Frameworks v0.1

Analysis of different engagement models for internet businesses. Where and how is the value generated for the user? How is the creator for value delivered compensated?

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Frameworks v0.1

Analysis of different engagement models for internet businesses. Where and how is the value generated for the user? How is the creator for value delivered compensated?

startup, technology, internet, business, social media

FRAMEWORKS v0.2

Many of the thoughts in this document draw on and synthesize concepts from economics, math, physics, chemistry, biology, and psychology. Here are a handful of core concepts that are often relied on as inputs:

* Activation energy

* Behavioral economics

* Cognitive biases

* Darwinism

* Entropy

* Game theory (particularly Repeated Games)

* Moral Hazard

* Nudge Theory

* Potential and kinetic energy

* Predation

* Price elasticity of demand

* Probability theory (particularly Expected value)

* Prospect theory

* Social psychology

* Supply and demand (particularly Economic equilibrium)

* The invisible hand

* Thermodynamics

ATOMIC VALUE SWAPS

An Atomic Value Swap is the measurement of the sustainability of repeated core transactions in an ecosystem. Payment for goods or services is an example of an atomic value swap, one where cash is exchanged for an item or service. Both parties deem the transaction to be beneficial and therefore the transaction occurs. If the price of a product or service is too high, the buyer will not engage in the transaction.

Secular to secular (money/goods/services) atomic value swaps are easily understood by the market clearing price of the exchange. Secular to sacred atomic value swaps are significantly more complicated to understand as behavioral psychology tends to skew expected reactions from supply or demand to changes in the transaction.

This extends best to less tangible exchanges as a concept to understand non-monetary transactions. For example, asking for an invitation to a new product is exchanging fractional social indebtedness for a scarce resource.

The three questions that help me ring fence the atomic value swap in any situation are:

* What is the value being delivered?

* What is the perceived value of what is delivered?

* How fairly compensated is the creator for value delivered?

Examples:

Instagram has two main atomic value swaps with its users, one to creators and one to consumers. Creators of content expend time and energy in the form of work in exchange for distribution and building an asset that can be monetized (audience). Consumers are willing to view ads in their consumption experience in exchange for entertainment. A third atomic value swap exists to advertisers, which is a typical secular-to-secular exchange of money spent on advertising (“ROAS” / return on ad spend).

Smaller atomic value swaps exist at the product feature level. The action of liking a post is a consumer expending a fractional amount of work to essentially “thank” the creator (and a small amount of social signalling, but to a lesser degree). Such an exchange would not occur if the hurdle to thank the creator was too high. By reducing the friction to engage in the interaction low enough, the atomic value swap occurs and is sustainable.

BUSINESS MODEL—PRODUCT FIT

“Business Model—Product fit” is just as critical for a company to succeed as “Product—Market fit.” Optimal Business Model—Product fit is the company level version of the Atomic Value Swap.

Examples:

Marketplaces generally take 20% of every transaction that occurs on the platform. Why has the invisible hand determined that 20% is the correct take rate for marketplaces? It’s important to understand the alternative to marketplaces and what they offer to the supply-side, which typically bears the cost of the fee rather than the demand-side. The marketplace offers pre-existing demand to incremental supply. A would-be supplier on a marketplace can rest assured that if they put their correctly-priced goods or services on a liquid market that demand will show up and transact. It’s not unusual for companies to spend approximately 20% of their top line revenue on marketing, which is essentially demand generation. If the supplier were to outsource all of their demand generation to a single entity, that entity would be entitled to collect what would otherwise have been spent, or about 20%.

OnlyFans’s innovation was one of business model—product fit. Credit card chargeback rates on adult sites were too high for payment gateways to incur the cost themselves. As a result, many payment gateways categorically refused to service adult content sites. OnlyFans internalized this additional chargeback risk and passed it on to its users in the form of a higher take rate. In a normal environment, a 20% take rate without delivering demand would be unsustainable.

FRAMEWORKS WITHIN BUSINESS MODEL—PRODUCT FIT

LOW ACV (AVERAGE CONTRACT VALUE) DEMAND CANNOT REQUIRE EDUCATION

If the expected economic return on an acquired customer is low[a], any acquisition path that requires education of that consumer to the virtues of the product will inevitably lead to failure unless a macro tailwind or zeitgeist eventually eliminates the educational cost[b][c][d][e].

