can create a step-function improvement in user experience, but despite that, they can actually struggle to scale as businesses.

Examples of the functions that managed marketplaces often take on include vetting providers, handling logistics, or authenticating goods. This translates into a much better user experience, but can also mean greater operational overhead, lower margins, and difficulty growing.

The complexity of intermediating the transaction is not trivial.

Consider Beepi–a managed marketplace for used cars–which created an amazing user experience (90+ NPS), but ultimately shut down due to challenges becoming unit economic profitable in many markets. For Beepi, the costs associated with each transaction included rigorous inspections, free returns, delivery, and a guarantee to buy the car if it didn’t sell within a certain time frame.

In categories where services are viewed by users as commodities and/or users are especially price-sensitive, the open version of a marketplace often wins out over more managed versions.

For example, Craigslist and Thumbtack are much bigger businesses than marketplaces that have attempted to employ home services pros themselves and own the end-to-end experience.

But for more emotional categories that are more ongoing in nature or have variable outcomes, where each provider is meaningfully different, and the stakes or $ values are higher, the managed version often does better than the unmanaged version.

Here’s some examples where managed marketplaces have gained ground:
– Uber (more managed w/ centralized matching and pricing) vs. Sidecar (double opt in, no centralized pricing)
– Lambda School (managed) vs. open MOOC platforms
– Rover vs. finding a dog walker on CL/via WOM
– TheRealReal vs. unmanaged consignment marketplaces

What do these managed marketplace companies have in common?
1) Focus on a service category where users value the experience differential and are willing to pay a premium that offsets increased costs
2) Building software to improve efficiency
3) Focus on high AOV & high frequency

Another factor to consider is that labor/service marketplaces typically have more overhead than product marketplaces in terms of management.

That’s because every aspect of a service can be managed end-to-end, and there’s frequently a geo-specific aspect to the overhead, vs. a product marketplace can just manage specific aspects of the transaction (validation, logistics)–much of which can be outsourced / centralized.

With any unmanaged marketplace, there’s going to be variance in quality. For categories where there’s less tolerance for uncertain quality/experience and desire for more consistency/certainty, a managed approach can win out.

For founders, the key is finding a way to provide a more delightful, managed experience where it matters, but doing so scalably, leveraging software. For instance, designer goods marketplaces can reduce the # of items needing manual authentication by predicting which items are most likely to be fake.

In addition, validate that you can charge higher prices or increase take rate to cover the costs of managing the marketplace.

TL;DR: Managed marketplaces can create a step-function improvement is user experience, but they can be complicated to operate & challenging to scale. There’s a number of factors to consider in whether to go unmanaged vs. managed, and to what degree.
For more on managed marketplaces, see our blog post:

https://a16z.com/2018/11/27/services-marketplaces-service-economy-evolution-whats-next/

Enterprization of consumer

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New tools are emerging and focusing on *consumers* first. That’s because consumers today aspire to become businesses tomorrow. I’ll dub this the “enterprization of consumer.”

It used to be the case that software tools focused foremost on business customers, because they had business needs and could spend money on such products. In that vein, Canva, Shopify, Wix, etc. built multi-billion dollar businesses based on empowering and selling to a large number of SMBs. 

Now, a new generation of tools have users that are initially just regular individuals, but who want to grow into businesses in their own right. There’s an opportunity to engage users pre-”enterprization”, enable their growth, and capture greater economic value as they professionalize.

The recipe is to start with a very basic offering — something that might even look like just a toy — and, as customers grow and start to earn revenue and develop new needs, get pulled into additional product capabilities. 

By virtue of engaging users early and enabling them to start and grow their businesses, these products build deep workflow lock-in and loyalty, and have the potential to supplant existing b2b-focused platforms.

The undercurrent here is that digital platforms have enabled people to amass an audience, and so creates an opening to help individuals turn their unique skills/knowledge into a business, whether that’s through designing and selling merch, self-publishing, starting a podcast, or other means.

