20VC 7 Powers The Foundations of Business Strategy Deconstructing Economies of Scale, How To Assess True Market Size, Assessing Risk vs Uncertainty, What “Brand As Power” Really Means with Hamilton Helmer, Managing Partner and Chief Investment Offi

In a dynamic conversation with Harry Stebbings on "The Twenty Minute VC" podcast, Hamilton Helmer, Chief Investment Officer at Strategy Capital and author of "7 Powers," discusses the intersection of strategy, investment, and teaching. Helmer emphasizes the importance of a simple yet non-simplistic mental model for strategy, the distinction between invention and first-mover advantage, and the necessity of barriers alongside innovation for creating durable business advantages. He also differentiates between brand awareness and brand power, with the latter being a long-term value built on customer perception that's not easily replicable. Throughout the interview, Helmer shares insights on the strategic journeys of companies like Netflix and Tesla, highlighting the role of constructive dissonance in fostering a culture that pursues the right strategy over individual correctness.

• Hamilton Helmer is the managing partner and chief investment officer at Strategy Capital.
• Strategy Capital is a long-only public equity fund that selects securities based on power dynamics, a model developed by Hamilton.
• Hamilton is also the author of "7 Powers," a book highly regarded by notable figures like Daniel Ek, Peter Thiel, and Reed Hastings.
• Additionally, Hamilton is an instructor in the economics department at Stanford University.
• His work encompasses advising companies on strategy, teaching strategy, and investing based on strategic insights.

"Hamilton Helmer, managing partner and chief investment officer at Strategy Capital, a long-only public equity fund that selects securities for investment based on power dynamics, a proprietary model of fundamental value developed by Hamilton over decades of strategy consulting with clients such as Hewlett Packard, Adobe and more."

This quote introduces Hamilton Helmer's professional background, highlighting his role at Strategy Capital and the unique investment model he developed through years of consulting experience.

• Hamilton has been involved in strategy from three perspectives: advising companies, teaching, and investing.
• His advisory role provided empirical experience through numerous strategy cases.
• Investing served as a "truth test" for his strategic insights, with tangible consequences for accuracy.
• Teaching at Stanford required refining and effectively communicating strategic concepts.
• The impetus for writing "7 Powers" was to provide a strategic thinking framework for moments of uncertainty, particularly useful for on-the-ground decision-makers.

"So I've really intersected strategy from three directions. I advise companies on strategy. I've taught strategy at Stanford and also inside companies, and I invest based on insights that I gained from strategy."

Hamilton explains his multifaceted engagement with strategy, which encompasses advising, teaching, and investing, each contributing to his comprehensive understanding of the field.

• A strategy mental model prepares the mind to perceive and understand strategic situations more easily and clearly.
• Hamilton cites Pasteur's dictum, "chance favors only the prepared mind," emphasizing the importance of preparation in strategic thinking.

"A mental model is something that prepares your mind in a useful way so that you're cognitively able to see stuff easily and clearly."

The quote defines a strategy mental model as a cognitive tool that enables clearer and easier understanding of strategic scenarios.

• Effective mental models must be simple enough to be easily retained but not simplistic to the point of missing important details.
• They must be exhaustive in covering essential aspects of strategy while remaining accessible for practical use.
• Mental models are not strategic plans; they are general frameworks adaptable to various situations.
• The ability to apply these models to new and changing circumstances is crucial, especially in the early stages of a business.

"The bar for effective mental models is that they are simple but not simplistic. Because if they're not simple, you can't retain them easily and you can't use them. If they're simplistic, then you miss important stuff. So it's got to be exhaustive, not simplistic, but it has to be easily retained. So simple, but not simplistic."

Hamilton describes the delicate balance required for mental models to be both practical and comprehensive, avoiding oversimplification while ensuring they are memorable and applicable.

• Constructive dissonance fosters a culture where the pursuit of the right answer overrides the need to prove oneself correct.
• Open, frank discussions with diverse viewpoints are essential for arriving at viable strategies.
• While operational excellence is crucial and consumes most of a leader's time, strategic considerations cannot be neglected.
• Effective strategy provides the potential for value creation, but it must be balanced with operational efficiency.
• Strategic discussions should be open and occur periodically, even if they do not dominate daily activities.

"And on the strategy side, I'm a huge believer in fostering a culture of constructive dissonance, which by that, I mean is what everybody is after is the right answer not to prove themselves right, because there's a lot of uncertainty around these things, and you need to have open, frank discussions with differing points of view, and that's how you can arrive at something that is strategically viable."

Hamilton advocates for a culture where seeking the correct strategic path is prioritized over personal validation, with constructive dissonance playing a key role in strategic development.

• Constructive dissonance is seen as beneficial in multiple companies.
• Netflix's culture empowers employees by understanding their goals rather than just their tasks.
• Employees have a higher-level view of their job's purpose, beyond just being told what to do.

"They try to have people understand what problem is. There's a phrase for it in their culture, deck, I can't recall it right now, where they're empowered by an understanding of what they're actually trying to accomplish opposed to what they're told to do."

This quote explains that Netflix encourages its employees to understand the problems they are solving, which empowers them and aligns their work with the company's objectives.

