0:00:01 - Alex Shevelenko
Welcome to an incredibly special episode of Experience-focused Leaders! I would love to introduce you to my friend of 20 years and a hero of mine, Mr. Pete Flint. Pete is the founding CEO of Trulia, which went from a startup in a Stanford house to a $3.5 billion exit and went public on the way, Pete leading the whole adventure through. So I'd love to hear the lessons learned from that experience. And then, on top of it, Pete now wears the other hat. He founded and runs one of the largest pre-seed and seed-dedicated funds, NFX, which is an expert in all things network effects. Pete, welcome to the pod!
0:00:53 - Pete Flint
Thank you, Alex! It’s so great to be here. Good to see you again and chat about stuff.
0:01:00 - Alex Shevelenko
Well, great, this is actually for our audience. You're having conversations with friends. And Pete is going to tell the whole story, the unvarnished truth behind what it takes to take a company from a super early foundational stage, where you just have an idea, all the way to an IPO. And then subsequent exit to build what is today the online real estate industry as we know it. So, Pete, if we look at that journey, let's say there are three phases that we would want to cover. One of them is the very early stages when you're just figuring out how to talk to investors and how to build your team. We want to dig into the challenges around that.
You lived through 2008. A crash in real estate clearly affected your business, so we want to hear what the challenges were along the journey. And then the thought process around. How do you take it? How do you exit right from both the IPO and then a really successful business that you've built, and then move on to new adventures? So let's dive in.
0:02:19 - Pete Flint
Sure, a lot to cover.
0:02:21 - Alex Shevelenko
Yeah, and that's before we even get to the network effects. Now that you're a VC, let's take another look at those founding moments. What were some of the tips that you would offer to founders wearing your shoes? Back in 2005, six times the timeframe.
0:02:45 - Pete Flint
We connected as fellow students at Stanford. My story is that I went to an internet business in Europe, and then I moved to Silicon Valley. One of the tasks I had to do, like many people, was to find somewhere to live. And I had these big ideas about Silicon Valley. There are going to be amazing technologies and amazing services. It was the home of Apple and Google and all these things.
I was trying to find somewhere to live, and well, it was awful. I think one of the remarkable things about Silicon Valley is that it's a problem-solving culture. When you say, “Don't grumble about it”, you kind of get on and, “Okay, how can I fix that?” So I spent a lot of time just thinking about how to fix and solve that. I think perhaps one of the lessons for me was that naivety was very much an asset versus a weakness. I think you see a lot of ideas in companies coming not from the core of the industry but from the periphery. What are the intersections between different industries? And so I was very naive. I didn't even know where Milwaukee was.
I didn't know anything about US geography or US real estate. But I really felt that this was a big, meaningful problem that I was really interested in solving. As you know, I teamed up with a classmate, Sami, and really thought about how to solve this problem. How do you solve the supply side, and how do you solve the demand side? There are a couple of chapters to the story. In 2005 we launched a small prototype service, and then the goal was to find a product-market fit pretty early on. I think people looking for houses and looking at pitches. And I think we probably hit product market fit pretty early on. But with a really, I would say, dankish product and sort of prototype MVP.
0:05:34 - Alex Shevelenko
So you hit it. And you think the reason it was successful is because of this visual experience. People like to just look at pictures. But I'm really intrigued. With your own insight, you come from a culture where talking to salespeople is not seen as a delightful type of experience. When you talk to realtors, you don't want to call them, right? And it sounds like you had an empathy that the world is moving in that direction and people don't want to talk to salespeople. They want to self-serve themselves and have the freedom to discover, and make buying decisions. Or at least educate themselves on the future buying decisions independently. Is that what it was?
0:06:29 - Pete Flint
The only sort of competitive positioning was that we were absolutely focused on providing the best data and helping consumers with primarily home buying. They've moved into home selling and rentals, but all the data, essentially, and insights were to help them with that decision. And then the other access was how do we create the very best user experience around that? So design-driven and easy to use. We were competing against newspapers, agent websites, and MLs. They all had their own various different constraints, and they really inhibited them from executing on that. But ultimately, we know that the truth in 2005, as in the truth in 2024 is that ease of use, data and insights are paramount in the high decision processes. How that manifests itself is, on the consumer side, how do we get as much information there? Obviously, historical prices, valuations, crime data, all these sorts of things that your real estate agent wouldn't necessarily tell you but that you want to know.
And then the other piece that seems bizarre now. But mapping was just breaking through. Google Maps launched three months before, we used their API to build a map interface. Then broadband internet was just starting to become pervasive, so people could download pictures. A lot of the previous generation of services was very two-dimensional text-heavy. We wanted maps on every page and rich images. Consumers love that.
