The European VC Podcast // Episode 44

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Episode #44 Written Transcripts // 

HOW CATEGORIES FORM: 

Andreas:

I've been an avid follower of your work here in little Denmark, and I think that one of the things that you actually originated in the Play Bigger book and as part of your research was something every VC knows of and every VC lives by. I think you call it the 6/10 law, and that's also, what I've heard Mike Maples, Jr. refer to it as. I'd love to unpack that insight and then hear a bit more about what led you to do that and where you are with category design as category and how life cycles really develop.

Al Ramadan:

It was in pursuit of trying to understand how categories form and what is the timeline for a category. I think that's where the whole research started. We were students of history, wanted to understand how these categories form and what drives the formation of categories, and so that was the starting point.

TIME TO MARKET CAP REPORT: (@4:30mins)

Al Ramadan:

We took a few different tacks to try and answer that problem, what drives category formation. One of them was sort of the quantitative attack, which was to look at every company that was founded since 2000 and just understand sort of the trajectory of all these companies. We first published a report called the time to market cap report. I don't know if you remember this one, but it's available on playbigger.com under the research tab. It was this astounding reveal that as we went through time from 2000 through ...

I think it was through to 2014 or '15 at that point in time. Each four or five years, the time to market cap, so the speed to which companies created value or created market cap for themselves increased over that time, and it progressively increased. So that was sort of the first finding.

The second finding was that if you categorize all those companies, literally 10,000 companies plus, and you take the ones that became category kings, as we called them in the book, you realize that 76% of the market cap went to the winner. I remember Mark Andreson talking about this in one of his doctrines back in 2013 or something like that, and he said it's a winner take all game. He didn't have the same amount of data as we did, but it was the same concept, and that's true. It is absolutely true. 76% of the market gap goes to the leader.

VALUE POST IPO AND THE 6/10 LAW: 5:30mins

Al Ramadan:

Then as we were doing that, we wanted to understand how did the value of a company progress after they go public? It's one thing to get to public, but VCs and any investor for that matter, including all the employees, want to know that there's going to be value created beyond that.

So, we started looking at sort of like post-IPO, who created the most value, and then where was the window for that? That's where the actual 6/10 law came from, that companies that went public between their sixth and tenth year of being generally created the most value.

CATEGORY DESIGN LIFECYCLE, 10-15 YEAR DEFINE, DEVELOP, DOMINATE: (@6:20mins)

Andreas:

Category design is as we talked about, a category in itself, I'm curious to hear, where is category design on this axis?

Al Ramadan:

Well, the category of category design, I would say that we're at the five- or six-year mark right now. If you have read the book or you understand our category life cycle, which is generally a 10- to 15-year timeline, we are just transitioning from what we call the defined phase to the developed phase.

There's three phases, Define, which is an early stage, where a lot of companies are talking about that particular problem. Then there's the Develop phase, where two or three companies sort of stand out as the leaders and become the evangelists for that problem and ultimately go on to be the category king.

Then there's Dominate, what we call the final phase, and it is where one company takes three quarters of the market cap, and then there's a bunch of other smaller companies fighting over the scraps. So, we are just in the transition from the define to the develop.

EVOLUTION OF THE DISCIPLINE OF CATEGORY DESIGN: (@6:54mins)

Andreas:

I'm curious to hear how it has evolved as a category. What kind of players have jumped in? Of course, some of them are competitors, too, but some of them are, of course, just part of the ecosystem and using the framework and the thinking.

Al Ramadan:

That's much bigger than it was in 2016. That is absolutely for sure. If you do a search for category design on LinkedIn, you'll find thousands and thousands of either people or companies doing category design.

So it is one of those things that has become sort of a management discipline. It's one of those design thinking disciplines, I think. You've got individuals within an enterprise who are, if you like, the category designer for her enterprise, and she's responsible for running the category design play.

You've got external agencies, like Play Bigger, but there are many others, and they're all good, who are also running these category design methods, as we call them.

Like I said, we're in that crossover phase between define and develop where the discipline itself, I think, is getting better understood. We've published a lot, and so have others published a lot around this.

It feels a little bit like product design back in the 1990s. I don't know if you remember that or experienced design in and around 2000, when those design disciplines kind of got going inside of enterprises. People realized they drive growth. People realized they create value, and now everyone's trying to understand, "Okay. How do I apply this to my company or my portfolio?"

CATEGORY DESIGN MISCONCEPTIONS: (@8:30mins)

Andreas:

Sometimes theories take on their own life once you have originated it as the first team developing it. I'm curious to hear if there's any misconceptions around category design in the market that you would love if people would maybe try and get out of their heads.

Al Ramadan:

It is definitely a transformative activity inside a company, and it does take some time. In the case of some of our big customers who we've worked with, it can take three, four, five months, something like that. So, I think for the first four or five years as we were developing, if you like, the process or the method as we now call it, there was a perception that it was only for sort of companies that had raised a billion dollars or a lot of money and had tons of money to spend and all that sort of stuff.

I think that was sort of the perception back in the day. Soon after the book came out, I think what happened was people realized, "Oh, no, no, we can either do this themselves," and we have literally hundreds, maybe thousands of companies that are now designing their own category, nothing to do with anybody else. It's all done by internals. So that really smashed, I think, the preconception that it was only for a specialist group and all that sort of thing.

OUR METHODS – IMMERSE, ACTIVATE, THERAPY: (@9:26mins)

Al Ramadan:

Today what's happened, at least with Play Bigger, is we've realized that there are different companies at different phases. You can't deliver, if you like, a one size fits all methodology or method, and so, we've created three. In 2021, this year, I think it was in March of this year, we released a first real update to our methods, and we launched two new ones.

