Bill Gurley - All Things Business and Investing
Inspired by Bill Gurley on Invest Like The Best
Worth Stealing
Network effects exist on a spectrum
Plot value to the customer against market penetration. The steepness of that line tells you more than any claim about having a network effect. Most founders treat it as binary, you either have one or you don't. This is the wrong way to look at it as not all network effects are created equally. The more useful question is how steep the curve is, and where it starts to flatten.
"Doing things that don't scale" is how flywheels start
Glassdoor's founders interviewed people outside Cisco with a notepad. Yelp's CEO went to nightclubs in t-shirts. The unscalable activity is not a phase to be embarrassed about, sometimes it's the only way to build a seed state strong enough to make the network tip.
Nail liquidity quality before going broad
Strong unit economics in one city beat mediocre metrics across ten. The venture dollars exist to fund expansion once the flywheel is spinning, not to create the impression that it is.
Marketplaces: monogamy vs promiscuity
Haircut and babysitter marketplaces fight human nature. Once you find a good one, you stop looking. Restaurant and travel marketplaces work with it. Knowing which side of this divide your market sits on predicts a lot about ceiling and defensibility.
Build with fragmented supply and avoid the big accounts
The most durable marketplaces Gurley invested in had highly fragmented supplier bases and focused on SMEs. Dance with the large incumbents early and they will try to stop you. The online airline marketplace never made money for that reason.
Cheap capital changes the game, not just the returns
Funding a business because your cost of capital is low is another way of saying you are excited about low return businesses. But the real danger is competitive: once a rival commits to losing $150 million a quarter, fiscal prudence just means you exit the field. The dollar bill game ends above $20 almost every time.
Regulatory capture is the default, not the exception
The businesses hardest for challengers to break into are the most regulated ones, because incumbents accumulate regulator access over time. IPO book building persists not because it serves issuers but because the banks that run it also control allocation. The friend of the incumbent.
Moat measurement: what would it cost to attack?
Buffett's question about Coca-Cola is the right frame. Not "do we have a moat" but "how much capital would someone need to deploy to erode it?".
Narrow your expertise until you're the best
The internet, and now AI, makes it possible to know more about a specific topic than anyone else alive, if you keep narrowing the scope. Everyone else runs out of time before you do.
My Thoughts
The book building IPO process costs founders hundreds of millions of dollars and everyone in finance knows it. Zoom and CrowdStrike each left significant money on the table when their stocks jumped 80% on day one. A Dutch auction would have captured that. The banks prefer book building because they control allocation. That is where their relationships live. Regulatory capture in plain sight.
Gurley is good at naming things everyone half-knows but has not articulated. The monogamy/promiscuity split in marketplaces is one. Your hairdresser marketplace is fighting human nature. OpenTable is working with it.
Cheap money does not just lower hurdle rates, it rewires competitive dynamics. If your competitor raises a billion and burns $150 million a quarter, fiscal prudence just means you lose more slowly. The dollar bill game makes it concrete. Auction a $20 bill where only the winner pays and the bidding stops rationally below $20 as there is no reason to overpay. Add one rule: the second-place bidder also has to pay their final bid, but gets nothing, and the whole dynamic changes. Once you are in second place, dropping out means you pay and lose, so you keep bidding, and the price goes above $20 almost every time. This is what cheap capital does to competitive markets. It changes the cost of staying in the game enough that overshooting becomes the rational move.
Bobby Knight put it well with "everyone has the will to win, but not the will to practise". Gurley is a good example. Frank Quattrone called him in 1996 because his reputation preceded him. That does not happen without the years of work that made it possible. Preparation is what makes you available when the moment arrives.