0:08:34 - Alex Shevelenko
This is a really interesting parallel. I actually heard you describe this one-dimensional interface without the maps. It’s a flat experience. And I think you have this juxtaposition, like here we are in Silicon Valley. The world is changing, but some of the largest transactions that a consumer could have in their lifetime are being presented in a suboptimal way that reduces the likelihood of that transaction happening. That feels like you've nailed that, and as you were figuring out that product solution, you were the product manager effectively. And then you start fundraising. What advice would you give to yourself now that you've been on the other side of the table as somebody who invests in a ton of companies? What did you do right? What would you do differently if you were fundraising again for your next startup?
0:09:41 - Pete Flint
Firstly, I moved to the US and didn't really know anyone. I was like a student at Stanford, so that was the network that I had. It was really about networking my way through. I think there's probably a couple of things that we did rightly and wrongly. I guess we made two big mistakes in fundraising. You can imagine the technology platform we built. There's a front end and a back end, and we spent a lot of energy building the back end, which is really the hard thing – aggregating enormous amounts of data on a rapid basis.
0:10:38 - Alex Shevelenko
Because you're basically an Oxford physics student right back in the day, and Sami is also a fellow rocket scientist. So you guys cared about the substance.
0:10:51 - Pete Flint
That's what felt like the hardest thing. To put it together.
I think of myself more as a product guy and a growth guy than an engineer. But you care about these people who are making poor decisions. You care about the data integrity. So we're like, “Okay, let's get all the data integrity.” And then I had an idea for what the front end would be like. We were sketching out, but we thought we'd slap that on at the end. We know what it is, but if the data is not right, then it doesn't really matter.
And I remember going to kind of pitch Sequoia and Excel and like with this prototype, look, it works, the data is awesome, it's like you know, and we've got all this data for these disparate sources. And and then we had it on a kind of like a terrible user interface. And they said, like you know, good luck. But you know, we need to see the kind of like make it, make it look great if you're trying to build a big consumer business. And so, you know, as it happened, we kind of ended up adding on the user interface and then going back to them. You know, excel invested like three months after we launched and then Sequoia two years after, but it, you know, they came around ultimately.
But you know, the mistake was just to be like well, what is, what is? The belief from investors is that data is a relatively solvable problem, whereas the interface requires a certain level of kind of magic and expertise to be able to build in that interface. And I think that, you know, particularly in the consumer business, you know, they thought the consumer interface was the whole thing, the days were easy thing, and I thought the opposite, you know, but I think I didn't put myself in the mind of the investor at that time to understand what would be the critical piece. Because they, you know, the belief is that if you can get demand, then the supply will follow, and this is why these marketplaces were absolutely that's the case you get demand and then supply will follow.
The other mistake we made was to, you know, we focused, you know, initially on spending a lot of time with kind of like, perhaps I would say kind of bigger name, bigger name BC's. Their sweet spot is leading series A's, and yet we were kind of at this prelaunt prototype stage, and so I think those meetings in some ways were kind of helpful to kind of socialize the idea, but none of them led to fundraising conversations. We kind of met them all because I think we were like, okay, they know, we're knocking on our door, we wanted the best investors but they were just not the right investors for us and so we ended up getting, you know, essentially a bunch of kind of angels and micro funds to kind of pull together the seed round and that, you know, and then that converted it. That was the right milestone for the kind of what you call probably pre seed today and then move into, kind of like season series A.
0:14:00 - Alex Shevelenko
Got it and what like obviously worked out and you got some of the best investors in the business on board. So what do you think was the magic that helped you self select? Was those types of investors in you know what, what could have made them overcome whatever, whatever challenges you had, whether in terms of presentation or other areas.
0:14:28 - Pete Flint
I think you know it was a hard sell at the time because there are literally no successful. You know, now there's a category called prop tech and, like you know, there were literally zero successful prop tech companies or realistic companies as a category. It had not been successful. And you know, I'd probably say you know probably a couple of things. You know one we were really efficient as a company. You know. Ultimately we went public having raised $33 million.
0:15:06 - Alex Shevelenko
Let's just repeat this for the sake of our audience. You went public was $33 million. We have companies that are raising $33 million. They don't know what the heck they're doing and just put a bunch of like bios on board. Just slap AI on top of it. And say we're doing that right. $33 million to go public. And what was the? What do you remember? I know you exited 3.5 billion. What was the IPO market?
0:15:34 - Pete Flint
cap Around 500 million. That was a sort of kind of service like you know, in those days that's very respectable, Absolutely.
It was a. It was a small, small IPO in 2012,. We raised $100 million and you know around the 500 million. So just being really efficient, and you know, we thought literally of the land, like every dollar we got was going to be the last dollar. And that's not just because you know, that's a combination of like really think about how does the product drive growth. You know both on the supply and demand side, but also about it was, it was the necessity I think we, like we could have. You know, a real estate company in 2008 was just the sort of like a worst possible industry to be in.
