Supported by Greenhaven Road Capital, finding value off the beaten path.
Businesses succeed when they create something of value and capture part of that value. “Just because you have a product people want to buy,” said Griffin, “doesn’t mean you’ll have any margin.”
David Chang noted this too, “One of the things I wish the public knew is that just because you’re a busy restaurant doesn’t mean you’re making money.”
You know you have value, Griffin said when, “Everyone in the company is thinking, ‘My god, how are we going to satisfy all these orders?’ You’re not sitting around in the conference room, thinking, ‘Maybe we should add a feature.'”
Word of mouth is the gasoline on the bonfire of value. “You can’t scale a business very well if you have inorganic approaches to acquiring customers. If you have to buy radio ads it’s a hard slog.” And that word-of-mouth needs to feed into a large enough market. “It’s hard to scale a business for horse blankets.”
But As a company grows they need to watch out for the Wholesale Transfer Pricing trap.
Griffin takes inspiration from Fisher, “Fisher basically says, if you’re negotiating for something and you only have one choice you’re screwed.” The Movie Pass model, he said, “is fundamentally dependent on the price of the retail tickets and they only have one supplier.” Netflix avoided this trap with original content and it’s reflected in Ted Sarandos‘s disinterest in sports. “The reason I don’t get tempted by major league sports,” Ted said, “is that the pricing power all belongs to the leagues.” Griffin points businesses to Andy Rachleff’s advice.
The organizations that capture value best have moats. They can be network effects (Modern Monopolies), economies of scale, intellectual property, or brand. “But brand doesn’t mean as much anymore, word-of-mouth means more. To the millennial generation and younger, they’re hooked on getting some product that Yeezy’s.” Brand could be considered a capital light business. During Rory Week we looked at his ideas, specifically around trains. It takes millions of dollars to upgrade to faster trains, Sutherland said, but much less to upgrade to more enjoyable ones.
Griffin notes that there’s a difference between building moats and buying them. Bill Gates built one. Warren Buffett buys some. To build one, Griffin said, takes an artist. “Jim Senegal and Howard Schwartz are artists. They have a gestalt sense of where the value is and what customers want.”
Moats, wrote and spoke, Pat Dorsey have high switching costs and we used his ideas for this podcast:
While platform businesses dominate today, there’s more than one way to build a business.”Sometimes you have to sell a box to sell software. You sell this thing which allows you to sell this service and the margins are in the service and the stickiness is in the thing.”
GoPro, Giffin said, never invested enough in the software angle. “Software is eating the world but hardware allows for distribution.” Software businesses are great. “I’m in the software business,” Griffin said, “and I see the gross margins in other businesses and I think, ‘MyGodd. How do they survive? They’ve got no money for anything.'”
Griffin’s notes, quotes, and ideas come from lots of reading. His deep interest started in 1999, “People were getting rich in ways I couldn’t imagine…I just didn’t know what to do…I read The Alchemy of Finance and I said, ‘I gotta read more books’… I read Hagstrom’s books and thought, ‘Who is this Munger guy?'”
He collected quotes. He wrote up notes. He built out his set of mental models. “Looking at mental models,” Griffin said, “is a mental model.”
How should you go about this? Let the index at the end be the beginning of the next. “If you chase someone like Munger down and read the books they recommend, then you find other strands and it’s like the root system of a redwood tree.”
More specifically, it’s Munger’s Worldly Wisdom and Psychology of Human Misjudgment talks that set Griffin’s hair on fire. Learning, thinking, and reading has also led Griffin to adopt Munger’s maxim, a year in which you don’t change your mind about something is a wasted year.
For instance, “The older I get the more I realize there are more pools of alpha than I thought.”
Griffin’s Barksdaleisms post is full of great quotes and we’ll cherry-pick one from the podcast.
“The infantry is always ahead of headquarters.” Jim Barksdale
This, said Griffin, was “classic Jim.” “Great operators get out of their chair and find out, they go and meet with the infantry…There’s nothing like a whole day in a call center to give you a good sense of what the customers are thinking about your product.”
This was something Kayak founder Paul English followed to the letter. English installed a red phone in the middle of his office. Tracy Kidder wrote that he also:
“He had wanted everyone at Kayak—and especially the programmers—to imagine themselves in the place of that customer looking for the right flight to Cleveland. Paul had devised a scheme he called “Empath,” which had obliged every coder in Concord to answer some angry emails from customers.”
Griffin said, “You and I need to go out on sales calls. We need to sit with customers…
Bill Gates said, ‘Unhappy customers are our greatest sense of learning.'” Andy Grove said that you can’t make decisions without feeling the winds of the real world.
Going out into the real world – Chasing the Scream – teaches you that gangs are antifragile
In Shop Class as Soulcraft, Matthew Crawford puts it this way:
“This history provides a nice illustration of a point made by Aristotle: Lack of experience diminishes our power of taking a comprehensive view of the admitted facts. Hence those who dwell in intimate association with nature and its phenomena are more able to lay down principles such as to admit of a wide and coherent development; while those whom devotion to abstract discussions has rendered unobservant of facts are too ready to dogmatize on the basis of a few observations.”