Invest Like the Best with Patrick O'Shaughnessy
· Gokul Rajaram
[00:00:00] S1: The good news is being first doesn't matter because especially if you're in category one, which we described, you control your first party inventory. In fact, being second or third, you can learn from the iterations and mistakes that the first one makes. Your inventory is not going anywhere. Now, some might have more urgency to monetize than others, but Gemini doesn't need to monetize anytime soon. So they can just sit back. They have a lot of ads expertise and data from Google. They can sit back and wait till they need to monetize. In fact, a good strategic move for them might be to say, "I'm the zero ad platform." Google can claim that Gemini has no ads in it. And there is a certain set of customers or consumers who care about that. The biggest thing is, and OpenAI has done a good job of articulating this, ads should not influence the content that is served to me, or the recommendations that AI gives to me. I think they should be relevant, but they should not be influencing the recommendations. And second, you have to keep a high bar for engagement and usefulness. Unfortunately, however relevant ads are, the reality is – and this has been proven – is that once you start showing ads in a previously unmonetized zero ads surface, engagement of users goes down over time. Because some of the engagement gets siphoned off by ads, and some of it gets siphoned off in different ways. But there's many holdout groups across many companies that have proven this. So the question for any one of these companies is, how much engagement are we willing to take in exchange for monetization? First, you need to have a holdout group of people who never ever see any ads, because that's your fresh group that never sees ads. And you need to understand that's their behavior. And then you need to always understand how people with ads are behaving. And then you need to figure out what the engagement hit is from each quantum of ads. And you need to then give your ads team a certain engagement budget. So that's what, at Facebook, there was an engagement budget every year that between the News Feed team and the ads team, we had to adhere to. In other words, yes, we wanted this much revenue, but the check metric on the revenue was, we can't take more than X percent dip in engagement overall for News Feed.
· Patrick O'Shaughnessy
[00:00:00] S0: Picking that well, you've talked about like a North Star metric. What are the attributes of a good North Star metric? What advice would you give someone that's trying to pick the thing around which the company is going to optimize?
· Gokul Rajaram
[00:00:00] S1: The North Star metric is a metric that is an indicator of company growth and customer value. So it actually balances customer value and business value nicely. North Star metrics, in my opinion, should not be revenue. It should be something that is directly correlated to customer value. So for example, if customers are doing well, the North Star metric should go up and to the right, but it should also lead the business doing well. For example, for Square, the North Star metric was GPV, which is volume of payments processed. It was not correlated to revenue – it was somewhat correlated to revenue, but it most importantly showed that the amount of payments processed to the company was continuing to grow. At Facebook, the North Star metric was DAU. It was actually monthly active users, then it over time went to daily active users because it was an indication of how engaged users were. Now, one of the most important things about an NSM is that it needs to be coupled with what we call check metrics. In other words, incentives drive behavior. So if you tell a team, go and optimize this North Star metric, it is going to go up, 100%. But then many things that you don't want to go down, could go down. So for example, in the DoorDash case, you could say, "I want to grow GMV", which is the gross merchandising value, which is the North Star metric. Now, GMV is the total order of total value of all the orders that go to the marketplace. I could make it grow up by setting delivery fee to zero, by setting everything to zero. And what happens then? The company's revenue goes to zero. So you basically want a check metric around the health of the customer and a check metric around the health of the company. Those are the guardrails around this North Star metric. So in the case of DoorDash, it might be I want to maintain a certain gross margin percentage, or I want to maintain a certain customer retention percentage. Margin is typically a good one to use because in some ways, that is an indicator of the company health.
· Patrick O'Shaughnessy
[00:00:00] S0: There's these two ideas that we talked about when we first met. One was the need for the very best software companies to stand alone, in the sense that someone can just go use it without talking to a human and it just works for their problem. So like fully, fully self-serve. So I'd love to hear you talk about that. And a related idea was – that’s sort of on the builder side – on the investor side, you mentioned to me that all the great investments that you've had – the companies that have really had explosive growth – have had a high number of one of four qualities, which is, I think was gross margins, low cost to acquire the customer, high retention, and a tight sales cycle, which maybe maps back onto the self-serve thing. Talk about the relationship between those two things.
· Gokul Rajaram
[00:00:00] S1: The self-serve notion actually came from – Google was the first company I worked at which achieved massive scale. And what happened at Google was, within the ads team, we basically had a wide number of customers using us, millions of customers using us. There were a lot of small businesses, but there were also large companies. What we ended up doing to serve the large companies, large companies didn't want to use the product themselves. They had agencies using it for them on their behalf. And they also had internal people at Google. Support, sales and operations people, using them. So on the product side, we built a lot of tools for our internal colleagues, for our sales and operations colleagues to manage the system for the large customers. One day I think we were at a Larry review, and we were showing these, what we called ICS, Internal Customer Systems to Larry. We were not meaning to show it, but I think to show him a demo, we somehow got into it. He was like, "What is that?" "Well, it's a system used by internal teams." He's like, "Why'd you build it?" We're like, "Well, we have to help our large customers." He said, "You mean our small customers don't have access to it?" We're like, "No." "End it right now. I want to make sure that everything you're building for large customers is also available to small customers." So we basically had to take everything we had built over years in this ICS system and make it available to customers. And turns out, an interesting thing happened. Turns out the smaller customers adopted it much faster, because some of these things we were building had advanced knobs and so on that we didn't think they would use. Turns out the self-serve customers were the most sophisticated users because if you do something that's interesting – there's all these small agencies, entrepreneurs, hustlers. If you can help them make more money, it's a testament to human creativity and ability. They exploit the system in ways that you never even know, and you learn a lot from working with them. So I've seen in every case, when you open up your system to self-serve, you learn so much more about the capability of your product, than if it's basically your sales team doing it on their behalf.
· Gokul Rajaram
In fact, I'll never forget, in AdSense, I think we had some of the largest publishers in the world sign up and start using us on a self-serve basis. And then we engage with them after that. And I think companies like Atlassian… Square, I think we had Nike, signed up for a Square device and self-serve onboarded and started using it in one of their stores. It does two things. One, it makes your product better because these folks, they use the product in ways that you don't expect or anticipate and it forces you – because what is the definition of self-serve? The definition of self-serve is that the customer can onboard, not just use, but onboard and use the product without ever talking to or engaging with a single member of the employee base of the company. So when you do that, that means you have to think about how do they actually get set up with the product. So it really puts a lot of effort into onboarding. Because onboarding is one of those things where most people drop off, if you don't do a good job. And then you've got to get them to a moment of delight very quickly. All of those things, if you're not building a self-serve product, you don't even think about. In a self-serve product, you think about it every day. It's like a consumer product or a self-serve business product. And then second, what it does for you is it opens up the aperture to your customers. Because with, say, 100 salespeople, yeah, you can reach maybe 10,000 customers. But with a self-serve product, with the right word of mouth, you can reach millions of customers. Look at Cursor, for example. It is used in every large company, I bet. Only maybe 1% of companies uses maybe the top-down motion. 99.9% of companies, some engineer got it. Great example is a company, is Figma, actually. After I invested in Figma, I joined Square one and a half years later, I tried to basically push Figma top-down into the design team, because I didn’t design. I said, "You've got to use Figma." Designers refuse to use it. They're using a tool called Sketch. And they said, "We're not going to use it. Sketch is much better." And so I felt, okay, it's not my place to tell them what to use. So I backed off. Two years later, a mid-level design manager came in and they brought in Figma from their prior company and they got it to be used across, and it kicked out Sketch.