0:16:28 - Alex Shevelenko
Well, let's, let's dive into that right, because so you've raised a bit. You had momentum where you had larger real estate firms accounting for majority of your revenue, and then 2008 hits those large real estate groups of brands that we all know, they said, hey, times are tough and you had to rebalance your model to getting much larger number of customers but a smaller revenue per customer. Yeah, exactly, that must have been a tough, tough kind of moment for rebalancing. You already had some momentum the 2000,. Obviously the market's crashing, yours in particular.
So let's put an entrepreneur or anybody who's in the midst of a crisis right now, let's put them into your mindset. And what made you succeed and power through that all around challenge, which is not absolutely non-trivial. And I think, to quote one of your previous, one of your previous conversations, that really struck me you were, despite all that challenge, you were still playing to win. You were not going on defense and kind of completely kind of cuddling up inside whatever you're doing. You went actually after the market despite all those challenges, which is fascinating to hear.
0:17:58 - Pete Flint
Yeah, so specifically we were in 2008, depth of the global financial crisis, and we were in the eye of the storm because online it's basically that GFC was precipitated by the Moorish backed securities, which resulted in massive increases, decreases in sales and home values. And so we were had some cash we'd raised, kind of kind of raised just before they kind of collapsed. So we were kind of like fortunate in that, but we were losing a lot of money very quickly and there was no hope of fundraising. So we were in this sort of okay, we need to get break even. And what we'd seen is that, as a small company, we were at its first revenue.
We went kind of like enterprise sales. We were going after big customers, six figure contracts, and they were like canceled all their deals pretty much when the sort of like GFC happened. And what kind of happened in a funny sort of way was that we had and I just saw how it happened like our head of customer service and we had all hands. This is kind of like okay, situation is not about going bankrupt, but we're like we just need to make revenue. And people were kind of the company was on sort of high alert how do we make revenue and ahead of like customer services, was building kind of in-bank calls from real estate agents who were saying and we didn't have any real estate agent product. So they say, look, my listing on this page is like is not?
0:19:41 - Alex Shevelenko
is not working Like okay the pictures are not right.
0:19:44 - Pete Flint
can you move the kind of kitchen picture to the front and all these sort of things? And Robin was like, started like, why don't we try and sell them some stuff as well? And so, like you know, and she's like, oh you really care about a product, would you be interested in perhaps getting some more promotion for your listings and yourself? And it was like a remarkable and it was a good value package and you know, the agents were traditionally spending on newspapers at the time and so we could offer something like very attractive to them from a price point when the conversion rate I forget what it was, but like something like 20% of the conversion rate of these sort of inbound calls for people who are complaining about things.
0:20:36 - Alex Shevelenko
So these are inbound. So and then did you start? Did you start moving from inbound to outbound?
0:20:42 - Pete Flint
Exactly so we like. So we built it. So the customer service team, a sort of portion, carved off, became inside sales, you know, which were initially rented to inbound. And then, you know, we started putting promotion on the site and then really thinking about okay, what is really thinking about? What are the sort of personas of these agents that would be like perfect candidates for this kind of product? Mining our data, prioritizing them and a whole bunch of kind of like lead management and kind of from prioritization initiatives. We built it entirely and improving the product so that. So we scaled from this sort of like our team which was going off and trying to, like you know, scale revenue into you know hundreds and hundreds of people who are building the inside sales team. And so it was. You know, it was kind of a sort of enterprising culture who kind of figured out this way to sell and.
I think probably I was probably quite resistant about having like large inside sales team at the time. I wanted to like an efficient capital making machine that people would come in and self-service and like. But actually when you're dealing with local kind of SMBs, the inside sales they needed the touch they needed the touch. They needed the touch.
0:22:05 - Alex Shevelenko
yeah, yeah, and it was still a new enough thing and Realistated was one of those high touch, you know, relationship driven industries, right? So people were interesting.
0:22:17 - Pete Flint
I think that you know the practitioners are we just at the time, we're just not used to kind of online online advertising and marketing, and so that was that. You know that scouting incredibly efficiently. And the other thing you mentioned is, like you know, don't play to lose, play to win. You know I started my career in online travel. Excuse me, I started my career in online travel and I had a sort of like, somewhat similar experience in online travel in 2001 with a company called LastMinicom, where we had a big online travel business, a travel marketplace, and then in, you know, September 11th happened and you know, in retrospect, it was the best time to be building that company. It didn't feel like at the time, for sure.
But when you look back, you know Expedia, to some extent, bookingcom and the other online travel, but certainly Last Minute at the time in Europe, got massive market share games. They got, you know, really increased their market share and you know you look at the business in 2008, it's like, okay, online real estate people. You know I can. You know one thing I know for true in 10 years' time, people are gonna be buying and selling houses and living in houses, whatever happens to the economy. And they're absolutely gonna be using digital platforms to do that and so like, and so it was like this was the time to attack, you know, not in a sort of like throw your money at the wall and hope it like like some spaghetti sticks.
