“The reason the social-networking phenomenon is something that I invested in early and massively—I led the Series A financing for Friendster; I founded a company called Socialnet in 1997; I founded LinkedIn; and I was part of the first round of financing in Facebook—it sounds trivial, but people matter. The deeper thing is, it’s massively valuable if you can integrate and coordinate with other people in order to enhance their lives.” – Reid Hoffman
In my opinion (and with the power of hindsight), the best tech investments and acquisitions over the past 10 years have been network effect businesses. Whether it’s Youtube, Instagram, Netflix, or Airbnb, these initially misunderstood businesses have generated massive levels of value today.
While I haven’t had many opportunities to invest in these types of businesses at Relational Investors, I’ve spent a good portion of my investing career trying to understand them, their business models, and why they are so valuable. Even today I have a fondness for finding platforms at a reasonable price.
When it comes to analyzing platform businesses, one of the more interesting concepts I’ve adopted comes from Reid Hoffman and his seven deadly sins of social networking framework.
Social networks do best when they tap into one of the seven deadly sins. Facebook is ego. Zynga is sloth [laughter]. LinkedIn is greed. With Facebook, it’s vanity, and how people choose to present themselves to their friends. It’s the feeling of being connected. I like to emphasize the importance of the deep universal, psychological structure in people’s minds. Zynga is about fun. Fun is important. Fun is good. And to have the ability to do something fun for 10 or 15 minutes that’s right at your fingertips and involves your friends, well, that’s better than television in terms of social connectivity. With LinkedIn it’s taking control of your economic destiny and improving how you operate as a professional and how you can develop a competitive advantage. These are fundamentals for having a fulfilling quality of life.
The 7DS framework (all good frameworks need an acronym!) really helped me clarify and simplify the value proposition of all sort of technology companies over the years. I even wrote an anonymous Quora answer in December 2012 to What are the 5 hottest startups to watch out for in early 2013? using the framework:
- Lust – This is actually one of the more powerful categories to get users early on in a company’s life. While Reed Hoffman identified Facebook as Vanity/Pride, I’d argue early adopters had a Lust centric agenda. What I find interesting about this category is – aside from Tinder – companies that initially get traction via Lust eventually broaden their scope. The use case for Snapchat and Facebook are much different today when compared to their early days.
- Gluttony – From Grubhub to Blue Apron, food tech has gotten a lot of attention and capital the past couple years. I have no doubt there will be big winners in this category, but most players in the space will need to be hyper vigilant about their margin structure and operating efficiency as they scale.
- Greed – An extremely competitive category with many large (legacy) players. I do believe Fintech is ripe for disruption and initially focused on AngeList when first looking at Greed. Maybe I should have taken Bitcoin a bit more seriously. My bitcoin wallet would be in much better shape today if I did. I’ve made a lot of great calls and mistakes in this category.
- Sloth – This is my personal favorite and think there will be interesting opportunities around mobile/virtual assistants long-term. In 2012 I was looking at companies like Exec, Taskrabbit, and Postmates. Today we see all sorts of text-based services like Magic and services built on top of Slack/chat being launched.
- Wrath – I didn’t have have obvious names off the top of my head in 2012 but I felt start-ups focused on improving customer service would emerge. My views haven’t change from that perspective. I think we’re in the early stages of companies offering Sloth/Wrath type services to deal with all the things in your life you just don’t want to deal with (notably customer service). I’m actually surprised more companies haven’t built out better customer service infrastructure on top of Twitter, Yelp, etc. to service their customers.
- Envy – When I first looked at Envy, I thought On Demand Luxury best captured this category. Uber was on the rise and I expected to see more “Uber for [insert vertical]” start-ups. In hindsight, a lot of the “Uber for…” ideas attempted didn’t work because many of the verticals had margin and operating efficiency issues coupled with poor recurring unit economics.
- Pride – I believe the future of Pride are platforms that allow users or companies to demonstrate their value add. Companies like Github or Strava will lead the charge. As more people get comfortable with their online identities, I think the natural next step will be to demonstrate their passions and abilities online to differentiate. Start-ups and companies that can create the benchmarks people and companies use to measure themselves against will be big winners.
The main takeaway when studying the 7DS framework is not all sins are equal.
Each sin category behaves differently in terms of unit economics, growth, and other metrics. Sustainable outsize growth tends to feature Lust, Greed, or Envy. Sloth has great unit economics if tied to mission critical workflow. I haven’t seen many decent businesses built on gluttony or wrath (yet), but there are many phenomenal business built on benchmarking pride. Overall, most companies are a blend of 7DS but Reid Hoffman’s framework helps narrow down and focus on the key issues.