Invest Like the Best Episode 193: Better, Cheaper, Faster: Why Companies that Reduce Friction Win
"What is the most unique feature of your business?" The feature a company highlights in their answer is often what they are most focused on building or extending. The question then becomes, how hard will this feature be to copy as the business scales and attracts competition? It is a powerful and often revealing question that's useful for investors and entrepreneurs in search of huge financial outcomes.
Modest Proposal begins the interview by explaining that investing is about underwriting the future. Meaning that in order to see large increases in the value of an investment the investor needs to be able to see things that are not transparent or clear, and more often than not, look downright silly or even preposterous when making their market debut.
Think about Airbnb, back in 2008. How many people thought renting a room in their own home to a stranger, while they were still living inside of it was a viable option for revenue?
Preposterous.
What about Uber back in 2009? How many people back then were willing to get into a car with a total stranger, that didn’t have a medallion, and be driven to their destination?
However, when one takes a step back and analyzes what point of friction these two companies are solving, both of their business models actually make perfect sense. In both instances, the companies were removing friction from a historically painful experience. As a result, they enabled a non-linear change in behavior, signaled almost immediately by consumer behavior. Consumers began speaking with their actions and as a result, you have a clear indication of product-market fit.
Airbnb was solving the frustration caused by trying to find an affordable available room and board wherever travels may take a person. Uber was trying to answer the question of knowing when and where transportation will be available to an individual when and where they need it. There had to be a better solution than waiting for a cab on 5th Ave at 5:30 pm in NYC in the rain.
Two fundamental related components were necessary to make these companies the success they became. One is their ability to be hyper-focused on increasing returns at scale and two is, as their network of users increased they didn’t see a diminishing rate of return. In both cases they saw, after some early important pivots their respective TAMs explode and the revenues followed.
What is the point of friction your company is minimizing to make things 10X easier for your users? Why is that unique? Are you providing a meaningful experience to the customer?
Offering specific examples of reducing friction for your customers in several different business categories will be incredibly powerful and effective to any business.
Sources:
Podcast: Invest like the best Episode 193
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