But like you know, I think it's a sort of and we see this now in a lot of companies. It's like okay, and there's been the process for many of them over the last couple of years. It's been okay, let's assess, let's change, because there's certain things that you know don't work anymore, or you don't have the capitalism. And then there's one group of founders who like, “Okay, let's hibernate until the world gets better.” And there's another group which is like, “Let's attack, let's play to win.” Not every company can attack, but actually, I think most companies can in their own way.
0:24:51 - Alex Shevelenko
Like, if we like, let's pinpoint into this because you know I could sort of connect on my own journey that if you're attacking but you don't have your foundational stuff together, right, you could kind of waste a lot of resources because you're attacking.
You mean to be attacking the wrong area. You may be going frontal attack, where you need to have a site attack, or if you, even if you gain through, you don't have economics that are that attractive, you know from the result from that attack, and so you know there's been a lot of these businesses that are spending $10 in attack to get, you know, $5 of revenue, and so that is a problem. And so how do you distinguish, you know, are you ready to attack right? And then the maybe the mode in this, particularly in this environment where you know fundraising is more challenging unless you're a gen A I business. But even that, where you probably sophisticated folks like you could see through the bullshit you know of what's real, what's not. So guide us a little bit on, kind of when you're saying that like, when do you know that, that this is the time to land grab right? When are you ready for that is, is it really every business, or you need to reach certain basics before you go into that.
0:26:09 - Pete Flint
Yeah, I mean it's, it was, I guess you know from that specific experience it's. You know we saw pretty clear product market fit in the sense the customers were enjoyed the product and they saw a lot of value in it. And this is only kind of the B2B side. And we tuned the product to kind of match the market and we had, you know, you know, very good sort of traditional SAS type metrics, whether that's, you know, cackl TV ratios, very efficient sales opportunities and and so. And then the last thing is that we would, we could see that there was strong network effect opportunities right in this. And so when you see, you know, in in you know we've seen over the last kind of like five years or so, there are certain industries where the customers may be fairly cheap today but there's no sort of real benefit of scale, like selling mattresses online. It's like you know, in most cases it's like sure you might be making money but you're open your mattresses do you buy per year and talk about?
there's no sort of necessarily, like you know, network effect, such that sort of catching, capturing a significant number, amount of the supply and demand really drives the sort of defensibility of the business. But we could see, look at this, clear network effects really attractive. You know economics, now's the time to go and and you know, and we, you know that and that was really a path, that kind of attack the business, to get to break even at the time, as opposed to like okay, let's like wait till things get a little better, like no, because there's someone else that can come along and somebody else and and sort of so.
0:28:05 - Alex Shevelenko
Again, if I summarize it, disruption means people are more willing to change behaviors because it's a disruption for everybody, so customers are more willing to change. Yeah, and then you're coming in was a product that works and delivers values both to consumer and the business user. You have the economics that work for the business and you have the, the gold prize that you see, which is the network effects, which is really unique to your two sided type of marketplace business. So I think that's kind of a pretty powerful combo. You may not need to have all you know four out of you know four out of four. You may need to have three out of four right in there, but it sounds like that combo was a great, great game changing move for you and you know you had the boldness and the vision to play, to play aggressively in there yeah and I and really built on a foundation of team work for Galatia, efficiency and just a strong kind of people driven culture.
0:29:12 - Pete Flint
So I think that's you know. I think organizational transitions are really hard and if you have that right foundation from the people side of things at the beginning, they are so much easy. We saw, we've seen a number come in the last couple years and then back in that crisis where they were, you know, very driven by kind of short term financial incentives or status symbols, like unicorn companies, which you know generally they're kind of hollow, as opposed to more mission driven companies and strong teamwork driven cultures, which you know, that foundation you don't have that foundation, that a lot of this stuff just doesn't happen this is great because actually leads me to my like, next question.
0:30:03 - Alex Shevelenko
So let's fast forward. So you went public, your CEO of a public company, you're doing well, you have a core competitor, you're kind of really going head to head. You've built this amazing culture and I kind of I to you know some people say that right, I remember from the very early days of Trulia, you guys had your value, value. You know you know meh, meh, meh like statement and you know it was really so people could remember it. So you guys really were living that. So you have this great company, you're performing well, your public, and then you have to make a decision as a CEO, like what, like how to think about the exit. You know what to accept, guide us a little bit through that journey and you know, maybe those, those that are thinking about you, know how to make that decision on behalf of the shareholders and behalf of the business.
0:31:06 - Pete Flint
You know how we were some thought process.
