Business strategy with Hamilton Helmer (author of 7 Powers)

Gordon Buffet famously said in business, I.

Look for economic castles protected by unbreachable moats. Power requires a benefit and a barrier. So he's taking care of the benefit part by saying a castle. You have to have a pretty good understanding of why it's a castle and not a shack.

So in a lot of decks it's like, oh, we have the most amazing team, we move the fastest.

You mentioned how rarely is that actually a power. You're on a treadmill and if you stop running that treadmill, you get creamed, but it's not power.

The things that drive operational excellence can be mimicked. Let's actually talk about achieving powers.

There's a thing called power progression. There are times when certain types of power are available. The path to power is where the rubber meets the road.

Today my guest is Hamilton Helmer. Hamilton is a legend in the world of strategy. He's the author of Seven Powers which outlines a framework for identifying and developing sustainable competitive advantage. It is widely considered to be the best book on strategy and people like Patrick Collison, Peter Thiel, Reid Hastings, Daniel Ek, and so many more leaders credit the book and Hamilton's teachings for helping them build durable, lasting companies. In our conversation, Hamilton shares what sources of power startups can start developing early, which types of power companies often think they have, but they don't, how power relates to strategy and moats, when to start thinking about power as a startup, and also what individual product managers and non-leaders can do about these insights about power. Also how Hamilton Hamilton sees AI impacting various entry and the sources of power. He also gives a preview of his new book that he is working on currently and so much more. With that, I bring you Hamilton Helmer after a short word from our sponsors. And if you enjoy this podcast, don't forget to subscribe and follow it in your favorite podcasting app or YouTube. It's the best way to avoid missing future episodes, and it helps the podcast tremendously. This episode is brought to you by WorkOS. If you're building a SaaS app, at some point your customers will start asking for enterprise features like SAML authentication and SCIM provisioning. That's where Work OS comes in, making it fast and painless to add enterprise features to your app. Their APIs are easy to understand so that you can ship quickly and get back to building other features. Today, hundreds of companies are already powered by Work OS, including ones you probably know, like Vercel, Webflow, and Loom. Work OS also recently acquired Warrant, the fine grain authorization service. Warrant's product is based on a groundbreaking authorization system called Zanzibar, which was originally designed for Google to power Google Docs and YouTube. This enables fast authorization checks at enormous scale while maintaining a flexible model that can be adapted to even the most complex use cases. If you're currently looking to build role-based access control or other enterprise features like single sign-on, SCIM, or user management, you should consider WorkOS. It's a drop-in replacement for Auth0 and supports up to 1 million monthly active users for free. Check it out at workos.com to learn more. That's workos.com this episode is brought to you by Vanta. When it comes to ensuring your company has top-notch security practices, things get complicated fast. Now you can assess risk, secure the trust of your customers, and automate compliance for SOC 2, ISO 27001, HIPAA, and more with a single platform, Vanta. Vanta's market-leading trust management platform helps you continuously monitor compliance alongside reporting and tracking risks. Plus, you can save hours by completing security questionnaires with Vanta AI. Join thousands of global companies that use Vanta to automate evidence collection, unify risk management, and streamline security reviews. Get $1,000 off Vanta when you go to vanta.com/lenny. That's vantaa.com/lenny. Hamilton Helmer, thank you so much for being here. Welcome to the podcast.

Hi, Lani. A pleasure to be here.

It's even more my pleasure. I want to start by talking about when power becomes important. When do you recommend founders start thinking about power in terms of pre-product market fit, post-product market fit? Is it worth spending time thinking about power early? Obviously, it's good to think about a little bit, but how much and how seriously should founders be thinking about it before they found something that people actually want?

One of the things that has really surprised me in the last five years has been that my understanding of the answer to that question has changed. And before I thought it was do product-market fit, and then you do strategy and if you try and put strategy before product market fit, it doesn't, there is not much you can do with it. That's wrong. Actually, one of the, I mentioned before, one of the great pleasures for me in my work is being able to talk to company founders. And one of the things that has surprised me is that conversations with them, even at an early stage about strategic matters, have a richness and relevance to me that was unexpected. And founders are practical people, right? I mean, it's very hard to do what they're doing, and they have to be extremely focused and choose what's worthwhile spending time on. And so in observing their reactions and that dialogue, I could see that there was something going on that was meaningful to them. And this second book we're working on will tease out why that's so more. But the answer to your question is when should you be thinking about I was thinking about this. The answer is always. And that's an odd answer, right? And so even before you have product market fit, it's worth thinking about strategy. Now, it's not strategy in the sense of sort of this fully articulated strategic planning. We're going to do this. These are going to be the competitors. This is going to how we're going to answer them. This is how we'll price. Not like that at all. at the earlier stage, you can imagine wildly more degrees of freedom. And the questions are, of the business propositions that you're thinking of in trying to get to product market fit, what are the underlying characteristics that might tilt them towards the availability of power or not? And those actually are meaningful conversations. and certainly by no means certain, right? You're tilting probabilities, you're not creating a determinative things. And then later on, once you've already have product market fit, then you have to understand your source of power if you're to understand what competitive position is, because then you have to establish that. And then later on in a more stable phase, when you're in a stability phase of business, you have to know what your source of power is if you have one, because you have to know how to defend it. And then also it is also the foundational knowledge that you need for if there's another step. Because another thing that's quite surprising about iconic businesses is they often have a second act or a third act or fourth act. I mean, think of AWS or Intel going into CPUs or Apple going into iPhones, all not the original business, right? And that's actually common, not unusual. And that's starting the process all over again.

