I recently read this newsletter around Thrasio, a company which runs a massive $300M revenue business by acquiring and managing private-label Amazon Marketplace brands. It seems a lot of the newer companies which are set to turn into behemoths are going to be much different than the previous ones. Daniel Gross has written an interesting post of the next generation of software startups here. For convenience, I will call the next generation successful startups as world 3.0 startups.
It's true that a lot of the newer companies which are growing rapidly are coming from unusual places. Companies like Thrasio are emerging from fragmented markets which people never thought had existed with so much money. This is common when observed with regard to a lot of the previous waves of business. However, this time it's especially unique. Web 2.0 startups and Mobile startups were different than web 1.0 startups, sure. But they were predictable. Some of them were not (AirBnB) but we'll go with the majority.
A lot of value in the next few years is likely to be in such non-obvious places. What's obvious has too much competition and quite easy to map. The non-obvious is defying a lot of the old rules of business and shaping a new trend. Unlike most other posts, I'll specifically be talking about distribution and strategy here:
We've been hearing this statement from the early years of the Internet. Fundamentally, the internet is fundamentally a distribution mechanism. Attention is the scarcest commodity in the world. And it's expensive. Companies in the 3.0 world are likely going to be community-led. CRED is a great example of this. CRED even calls its users 'Members'. Their hypothesis has also been very community-driven. CRED began by aggregating the affluent segment of Indian users and is gradually building up utility products on top. Their members are likely to use a financial product offered by them rather than a simple utility competitor because they're stuck to the community. When you own a utility, you own a part of the customer's spend. When you own a community, you own the customer. This is likely to be the case with a lot of ed-tech companies too. Great digital communities are a good alternative to the social setting in colleges.
Distribution-first is also the case with a lot of the major influencer-led brands that are popping up today. The ultimate benchmark ofcourse is Kylie Cosmetics. Influencers own distribution through attention and trust. The latter being a much larger force in India. I think we'll have a lot of successful D2C brands springing our from major influencers in each category. In essence, I don't mean social media influencers alone (although majority) but a lot of other key opinion individuals / influencers who may operate in different forms.
I suspect if you're a founder today, you're likely to succeed if you can build an audience before you build a product. The tailwind of having a few hundred people behind you is a great support for the ride you're going to have. Traction is also one of the primary metrics to get initial funding.
Considering Thrasio's example here, private-label brands have little to almost zero innovation on the product front. Value is in the brand, which is very intangible and hard to measure. I think a lot of new companies share this trait. They're operating on business models which are hard to understand in context of the previous winners. Consider FamPay, a payments app for teenagers. They're built on existing infrastructure and bank services. The customer segment is completely under-tapped as of now and there's a significant number of possible ways they can make revenue on top of the teenage customer segment. Weird model, but lot of potential because they own the teenagers. (And teens are the most active citizens of the internet)
Fragmentation —> Centralization gave rise to a lot of successful companies in the previous decade. Micro-services like cabs, events, travel, hiring.etc were all won by dominant marketplace platforms. I see a reverse loop at the moment. We're likely to step into a new era of fragmentation. Although ride-hailing is not something that will become too fragmented because it's inefficient (maybe to some extent) a lot of other things seem to. This highlights the broader trend of the creator economy. Dominant platforms arose because people were not good at handling their business. It was either too complicated or it was too new. But the Internet has been around for a quite a few years now. Companies like Gumroad and Substack are just the initial wave of creator tools. I wouldn't say that any of the existing platforms will die because the creator economy is primarily fueled by a power law (although the ratio is different as compared to other places with power laws). Not all services and products can exist without distribution through a platform. However, some of the better creators are realizing the importance of owning their distribution and experimenting with individual systems.
I hope to see a lot of companies like Thrasio doing useful businesses in fragmented spaces. Centralized markets are anyway too competitive to create breakthrough progress as a startup. The newsletter above also mentions how we may possibly have a series of brands for Substack newsletters, social creators, Shopify stores.etc In largely disorganized fragmented markets, a little bit of expertise and service can create a lot of value. In essence, this is micro-centralization within a centralized system of a platform (Amazon | Thrasio) Such companies are heavily platform dependent and their only hope is regulation to survive against platform control. Maybe companies like Rocket Internet will become a mainstream business type in the 2020s.
In education, we're seeing a new trend with big companies doubling down on their in-house education initiatives. The best example has to be Google. Based on what I've heard, they're even planning to provide advanced diploma/masters/skill courses besides the current ones. The broader trend here is the inbound approach to distribution. Maybe education will become a part of the job itself? Google will train you, fund you, hire you and grow with you. It's getting harder to recruit and maintain good talent (another distribution challenge) even for companies like Google and building an in-house approach to education probably makes it a lot more easier. This is also seen broadly in the VC space in India with the bigger funds starting accelerators and seed divisions (Surge. Deal flow was getting difficult for the bigger India-focused players and it made a lot of sense for them to build their own source channels.
The reliance on third party sources of distribution is slowly fading away. Why hire from college placements when you can run your own mini-school? The way platforms have been cutting out middle-men for consumers over the last decade, companies are cutting every entity that creates friction in their distribution process.
Considering the creator economy, there's a huge amount of money that's taken by middle-men. For these people, the new channels are anything that allows them to reach their users directly. Shopify, Substack, Spotify.etc are all the examples of this (maybe tools that start with S have an advantage). At an individual level, building in-house distribution for influencers and creators can be a huge opportunity in markets like India. In music labels, T-series has a monopoly, maybe someone can challenge them in the digital space.
At large, there's been a lot of debate around the feature-ization of products by larger companies. Companies that own distribution can seamlessly eat up useful products by converting them into features. This is mostly a part of the Attention economy. Attention was primarily monetized in the previous decades by selling it to third-party promoters, the model was not only bad for a lot of businesses, it gave rise to a whole new wave of privacy concerns. Attention is likely to go in a different direction now. Companies can make more money building additional services on top of their attention moats rather than sell it someone else. A lot of it is based on additional financial services (Shopify Capital). Facebook can probably think of ways to generate revenue by cross-selling an up-selling useful services besides their ad model today. You'll even find Google pushing for such models on top of their search product. This is possible today because of the general economic growth of the Internet and growing applications of software.
The only viable way I think startups can defend from this feature-ization problem is to build a community. If you can build a cult following within the community, the members defend your brand like soldiers.
Concluding the question about world 3.0 startups, distribution's importance is growing at an exponential. Word of mouth is powerful and difficult to measure. Paid advertising just seems so bad at this point. People (team, customers, investors) are the most powerful force on the planet and they're set to play a bigger role in making companies successful now more than ever. Everything people-driven has a vector of quality distribution. Attention is scarce, distribution is quick, exposure is global. Previous moats will not remain strong enough. A series of new moats at a different level of abstraction will arise. That's a topic I'm curious to explore in the next few posts in this series. Do let me know your thoughts on this here. Shares appreciated 😀