He buys the top two because profits concentrate there

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 16:21

   Why is number one and number two so important to you? If you look at most markets, number one and number two end up with disproportionate share of the profits in the category. This is what you were trying to get out of me before we started recording, which we'll talk about after. Okay, fine. That's exactly what's happening right now. Right. So, you know, number one and number two end up with disproportionate share of the profits.

2. 16:42

   Three gets close sometimes, but never. So, if you're going to go win, you want to be number one and two in the long term. If you're not going to be number one and two, you've got a problem. Now, if you go buy number two or number three, remember, number one still exists. More than likely, you're going to slow down whatever you buy because you're still a large enterprise and you can't control every variable.

3. 17:01

   There'll be somebody from finance saying, I'm here to help. Somebody from HR saying, I'm here to help. Some guy says, dude, let me go build the product. And you have this whole onslaught of people who show up saying, I'm from the mothership. I'm going to help you. So you have to figure out how to maintain momentum for number one. You don't have an acquisition team, right? I read somewhere that it's just like, it's fucking me.

4. 17:18

   Well, no, there's a set of people who are very good at what they do, and they work with me, so it's not like I work alone. But, you know, eventually every acquisition ends up with me being involved. Let's say you figure it out. We want to extend to this product. You look at both one and two, right? Can you get into the difference? Like from the outside, maybe two look similar to one. Yes. I think when you get deeper and closer, like do you notice, can you explain like what you typically find?

5. 17:46

   Sometimes there are small differences between one and two, right? And sometimes we've had a situation where we bought what we thought was number one and number two went around us and became number one because we screw up the execution. That happens too. You know, we buy 35 companies, Not everything works out as per plan. But typically both one and two have product market fit. And if you think about product development and you say this is what the end product will look like in four years.

6. 18:10

   Number one could have started with this as their primary test and number two could have started with this part as their primary test. They both look like they're winning in the product category. But it sometimes becomes apparent later that you should have started here because that's the primary need. And the customer wants this to work really well before they take the second half. But it's hard to tell in the early days when both of them are about 30 or 40 customers that effectively prove product market fit.

7. 18:33

   So you'll find it's a strategy question, it's an execution question, it's a product market fit question, it's a business model question. All those things are somewhat different, but they're hard to project how they're going to pan out over the next two or three years. So you have to sit back and look at both their positions and say, which one is more likely to succeed? Then you have to add to that which one is more likely aligned with our product direction.

8. 18:56

   So, you know, I made a mistake early.