Awesome. You mentioned this word strategy. I want to set a little foundation here. How does strategy relate to power when people are thinking about these two concepts? And then do you have just like a nice definition of what strategy is? Everyone's always just like, what the heck do you mean when you're talking about this strategy?

As I said, I'm sort of a concept person, right? And so when you develop concepts, you have to be very highly constrained by their usefulness. I'm a great fan of the great mathematician John von Neumann. And he had a view which really irritated a lot of mathematicians, which is that if mathematics wasn't guided by what was useful, it would become, I think the word he used was aesthetic to aesthetic. And so any concept developments like that, it needs to be guided by usefulness. So in dealing with strategy, the question is, what domain of things do you want to include in that conversation? Because the term is ubiquitous in business. I mean, do a Google search sometime. I've done one recently on Google Scholar for the word strategy, and you'll get, you know, a million, I'm not exaggerating, a million hits, right? And, and so strategy for some people might mean everything that gets to the pile, gets to the top of a pile in terms of what you have to do that year. Everything is, and that's a perfectly legitimate definition, you know, but, but what, what I have found is that there is a very important narrowing that makes it much more useful. So that's coming back to what I was saying about John, John, makes it much more useful to do business. So my view is that you, you want to focus, it's very useful for business to focus on the fundamental determinants about, of business value. and it, and that's a, that's an arbitrary choice. It could be something else. But, but I can tell you from Decades of business experience that that narrowing is very useful. And then, so, so once you make that, that, once you reach that understanding, it tells you some important things. So if you understand what drives business value, I mean, if you do the math of it, right? It's NPV of cash flow, right? expected cash flow. And what that tells you is that strategy is a long time concept. You're looking far out in the future. So think of Pearl Harbor. Pearl Harbor for the Japanese was this enormous tactical success. They just destroyed the US naval ability in the Pacific Ocean. and the worst possible strategic move because it completely solved Franklin Delano Roosevelt's problem of how he could get the US citizens on board to attacking Hitler. The strategy of it was US's industrial might would eventually win the war and population. And the difference there is time constant, tactical, short, strategy long. And so if you focus on value, that narrows what you think about and allows you to get rather concise and offer up advice to founders about what they need to pay attention to.

So then how specifically is power informing strategy? The way you think about it, focus on your power and that will inform your strategy.

Earlier I talked about these economic structures that provide durability in terms of refuge from withering arbitrage of everybody who wants to eat your lunch. And so that's what power is. So you have to understand what is an economics. You're asking me questions that get pretty deep into theory, or I hope you don't, this is too conceptual, but you have to say, you have to understand how competition takes place and say, what is it that creates some kind of refuge? And what it is, is there's something in what you do that gives you either a cost or price advantage over others. So let's say you're lower cost and that's the benefit. And the barrier side is that there's something that is durable about that, that makes it over time that you can't, that competitors can't take away from you. So benefit and a barrier, we call it the to be or not to be test, right? And if you have that, you can think of that immediately translating into value because that will give you good margins out into the foreseeable future. which is what you're after. And so I don't know if that's, we're getting into the weeds here, but that's what it's about. And so power is those structures. Let me give you a quick example. So one I use in the book. So Netflix with scale economies, right? They have more subscribers. The cost of their content is a very large fixed cost. about 50% of their cost structure every year. They can take that fixed cost and spread it over more subscribers so their cost per subscriber is less. So versus somebody with fewer subscribers. So if they were, if, if, if they face the same prices as their, for subscriptions as their competitors, they will be more profitable. So that that's a scale economy. And that's an example of a type of power and a common one, I'd say. But these things are hard to achieve, right? Because there's kind of the holy grail.

So let's actually talk about achieving these powers. Essentially, the argument here is your power informs everything you do because this is the thing that'll allow you to stay durable and competitive and last. There's seven powers. We're not going to talk about all of them if you want to go understand each of them. Go read the book.

Yeah, I think the conversation all just goes too long.

Yeah, exactly. So what I'm wondering is, okay, so say you're looking at this list of seven powers and you're a specific type of startup, do you have kind of a heuristic that tells you here's most likely the power and set of subset that will most likely be an option for you? B2B SaaS companies? Is there like a smaller subset? Like probably one of these has to be one of your options versus B2C?

