How to create legal monopolies via network effects and economic moats

If there’s one thing that customers dislike, it’s the barriers in switching between competitive products. As customers, we want to retain our freedom. However, as entrepreneurs, we are incentivized to curtail that freedom. As I wrote earlier, head to head competition in a market pushes profits to zero. To make a profit, an entrepreneur needs to find a way to keep customers and competition away from each other.

There are two ways this separation can happen:

  • Prevent competition from entering into your market
  • Prevent customers from switching to a competitor

Obviously, these tasks are hard in a free market (and that is why market pays through the roof for companies with a sustainable competitive advantage). Unless you sell drugs, you can’t (and shouldn’t) hire an assassin to prevent competition. Nor, can you (and should you) threaten your customers with dire consequences if they switch. ...  Read the entire post →

Meta mental model

Mental models are shortcuts that help you think better. One of the most famous ones is Pareto’s principle which says that for many phenomena, 80% of effects come from 20% of inputs. Management consultants love mental models: BCG matrix helps you with manage a portfolio of businesses, Porter’s five forces model helps you think about competition and Peter Principle helps you understand why organizations become full of incompetent managers.

Mental models are abstractions of reality. They’re like proverbs. For example, “Actions speaks louder than words” tells us that revealed preferences carry more information than stated preferences (something economists now take for granted). It’s a fun exercise to go through popular proverbs and decide if these old mental models are still useful in our interactions in the modern world. ...  Read the entire post →

Speaking your mind is a public service

There’s a famous joke (that I discovered on Scott Aaronson’s blog). It goes something like this:

There’s a man standing in the Moscow train station, handing out leaflets to everyone who passes by. Eventually, of course, the KGB arrests him—but they discover to their surprise that the leaflets are just blank pieces of paper. “What’s the meaning of this?” they demand. “What is there to write?” replies the man. “It’s so obvious!”.

This joke gives a chuckle because without saying anything it points out how bad the living conditions were in the Soviet and how everyone knew that the conditions were bad. Yet, the Soviet Union remained in power from 1922 to 1991. How did it last so long when the public knew that central planning was devoiding them of progress? Surely, the large population (that included soldiers in the army) could have revolted against a few leaders. ...  Read the entire post →

Why startups need to be cult-like

Peter Thiel wrote in his book, Zero to One, that startups need to be cult-like. At that time, I didn’t completely appreciate his message, but now I do. By ‘cult’, I mean a group where members have values that are similar to each other, but extremely different from the outside world. Cults, as long as they don’t harm their members or others, are society’s exploration vessels. Because they’re cults, they obsess about arcane stuff that nobody else cares about. Most of the times, they keep it to themselves and rest of the world ignores them. But if they discover something valuable, rest of the world benefits.  ...  Read the entire post →

Staying relevant in a changing world

Many designers I know started their design practice by first practicing on Photoshop. Almost all marketers I know entered the field by reading articles on content marketing, Adwords, or Facebook Ads (SEO is long gone). Engineers in my day started learning web programming with PHP (apparently these days it’s Javascript / NodeJS).

Most self-made professionals get attracted to the methods and tools because they get immediate results. Want to do content marketing? Sign up on Medium, write an article and spread it. Want to write your first app? Use Bootstrap in the frontend and Mongo/NodeJS on the backend, and you’re up and ready in a couple of hours. Tools enable immediate gratification and that’s what makes them so attractive. ...  Read the entire post →

To get good startup ideas, look for anomalies

Most entrepreneurs are aware of product-market fit. It’s a good advice but I have an issue with the term “product-market fit”. It makes an entrepreneur focus on product first, market second. The words we choose to describe the world ends up shaping the world for us. This means not all “social networks” are the same and words you choose to describe an innovation has a significant influence on how much customers value it.

Repeated usage the term product-market fit, develops a mental model where the entrepreneur’s inclination is to make a product (or get an idea) first and then go out in the market to test it. In fact, that’s what Lean Startup and other methodologies suggest. Quick experiments and fail fast. ...  Read the entire post →

Details and structure matters: lessons from Facebook’s foundation in 2004

Continuing on the same theme as yesterday’s article on the winner-takes-all effect and the structure of network effects, today I dive deeper into the very early days of Facebook. By early, I mean the very week of Facebook’s launch on Harvard campus in Feb 2004. The early history of Facebook is interesting because when it launched Myspace and Friendster already had millions of engaged users.

Any explanation of the success of Facebook as a company that it is today will fall short. There are so many factors that explain Facebook’s current valuation of $500Bn that I’m not sure if a comprehensive account of that is even possible.  ...  Read the entire post →

Endowment effect in business

We value things we own much more than the things we don’t own. It’s called the endowment effect. This goes well with our intuition that other people don’t value our things as much as we do. But it isn’t just that other people devalue what we have. Experiments show that if we reverse the roles, our willingness to pay is much less for the same product that we were earlier owning (and were demanding a high price for).

How does this disparity in selling price and purchase price occur? It occurs because buyers don’t have perfect information about a product and cognitively what “jumps” in the mind of a seller is benefits of the product or service (while seller focuses on costs). ...  Read the entire post →

Nobody likes using technology

If you are an engineer, the title of this article may shock (or even offend) you. But if I rephrase, I’ll merely state what’s immediately obvious: people are motivated towards achieving their goals and technology is simply the means towards that end (and not an end in itself). This holds true even for engineers. When they get excited about new technology (say, a new programming language), they’re responding to their intrinsic motivations of exploration, competence, social acceptance (or even aesthetic appreciation).  ...  Read the entire post →

How to avoid cognitive biases when you get paid to think

One of the major findings in last 50 years has been what people had suspected all along: human thinking and judgment often isn’t rational. By this, I mean given a situation where someone has to make a decision, she will often take a decision that “leaps” to her immediately rather taking than a decision that incorporates the structure of the problem, data available immediately and the data that should be collected. In many cases, intuition and reasoning arrive at the same decision so it isn’t an issue. But, stating the obvious, in many other cases, intuition leads to a worse decision in retrospect. How often have you said to yourself: why did I NOT think of it earlier...  Read the entire post →