The Importance of Convexity and Supply in Building Successful Ventures

The Importance of Convexity and Supply in Building Successful Ventures

Introduction:

In the world of technology and empirical science, the gains attributed to trial and error and chance are often questioned. Logically speaking, neither of these factors can lead to long-term gains. Chance, by definition, cannot create consistent positive outcomes, as it would no longer be considered chance. On the other hand, trial and error is not unconditionally effective, as errors can have catastrophic consequences. However, there are other elements at play that contribute to the success of ventures, such as convexity and supply, which we will explore in this article.

Supply as the Driving Force:

When examining successful marketplaces, one common thread emerges - the emphasis on supply. Many companies that have achieved marketplace success found that focusing on growing their supply early on was crucial. In fact, 80% of the companies interviewed in a study prioritized supply growth (14 out of 17 companies). This approach yielded favorable results, as supply often drove its own demand or generated strong word-of-mouth referrals.

The Chicken-and-Egg Problem:

One of the challenges faced by marketplace businesses is the chicken-and-egg problem, where it becomes difficult to attract both supply and demand simultaneously. However, the lesson learned from successful marketplaces is that prioritizing supply can help overcome this hurdle. By concentrating resources on growing the supply side, these companies were able to create a thriving ecosystem that eventually attracted the demand they needed.

The Importance of Brand and Product:

While supply is crucial, it's important not to neglect the brand and product. However, the timing of brand and product development is key. It may be more beneficial to postpone building a brand and focusing on creating a delightful product until after achieving liquidity through supply growth. This approach allows companies to allocate their resources effectively and ensure that their product aligns with the needs of the market.

Patreon's Shift from a Marketplace:

An interesting case study is Patreon, a platform that initially positioned itself as a marketplace. However, through careful evaluation, the company realized that it was not truly a marketplace and made the necessary adjustments. This realization turned out to be a pivotal moment for Patreon, allowing them to shift their focus from "Discovery" (finding creators to pledge) to building an apps and developer platform. By acknowledging their true identity, Patreon was able to differentiate itself from competitors like YouTube and Facebook, who were limited by their marketplace-oriented products.

Actionable Advice:

1. Prioritize supply growth: If you're building a marketplace business, focus on growing the supply side early on. This can help create a self-sustaining ecosystem and attract demand organically.

2. Postpone brand and product development: Instead of investing heavily in brand and product from the start, concentrate on achieving liquidity through supply growth. This ensures that your product aligns with the market's needs and maximizes resource allocation.

3. Evaluate your marketplace identity: Continuously assess whether your business truly fits the marketplace model. It's essential to align your vision and metrics with the reality of your product-market fit. Adapting and shifting focus can lead to better opportunities and differentiation from competitors.

Conclusion:

Understanding the limitations of trial and error and chance in driving technological and empirical advancements is crucial. Instead, focusing on the concept of convexity, where supply growth generates its own demand, can be a more effective strategy. By prioritizing supply, postponing brand and product development, and aligning your marketplace identity, you can increase the chances of building a successful venture. Remember, understanding the importance of convexity and supply is a powerful substitute for relying solely on trial and error or chance.