That's a great question, Lenny. And because I think the path to power is where the rubber meets the road and it's very complicated and nuanced. But I'll give you a few thoughts along it. And frankly, that our next book, the Second Invention. That's what it's about. It's about the power, the entire read. So in a book, there's a thing called power progression, which says it tells over the cycle of a business, there are times when certain types of power are available. And the converse of that is times when they're not available. And so there are some that only are really available when you reach a stability phase of a business pretty far out there. And so if you're starting a company, take those off the table. So those two are branding and process power. So I often, you know, I find that there's a confusion about this because brand recognition for a startup may be incredibly important. but you can get brand recognition by buying an ad in the Super Bowl. That's not power that you paid for it. And so take branding and process power. And process power is really sort of operational excellence on steroids kind of, and usually is imitable. So it's usually not. So take those off the table. And then a kind of resource type of power, which is you have something that is of value, that if you transferred it to somebody else, it would be of value to them, but you own the rights. So the barrier is law, for example, or lack of knowledge from others. And there are classes of businesses that are like that. So prescription pharmaceuticals, right? If you're the first person to come up with Viagra, that's worth a lot of money. If you took that license and gave it to somebody else, it'd be worth a lot of money to them. But that's a different class, and it's usually not the types of things that I'm dealing with. And it's kind of obvious to everybody. So the key challenge there is, can you invent a pharmaceutical that's effective for a large market? So So, you can take those three off the table and that then leaves counter positioning, scale economies, switching costs and network economies. And the important thing to keep in mind there is that they're sequenced. So, almost every startup that you want to deal with starts with counter positioning because remember what product market fit is primarily is substitution. It's you are coming up with a way to satisfy a more or less existing need in a novel way that creates more value. Now, there are sometimes you in, you tap into entirely new needs, but it's not so often. I mean, you know, Amazon was up against brick and mortar stores, you know, Google was up against Yahoo, you know, and so on. And so you're usually substituting. And that's substitution. So your competition at that point is functional competition. And if you don't have counterpositioning at that point, you're pretty high risk from an incumbent who already has the capabilities necessary to do that. They just have to extend their product or, you know, do this or that. And, and so, so, but counter positioning is the refuge from that. And then you go into the other three types of power scale economies, such as costs and account and network economies, and those depend on on your, your scale relative to competitors. This is pretty cursory, you know, but, but that, but that's what I'd say. Focus on those four. And, and I would, I would recommend that you think pretty hard about whether you think there's, you have counter positioning to start.

Awesome. I actually want to double down on that thread. But just to summarize, I have the list here. Basically, you're saying if you're an early stage startup, the Ford to really that are actually potential powers for you, at least early on or counter positioning, which your point is you could just start with that. That's essentially positioning and business model design, which happens at the beginning. And then you can start to think about network economy, scale economy, switching costs as powers.

Right. And you've done the right thing by not having me go through and define each of those, but your listeners will We'll need to sort of go back to my book and see what those things are to get, you know, we're going through the shorthand as we should, but all of what we've said won't be completely obvious to them.

Yeah, I think a simple Google search, I find, just gives you a very simple definition of these patterns.

Yeah, that's right. There are some people have done some really good summaries of this.

Or ChatGPT, even better in a lot of cases.

Right, right. ChatGPT, if they get it right, sometimes I find they don't get it right. They hallucinate.

Halucinate an eighth power. You mentioned how some companies think they have a certain power or it's common to think you have a certain power. If you look at every startup deck, there's always like, here's our moat, here's the way we're going to have barriers to entry. I'm guessing in almost every case they're delusional about the power that they actually have and the power they think they'll have. Do you also find that to be true that often founders are wrong about how much barrier they've actually created? And is there a power you often find most wrong and mistaken?

Yeah. So I agree with your observation, but I don't want to be unkind. So, I mean, there are two things to keep in mind here in terms of making people feel better about that incorrect slide in the deck. One is that founders have to be optimistic, right? I think it's an important quality that they maybe understate the risk a little bit, you know, but, but they're so committed to, I'm going to do this thing that they, they, they go through that. And that may give them an advantage over a large corporation trying to do the same thing. The other is that, despite the name seven powers, which makes it sound like, oh, you can kind of sort this out, actually understanding whether or not there is a type of power in place is hard. I mean, if I did it with my colleagues here at Strategy Capital and we're looking at a well-known company, it might take us weeks to answer that question for a single company. And it comes down to the hard part is industry economics is what really are the economic relationships. And it's very hard. So, so with, with those caveats that sort of give them some courtesy, I'll say some, some of the obvious ones are I mentioned before, people sometimes think they have branding power, which that, but, but another one that I think I've heard you mention is, is people often think that they get scale economies through data. And I'd say that that's possible, but it's rare. And, and the reason it's rare is not because there aren't scale economies in data, but rather that the range of scale that the existing competitors have are often large enough to be able to put them in, in, in shouting distance of each other so that the, the differences in their cost per unit is not that great. The curve flattens, in other words, which is typical of any, because the most common scale economy is you've got a big fixed cost. and then you, and you prorate that. And, and as you get more and more scale, the, the percentage cost advantage of a fixed cost Advantage like that goes down. And that, that often. So that's, that's, that's a pretty frequent one that we see. We sort of laugh whenever we say, we hear somebody say they have a flywheel, which kind of gives you the idea of network economies. There are often flywheels, the ones that really are material are rare. The key thing here is materiality, not whether the flywheel exists, but whether the effect is strong enough to really tilt returns.

I was actually going to ask about that one, because in software and social consumer products, network effects is always the pitch once we get big enough. We create this huge barrier. you mentioned just now, you often find that's not actually true. It's rarely something that'll become a barrier. Is there anything else you find with network? And I know your power is called network economies, not network effect. I guess just to be clear, are these kind of the same thing in your mind with different words?

Yeah, kind of. I mean, I have called it a type of power. So for me, it's only those things which clear the significance barrier. hurdle, rather, that they're a large material. And so there are lots of things that I would say have network effects but not network economies.

