January 21, 2025 | Read Online

Supply x Demand

In 1892, Andrew Carnegie founded the Carnegie Steel Company, a steel mill.

This was not the beginning of something new - Carnegie had been hard at work for the past 20 years operating and acquiring steel mills from Pennsylvania to Ohio.

Carnegie's laser focus on consolidation made a lasting impact on business strategy:

Raw Materials: bought iron ores in Minnesota
Manufacturing: acquired the largest steel mills to turn iron ores into steel
Transportation: bought railroad companies to transport steel
Distribution: acquired shipping companies to control distribution

This process of controlling multiple stages of production became known as vertical integration.

Carnegie is the golden child of vertical integration. A more modern example can be seen in Bernard Arnault.

When Arnault bought Louis Vutton, his most important move was to integrate forward and take control of distribution.

At the time, Louis Vutton was being sold in department stores. They did not have a relationship with their customers, and the profit margins on luggages were a mere ~20%. Meanwhile, those department stores and retailers pushing LV bags made the largest margins.

Arnault vertically integrated Louis Vutton, controlling value from the designer to distributor:

Improved margins on luggage to 40%, compared to 15 - 25% for other brands
Going direct to consumer allowed the company to create a special Louis Vutton shopping experience + brand

quality control

The aforementioned companies are case studies in successful pipeline businesses.

Pipeline businesses employ traditional producer → consumer business models, pushing products linearly from manufacturing to marketing and distribution.

At some point during the mid-2000's, the seeds of change were silently planted.

In 2007 the Industrial Designers Society of America (IDSA) was holding a convention in San Francisco. Hotels on the conference website were sold out, and two young designers decided to fill a market gap.

should've wrote this in latin

Brian and Joe had recently moved to San Francisco only to find that rent ate up most of their personal cash flow. In October 2007, they were on the verge of coming up short when they got the idea to rent out their living room to some designers who couldn't secure hotel rooms.

The end result was a few thousand dollars that covered rent + a business that would go on to cover their life expenses many times over.

Airbnb is the poster child for platform businesses; online marketplaces powered by algorithms designed to connect consumers and producers.

The most famous and valuable businesses of 2004 - 2014 were platforms:

2004: Facebook ($1.5T market cap)
2005: YouTube (~$400B est valuation)
2006: X ($44B acquisition)
2008: Airbnb ($83B market cap)
2009: Uber ($129B market cap)
2013: DoorDash ($70B market cap)

Rather than consolidating and controlling supply, these businesses experienced rapid growth by constructing marketplaces to marry outside supply with demand. By outsourcing supply, growth was no longer limited by space and time.

The seeds planted during the Great Recession grew, and pipeline businesses were uprooted.

Below are key considerations when building a platform:

Liquidity

One of the most important components of a marketplace is whether supply can meet demand and vice versa. A minimum number of consumers and producers are needed for interactions to be successful

Can you find a driver on Uber / a host on Airbnb / videos on YouTube

Can drivers find riders / hosts find guests / content creators find viewers

In some sense, there is a chicken-egg problem where consumers will not show up unless producers are there and vice versa. This is where the best founders get in their creativity bag

Uber Example

1 Uber driver can serve about 3 Uber riders. Therefore, Uber places a priority on driving drivers (supply) to the app
Early in Uber's life, the company realized that recent immigrants were some of their best prospects for drivers, but they lacked the financial history to qualify for car purchases
So Uber decided to guarantee car loans for its drivers. They deducted repayments from driver revenue and sent them directly to the lenders. Finance companies liked the program because loans backed by Uber's balance sheet are nearly risk free + local auto dealers are happy with the extra inventory turnover

like the fries are at the bottom // dont try this at home

The beautiful thing about liquidity: once a threshold is met, a positive feedback loop occurs that brings more consumers and producers to the platform.

Governance

Facebook has 3 billion users, a larger population than China and India combined

Marketplaces often draw analogies to countries, and for good reason. Once liquidity is in place, governance is critical to ensure law and order. Without it, citizens of said platforms are vulnerable to bad actors

At the foundation of governance is architecture - the lines of code that reinforce good behaviors and reprimand bad ones.

aka "the algorithms"

Monetization

Generating income from a marketplace is an incredible complex topic so I won't attempt to simplify it by tackling everything at once.

Instead, let's lock in and analyze who to charge once a platform is generating value

A couple of options:

Everyone

In this monetization strategy, charging everyone strengthens the network effects at play by providing skin in the game and an air of exclusivity.

Think of this as the country club model

One Side

Pretty self explanatory: one side of the marketplace is willing to pay while the other is price sensitive. Maximize profits by charging that one side

Most Users, excl. stars.

Nearly everything in life is subject to the power law

80% of results comes from 20% of producers.

The strategy here is to make it as easy as possible for those 20% of producers to produce tons of value on any given platform.

So we charge almost everyone except the top producers / users

High school basketball coaches are familiar with this concept. In AAU basketball, most of the team is subject to hefty fees for tournament entry, gym time, etc.

But the best players on an AAU team don't pay a single dime…

Think of this monetization strategy as the AAU model

how long before eybl games hit fanduel

Some Users, excl. the price sensitive.

Also known as the freemium model: allow users with the highest levels of demand to upgrade their access for a price.

With those key considerations covered, it's important to realize that platforms have been built in every massive consumer spending category…

the map is not the territory

The evolution taking place now is not into other categories, but rather, into (a) serving high quality niches within these massive categories and (b) a return to vertically integrated companies.

Headlines

Mistral AI, last valued at $6B, plans IPO. Techcrunch article here
African VC Oui Capital returns first fund with Moniepoint's unicorn exit. TechCrunch article here
Goldman Sachs CEO Solomon says that AI can draft 95% of an IPO prospectus in minutes. Fortune article here
Blackstone expected to fetch $3B for Sesac, a music royalties portfolio including work from Bob Dylan and Adele. Bloomberg article here
Trading company eToro said to be eyeing $5B US IPO in 2025. TechCrunch article here
Instagram is trying to attract TikTok creators with large bonuses. The Verge article here