Yeah, we were. You know the company was, I don't know, somewhere kind of two plus billion dollars. We were. So this was sort of 2014, you know, a couple years post IPO. You know we were revenue run rate quarter of a billion dollars. You know a thousand plus people and things were going great. I would say, you know, there's always things to fix, but generally we were kind of we're very happy with where things were going. And then, you know, we got a, an inbound, essentially from from Zillow, and so Zillow is a sort of near competitor. We started in quite different places. What is it? Started over there over here with home values and his estimate and really built a great brand from that. And then, Trulia, I started over here with her to sell and searching and information around that and then over this would have like subsequent, you know, a plus years. The propositions are kind of merged. You know what we had two smart teams.
0:32:17 - Alex Shevelenko
You're figuring out the market. Yeah, it's sort of like you want to be total solution.
0:32:25 - Pete Flint
Yeah, you know people had sort of you know the people had different preferences but generally kind of like it was sort of the you know these two similar bit by similar business models, when I think in many ways, that competition was really helpful because it's helped to change the mindset of the real estate agents and brokers that they need to embrace digital marketing and listing syndication. It was the collective brain power, these two teams competing very aggressively was the path forward. Anyway, we got this kind of inbound and we weren't, certainly weren't, looking to sell but the you know, I think at the time you can go through things, that a bunch of soul searching, and think, okay, what is the right part for the company? I had the best job I could imagine, but I came to a perspective that and this is somewhat retrospective in terms of how I'm thinking about it but the advice I would give folks in a similar position was that it can make sense to sell if a number of these sort of criteria are in place. One was we were the number two Zillow in terms of Mark position, which was number one, zillow was a quarter or two ahead of us and they'd raised three times the amount of money that we had. So we were just this little bit behind.
And I think in clear and network effect businesses, if you are that little bit behind without significant differentiation, it's really hard to catch up. And I'm not quite sure that we had sort of all the ideas, I mean the resources essentially to get there to make them. You need a really significant technology on market catalyst to kind of change that market position. Two is that we were very much a product driven company. We were focused on significant growth using the product. We were just engineers by heart. Okay, how do we get points to solve a problem? We designed a product to solve that and the product differentiation kind of being sort of whittled away. What we had, they had advice of us and actually turned into more of a marketing battle Rules that collectively we're spending like 150 million a year on marketing and then that's TV ads, it's all of it online advertising, and so the kind of the rules of the game had changed Right so what got you to your original success and your passion for product led and getting all that best data and everything fixing the UX?
0:35:31 - Alex Shevelenko
that was no longer going to be the game changer in the competition and what is going to be is basically kind of classical marketing spend in the CMO game.
0:35:44 - Pete Flint
We could do that but it just wasn't that fun and it's like and I don't know you'd necessarily create that much value doing it as well, because you know the value kind of accrues to you know the TV, google TV and Facebook and I guess three is like, is this kind of like fair value for future execution? You know, and I think it kind of felt, you know, reasonable. You know it's at that kind of like multiple based on the revenue. So it seemed kind of reasonable, so kind of that. You know that was, you know that was the kind of feeling.
So it was a stock for stock merger between the two companies and I, you know I wasn't, I wasn't looking to move, but it kind of like okay, this was the right move for their, for their shareholders, and poison. Ultimately it could bring the the product roadmap, which was, you know both companies are roughly similar to you on the product roadmap you could bring that forward a couple of years by combining resources and and credit a lot of value. So I, you know I was, you know I was on the Zilla board for a while, but otherwise I was kind of trying to think about both.
0:37:00 - Alex Shevelenko
Next, Well, let's talk about that. So the transition from founder CEO of Trulia to an investor at NFX must have been quite this journey, and I think it would be really helpful to hear what your experience as a founder influence, you know how it influenced your approach to building NFX, which is, you know, in my view, definitely feels like it's built by a founder, because you're effectively building in, you know, in terms of products, right Like you're, you have a bunch of solutions that you've built. I, you know, I think a lot of folks use, for example, NFX signal to connect with other investors. So you're, you've taken a really radically different approach to investment fun and, you know, I kind of wanted to see how you connect the dots, but to me it feels like here's Pete doing his, you know, you know, founder head on, but like rethinking what a fun should look like.
0:38:06 - Pete Flint
Yeah, I mean that would you know, we, we wanted to have funds at the earliest stage that we wanted to have when we were found and so and we always felt that the you know, in my, my, the founding general plan is that James Curry and Gigi Levy-Weiss and you know we were all similar background as investors, operators and founders and you know the best advice came from other operators when we were a former founder or founders when we were operating.
The single best advice: if you're a founder and you can sign yourself up with other founders who also can invest in the company, then that's the best of both worlds.
And so that was very much the focus to be a team that have been there and have the empathy through many different periods and the other pieces of you know, as, as operators, when we see a problem, we think about what's the technology solution to this, and so much of kind of BC is sort of old world judgments, you know, not driven by kind of data, then they're not kind of like practicing what they preach.