Oh, interesting. Wait, can you speak to that? So there is a difference between these terms, network economies.

Yeah. So for me, the difference is materiality, you know, is that whether the value benefit is large enough to engender a price delta significant enough to give you materially different margins into the future.

Basically, does that network effect have an actual impact on your business and your ability to price?

Yeah, it's not an impact, it's a material impact. So it could have, if it's a penny to your bottom line, that's one thing. If it's a billion dollars or something else.

Wow, that's actually really interesting. Is there an example of a company that comes to mind that they had network effects but not network economies as a power.

Oh, I think you could turn almost anywhere and get some modest network effects. And any platform business would probably likely have some modest network effects. You asked me earlier, or in the material you sent me about Uber and Lyft, I'd say that they probably have network effects involved. but not network economies.

Wow, that's interesting. And the reason you're saying they don't have network economies is because they're still so competitive, they still have to spend so much money to stay ahead. And so the network effect is not as important.

Right. The advantage that they get is not non-material. Right.

Wow, that's so interesting. Kind of along those lines, It's so interesting to see Uber and Lyft these days. In theory, they both had some sort of strong network effect. I was just looking, so Lyft is 5% the market cap of Uber. Is there a lesson from just what it is that allowed Uber to just win and kind of run away with the market essentially?

I'm not entirely sure. I'll take a guess, but I would I'll take it as sort of an informed guess. I haven't really studied it carefully. I think that over time, if I had to guess, I'd say they're probably modest scale economies in the business. And over time, Uber has just very successfully played a war of attrition. and that's both been in how they run their business. They made one sort of initial misstep, which is they misdefined their business. They said it was international transportation, and it's not. That business is extremely geographically specific. You know, if you're, if you have a, a, you know, a great position in the Bay Area, it doesn't help you in London, right? and so their forays into China and everything really didn't make... But they pulled back on that, focused down on understanding their source of power, which was a geographically specific scale economy. And then they've done interesting things like Uber Eats, where they've tried to utilize the platform that they have to get other opportunities for the the one side of their platform, the drivers. And so, so I, I, I, you know, if I had to, if I had to guess, I'd say it was a well played war of attrition with modest scale economies.

And is that attrition coming from a source of power or is that just like a broader, more strategic?

Yeah, it only works because they, there are modest scale economies. If there weren't any, then they, if they did all this stuff, they'd still have equivalency.

Got it. Let me go in a slightly different direction. We've talked about power, we've talked about strategy. There's also, there's this word moat that comes up a lot. Everyone's always trying to build a moat. In your mind, is a moat equivalent to a power? Is there a difference when people talk about these two?

Power requires a benefit and a barrier. You have to have something that you do that gives you a better outcome than your competitors, lower cost or higher price. and then something that makes it impossible for somebody else to mimic that. So mode is the second. So it's not synonymous with power because you could have a mode around a very undesirable piece of property and wouldn't get you far.

So.

But I think it is pretty synonymous with barrier. I think Warren Buffett sort of Charlie Munger, who I admire enormously, I think I get credit for popularizing those concepts. And I think the way they think about it is good. I'd say that Seven Powers is probably more systematic and comprehensive than saying that I don't think there's this wonderful I don't know if you read any of the Microsoft antitrust literature that came out of the, their lawsuit, but there was a communication between Bill Gates and Warren Buffett where Warren Buffett was saying why he couldn't invest in Microsoft. He just didn't understand it. And so that meant he didn't, you know, the idea of network economies and what the moat was there, he didn't understand. So I think But I think the concept of moat is a good one. The idea that you have something that gives you a refuge from competing forces.

In terms of Warren Buffett, I found the quote about moats. Warren Buffett famously said, In business, I look for economic castles protected by unbreachable moats.

Right. And so he's taken care of the benefit part by saying a castle. Right.

He's got it covered.

But one of the tricks to understanding power is you have to have a pretty good understanding of why it's a castle and not a shack. So I'll give you a Netflix example. So a company I admire a lot, and I think if some of the things that they had to do to develop their business were so important for their business, that aren't, that don't guarantee a castle. So, for example, UI development, they spent an enormous amount of resources on trying to get just the very best UI, I mean, a zillion A/B tests, all kinds of things. Their recommendation engine, everybody's kind of knows the story about how that went on, you know, their interface with the content world and all this. So those things those things are important. They're things they have to spend a lot of time and resources on, but they can largely be mimicked. So when, when Netflix in an earlier phase was fighting Blockbuster, when Blockbuster finally threw in the towel and said, well, we darn well better do a mail order DVD business, if you looked at the Blockbuster site, their UI site, you couldn't tell it different from Netflix. They just copied it. And so all that thoughtfulness about which things you put first and how you structured and all that to make this suitable was mimicable. So that's an understanding of looking at the properties you have and trying to figure out if they're a castle or a shack.

