Building In Competitive Markets & Marketplace Defensibility

2 Aug 2024 · 5 min

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4:38

In this monologue, the speaker discusses how marketplaces achieve defensibility, emphasizing that the ultimate protection comes from customers who love the platform, reinforced by network effects, loyalty programs, and stickiness. He then shifts to the challenges large companies face when trying to build new products internally—resource constraints, time delays, and disruption of existing priorities. To overcome these hurdles, firms often acquire startups, a strategy he illustrates with TripAdvisor’s history of buying over 30 companies and Google’s acquisition of YouTube after failed internal attempts. The speaker explains that acquisitions are less about EBITDA multiples and more about acquiring ready‑made products, teams, and CEOs who can integrate with existing assets. He notes that public companies can spend cash on relatively small deals without board approval, and he is comfortable overpaying when the strategic fit and talent are right, even if the target has no earnings. The overall message is that defensibility stems from customer love and network effects, while growth and product expansion are efficiently achieved through strategic acquisitions that bring in talent and proven solutions.

Chapters

How do you just generally speaking for marketplaces think about kind of competition and defensibility? The ultimate defensibility is having customers that love shopping on you. If it's something a little bit more sticky because you have a network of friends there, you have loyalty points, you have something that keeps them from switching, all the better. But like in the travel space, it's a dynamic industry. I, you know, we can get to it now or later, but I'll tease it as I, the thing I didn't appreciate as a startup that I now appreciate as having run TripAdvisor in the, you know, the thousands of people days is really hard for a big company To build something new. So TripAdvisor bought 30+ other companies. Most other big companies have bought their way into new products, even Google, right? They tried to compete with Facebook. They killed that effort. They tried to compete with YouTube. They killed that effort and bought YouTube. They don't always succeed at what they tried to do. And there's a huge advantage for a big company to spend absurd sums of money buying a tiny company, absurd as a revenue or EBITDA multiple. Because as CEO, and this is just to get you in the head of someone that might buy your company, for me to, I know I can build Whatever you've got, as much as you may think it's unique, special, blah, blah, blah, you've got a product out in the market. I can tell a team of people to copy it. Now, telling a team of people to copy it is just hand waving. I don't have a team that's available. Everyone in my company is working on something important. I have to go hire a team. I have to go Find someone to lead the project internally coming off of a key priority already. Externally, it's a risk. Maybe the person knows how to build stuff, maybe not. So assembling the team, it's not that it costs too much money. I'm gonna pay a lot of money for this company. It's that it'll be 6 months before I'll even be up and running. Or I'll have to disrupt a bunch of current priorities for building a product that may not work. Even if there's an example over there, it may be tough to replicate. We don't really know this new thing. Flip side, as a public company, I'm worth a billion dollars, $2 billion, $5 billion, whatever the number is. For me to spend in stock or if I'm profitable, my cash to buy a company for $10 million, $20 million. I didn't even need board permission for acquisitions of that scale. Okay. I had to like the team. I had to like what they accomplished. What they were doing needed to fit in with where we were going. So I rarely, I don't think I ever bought companies just for their EBITDA. And I needed to be able to explain to myself why it was worth the legal and accounting and rest of hassle in bringing a new company on. But if I liked the company, they'd already built it. They'd already hired the people as the CEO or head of product. All the companies we bought, we almost all, we wanted to keep the CEO because that was the person I was gonna be now be depending upon to grow this when combined with all the TripAdvisor assets or customers or traffic, you know, whatever it was that made the synergies good. And I didn't frankly care if I was overpaying. So the number of companies that we Bought for, you can call it an infinite EBITDA multiple because they weren't making any money. Yeah. Dozen at least.