You know which is like if you, if you're, if you're, you know, founder, use data, use technology, use high scalability use like kind of what is the sort of edge you have? And so we really thought about an effects as a company and so you know our product team and software team and and it's an AI team essentially is kind of on par with our, if not bigger than our, investment. So they've really and they really embrace a lot of you know AI technologies, which we think you know don't necessarily help in the picking but give us kind of a real kind of opportunity to think about how do we aggregate data and and platform and be myself, or to the be most efficient ourselves, to analyze the boss surface area of deals out there.
0:40:15 - Alex Shevelenko
Well, let's, let's dig into your focus, right, and your core area of expertise, which is network effects. And I guess the one observation that I have is that, even if you were an operator, but you operated five years ago, 10 years ago, you may not be operating in the current environment, right, you may not be up to up to speed and up to the latest trends, right, certainly, some things like culture and team building, those remain the same. But even now, in the remote first environment, those change a little bit. But it was network effects. You guys are the you know the Bible carriers and creators of literally everything there is to know about network effects, right, you continue to invest and specialize in this. So you, it feels like it's very current knowledge and you effectively laid out, with your physics background, right, like really foundational first principles of what it is. Decompose that.
Tell us a little bit about this and what does it mean for a startup today? Is you know that, like the figuring that network is like component out and how important? When is it important to figure out? Right, does it force you to get the basic functionality and the user experience and then you go on the network effects, or do you really need the network effects right away, because I think one of the things that I ran into challenges like hey, this is really exciting, creates a lot of value, no brainer. But do you go build network effects at the very beginning, or do you first solve a particular problem for a particular user and then add that network effects, kind of as an additional momentum and defensive capability, or do you start with network effects first?
0:42:02 - Pete Flint
Yeah, yeah. So I mean just I think folks listening should be kind of pretty familiar with network effects. But it's the principle where the product or service gets better, the more people use that product or service gets better for all users, the more people. So I think this is really born out of my personal experience and similar experiences from the other partners that you know last been on their travel marketplace, truly as a little on a real estate marketplace, and it's like they appear pretty fragile when you're building them but once you get to certain scale becomes like remarkable that the kind of like product has a life at its own. It's incredibly defensible and you know, through the analysis that we've done, the vast majority of value creation through the internet areas comes from companies that have network effects at their core. In the last 20-plus years, it's very obvious. The big ones, particularly Facebook, Airbnb, Uber are just classic deep network effect businesses.
0:43:14 - Alex Shevelenko
I would like say hey, like, let's take a look at Microsoft Office Suite, right, yeah, that was fundamentally in network effects business, because once you have a few people that figure out how to use it, then they can share our content and then other people to leverage the slides and then, obviously, app ecosystem around Windows or Apple. Right, so it was even true before the internet, I would argue. Right, but it was internet. I just put this on steroids, I mean it's only true.
0:43:46 - Pete Flint
You go back to the kind of like classical marketplaces and look at, you, go back in history and you go to someone like you know Venice or cities, and like the marketplace, towns, and so these, that's a network effect, that sort of like great aggregates, but I can sell it in that marketplace and so it's. It's almost like we think of it really like as law of nature. I mean, it's an economic principle but it sort of pervades. It's pervasive not just in, you know, in sort of like classical social networks or consumer marketplaces, but really a lot of like B2B. And you know, we see in biocompany's that we're investing crypto, of kind of massive network effects. You know the AI, there would be network effects in AI as that kind of that matures as well, and so, and so we, we think of it as just a guiding principle. You know, NFX will last, you know, many, many decades, we anticipate and so and so, having that as kind of a guiding principle is, is, is really important for us, and so in that, and that transcends categories we don't, we don't think about this is some sort of specific, specific categories, so that that's the focus in terms of like, what we, you know, is this.
You know, we certainly invest in companies that are very obvious network effects from the outset, but we also invest in companies that's like you know it could be, as a sort of straightforward SaaS tool that solves a meaningful problem.
But the you know, the founders know, okay, as soon as this gets any scale, it's gonna get like 20 competitors that they come in and they'll be able to kind of like copy this kind of functionality maybe not all of it, but kind of like a bunch of it and so it's really critical that they come in.
Next phase of growth is that we need to build these multiple modes and their capabilities around it. You know, and that, and that is you know, network effects are definitely native. They're very scalable once in a place, and so if they can take this early, early head start for this tool, then we can add that network effect on board, whether it's a platform, whether it's marketplace, with multiple network effects in there, and that that really is the path to help to create. Okay, we, yes, we're creating economic value for participants, but we're also creating defensibility and enduring companies. So ultimately, what we're trying to do is invest in really enduring companies that become the kind of “winner takes most” or category-defining businesses.
0:46:33 - Alex Shevelenko
You brought up B2B, so let's just for the argument's sake, because people probably imagine network effects and consumer-oriented businesses, but not as much in B2B let's like any examples that come to mind of you know, well-known B2B businesses that rely on various types of network effects. Right, and we talked a little bit about learning how to use presentation design software, right, like you could. You know, maybe there are other examples that are more recent that you want to highlight.