I love that. This episode is brought to you by Paragon, the embedded integration platform for B2B SaaS product development teams. Are your users constantly requesting new integrations with other SaaS platforms that they use? Unfortunately, native product integrations take months of engineering to build, and the maintenance never ends. Paragon enables your engineering team to ship integrations seven times faster than building in-house by removing the complexities around authentication, messy third-party APIs, and debugging integration errors. Engineering teams at companies like Copi AI, Synch, TLDV, and over 100 other SaaS companies are using Paragon so they can focus their efforts on core product features, not integrations. The result? Their shipping integrations on demand, which has led to higher product usage, better retention, and more customer upsells. Visit useparagon.com/learn Lenny, to see how Paragon can help you go to market faster with integrations today. That's useparagon.com/lenny. So let's take this concept of seven powers. A lot of people listening to this are just like individual contributor product managers on teams building new products or iterating on products they already have. What do you suggest they do with this knowledge of there exists these ways to build benefits and barriers? I'm working on, say, a new product. What do you recommend they do? What's something they could do this week, next month to infuse these lessons into the products they're building?

I'd say there are a few, and it's a little bit different. I'm not a great fan of the strategically driven organization because that idea because it fuzzes over how this knowledge is useful at different stages in the business. And so for somebody in that position, say a product manager in an existing successful business, so it's important in terms of just understanding their business to know what their source of power is because they, and that can inform them about, you know, what it is that they're working for. And also they may see things since they're down in the weeds, they may see things that, that are important to that, that they need to bring to other people's attentions, because they're the ones that really have the knowledge of what the heck's going on. There's another aspect I mentioned before, this idea of transforming, of starting up entirely new things. and usually not, I wouldn't say usually, I say it's not uncommon for ideas about that to bubble up from down below, you know, and so that's another source. So let's separate a business into three phases, you know, origination, takeoff, and stability. So the answers I've given are more in the stability phase. In the takeoff phase, let's say you've launched a product, you've gotten customer traction, now you're in a phase where there's just very rapid growth, probably other entrants like you. What are you facing? What you're facing is, remember that underneath all of this is a change in technology. that's what, that's what made the product market fit possible in the first place. But that doesn't just stop that keep. If you're, if you're in a technology wave, often there are all kinds of offshoots, both for you and the compliments to your business, everything else going on at the same time. And, and to, to win at that stability phase, which is really a market share win, you, you have to be aware of those and understand, okay, we have to incorporate this new, new feature. or maybe now things have gotten to the point where this new market segment is our product is attractive for it or as before it wasn't. This is meat and potato stuff for somebody at that level. And it may well be the decisive element in terms of whether you win that market share battle with the other contenders. And so you have a very, very important role at that point. And so, so I'd say, I'd say the first thing to do with your question is to make sure you think about the different phases of this and then, and then ask what those responsibilities are.

What about for people that are just trying to get better at being strategic, thinking strategically, something every product leader is always encouraged to do, become a better strategic thinker, get, build this muscle of strategy, what do you often advise to people to just get better at the stuff? Obviously, read your book.

Read the book and then have conversations with your colleagues about the topic. Because as you sort of, you know, internalize what that means and how, you know, have conversations with them about, do we really have this kind of power? What's going on here? What's important? What isn't? You know, those conversations tend to to allow you to sort of get a better grip on things. I mean, in the case of Netflix, Reed actually had me come in and train the top 100 people in Netflix and strategy. We actually ran classes in the company. But that's unusual, I'd say. And I didn't have the book yet. And so I think the book gets people pretty far down that path already.

And you don't do that anymore. I imagine if someone wanted to do that today, not an option.

I sadly don't have time. I do, I mean, I do often do fireside chats at company meetings and that kind of thing, but not a full, full-blown course. And I'm not teaching at Stanford anymore either. And so, so, I don't, I enjoyed that immensely. Wonderful people to work with. But, but, but I'm, sadly, I don't have the time.

You're about to get a lot of requests for fireside chats. I hope you're ready. You mentioned AI at some point in our chat. I'm curious how you think AI is going to change your seven powers framework. Do you think defensibility goes down in general? Will certain forms of power become more important or harder to achieve? How do you think about AI?

Yeah, it's a great question. I mean, we're all in this phase of wondering exactly how generative AI is going to play out. My own view, currently, I don't see any change in seven powers from it in terms of an eighth power or something, but the issues that it brings up like scale economies, I mean, think of scale economies, if you have a fixed cost of trying to develop a model of a billion dollars or something, or network effects, you know, will AI models develop so that they learn in a way that for one user's interaction helps another user's interaction? That would be a powerful network economy. Or if it learns, if you think of, you know, if it learns about you and becomes a better psychiatrist or something, then that's a switching cost, right? So all these things are relevant to which business models will work and I find that useful. But I think in general, the way I think about it is it's a standard form of potentially very powerful technology that is being introduced into the business world and just asking how that plays out. I, you know, I currently tend to think of that as sort of three types of plays. There's the company that's the technology play itself. So if you think of microprocessors, it would be Intel. If there's the companies that wouldn't exist without the technology. So for semiconductors, it would be Microsoft. And then there are the companies that that utilize the technology, but have existed before and after. So for semiconductors of the automobiles, they use a ton of chips, but there were still cars before after. And so, so I'm, I'm kind of of the view, very much uncertain at this point that, that generative AI will, its biggest impact will be that tertiary class. it will be used in a lot of things that existed before and exist after but are made better by it, like semiconductors and automobiles. And so it reminds me sort of, if you think of really big technology shifts like this, it reminds me sort of electricity. When electricity came, you could completely reconfigure a factory floor, right? You no longer had to have you could have the power source at essentially at the operating unit of an operator. But, but that took a lot of redesign and Corporation investment, learning, complements, all kinds of stuff. I I I tend to think this will be more like that. There will be some pure cases people will want to have them write their term paper with ChatGPT or something. But if you think of businesses, it's hard for me to think of a single functional area in a business that with redesign couldn't benefit. So, you know, accounting, HR, R&D, you know, all have use uses of this, but requires incorporation, which is always, you know, Troublesome. And so, so that, that's kind of my view. And, and so I, but, but there may be, there certainly will be businesses that couldn't exist without it, and there's some that are coming up. But, but, and, and some of those are, in fact, the businesses that Empower the tertiary need. They're the ones that bring in. But if you go back, this will date me, but if you go back into business history back in, I guess it was the 90s, there's this thing called business process re-engineering you know, the idea that you would, you could take a computer sensibility into business processes, redesign them and get these monstrous cost savings. And, and, and it was a gigantic Consulting opportunity, right? for people, whole companies got developed based on that. And it sort of feels kind of more like that to me. But it's very interesting. I could be wrong, but it feels different than crypto. It feels like there's more of a real ultimate use case. I mean, if it really is true what they say, that a 50% improvement in programming efficacy is not uncommon. Just that proposition alone is worth an awful lot of money, if you think how many programmers are in the world.