HIGH ACV DEMAND MUST REQUIRE EDUCATION

This is enterprise sales in a nutshell. If the addressable demand for a product with high ACV did not need to be educated about the virtues of the product, market forces would naturally give way to a competitor who charges a lower ACV and acquires customers more effectively. If a high ACV product “sells itself,” the producer should anticipate lower cost competitors to enter the market.

USER-GENERATED CONTENT > EDITORIALLY DRIVEN CONTENT FOR AD-DRIVEN PLATFORMS

It is impossible to compete for the same ad dollars with a product that has strictly higher COGS (cost of goods sold).

Examples:

The ongoing crisis of how to sustain the business of journalism in a post-internet world was born when news moved online and began competing for the same advertising dollars as UGC platforms. Prior to the shift, news publications were very attractive businesses with a large market share in advertising and a healthy paid consumption model (see NYT[f][g] revenue collapse and slowly recover through the focus on subscription)

EDITORIALLY DRIVEN CONTENT > USER-DRIVEN CONTENT FOR SUBSCRIPTION-DRIVEN PLATFORMS

No user-generated content platform that offers distribution (and not monetization) to the marginal content creator can succeed with a paywall.

Examples:

Netflix and Spotify are great examples of paywalled content that primarily offer monetization to their suppliers. Medium is a good example of a failed paywall because its original value proposition to supply was built more around distribution than monetization.[h][i][j]

THE SEVEN DEADLY SINS ARE ACTUALLY THE SEVEN CORE MOTIVATORS

All successful consumer-facing companies appeal to one or more of the seven deadly sins. They are time-tested core motivators that incentivize people to do things (the fact that they have survived for all of time without any edits is proof of their power). There are no successful consumer companies that do not appeal to any of the seven deadly sins.

Different motivators can apply to different constituents within each company, even different behaviors from the same constituent.

Examples[k]:

Sloth: Uber, Amazon

Pride: Instagram, Tik Tok

Gluttony: DoorDash, Netflix

Lust: Tinder, OnlyFans

Envy[l][m][n]: Pinterest

Wrath: Twitter

Greed: Bitcoin, Robinhood

Sloth tends to be the easiest to monetize because the end user places a fairly consistent price on the trade off between money and time (convenience). Pride is also easy to monetize—see framework on elasticity of demand and Maslow’s Hierarchy of Needs. Gluttony is straightforward in its monetization as it is rooted in consumption. Lust, while easy to monetize, has historically been confused with long-term mate finding, a seemingly impossible atomic value swap that has plagued dating websites. Envy is slippery to monetize, as the challenge is how to own the point of purchasing decision (the path from inspiration/envy to a monetizable transaction can be long and convoluted). Wrath is a very difficult sin to monetize and often manifests through in-group/out-group dynamics. Greed is the hardest of all sins to monetize, naturally so as the user is loath to engage in a sub-optimal transaction[o][p], and will prefer to be monetized via any other sin (i.e. sloth in the form of performance fees).

WHY “WHY NOW?”?

Venture capital is a very specific instrument that is purpose built to fund companies that are capable of explosive value creation over compressed periods of time. Concurrently, the invisible hand is a constant force that continually reduces the ability of any one company to generate outsized value. That means that venture capital is particularly well suited to finance companies that are capitalizing on “dam-breaking” moments—sudden changes in technology and regulation (and to a lesser extent, capital markets and societal shifts)[q][r]. Each time a new shift occurs, it is analogous to the formation of an unstable radioactive isotope. The radioactivity throws off a huge amount of energy in the form of capturable enterprise value, but is subject to half-life decay (the invisible hand’s movement). Over time, the isotope decays and eventually becomes lead, at which point no new companies can generate enterprise value from the shift. Without a sufficient answer to the question of “Why Now?”, any venture capital invested into the company or category is subsidizing company building that would be better served by alternative capital instruments (with a lower cost of capital, i.e. debt, etc.).

Examples:

A helpful metric to examine is “Enterprise Value Per Year,” which often elucidates the distinction. Since inception, Facebook has generated an average of $43B in enterprise value for every year of its existence (Google is $54B/yr, Apple is $50B/yr). Conversely, Disney has generated an average of $3.5B in enterprise value for every year of its existence, a full order of magnitude off (Nike is $3.9B/yr, etc.). To put this in perspective, L

Frameworks v0.1
Info
Tags Startup, Technology, Internet, Business, Social media
Type Google Doc
Published 18/06/2021, 05:19:23

Resources

Thiel on Progress and Stagnation
Scottish Tech Map
HW Startup Business model list