Some examples of the “enterprization of consumer”:

  • Instasize started as a free app for resizing IG photos, then realized much of their user base was comprised of “aspirational influencers” who want to uplevel + differentiate their content and grow their following. So they moved into premium features to help users achieve these goals, including filters and editing tools, as well as an inspiration map that helps users find photo-worthy/Instagrammable locations around the world. 
  • Substack helps individuals easily launch paid email newsletters. The tool is built to be intuitive enough for normal consumers to use, who can opt to make their newsletters free. At the high end, top creators on Substack are making $500K a year! In the old world, these writers would likely have had to join an existing media publication as their livelihood.
  • Universe enables people to create websites entirely from mobile in a few taps. As a result of being mobile-native, the user base skews young and international. Lots of the websites created w/ Universe are purely personal/just for fun–sites that people likely wouldn’t have built with SMB-focused website builders. You can imagine these mobile-native consumers staying with Universe as they grow and monetize, and the platform can capture more value by building out richer functionality and features.
  • CALA is fashion house technology that makes it easy to design, produce, and deliver custom apparel. Initially, the product was used by a lot of fashion design students and influencers to create one-off projects. As these creators grow into the next generation of fashion designers and launch their own brands, CALA grows with them and can capture more value through the managed marketplace.

The “enterprization of consumer” is all about starting off as a lightweight, accessible consumer product. But as those individual consumers grow into businesses — whether as influencer brands, writers, podcasters, streamers, etc. (jobs that don’t even exist now) — these tools can evolve to meet their needs. 

See my thread on the influencer stack here for related thoughts: https://twitter.com/ljin18/status/1088501349187182592?lang=en

What else have you seen like this?

Tweetstorm: The best marketplaces solve a demand need

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Thread: The best consumer marketplaces end up supply-constrained, because they tap into an incredible amount of demand. For instance, Airbnb, Lyft, and Uber have seemingly infinite demand since the product/market fit is so strong–and this demand puts pressure on supply.

Everyone talks about chicken-and-egg as if demand and supply were equivalent problems. But identifying a widespread user need and driving tremendous value for the demand side is what underpins successful consumer marketplaces.

Only once you solve a demand problem, and provide a 10x better solution than what existed before, do you have the luxury of being supply-constrained as a marketplace.

I often see early-stage marketplace founders, during the idea picking stage, focusing too much on the needs of the supply side. “Suppliers in [industry] need better monetization, more data, lower fees, etc, which is why we’re creating a marketplace that helps them with this!”

But the most successful marketplaces didn’t start by solving supply problems. Homeowners likely weren’t thinking pre-Airbnb, “I have a spare room and need to monetize it,” or car owners pre-Lyft, “My car is unused all day, I want to get paid for driving it around.”

Instead, these marketplaces started with acute, widespread demand problems.

They honed in on user needs that already existed–for affordable places to stay and convenient transportation–that were poorly or insufficiently met, and leveraged underutilized supply to fulfill the latent, excess demand.

“Chicken-and-egg” becomes “Supply, demand, supply, supply, supply.” Translation: identify a user problem, then bootstrap enough supply to make the marketplace valuable to initial users. Once there’s product/market fit, focus on scaling the supply side to meet all the demand.

In a marketplace, it’s relatively easier to attract the supply side because they’re economically motivated and will usually meet demand where they are.

Marketplaces can bootstrap supply by creating single-player tools, paying suppliers to join the network, or other tried-and-true tactics.

However, it’s more difficult to aggregate demand, and tremendously more difficult to create new consumer demand where it didn’t exist before.

Humans have remarkably stable needs throughout time and across cultures–for entertainment, belonging, acceptance, friendship, communication, shelter, etc.–but the particular solutions change and improve over time. So in building a marketplace, start with what the demand needs!

Thanks and for interesting conversations that inspired this.

Tweetstorm: The “influencer stack” and China’s influence incubators

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Thread: Looking at China illuminates just how nascent the US “influencer stack” is. While the US continues to debate whether influencer marketing is even effective, China has an entire industry of influencer incubators who work end-to-end to turn individuals into big businesses.

These influencer incubators do everything from selecting and grooming talent, managing and growing social profiles (including teaching how to apply makeup, pose, and livestream), to helping their talent launch their own brands and e-commerce stores.

Like VC firms that pool risk among different startups, these incubators–which take a cut of influencers’ sales–work with dozens or hundreds of influencers, though much of their revenue comes from the top few who gain massive traction.

These incubators can be extremely lucrative. The Hangzhou-based incubator Ruhan Holdings, which manages about 50 influencers, surpassed $158M GMV in 2017.

Its biggest star is Zhang Dayi, a fashion blogger who signed with Ruhan in 2014. Under Ruhan’s management, Zhang Dayi’s Weibo account grew from 250K to 4M+ followers in the first 18 months.

Her Taobao store–for which Ruhan manages all of the design, manufacturing, logistics, customer service, and inventory–is often among the top 10 grossing on the e-commerce platform. Her 2016 earnings: over $46M.