No question. You mentioned eighth power. I just want to check, is there an emerging eighth power you wish you may be, would have included or may be added in the future that It's like, oh, maybe this is on the edge. Or it's like, nope, we got these seven.

You know, it's a great question, Lonnie. I'm always looking for it because if you find it, it probably means it's so obscure there will also be a great investment opportunity. We're looking all the time, but so far, no. So far, I'm pretty satisfied that seven is an exhaustive set, but never say never, you know, you know, that's an empirical seven, not a theoretical seven. Yeah.

If we start seeing you making incredible returns, you've clearly found a new Power, right?

That's right.

I want to close one thread on a power that you mentioned that is often a kind of a pitfall, which is around process power and basically execution. A lot of people think, so in a lot of decks, it's like, oh, we have the most amazing team. We move the fastest.

We're earliest.

You mentioned how rarely is that actually a power actually being able to execute and create a process that is an actual barrier. You just talk a bit more about that to help people understand, okay, it's probably not. our power.

One of the great thinkers in strategy was this Harvard professor Michael Porter. And he, and probably 40 years ago, made the very controversial statement that operational excellence is not strategy. He got a lot of people of the Harvard Business School faculty really mad at him because that's what their careers were about. And it sounded like he was dissing them. But the point he was making was when you get to kind of this end state, if you already have power on that, that the things that drive operational excellence can be mimicked because you can hire a consulting firm with, who has best practices, knowledges that come in and get you up to snuff. You can hire people from your competitors who know how to do it better and that, and, and, and that's, that's kind of true, but it's also true. in, in the, this takeoff phase in a business, one that we talked about before, when you're trying to attain competitive position, operational excellence is everything. And so, so in, if you think of not strategy, not statically endpoints like Professor Porter was, but if you look at dynamically how you get there, operational excellence is essential. for a strategy. And so think of those things I mentioned before about Netflix, about their UI and recommendation engine and so on, or international rollout, all those things. They were in a battle to get more subscribers than other people. And those were critical for that, right? But in themselves, they're critical in attaining competitive position, but in themselves are not sources of power typically. quickly unless there's some very tight considerations here or very demanding considerations for the unless. If they're really there, they have to be material, but they also have to be opaque or some way people can't easily imitate them. Either they don't understand what's going on or it might be opaque. So, for example, think of TSMC. So when they put up the latest fab and get that operational, are there a lot of steps in doing that that they kind of know how to do with their staff is trained to do, but it's not documented necessarily and not, and you can't imitate it. Yeah. Then maybe, maybe they have it. I don't know if they have process power or not, but it's, but it takes that level of complexity. In my book, I use the example of Toyota and a car manufacturing is complex enough that you can have this opacity in terms of, of material steps, but it's, but it's not common. And so So you're so, so if you're in a stability phase of business, you're, you're, you're stuck with this, this funny thing, which is most of your day is on those issues and it should be because if you, if you, if you don't do it, a competitor can and they can end up better than you. And so you're always, you're on, you're on, you're on a treadmill and that's the way businesses, that's fine. and, and if you stop running that treadmill, you get creamed. And so you got to do it. It's most of your day, but it's not power. And, and, and there are those rare cases where it's so material and so inimitable that it can be power, but, but they're rare.

I like the heuristic that if you haven't written it down or you can't describe it, that might be a sign that maybe process power is a power of yours.

Yeah, yeah. And there isn't a consulting firm that offers to bring you up to speed.

It'll make you more like Amazon as a service.

Right.

Kind of along these same lines, you talk about how the only three things that create value in a company are power, market size, and operational excellence. And I think hearing that will blow a lot of people's minds because they think there's so many things that contribute to the value of a company and you whittle it down to these three things. What can you say about that insight?

So I'd say they're right and I'm right. They're right because there are this incredible, I mean, business is really hard, right? And there are just a multitude of things you have to pay attention for. I'm right because all those things fall into those three categories. So it's an exhaustive set and it's just, it simply comes out of the math, you know? You know, it's, it, it, so, so we're both right, I'd say.

