Stealing Signs - Issue 44
The 3rd Party API Economy, Browsing eCommerce, Substack & Growth, Systematic Ideation for Startup and Venture Theses, & Collective raises $$
I recently joined the production team at the Growth Stage podcast. We pair an operator or entrepreneur with an investor to dive deep on a particular industry. Past guests include Noam Bardin (CEO of Waze), Eric Paley (Founder Collective), Philip Krim (CEO/Founder of Casper), Sophie Vandebroek (IBM Research COO), and Will Szczerbiak (Greycroft).
Check out the latest episode where Frank Rotman (QED Investors) and Leif Abraham (Co-CEO of Public) discuss the evolution of wealth management and implications of new fintech business models.
Please let us know what you think and if you enjoy the podcast, please rate and review!
Worth Reading
The Third-Party API Economy
Grace Isford, Canvas Ventures
A key distinction — many successful companies like Stripe or Twilio were API-first from inception, while others start with a non-API use case (e.g. Shopify with e-commerce back-end) but expand into APIs over time. The opposite is also true — API-first companies are strategically positioned to expand customer usage in other non-API products (e.g. Stripe Atlas, Shopify fulfillment, Okta lifecycle management.) Another interesting area of analysis is how companies broach the API to non-API product transition and the common attributes and strategies of those companies that successfully do so.
The two most striking realizations out of this piece are 1. Startup costs are lower now than probably anytime in history thanks to the plethora of API businesses, and 2. It’s nearly impossible to build a software product without coming in contact with APIs. To borrow and tweak Apple’s famous App Store slogan a bit, there’s an API for that.
One thread I want to pull apart is the commoditization of APIs. The market map above is quite busy, with multiple successful examples in each category. If you asked me how the API economy would shake out a few years ago, I would have guessed each vertical would be more or less a winner take all market. However, the opposite scenario seems to have played out. Its understandable that API categories like business as a service, health, and content management have seen multiple large players emerge, but less so for categories like fraud, verification, and messaging. Of course feature parity exists in each vertical, but I would guess less so for the latter group — the regulated, complex, high risk APIs that threaten the integrity of customers’ businesses more directly.
I’m glossing over some nuance in this analysis, such as the common competitive dynamics and customer segments, but I am interested in how API businesses in the regulated and high risk verticals compete with one another. Do these APIs compete more heavily on technical capabilities vs. workflow or user experience? I think so. I’m going to spend some time digging in here, and would love to hear from readers (or, Sign Stealers ;) ) with experience in API businesses.
Lastly, from the VC angle, the API business model is very attractive due to scale dynamics. API businesses grow alongside their customers. Stripe, for example, grows at a similar pace to transaction growth of their customers, which makes for a very steep growth curve if things go right. I suspect this is a key component of API businesses efforts to build a community of product evangelists, which Grace points out many of the best API businesses have done successfully. Because API business growth is closely tied to customer growth, the more customers they acquire the higher chance they have a customer that reaches massive scale. Yes, I know — duh, more customers = good. But, in this case, an API business takes somewhat of a VC approach, where their customers become ‘bets’ and one outsized customer can make up for a number of less successful customers.
Browsing eCommerce
Vivek Goyal, Altimeter Capital
…the one model that I am the most excited about is browsing e-commerce. Current leaders, Amazon, Alibaba or JD, are mostly search based — users know what they want, they search for it on the app, and find the product within the first scroll. Browsing e-commerce is a model where users come with the intent of having fun, much like going to a shopping mall, browse for products and end up buying things if they like. What Amazon is to buying, browsing e-commerce is to shopping.
Browsing ecommerce will win. It’s only a matter of time. However, I disagree with Vivek’s statement that the players who combine entertainment and ecommerce will win in the browsing eCommerce battle. There is much lower hanging fruit for browsing eCommerce players to tackle prior to implementing entertainment features. For example, as search-driven eCommerce gives way to browsing eCommerce, these companies will have to show people both what they definitely want and what they might want. In my experience, even with Amazon, there is significant room for improvement here. Further, eCommerce sites must surface products that the customer doesn’t yet know they want. This is the hardest of all and, though the internet and frictionless commerce increases the odds a customer will purchase any product recommendation, it doesn’t seem we’re quite at the accuracy level of Tik Tok’s algorithm, for example.
