The law of diminishing distribution arbitrage
David Peterson

I shared some thoughts on LinkedIn about the importance of distribution last week, and decided to expand on them today.

I’ve been thinking a lot about this Justin Kan tweet from 2018:

This tweet has been quoted countless times since then. But I wanted to interrogate why Kan’s insight rings so true.

I think it’s because:

• To create a truly breakout company, you need some sort of distribution advantage

• Every successful distribution tactic is copied until it’s no longer effective

In other words, second-time founders obsess with distribution because they’re intimately familiar with what I like to call: the law of diminishing distribution arbitrage.

If you’re a student of the startup world, then you probably remember when new distribution tactics first came on the scene. Paypal’s referral hack. Facebook’s university rollout. Zapier’s long-tail integration-focused SEO pages. Notion’s community-driven templates.

But the effectiveness of each of these innovations lessened over time. A simple referral code link doesn’t have the same impact it once did. Long tail SEO is a morass. Every tool today launches with a template gallery.

At least part of what made these tactics work to begin with was their novelty. But I think the real secret is that each tactic was tied to a key product innovation.

Paypal’s referral hack ($10 for every user you invite) was so powerful not just because they were giving money away, but because the money showed up, immediately, in your Paypal account. And then you could use it, immediately, to pay for stuff. The immediacy, made possible by Paypal’s underlying technology, was what made it magical.

This is why the same sort of referral code hack worked for Uber (the “credit” currency could immediately be used to book a ride), and why it did not work for Airtable or any of the other SaaS tools out there (who cares about “credit” in my account when I’m paying with my company credit card?).

That being said, the most interesting distribution tactics, in my estimation, are those that emerge from people simply using the product itself. As an example, what made Dropbox so viral was the fact that users could share files with nonusers as easily as sharing a link. In the world of FTP, that was groundbreaking. And inherently viral.

To copy that distribution innovation, you’d need to copy the product. Not so easily done, and certainly not by Dropbox’s old-school competition.

Perhaps because of my background in growth and go-to-market, I focus a lot on this question when I speak with founders. And that’s in large part because I don’t think you can make this up on the fly. At first glance, it may seem like something you shouldn’t waste your time on until after you find product-market fit, but I strongly believe you need to have some sort of hypotheses about what your distribution advantage will be from the very beginning, as those hypotheses may impact how you approach building your product today.

So, if I’m lucky enough to get to speak to you about what you’re building, don’t be surprised if, despite the fact that you’re pre-product, pre-revenue, pre-everything (the stage we love to invest!), I’m still asking you about how you think you might build a durable distribution advantage. Innovating on product isn’t enough. You have to innovate on distribution as well.

David

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WORTH READING

ENTERPRISE/TECH NEWS

JP Morgan’s Silicon Valley push. For years JPMorgan has been trying to strengthen its foothold in Silicon Valley, especially as JPMorgan was the “tech world’s third-favorite bank for running big-ticket tech initial public offerings, unable to break the stranglehold Morgan Stanley and Goldman Sachs have on the lucrative business.” Last year’s banking crisis that collapsed Silicon Valley Bank and quickly spread to First Republic offered JP Morgan a unique opportunity. JPMorgan was able to acquire First Republic and other bank customers “scrambled to move their cash to the bank in the wake of SVB’s and First Republic’s problems. After having experienced several quarters of declining deposits as customers sought out banks that paid higher interest rates, JPMorgan added nearly $60 billion in net deposits in the first half of last year when fearful companies and consumers shifted their cash to the U.S.’s biggest financial institution.” A year following the bank crisis JPMorgan’s Silicon Valley approach has shown to differ in a couple of substantial ways from SVB and First Republic’s approach. 1) “Some customers say JPMorgan hasn’t shown the kind of human touch that once made banks like First Republic such an appealing option for venture capitalists and startup founders.” 2) JPMorgan has been very selective about the VCs and founders they are willing to work with — focusing primarily on the larger VC funds and later-stage companies. On the other hand, SVB and First Republic’s approach was capturing market share.

2024 guides. Jamin Ball put out an in-depth report on 2024 guides for public cloud companies. “Overall, companies are not guiding above current consensus (median guide is 0.2% below consensus). Is this just companies guiding conservatively, to set up the year for beat and raises? There’s been a lot of dislocation in the world, and after going through the last few years I can see how companies would want to “set a low bar” for the full year.”

Bias in GenAI recruiting. A Bloomberg experiment uncovered that GPT 3.5 systematically produced biases that disadvantage groups based on their names when asked to select “the most qualified candidate”. The extent of GPT’s bias “would fail benchmarks used to assess job discrimination against protected groups.” The findings of this experiment highlight the dangers of widespread GenAI adoption without careful oversight.

HOW TO STARTUP

Launching on Product Hunt. Lenny’s Newsletter featured key strategies on how to successfully launch on Product Hunt. The entire post is worth reading, but this is key: “High-level, here’s what you need to be doing weeks before launch:

• Build anticipation: Let your community know you’ll be launching on Product Hunt. Plant a seed that you’ll ask for their help later.

• Account creation: Encourage your network to create a Product Hunt account 30 days prior to your launch date (if they haven’t already). The Product Hunt community (and algorithm) values engagement from seasoned members more than newcomers.

• High-value-user engagement: Focus on engaging users who are active on Product Hunt and have a significant following. Their support can be pivotal.

• Global strategy: Leverage time zones to your advantage. You’ll want users in as many time zones as possible, to spread votes throughout the 24-hour period.

• Maker Network: Engage with the community well before your launch. If you are active on Product Hunt in the weeks leading up to your launch and support other makers throughout their launches with meaningful feedback and comments, they are often more than happy to reciprocate the favor and support your launch in turn. Users who have recently launched on Product Hunt have much better response rates than those makers who last posted anything two years ago.”

HOW TO VENTURE

OpenView’s final chapter. OpenView, the highly-regarded VC that sent shockwaves last year when they abruptly announced they were shutting down, will be returning $571M to their LPs, 75% of the fund they raised last year. “The firm, best known for previously holding stakes in enterprise software firms including Datadog and Expensify, late last year laid off most of its investing staff and halted new investments. The move underscored the challenges presented by the collapse in startup valuations and the quandaries faced by VC firms as a generation of partners prepares to retire.”

The VC’s role. Alpine’s Ed Suh dropped some hard-earned VC wisdom on X. “We are consigliere to founders. We are not bosses, coaches, or parents. At best we can try to guide & impart advice, but we cannot control (nor should we).”

The state of Israel pre-seed. Fusion released their report on the 2023–2024 Israeli Pre-Seed Investment Landscape.

PORTFOLIO NEWS

Steadybit announced a $6M Series A funding round led by Paladin. They also released ‘Advice’, a groundbreaking new feature and your new chaos engineering sidekick.

Reco’s Co-Founder and CPO, Gal Nakash, shared a CISO’s guide to SaaS security posture management.

Aquant’s CEO, Shahar Chen, wrote a Forbes article on AI bridging the skills gap and enhancing operational efficiency in service organizations.