Final question. The intent of a lot of your work is to empower founders. I'm curious if you've noticed any broad economic trends or shifts that do you think will make life easier or harder for founders in the coming years?

Personally, I am very, very concerned about the debt trajectory of the United States and many countries around the world. But I'll pick on the United States, but it's a trend going on everywhere. We're on a trajectory for this extremely high indebtedness. And so, if you think about the last 30 years, right? There's been a crisis about once every 10 years. So there's the.com bust, there's the financial crisis, there was COVID. You know, I have nothing makes me think that the frequency will be a lot less. I don't know what it is. Who knows? These are all uncertain events. But. But imagine if we got to one of those. and we had no dry powder. And dry powder for us is the ability to heavily deficit spend, take on debt. And fortunately, our government did that in both the financial crisis and in COVID. And because that people had jobs, my own view about the financial crisis is that if we hadn't done that, plus having Ben Bernanke as the head of the Fed, the Fed, we would have gone into another Great Depression. It was that ugly. So this current debt trajectory, you don't know how long it will take exactly when, but eventually that will mean we will not have dry powder. People will not respect the creditworthiness of this country. And so, that worries me a lot and it utterly will affect the idea of company founding, because if you get into a crisis like that, the capital markets lock up and it gets very difficult to do anything. And to really stretch my credibility here, I'll opine on just how hard a problem this is to solve. The reason this is so difficult for this country to solve in other countries is that it is right at the crux of the delicate dance between capitalism and democracy. So if you think about these, the problem, of course, that's driving all this is entitlements. There's sort of discretionary spending, you know, the, you know, certain recovery programs and stuff, but those can go away. The thing, the underlying trend that people just can't get their arms around is entitlements. and anybody who looks at the numbers can see that every economist knows that. But that's not an easy fix. And the reason it's not an easy fix is there are two opposing views of kind of what's going on, and there's no way to resolve those two views. One is that Capitalism is rapacious and results in more and more inequality and the government has to do something about it. And the other is that the government is on a path that is creeping socialism that will undermine our freedom and economic sufficiency. And the poster child for the rapacious capitalism one is, I don't know if you've seen the recent analysis of inequality in the United States, it just came out much more robust analysis. And it said that basically inequality in the last 60 years in the United United States is unchanged. But that's post-transfer, post-tax inequality, which basically says the amount of taxing and transferring going on was about right. So it says that the amount we're spending is about right from that perspective. It compensates for other inequities and we should be spending that much, so we should tax more. And the other, the the poster child for the other point of view of the dangers of government is the steadily increasing, without interruption, percentage of the economy that is government. And to levels that 75 years ago people would have thought absolutely impossible. So there are these two views about what's going on. One is that we're compensating for the normal inequities of capitalism, and the other is that we're headed down a path to socialism and ruin. And that leads to a deadlock, which is you don't tax anymore and you don't cut spending and that leads to deficits. And so anyway, a long, long rant, sorry, but that trend is extremely politically difficult to deal with and extremely threatening. that concerns me immensely.

Not to leave listeners with a very sad state of affairs. I think this is important. I think it's important people think about this and know these things. Is there anything that gives you hope? Is there anything that gets you excited about either for founders or anyone in general, just to kind of leave folks with maybe on a happy.

Yeah, I mean, I am an optimist really in a way, you know, and I I do, there's a famous Austrian and eventually American economist named Joseph Schumpeter who wrote this wonderful book, Theory of Economic Development way back when, over 100 years ago, where he took the unusual view of saying that the vitality of an economy depended on entrepreneurs. and I ascribe to that. I think that, that creativity and action are the ways society and people Advance. And, and I'm, and I think the, the US is and, and a free society is, has huge advantages in, in that. And, and I think that I'm, I'm I feel very lucky to be in a place, I'm in Silicon Valley, but to be in a place in a country where that is vital and active. And I think that's sort of ground zero for me. And so I think you see that alive and well, I think, and there are people that are very enthusiastic about that, as I am.

A beautiful way to close out our chat. Is there anything else you want to share before we get to our very exciting lightning round? Is there anything you want to leave listeners with or any last tidbit of advice?

I sort of alluded to it before, but just remember, action is the first principle of business. You do stuff. And my book is very oriented towards that. The idea was not to tell you what to do, but to give you sort of guideposts, follow your on that journey. And so I just, to the people that are enthused about it, I encourage you to do stuff. That's where it all starts. And I can think about it and maybe help a little bit, but it's mostly doing stuff.

I love that point so much. It was something I was going to touch on, but I didn't get to. There's so many people that just sit around and theorize about a strategy of their business, especially in the early stage. Here's our grand master plan. Here's an amazing strategy. or just read about startup ideas and don't actually try it. I love this final note of just like, just try it. Just do it. Don't just sit there and- yeah, yeah, just do it.

And life is full of surprises. You'll end up in a place you didn't expect.

Amazing. Speaking of ending up in a place you didn't expect, it's time for our very exciting lightning round. Are you ready?

Oh, sure. I'll do my best here. I'm not very good on lightning.

First question, what are two or three books that you've recommended most to other people?

