Supported by Greenhaven Road Capital, finding value off the beaten path.
Ali Hamed’s podcast with Patrick O’Shaughnessy was a wonderful hour+ of stories, ideas, and adjacent possibles. Among other things, I thought Hamed’s explained the value of understanding customers and establishing advantages.
Customers, customers, customers. Successful companies satisfy a customer’s need. This is true for authors like Andy Weir and restauranters like Alice Waters. It’s something that Hamed understands too:
“The hardest part of starting a technology company used to be building a product. Now the hardest part of building a company is acquiring your first customers.”
“I think the tech world has this problem where we go out and say ‘We think we’re really smart and the rest of the world is really dumb, and so why don’t we build apps to make their lives more like ours.’ What you end up doing is building products with judgment at their core. But when you find founders that are building products for themselves and their friends you find products with empathy at their core. That empathy translates to features and functions that understand the seemly non-pragmatic nuances of a given industry.”
“Walk into the offices of any of the world’s leading design consultancies, and the first question is likely to be ‘Where is everybody?’ Of course, many hours are spent in the model shop, in project rooms, and peering into computer monitors, but many more hours are spent out in the field with the people who will ultimately benefit from our work.”
Hours are spent with the customer, not in the design studio or, as Hamed said, tech world. It’s something Jason Calacanis sees too. He told Meb Faber:
“I have to always get founders to stop thinking about the game ‘Startup Land’ and get them to play the game ‘Customers.’ My inbox is filled with ‘How do I get investors to do this?’ ‘How do I convince VC’s to do that?’ I’m like, ‘How do you convince customers to buy your product?’ Let’s answer that question.”
But what your customers want isn’t always clear. People would have told Henry Ford they wanted faster horses. IDEO encourages people to find latent needs. As Hamed noted, find someone who already is the customer. This was Yvon Chouinard‘s advice too:
“We knew what we wanted. I heard someone say that if you wait for the customer to tell you what to do you’re too late. We were our own customer. I think that was the secret to coming out with products.”
Hamed ended up here thanks to the base rate. He said, “‘What are the main reasons seed companies don’t get to a Series A?’ One of the main reasons is they never build their software and bring it to market…And the second reason is they don’t find customers.”
Founders of failed start-ups missed this.
Advantages. Hamed’s second pursuit is advantages. He said, “The minute I’m nervous to get on this podcast and talk about one of our investments means it’s not defensible enough and I never want to be the guy waiting for everybody else to find out about his secret.”
What kind of advantages does Hamed look for?
“Our goal is to add one or two asset classes a year and ask:
why does this exist,
do we understand why no one knows how to price it,
do we think that our teams’ DNA of being between technology and finance allows us to underwrite it differently than anyone else can?”
Hamed is also fortunate to have the right stakeholders that let him explore these kinds of moats. He explained, “We have an amazing LP base that allows us to be flexible and do these weird, niche, interesting things because they like we’re getting a really high return and no one knows how to do it.”
Stakeholders are like bobsled pushers. They help start your journey but at some point, they just need to hop in and keep their head down.
Seth Klarman said “The more flexibility you have, the better your ability to maneuver in complicated, volatile, and fairly competitive markets…the more weapons you have at your disposal.”
Michael Batnick wrote about the volatility of stocks like Amazon, Netflix, and Apple. Realized and idealized returns are two different things. Moats too are non-obvious.
In the episode, Hamed gave an example of scheduling and payment software. For example, a company like McDonald’s pays the software company and the software company pays the employees on whichever day they choose – for a small fee. Hamed said:
“I don’t know what to call it – payroll finance, I don’t know – there’s probably a word that will one day be a thing once it’s an established asset class but that’s the type of stuff we love…not by taking a ton of risk but by doing something no one’s done before.”
I don’t know what to call it. That’s a moat! It’s like what Scott Norton and O’Shaughnessy talked about, once there’s a manual for how to do something it’s not a new something. Hamed said, “We love looking at stuff and wondering, this is a new thing, how do you buy it?”
The best example was a Stanford Ph.D. who was a consultant for heavy equipment operators. She found out a better way to do warranties and built an app to do so. “That’s a person,” Hamed said, “who’s solving a problem that no one in Silicon Valley gives a rats ass about.”
She knows her customers and her advantages is an unsexy industry.
Thanks for reading.