Another example is customer support. Basic on-site chat seems to be the bar to clear, which, frankly, is pretty low. The browsing eCommerce winners can implement features like live video chat customer support and live shopping concierge services to enhance the customer experience. My bet is we’ll the live, digital shopping concierge concept in US eCommerce within the next 2 years.
Substack, Growth and Why Casey Newton Should Be The Exception, Not The Rule
Don Richard, Product @ Shopify
Substack is not a distribution channel...yet. Most big name writers on the platform will have to rely on HAMs (horizontal attention marketplaces) like Twitter for distribution beyond their own subscriber-driven growth. Substack is come for the tools, stay for the tools.
This is my favorite analysis of Substack’s business model, their target customers, and limitations of the platform. Don points out the most important missing mechanisms of Substack’s platform: distribution and discovery. Substack is still a tool for writers, not a platform where users discover new writers nor a distribution channel through which readers access writers’ content.
Where Substack could become a platform, though, is with applications. An app store with Substack-native and 3rd party applications for additional capabilities may solve another significant risk for Substack, too: their business model, which centers on a 10% cut of revenue generated from writers with paid Substacks. Shopify is a good analogy here.
Shopify is eCommerce infrastructure much like Substack is email newsletter infrastructure. Shopify evolved into a platform by allowing 3rd party developers to build tools specifically for Shopify which are then listed in Shopify’s app store. Users can pick and choose which apps best fit their business needs and simply tack them on to Shopify’s infrastructure. Shopify takes a cut of all app transactions, which now accounts for a significant chunk of their revenue. Substack could build something similar to augment their generous cut of paid newsletter transactions.
While promising, this approach conflicts with Don’s position that big name writers are not Substack’s target customer. The writers who generate revenue from paid newsletters are likely those who would pay for 3rd party apps, not the long tail of writers who write free newsletters. If Substack’s target customers are these long tail writers, a 3rd party app store isn’t as attractive (though Shopify does serve SMBs, so the opposite case can be made that because Substack’s customers are the long tail of writers, an app store makes sense). If Substack continues to focus on writers with paid newsletters and large followings, a 3rd party app store could help convince more of them to sign on and evolve into a significant, even primary revenue stream over time.
Systematic Ideation for Startups & Venture Theses
Ali Afridi, Equal Ventures
4 — Fast Followers & Clones
Develop a business that is similar in value prop and business model to another that has been observed to be doing well.
This approach works especially well in non-winner-take-all-markets, regulated markets that make it slower to scale geographically, or in CapEx or service-intensive businesses where capital (financial or human) is a constraint to growth. Often the fast follower will target a different geography so as not to be a direct competitor on Day 1 although this is not always the case.
This post dissects 10 excellent mental models for startup ideas and venture theses. Each model identifies a gap in a market, competitive dynamic, user behavior, GTM strategy, or power structure to help build pattern recognition for how companies can emerge and grow successfully. A few of my favorites include 4. Fast Followers and Clones, 5. Unbundling, and 9. Backcasting.
Number 4, Fast Followers and Clones, is particularly interesting given the ease with which companies can provide an excellent consumer experience. This is to say that a world class product and great user experience alone do not always serve as a sustainable moat. There’s plenty of room for a fast follower to create a similar experience with a different business model, incentives, and user behavior. Robinhood and Public serve as good examples of the this mental model.
Robinhood pioneered day trading with an excellent, mobile-first product that instantly enabled access to the stock market for anyone with a smartphone. However, they’ve recently come under fire for incentivizing dangerous user behavior in part driven by their business model (selling users’ trading data to high frequency trading firms). Enter Public. They quickly rose to prominence with a similar product to Robinhood, but a meaningfully different business model and user behavior incentives. Their primary business models consist of a percentage cut of user account balances and, over time, a monthly subscription fee. Public also places education at the core of their mission, making significant efforts to teach users about how the stock market works, in stark contrast to Robinhood’s focus.