• Strategy is often discussed as static, focusing on the end goal rather than the process of getting there.
• Invention is a creative act that is crucial to forming a company and its strategy.
• Founders do not have a fixed playbook but must adapt and create as they build their company.
• Knowledge of attractive destinations in business helps guide the creative process.

"And the how you get there in the first place is that it's a creative act. And every founder knows that in the fiber of their being, they don't go around with this carefully analyzed playbook where they can say, I'm going to do exactly this today and this exactly this tomorrow, and have good visibility for the next five years. They are having to create a company as they go forward."

Hamilton Helmer emphasizes that creating a company is an ongoing creative process without a predefined path, contrasting with the static view of strategy.

• Early-stage companies may not have a granular strategy due to many moving parts.
• As a company develops, the strategy must become highly granular and specific to the company's situation.
• Understanding the nuances of scale economies, for example, is critical to developing a robust strategy.

"So in the end, it's highly granular."

Hamilton Helmer stresses the importance of a detailed and nuanced understanding of strategic elements, such as scale economies, for a company's success.

• Scale economies are rare sources of power against all types of competitors.
• Startups may initially lack scale economies but can develop them over time.
• The transition from a startup to a company with scale economies is significant for gaining pricing power and leverage.

"So really powerful scale economies, there are many instances of it, but in terms of being the source of power against all the types of competitors, you have to consider, they're much rarer than you would think."

Hamilton Helmer explains that while scale economies exist, they are rare in providing a competitive advantage against all potential competitors.

• Creation and invention do not necessarily mean being the first mover.
• The creative act is ongoing and involves adapting and incorporating ideas from various sources.
• Companies can be successful even if they are not the first to enter the market.

"I think the issue there is that with the creation or invention doesn't mean first mover."

Hamilton Helmer clarifies that invention is not synonymous with being the first to market, and success can come from how a company adapts and evolves its offerings.

• The notion that a product must be 10x better to succeed is not universally applicable.
• The idea of 10x improvement came from the semiconductor industry and does not translate to all industries.
• A compelling value proposition is more important than a specific degree of improvement.

"So, for example, if you, Harry, came up with a battery that was two times better density and met every other criteria of current batteries, you'd be a billionaire and we'd have 600 miles teslas instead of 300 miles teslas, that's two x."

Hamilton Helmer argues that a significant improvement, even if it's not 10x, can be incredibly valuable and lead to success, using the example of a hypothetical improved battery.

• Innovation is necessary across all aspects of a business, but not all innovations lead to a competitive advantage.
• The combination of a beneficial innovation and a barrier to competition creates power.
• While many innovations occur daily, strategic innovations are those that contribute to a durable business model.

"But in the ones where there is a barrier, and they are significant, it is possible to have those in just one area, that particular one."

Hamilton Helmer discusses how innovation in a single area, if coupled with a barrier to competition, can be a source of power for a company.

• Hamilton Helmer believes precise market size estimation is likely too late for innovation.
• Understanding unexpressed needs rather than current wants is crucial for creating new markets.
• Market surveys often fail for innovative products because customers can't articulate desires for unknown products.
• Founders should estimate market size with large error bars, aiming for order of magnitude rather than precision.
• Amazon's evolution from books to general shopping exemplifies the fluidity of market size and the importance of adaptability.

"My view is that if you can pretty carefully estimate your market size with great confidence, you're probably too late."

Hamilton Helmer suggests that if a market size can be estimated with high precision, it likely indicates a saturated market with limited room for innovation.

"What you'd like to do when you create something is to understand a need that somebody has, but is not yet really expressed in a want."

Helmer emphasizes the importance of identifying and addressing unmet needs that potential customers themselves may not yet recognize, which is essential for creating innovative products.

"So I'm talking large error bars here, but kind of order of magnitude estimates."

He advises founders to make broad estimates about market size, accepting significant uncertainties but aiming to identify whether the opportunity is potentially large.

• Founders should focus on their unique creative core rather than conforming to external expectations.
• Competitor awareness is important, but it should not distract from a company's originality and innovation.
• Success comes from authenticity and leveraging one's strengths, not from merely collecting accolades or mimicking others.
• Balancing internal drives with external realities is key to both personal career success and building a unique company.

"If you're a company that focuses just on competitors, it's an outside in type of situation. You lose touch with your own creative core."

Hamilton Helmer warns against an excessive focus on competitors, as it may lead to losing the unique value proposition and creative edge that differentiates a company.

"My advice is pay a lot of attention to competitors. Ultimately, power is about being better than them, but never give up that uniqueness and focus on your own creativity and moving the ball ahead yourself."

He advises founders to strike a balance between being aware of competitors and maintaining their own unique vision and creative approach.

• Founders often don't know their eventual 'power' early on; awareness of potential powers is key.
• The Seven Powers framework provides a mental model for strategic discussions and decision-making.
• In the face of uncertainty, adaptability and strategic thinking are crucial for startup success.
• Understanding the distinction between uncertainty and risk can guide founders in navigating the unknown.

"You want a number of people in the company to have a solid mental model of strategy so that they can have ongoing discussions about it."

