Ep. 4 - The 4 Pillars of Defensibility (NFX Masterclass)

SPEAKER_1 (0:00)

You're listening to episode 4, The 4 Pillars of Defensibility from the NetworkFX Masterclass, here on the NFX Podcast. This episode is hosted by NFX general partner Pete Flint, as he walks you through the other forms of defensibility, including network effects. To watch the course, visit nfx.com/masterclass.

Pete Flint (0:24)

So I first realized the power of network effects from my experience at lastpin.com. So lastpin.com was a late 90s Web 1 company. I was joined as part of the founding team in the travel space, and we were providing a travel marketplace for everything from flights to hotels to tickets to car hire. At the end, it was a phenomenal success. Sold for over a billion dollars in 2005 So I moved to Silicon Valley after lastpin.com, and to attend Stanford, and really stumbled across the real estate industry, and ended up attending a real estate conference, and driving back that day, I started to connect the dots, and see how what had happened in European travel was going to happen to the US real estate industry, where there would be a marketplace, that would provide transparency to the consumer, as well as provide a platform to help the supply side market the goods and services. So I set about to build a marketplace in the US real estate industry that became Trulia, and really thought about it from the principle of like, how can I amass as much supply as quickly as possible, and then track consumers on top of that? Like, how do you find this fragmented supply in this high value transaction, and build a better user experience on top of that, and help consumers to find exactly what they need? So, my entire career, frankly, has been about network effects. I've had three jobs, all of them fundamentally been network effect companies, two unicorn companies, and then with NFX, helping to invest and help the next generation of phenomenal network effect businesses. So, the partners at NFX are focused on giving you the power of network effects, the insights, the tactics, the hidden secrets, to enable you to incorporate those ideas into your start up from day one. So, defensibility really means resilience, and the fact that companies can survive against what the reality will be of any successful business is an onslaught of competitors or substitutes. And understanding how you can build that defensibility early on means that only you can have a successful company, but also you can have one that can dominate the category that it's executing in. So, you should really care about defensibilities from the early stage of building a business. There's so many things as a start up founder you need to focus on. And looking at how do you not just build an interesting product or an important company, but frankly one that doesn't have substitutes at scale. And thinking about the different types of defensibilities you can build in, in a start up to ensure that you have the opportunity to become a category leading company and to dominate your industry. So, there are four major defensibilities in the digital world. Of course, there's network effects, but beyond that, there's brand, embedding and scale. And we'll walk through these.

So of course, you can build a really interesting business that's not number one, that doesn't have network effects. But the real opportunity is if you're able to incorporate these network effects early on and find industries where they can have massive defensibility at scale, that's the way to build category-defining companies with ultimately huge market valuations. But it's critical you think about network effects from the beginning. It's so much harder to add those in a later stage. And picking businesses and markets and products that can have that network effect in the beginning is critical to enabling you to incorporate those later on. So brand arises when consumers or companies understand who you are and what you do. And it drives this psychological switching costs. You have this natural preference over one company or one brand over another. And that's really critical to enable consumers to be drawn to your product. Not only do they pay higher prices for it, but you end up getting lower customer acquisition costs for the product or service. In many ways, brand is a proxy for trust, and consumers are risk averse. And so, to have a well-known brand and more defined brand enables startups and companies to bring over customers and retain them that they would otherwise not. And today, in a society and media which is, there are so many distractions and so many interruptions, having a brand is critically important for a competitive rise above the noise of all the potential substitutes in that market. So, early stage founders, you really need to think about this from the earliest days. How do you define your brand? How do you stand out? How do you have consistency in what you do and have high visibility in the brand that you're creating?