Another gap fast followers can attack is target customers. Robinhood targets people who already day trade or are generally interested in the stock market. Of course users outside of this segment have emerged, but it’s built for those target users. Public, on the other hand, targets people who have historically been left out of the stock market culture. In essence, they target everyone outside of Robinhood’s target customer segment.
It’s important to note that the reason Public was able to successfully execute the fast follower strategy is because direct to consumer day trading is not a winner take all market. As Ali mentions, this strategy works especially well in these market.
<stuff> Weekly
LOL Weekly: CEO Home Screen
lol so good
Funding Weekly: Collective
Collective is an online concierge financial platform designed to give self-employed people the technology and team they need so they can focus on their passion, not their paperwork.
Collective raised $8.65M from General Catalyst, QED Investors, Garret Camp, Scott Belsky, and Dylan Field, among others.
Collective is an excellent bundle for individual business owners — it’s the very definition of business in a box. Features of Collective’s bundle include a 1:1 with a tax advisor, a customized Quickbooks implementation, ongoing bookkeeping and accounting support, comprehensive tax guidance, Gusto (payroll tool) set-up and training, and benefits set up and guidance.
While this bundle is compelling, it includes both services and technology products. Collective seems to be more of a tech-enabled service than a software platform, which makes me curious about their margins. I’m also curious about churn — at what point do customers see declining value in the ongoing monitoring and support? Do they ever? Just how valuable is the set-up and implementation of the tech tools included in the bundle? I suspect they’ll see some churn after customers’ first 6 months to 1 year unless they begin to differentiate on the services, rather than the technology. This may seem counter intuitive, but Collective isn’t winning on the tech tools in their bundle. Rather, customers will choose Collective for peace of mind, most of which stems from the ongoing support, guidance, and expert consultations.
All in all this is a huge win for individual business owners and it will be interesting to see which products and services they roll out next — this should give us an indication of what users truly value in the Collective bundle.
Baseball Weekly: MLB Teams as Investors
Evan Demchick, Reboot Motion
PE firms are very focused on the price they pay. Angel investors focus more on the upside. They realize if an early stage firm grows and develops, the exit price will be the driving factor of returns.Â
Organizations should think similarly. Teams bottom lines will be far less impacted by cutting five and six figure expenses than they will be by extra seven and eight figure values found through scouting and player development.
It’s quite surprising how few MLB teams share the mindset Evan presents in this post — players as entrepreneurs vs assets. This is evident in the personnel moves teams make over and over — consistently signing high-priced or overvalued free agents vs. developing homegrown talent in their minor league system. The former approach treats athletes like assets, as PEs and Hedge Funds operate, and the latter approach treats athletes like entrepreneurs, as VCs and Angel investors operate.
Treating athletes like assets suggests teams undervalue undeveloped talent and overvalue developed players. Treating athletes as entrepreneurs suggests teams understand their players’ potential upside and the outsized returns (and capital efficiencies) associated with doubling down on their development. Save for the teams with bottomless pockets (Dodgers, Yankees), those that treat their athletes like entrepreneurs — investing in their development, aligned incentives, and focusing on upside — will not only outperform those that don’t in the long run, but will be better businesses, too. Evan pointed out to me that the Tampa Bay Rays have executed this strategy to perfection. They’re hyper-focused on player development and disciplined in free agency, and have achieved above-average results with roughly 30% of the average MLB team budget.
Art Weekly: The Great War
Gianni Lee
Hand knotted with wool, natural silk and a variety of exotic yarn, this item represents a collaboration between the work of celebrated modern artist Gianni Lee with Rug & Kilim’s custom collection, as well as one of the team’s most ambitious approaches to luxury rug making in the industry. Recapturing Lee’s tribal social commentary and his distinct, bold aesthetic inspired from hieroglyphs in a new medium, the silk’s natural sheen lures the eye to the vibrant blue and pink skeletal pictorials surrounding the arresting scene of anxiety and conflict, set fabulously against a texturally soft beige open field allowing the equally rich red and brown hues to pop in splendid juxtaposition. The stylistically masterful linework and sense of frantic movement comes to life in this unprecedented, large-scale approach and refinement unique to our team, seeking to honor the many-fasciated conversation and cultural exploration of Lee’s acclaimed work.Â