0:47:06 - Pete Flint
I mean that as I think this, that's sort of the. The playbook that we see in, certainly for kind of the successful B2B businesses, has been like yes, let's have a compelling product and then building some sort of in. There's probably two parts. One is a platform out of it, so you build the product, become a platform. So Salesforce with its app store and an ecosystem around that is very clay, you see in zoom do a kind of similar path with make success, but it's thank you for promoting we love Epic Exchange, one of our favorite customers that RELAYTO and early believers and it is remarkable.
0:47:46 - Alex Shevelenko
You know what a what a community it is. And it was it was your right, very much a pioneer in the web-based B2B community. That was not a thing, yeah, when right like when they started shortly after the IPO around the IPO.
0:48:01 - Pete Flint
So great, great point and then you see the other, you know the other and you see Notion do kind of not similar but kind of you know, building that kind of network effect into that, into the product.
And then you see, you know the other. The other path often is okay, how do you, how do you build into the kind of network of participants outside of this at this platform is being, you know, carter is a sort of a classic example around this. The network effects of of Carter. They kind of there's core network effects from an ease of use perspective and a database of record in that business and then they bench it into this sort of secondary marketplace or for liquidity on private transactions and that and that's somewhat competed with their core business and that obviously in retrospect wasn't a great idea for them to do. But there's many other areas where it is a good idea. So we've seen, you know, we've backed companies that have really compelling tools and then add in a kind of marketplace for procurement so how can they purchase products at cheaper price, more efficiently, and that's that's a clear network effect.
0:49:17 - Alex Shevelenko
That so, fundamentally, the inside is that it it's sort of it's aids a sequencing game and be. There could be multiple types of network effects from core to periphery. So it's not like oh, I got a network effect, good, my job is done. It's like.
0:49:32 - Pete Flint
It's just like was a product iterations you can have continued to build additional defensive modes, yeah, and capabilities yeah, and I think, particularly in this sort of new AI era, I think there's it's gonna be very interesting. There's gonna be a bunch of different kind of network effects put out of that area, but we do see a lot of this, that sort of magical tools that are being kind of built out to solve specific problems with this, that kind of presentation tools, other tools that can really be game-changed, but but then founders are really okay. How do we add the marketplace or network effect defensively on top of that, because there are so many other competitors going after similar problems using AI? But what is that ultimate defensibility going to be?
0:50:23 - Alex Shevelenko
right. So the question is the whatever is the latest technology underlying technology like AI, the fundamentals of capturing, you know, some kind of creating value for customers, capturing that value and then defending that value. That that still needs to be played out, and that's whether it's sort of network effects is one of those games, right, a classical sass or whatever other playbook is another game, but you need to. Just because you have AI doesn't solve all problems, right. You still need to think that through. So what are you seeing like? What are people who is really getting a combo of AI and network effects right right now, or is it too early to tell?
0:51:08 - Pete Flint
yeah, well, I think it's it's really early, I would say it's very early on it. We generally look at AI as a spectrum, so there's, you know, there's one end of the spectrum which is, you know that really using kind of AI in a somewhat invisible way, like okay, I write my, I do my customer service more efficiently, I write my code more efficiently, but kind of like, you know, are they all companies in AI in some respect in the area? And then the other end of the spectrum is, you know, ai first businesses that are really kind of like native to solve a breakthrough product or service that otherwise couldn't be done in the area. And and we're very much kind of like swinging into that direction, obviously from a kind of an investment perspective, because I think we can build, you know, breakthrough businesses in in that, in that arena. I would say there's, you know, there's probably a couple of different sort of AI and network effects areas which are intriguing. One is one is really the looking at the assets or technologies within AI and and building you know marketplaces on networks around them, and I don't know exactly what that will look like, but you can see whether that's and in some of these emerging ideas around this area kind of like this clearly startups in that space so hugging faces doing that for models and and algorithms. There's GPU marketplaces out there which are kind of like this is the sort of you know the scarce commodity which, how do you build capabilities around that? You know, unclear the defensibility exactly, but it seems, seems intriguing and there'll be other areas, whether that's marketplaces around AI created assets, you know, from avatars to kind of other components, and so that will be. You know these are kind of like the, the tradable assets of purely kind of AI native themselves, and so the new marketplace opportunities will be created out of that and that's sort of it. That's that's definitely intriguing area and we'll see where that goes.
Algorithm to algorithm or AI to AI into communication. Just like you'll have in any sort of business transaction of lawyers, bankers and business people working together. You could see these sorts of AIs doing those things, whether that's complex procurement, project management, other areas. That's intriguing. And then there's probably more mundane stuff, which is okay. How do I create what is a breakthrough tool to help in? You know, it could be legal, could be construction, could be an education, and then what is the marketplace brought on top of that? And there'll be and I think these, I think people are kind of and as more and more people start to use some of these AI tools, they're gonna be expecting high levels of intelligence from our product experiences.