There are hundreds of such incubators in China, managing thousands of influencers. The recipe involves a combination of Weibo for growing social influence, Taobao for e-commerce, and a network of local manufacturers for producing products.

Contrast this with the dearth of turnkey options for US influencers today: While top influencers like Kylie and Rihanna have access to resources to help launch their own product lines, the mid- and long-tail of influencers are neglected by existing solutions.

Influencers in the US today have to do the complicated, fragmented work involved in bringing their own products to market–including finding designers or cosmetic chemists, manufacturers (potentially in other countries), logistics providers, and other parts of the value chain.

Part of the reason for the gap between the influencer ecosystems in China and the US is proximity to manufacturers, and social platforms and marketplaces that make it easy for influencers to promote and sell products.

In the US, while Instagram enables users to build a following, it lacks features to help them monetize that audience–like easily linking out to stores/products, integrated purchasing, or direct follower monetization.

If the past few years were about brands & retailers turning to influencers as a new marketing channel, the next few years will be about influencers bypassing 3rd party brands/retailers entirely, spurred by new platforms that let influencers take charge of their own monetization.

That could take the form of launching their own branded products, monetizing fans directly, or something else.

With consumer affinity for influencers only growing, I’m bullish on the future of companies in the “influencer stack.” Would love to chat with any entrepreneurs who are working on this!

5 Things to Look for to Make E-commerce Startups Work

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There are over 400 startups trying to be the next Warby Parker, but history shows that 90%+ of e-commerce companies will fail. What separates the successes from the failures? Here are 5 things I look for to figure out if an e-commerce startup is a good opportunity –>

1. Does it have defensible, scalable acquisition channels?
2. Is it operating in a category that is well-suited to brand building, and if so, has it built a brand that people love and trust?
3. Is it selling a unique product that not everyone can offer?
4. Does the business have network effects?
5. Are there economies of scale that can be captured ahead of later entrants?

Unpacking each one of these:

1. Customer acquisition: It’s unsustainable to rely heavily on paid acquisition channels to grow, as the margin ends up being bid away.

Instead, does the company have unique, scalable ways to reach new consumers, e.g. a devoted community who spreads the word, or exclusive distribution channels?
Dollar Shave Club’s launch video was a major accelerant for customer growth, and cost just $4500 to produce. While viral videos aren’t an uncrossable moat, it was an advantage that helped build up brand awareness cheaply, and enabled DSC to reach scale first.

2. Brand: Brand as defensibility exists for a lot of companies–but not all product categories are suited to building strong brands, and brand defensibility is also difficult to assess in the time frames that map to venture investing.
Brand as defensibility works better in categories where there is a big emotional component to the purchase, where a sense of identity or community is intertwined with the brand, e.g. categories like health, cosmetics, or anything aspirational.

Whitelabel a Glossier/Chanel/La Mer product, and chances are women won’t covet them nearly as much, even if the contents inside are the same. See my tweetstorm on the shifting power balance between brands & aggregators–and where the opportunities are:

3. Product: Does the startup have defensibility in terms of creating a proprietary product that others don’t have the ability to create, whether that’s derived from better design, deeper customer understanding, or manufacturing moats?

As an example, Hubble Contacts found that the vast majority of the contact lens market is controlled by a few manufacturers. Hubble was able to establish exclusive supplier relationships that blocked other contact lens startups from scaling in the US.

4. Network effects: There are various flavors of network effects in e-commerce. Marketplaces, obviously, improve with more buyers and sellers.

But even a single retailer or brand can have network effects. Stitch Fix’s algorithms for predictions and recommendations improve each time a customer reviews the items their stylist chose for them, leading to greater retention and LTV.

5. Scale effects: Amazon is the archetypal example of a retailer that thrives on economies of scale. As a startup example, Rent the Runway purchases expensive designer apparel and accessories, amortizing that cost over multiple rentals from different customers.

With greater scale, RTR can increase utilization, expand its inventory, and lower prices, making it harder for another women’s rentals startup to compete.

Not every company will be a ‘yes’ to all of the above, but more of these being true can indicate a stronger opportunity.

There’s also interactions between these: Strength in one regard can compensate for the absence of another. A manufacturing moat in a large category means establishing a beloved brand is less important. A strong distribution advantage can be investible in and of itself.

Obviously, building a great company and making investment decisions is more nuanced than just 5 factors. It’s apparent that there’s still tons of exciting opportunities left to build great e-commerce companies, and I’d love to chat if you’re working on one!