One book that is extremely wonky, and I can only take it in very small doses, but is magnificent is one called the Road to Reality by Roger Penrose, who's this brilliant mathematician. And it will be very daunting for anybody unless you're a deep math person. but his brilliance in every edition just shines through in this thing. And it's just, it's an amazing book. I would say there's another book, boy, I wish I could remember the name. Maybe you can get the name of the author, a book called Gene by this geneticist, and I think he's a Harvard Medical School professor that's about the history of genetics. and he is an absolutely luminous writer. I mean, it puts me to shame. I'm embarrassed when I read it because I think how pedestrian my writing is. He's and incredibly knowledgeable about the history of genetics. And I think that's such an important topic. So those are two that I would recommend. I would fairly wonky, but I like them both.

I love them. The author, I just looked him up, said Hartha. Mukherjee.

Yes, just amazing. You read it and you'll go, How did he think of that phrasing? I mean, it's just amazing.

Do you have a favorite recent movie or TV show you really enjoyed?

I'm a huge movie fan and have been all my life. And I'm particularly keen on animated films. But the movie that I've recently seen that I liked particularly it was American fiction. I thought that it didn't make any of sort of the easy choices in a movie and as a result was just incredibly interesting and thoughtful, I thought.

Do you have a favorite product you recently discovered that you really love?

In my office just this last week, we actually put a Persian rug in our entry room. And this is what's called a Farahan Saruk rug. And it's 150 years old. And it had an effect on me that I didn't expect, which is. It is. It is a work of great beauty. And it was before. It was all hand done before machines. You get all this wonderful variation. of the actual icons in a rug and the different dye colors. And I find that every morning when I walk in, I go, that's really beautiful. And it's uplifting. And it shows you the importance of or the value of sort of the quality of art. I mean, it's just it just kind of blows my mind, actually. So that's probably not the usual product. Discussion that you get.

But no, I love that answer. Recently we've had some really unique choices. One is a very nice Mercedes in a Rivian and a minivan recently. We've got a lot of very, very nice things.

Oh, that's good. I'm a car guy too, so I didn't answer on the car. Oh, man.

I love that. We have Rory Sutherland coming on the podcast soon. He's one of the leaders of Ogilvy and he has a whole thing about how buying a home is like the best value of art to buy art if you live in a home that makes you feel inspired and is beautiful.

Yeah, I'm a big believer in that. I think that sort of your place and how you connect to it has an important grounding effect. And before I talked earlier about creativity and I think surrounding yourself with in an environment that stimulates that is, is really important. And so I, I couldn't agree with it more.

Two more questions. Do you have a favorite life motto that you often think about, come back to, share with friends or family?

One is what Clint Eastwood advice to actors, which is don't just do something stand there. and so there, there are a lot of things that are long-term-ish with kind of low signal to noise. And, and you can often just do a lot of stuff that you think makes a difference, but it really doesn't. And so that, that's, that's, that's one. The other one, which is somewhat more profound, I think, was one that I had a famous Sri Lankan journalist who was a mentor of mine and very dear friend. And he had a favorite expression that I adhere to all the time, which is everything is always about something else.

Wow. Deep.

And that's so true if you're dealing with this power stuff. When if you really dig down, everything is always about something else.

Speaking of power, final question. People that have a lot of power are leaders in the world. I'm curious, do you have a favorite historical leader?

So, yeah, so I have some that I admire a great deal. I'm a tremendous fan of Winston Churchill's. You know, quirky, most really great people are quirky, you know, and he qualified. There are things you could say about him that, you know, you might not have liked that so much, but but he was a genius and had great fortitude, human sense. He understood things long before other people. I've given him eye marks on some of the great artists I admire enormously. I'm just, I'm reading a book right now on sort of the last 20 years of Michelangelo, which is a wonderful book, actually, and which is a very interesting period because in his first 70 years, he sort of finished, you know, he finished up all that. He wasn't going to do sculpture anymore. He just finished the, the last judgment, which was the wall of the Sistine Chapel and, I think, the last major Fresco he did. And a lot of his friends and as he, at that time, he was exiled from Florence and living in Rome and, and. and he had this Roman community and a lot of his close friends had recently died or had difficulties. So he's at this inflection point in his life at 70, which in those days was very old. And yet he went on to do some of the most remarkable architecture in the history of the world. And so that, you know, you've got to admire that, you know, I mean, I started doing that, which is that rare second act. But I think for world leaders, Winston Churchill is very high. I'm a fan of Teddy Roosevelt, I must say, too, in this country.

I love that. Hamilton, you are wonderful. I feel like we have helped a lot of people up level their ability to think about strategy and moats and power. Thank you so much for being here. Two final questions. Where can folks find more online if they want to dig in further? And how can listeners be useful to you?

Yeah, so as I say, I'm an idea person and I'm about trying to empower company founders. And so only thing I can say is, you know, read the book, spread the ideas, start your own company. Those are the things that would make me happy.

Amazing. Hamilton, thank you so much for being here. Great.

My pleasure, Lenny.

Bye everyone. Thank you so much for listening. If you found this valuable, you can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. Also, please consider giving us a rating or leaving a review, as that really helps other listeners find the podcast. You can find all past episodes or learn more about the show at lennyspodcast.com See you in the next episode.