The Power of Market Networks

Steve Case has been discussing his concept of market arbitrage through his Rise of the Rest efforts. As a follow up on a recent post, I wanted to dig a bit deeper into the value and power of market networks.

NfX has explained the essence of a market network as well as anyone I have come across. In their words:

“Marketplaces provide transactions among multiple buyers and multiple sellers — like Poshmark, eBay, Uber, Patreon, and LendingClub.

Networks provide profiles that project a person’s identity and then lets them communicate in a 360-degree pattern with other people in the network. Think Facebook, Twitter, Goodreads, and LinkedIn.

What’s unique about market networks is that they:

  • Combine the main elements of both networks and marketplaces
  • Use SaaS workflow software to focus action around longer-term projects, not just a quick transaction
  • Promote the service provider as a differentiated individual, helping build long-term relationships
  • Market networks are also unique from a monetization standpoint. They combine the strong network effects defensibility and scalability of direct networks like LinkedIn or Facebook together with the lucrative revenue models of SaaS or marketplace businesses.”

Here is why this is relevant to the world of alternative investing:

Investment platforms that get the market network engagement and workflow dialed in will offer an opportunity to invest more efficiently and intelligently than analog models.

The premise of the advantage is that we are smarter as a community than we are individually. A network can efficiently and effectively tap into the wisdom of its members. A well crafted platform will also make work-flow associated with the investing processes more efficient than is otherwise possible with a host of individual inputs managed offline.

The point of this post is not to linger in the realm of academia, but to encourage readers with a penchant for investing to lean into a marketplace with aligned interests and help mold it into a place where you can gain personal value and advantage.

When you’re ready to stop wasting potential, join us. Sign up to the AngelMD network and you’re immediately part of a community with a potential that is far greater than any one individual.

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Culture in Progress

I enjoy reading material by Ben Horowitz and his recent book “What You Do is Who You Are” is no exception. Ben takes on the task of exploring what makes for healthy company culture and articulating how one shapes said culture. This is no small task, but he takes an unorthodox approach and it worked for me.

Culture is Complicated

Horowitz explores three odd historical figures to demonstrate leaders who influenced culture. He started with Haitian slave Toussaint Louverture then moved to murderer-turned-author Shaka Senghor and finished with Genghis Khan. But he didn’t dwell on their troubled past, he focused on their personal evolution and the subsequent influence on everyone around them. 

In other words, culture is evolving just as we are evolving. The question is whether we are evolving toward something worthy. Horowitz also speaks of more modern-day cultures such as Uber, Lyft, Slack, Intel, Netflix, etc.

Culture is Deliberate

Horowitz is transparent about some of his own leadership shortcomings and what he has learned along the way. Among the key lessons was to surround himself with people who offset his weaknesses. All of us have flaws and — presumably — we don’t want to incorporate those flaws into our company culture. One of the best ways to ensure this happens is to find people to counter-balance our flaws. Horowitz points to his interest in long conversations. This can be a productivity killer if not guarded, so he surrounded himself with people who had no interest in carrying on long conversations.

I also appreciate that Horowitz does not subscribe to feel-good nonsense like “do the right thing”. He dives into this mindset by showing how one person may think X is the right thing to do based on some set of values, but another person may find a different response to be appropriate. 

Culture gains clarity with specificity and storytelling. The more examples a company can create to reinforce its aims, the better. It’s also the case that culture has to evolve just as companies evolve. The same guidelines that helped a company succeed in the very early days may become counter-productive as it matures.

Quickest Way To Shift Culture? Hiring Practices

In Chapter 8 Horowitz talks about the CEO of Slack:

He decided to orient his culture around the people he wanted to hire. 

Who you hire, defines your culture more than anything else. Horowitz follows… “in a meeting I had with Suresh Khanna (the hiring manager) at AdRoll, something he said really stuck with me…He narrowed down a hiring process with the following attributes; (S.H.H.C.) Smart, Humble, Hard-working and Collaborative.”

No matter what culture, no matter how many thousands of years ago, no matter what “business model” one is creating — actions speak louder than words. Culture is an adjective, not a noun. Actions start at the top of the Enterprise.

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The Case for Arbitrage

Steve Case has worked for the past few years promoting his thesis that investment grade companies are increasingly rising out of non-coastal markets. Through his Revolution venture firm and Rise of the Rest Fund he is putting money to work in markets that aren’t California, New York, and Massachusetts.

At the recent Greenwich Economic Forum, Case shared that investment opportunities in middle-of-the-country markets are acting as an arbitrage against the traditional economics of venture investing. According to the National Venture Capital Association (NVCA), 75% of startup investment dollars in 2018 went to California, New York, and Massachusetts. More than 50% went to California alone.

The glut of capital in coastal markets has led to a rise in valuations as money chases deals. Case and others would say the valuations have become inflated which presents an arbitrage opportunity. These areas allow an investor’s money to go further.

The reality is that most coastal-based venture firms are not going to put serious effort into sourcing and signing deals in the middle of the country. There are a few VCs that have made the move, and we are starting to see new funds cropping up in many of these nascent markets. They bring together LP capital from sources that want to take advantage of the arbitrage opportunity and locals that want to stem the brain drain from their backyards.

The most interesting shift has little to do with the venture firms at all.

Most VCs have poor fund track records. For many of the newer funds, the clock is ticking on the merits of their first efforts. Furthermore, investment marketplaces now democratize early-stage access to private investment opportunities. Sharp investors are less reliant on a venture fund serving as the middle-man to get access to this class of investment. In most cases, these marketplaces will offer access to deals with better economics than can what a Venture firm can offer.

With these new investment platforms and the continued focus on the coasts, the smart move has changed. Those looking to take advantage of the landscape should look to include better economics in non-coastal deals with access to deals with non-venture fees.

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The Health Halo – Bill Carpou, CEO of OCTANe

Bill Carpou is a champion for innovation in healthcare, and the CEO of OCTANe, based in Southern California. The goal of OCTANe is to improve both technology and medical technology business ecosystems by connecting people, resources and capital. Two of the company’s initiatives, LaunchPad SBDC and OCTANe Enterprise Solutions (OES) aim to create 22,000 high paying technology jobs by 2025 and 55,000+ by 2030.

Bill Carpou on AngelMD

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Innovation4Alpha Se2 Ep4 – Stephan Livera of The Bitcoin Podcast

In this episode, Tobin Arthur and Dr. Jeff Ross talk with Stephan Livera. Based in Sydney, Australia, Stephan is the host of The Bitcoin Podcast. He’s quite bullish on Bitcoin, and in this episode he provides us with some education about how the currency works, as well as how it can be used for investing. Make sure to check out the extensive show notes, and subscribe to The Bitcoin Podcast to stay up to date.

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