And I don't know exactly what that will look like, but just like your expectation, just like when you go into Google and you type a query, you know like it's in the top few answers is gonna be the answer to your question. What do you think you do with СhatGPT? You type a prompt in, and you feel, “Okay, it's gonna give me the sort of intelligence of my intern or someone who's pretty good, competent, but maybe not the world expert on it.” And you're gonna expect this experience across all internet products.
0:55:00 - Alex Shevelenko
So you think the bar will start getting higher? Absolutely, I mean yeah go ahead.
0:55:05 - Pete Flint
Yeah, I mean, that's just a nature of things, and so it's gonna be a bunch of this stuff which is TableSync, and there's gonna be a bunch of founders who use this to reinvent different product experiences.
0:55:17 - Alex Shevelenko
So this actually takes us to the very beginning, right To your first pitch that you were saying where you showed up in the front, you know, front end UX UI was not necessarily up to par, right For investors. And then you kind of went and fixed that kind of that level of experience, at least the consumer facing component. And if we look, you know, I kind of look at it from my perspective, like back in you know, 1990, 1997, when I first encountered Microsoft Office, when I worked there, and the PDFs and the documents, they kind of they haven't really changed that much. You know from that era, much less. You know, even if you're in Silicon Valley you're still sending around like relatively, you know, old fashioned, sometimes pre-internet formats.
And so we look at that and you know, I'm wondering, like, what do you think is preventing some industries leaping into this new world? And they're still stuck in the old UX UI. And then you know we're parallel in parallel time we're having as consumers, right In the consumer led you know, consumer led marketplaces. You know the experience is much more wrapping around us and it's anticipating everything we need as a consumer. So what's your take on? You know, why do you think some areas just get stuck a little bit in the old way of doing things and does that create opportunities.
0:56:50 - Pete Flint
Is there a-? Yeah, it creates significant opportunities. I mean there's, you know there's. We've seen big elements of our lives being transformed through technology and the internet, and I think there are many other elements that are not, and they all have their sort of different reasons. Often it comes down to like lack of incentive. To some sometimes it's regulations, but often I think it's like it's just no incentive we need to-.
Inertia and no incentive is a combo. Yeah, I mean, like you know, no incentive for the company or no incentive for the individual to do things. They just they don't really have that kind of incentive and it may not even, you know, there may not be a profit pool. Therefore we're kind of like startups to invest in it and attack. But there's like the San Andreas sport. People using whether it's government software or another sort of legacy. On the one hand, the things people use in their private lives are getting better and better. The stuff they use in their professional life is stuck in the dark ages. And it's just like the pressure's building up, just like the San Andreas sport. And one day it's going to flip. I do think AI gives this opportunity for leapfrogging.
0:58:18 - Alex Shevelenko
The AI is going to be the enabler to make this sort of hundred X better, a thousand X better. That just makes the status quo no longer sustainable. I think it can do?
0:58:28 - Pete Flint
I think it can do. I think for a couple of reasons. One is just the product experience doesn't just become a little bit better. It becomes radically better and I think this is so good. It's like I can't ignore this. It's not just sort of like, you know, cloud-based software versus sort of on-prem or something, it's like this or just like, okay, this is not just built in a modern, easy to use way, it's like it just becomes radically better and that's just enough of a kind of catalyst. Then the other pieces that you just I think this is a you know literally, you know overnight.
I think AI is part of the conversation in every boardroom. Every CIO and CEO has been asked what their AI strategy is, and so the sort of corporate kind of enthusiasm is that there's is off the charts, and so it's like if you're pitching a kind of you know some sort of breakthrough technology and the AI can be you know, can be proprietary, you can just be using something off the shelf, but it's like the sort of like customer interest in the technology is significant, and so those you know I think those two combined mean that the kind of markets you know there are certain markets that are well-established and improving with AI. And there are other markets. This is going to be the iPhone moment for them, and they'll start these businesses online in a modern way.
1:00:12 - Alex Shevelenko
Well, this is a great way to summarize this discussion for me. It's for the audience that listening. I think this is a great insight in like, whether you're a CIO or a CMO, to hear your perspective, Pete, on what kind of what they should be paying attention to, and for us as general consumers. I want to thank you for creating a radically better online real estate technology, for creating radically better venture venture firm models for pre-seed and seed investment that creates a ton of tools and value for the ecosystem, and creating a radically better podcast experience. Sharing all these insights today with us. Thank you so much for being here, Pete. How can people find you? And NFX?
1:01:06 - Pete Flint
Yeah, so we're pretty visible. So NFX.com is a website sign up for the email newsletter. There's a ton of like great kind of insights not to go all about company building, starting companies, scaling them, and then Twitter or X app. Pete Flint.
1:01:26 - Alex Shevelenko
Amazing. Thank you so much, Pete, great!