Hamilton Helmer stresses the importance of having a shared strategic framework within the company to facilitate intelligent decision-making as the business evolves.

"Remember, strategy isn't everything, but it is something that if you don't get it right in the end, it won't be good."

He underscores the significance of strategy in building a sustainable and successful company, while acknowledging that it's not the only factor.

• Brand as power is distinct from brand awareness; it involves customers paying more for identical goods based on emotional satisfaction or uncertainty reduction.
• Building brand power requires time and cannot be easily imitated, establishing a competitive barrier.
• The value of brand power is in its ability to command a premium price due to positive associations or trust built over time.
• Examples include Apple's brand appeal and the historical prestige of luxury brands like Hermes.

"So brand as power is that somebody will pay you more for a good or service that's objectively identical."

Hamilton Helmer defines brand power as the ability to charge more for a product not due to its objective superiority, but because of the emotional or psychological value it provides to the customer.

"It's those situations where that takes a long time. So if you think about Hermes bags, if you pay $50,000 for a Kelly handbag, it's not because it's better than another handbag, particularly functionally."

He illustrates brand power using Hermes as an example, where the brand's long history and emotional appeal allow it to command high prices despite functional similarities with less expensive alternatives.

• Early-stage businesses should not solely rely on building brand power as their strategy.
• Brand power is typically a long-term outcome of consistent product quality, customer satisfaction, and social validation.

"I think it depends on the stage you're at. So if you're an earlier stage business, it's not a thing that you would want to pin your entire future on."

Hamilton Helmer suggests that for early-stage companies, focusing exclusively on building brand power is not a viable strategy due to the time and resources required to establish it.

• Establishing a brand is a long-term endeavor, often taking at least a decade.
• Brand building is fraught with uncertainty and requires numerous correct creative acts.
• It's risky to rely solely on brand strategy, especially for early-stage companies.
• For established companies like LVMH, brand discussions are crucial and focus on reinforcement and preservation.
• The example of Hermes cognac illustrates the difficulty of extending a brand to new products.

"But if that's the only aspiration that you have, you better be careful." "Building a brand involves enormous number of correct creative acts over a long period of time."

The first quote emphasizes the risk of focusing solely on brand building, while the second outlines the complexity and creativity required in the process. Both highlight the importance of diversifying strategies beyond just brand development.

• FANG (Facebook, Apple, Amazon, Netflix, Google) are all highly successful companies with durable market caps.
• Each FANG company exemplifies one or more of the "Seven Powers" that explain their success.
• These powers include network economies, brand, switching costs, scale, and others.
• The source of power is key to each company's success and removing it would significantly impact their status.

"So these are all companies that are triple digit or quadruple digit billion market cap. So these are durable market caps."

This quote highlights the significant and lasting market success of FANG companies, which is attributed to their strategic use of the "Seven Powers."

• Hamilton Helmer enjoys Neil Gaiman's "Stardust" for fiction and Roger Penrose's "The Road to Reality" for non-fiction.
• He is constantly seeking to extend and refine his framework of the "Seven Powers."

"On fiction, I'd say Neil Gaiman's stardust is probably my favorite book. And on nonfiction, maybe Roger Penrose's road to reality."

The quote reveals Helmer's literary preferences, indicating his interest in both imaginative fiction and complex non-fiction that likely influence his strategic thinking.

• Tesla's success in electric cars, becoming a world-scale auto company, and leading in auto technology was highly improbable ten years ago.
• This serves as an example of a company achieving what seemed nearly impossible, defying standard probability assessments.

"So just absolutely extraordinary."

The quote reflects Helmer's astonishment at Tesla's unlikely success and its defiance of expectations based on traditional frameworks.

• Hamilton Helmer is focused on understanding the nuances of strategic power and its application.
• He uses Uber and Netflix to illustrate how the application of power differs based on the company and industry.
• The challenge lies in determining how to extend power and in which contexts it is applicable.

"So for me, the challenge right now is thinking deeply about all the ways in which you can extend power and which cases it applies, in which case it doesn't."

This quote underscores Helmer's current focus on exploring the detailed aspects of strategic power and its application across different business scenarios.

• Hamilton Helmer acknowledges the significant impact mentors have had on his life, despite his introverted and independent nature.
• He wishes he had understood the value of mentors earlier in his career and been more proactive in seeking them out.

"I think mentors can be incredibly valuable."

The quote encapsulates Helmer's realization of the importance of mentors and suggests that seeking guidance can be transformative, an insight he wishes he had embraced sooner.

• Hellosign, an e-signature solution, and Headspin, a mobile testing and performance platform, are highlighted as successful startups.
• Both companies have raised significant funding and achieved notable acquisitions or customer bases.

"Hellosign is an effortless e-signature solution used by millions to securely send and request legally valid digital signatures and agreements."

"Headspin began in April 2015, when founders Manish and Brian both had painful firsthand experiences as lead engineers building mobile products at Amazon, Zynga and Google."

The first quote describes Hellosign's product and success, while the second details the inception of Headspin and its founders' motivations, illustrating the potential for startups to solve real-world problems and achieve substantial growth.