We have the Immerse method, which is sort of the gold standard. It's the thing that you use for a company like a Qualtrics or one of these companies hat are sort of 12, 18, 24 months from IPO and really want to drive some outstanding growth.

 We then have a method called Activate, which is for companies that are in generally the Series B to Series C, or it could be a department of a bigger company. We also see that showing up sometimes. That method's been really good, and it's us being essentially the coach and counsel to an inside category designer, somebody who's inside the company and trying to drive this transformation inside the organization, but they're the ones actually doing the work. We're the ones helping them out with reviews and counsel, and we provide a whole bunch of assets as well.

For companies sort of in the pre-Series A and Series A, and this is something that Mike Maples used to sort of yell at us about, and they were like, "Yeah, it's great for all of the companies upstream, but what about creating sort of , ... I think they called it a process back then, but a method for earlier stage companies. So we really took that to heart.

Got to give a lot of credit to Mary Forman from Play Bigger, who really developed this product-market fit for companies in the pre-A and A stage. We have a method we call therapy, which is really innovative, very agile, and it works for companies in that phase. It allows them to do a bunch of the work, get it mostly right, and then move on as opposed to these other ones where you're having to do a longer sort of lead.

 So I think that's the evolution that we've seen. Other companies and other sort of authors have been talking about the same ideas, that there's definitely different types of category design, depending on the phase of the company.

EVANGELIZING THE PROBLEM, CATEGORY POTENTIAL, FUNDING GROWTH: (@15:30min)

Al Ramadan:

I think VCs and other investors have been trying for some time to evaluate the potential of a company, and clearly, some of the smartest people in the world, way smarter than us, have been thinking about that.

I think what category design gave people an understanding of and some of our research may have helped was that there was this sort of X factor that's at play, which is that if you become the thought leader, if you become the evangelist for that problem and you become ultimately the category king, the returns are so outsized relative to any other metric that you could identify within a company that you wanted to be part of that.

I think the real savvy investors, VCs in particular, but hey, it's not just VCs anymore. That might have been what happened in 2015, '16, '17 sort of timeframe, but now it's private equity firms, which used to be driven by sort of like pulling cost out of the model, were now starting to fund growth and starting to underwrite growth, if you want to think of it that way, and then public investors themselves, so the broader class.

So, I think there's a sense that category potential is something that people need to understand. Like TAM, it's hard to get your hands around exactly. But the way we sort of explain it is that the size and scope of the problem that a company is trying to solve really defines the thing we called category potential. Clearly, it'll have a TAM at some point in time, and those two things are going to be highly correlated. But some of the really smart investors, savvy investors are looking past TAM to category potential.

RIVIAN AND THEIR ELECTRIC VEHICLE CATEGORY: (@16:52mins)

Al Ramadan:

Some really smart investors, savvy investors are looking past TAM to category potential. I use sort of a company, actually, we didn't do the category design for, but I think they did a phenomenal job of doing this, was a company that just went public here in the United States called Rivian.

Christopher and I have done a couple of podcasts on this. I've been writing about it for some time. When I first heard RJ ... He's the CEO, RJ Scaringe. He's the CEO of this company, talking about his company, Rivian. His point of view was that it was just different. It was different than I'd ever heard from anybody, including Elon Musk, who I have the ultimate respect for, but I just think RJ's a way better category designer than Elon.

RJ sort of said, "I want to just start with the fact that we as a human race are facing an existential threat and that this thing called climate change is fundamentally changing the nature of our world and that our kids ... and this is about the future of our kids. We must fundamentally change an industry. Industry by industry, we must go about changing this, and I'm here to change what we think of as the automotive or the mobility industry."

He didn't talk about vehicles. He didn't talk about electric vehicles, even. He didn't even talk about features, none of that. He was like, "I'm going to start there." So, when I first heard that, I was like, "That's a giant freaking problem, man." So, you immediately think, "Well, sh*t, if he's the evangelist for that problem, how is he going to solve this thing? That's a mother lode." So, roll the clock forward to the time that he goes public, and if you read his S1, which I've done a few times, pre- and post-IPO, they went as far as saying that the TAM for his category called adventure vehicles and electric delivery vehicles was $9 trillion.

I stopped at that point. I called one of my friends in investment banking. I said, "This is probably a dumb question, but have you ever seen a TAM of more than a trillion dollars in an S1?" He was like, "Nope." I said, "That's a big number, right?" He's like, "Yep." It's like, "How big?" He's like, "Well, the GDP of Japan, which is the third largest country in the world, is 5 trillion, China is 18, and the US is 24." This is an annual GDP. So, saying that you have a $9 trillion TAM, it's quite a statement, right?

Then you just look at the category design play that he made. It's a remarkable example of where ... and of course, at the time, this is when they just finished their whatever round of financing, pre-IPO round of financing, and they were valued ... I think it was at 15 or 20 billion, and everyone was saying, "Not a chance. They haven't even shipped a car, blah, blah, yada, yada." I was like, "I just don't think so, mate. I think you're wrong.  I think this guy is going to fundamentally change this industry."

I went on record as saying that, and Chris and I kind of did this podcast a month or two before the IPO. We said, "Look, they're projecting a $60 billion IPO for a company that hasn't even shipped a car," and there were people laughing about it. Ultimately, of course, that story played out that they went public and there were 100 billion and they're the third largest auto manufacturer in the world and they've shipped 150 trucks in total.

Again, what I'm saying is that the savvy investors are now starting to understand that there is this thing called category potential. There is this thing, which is 76% of the market cap for technology companies, at least, goes to the leader, and we think that in the case of Rivian, it's most likely to be hold for that industry as well, because it's not just about the vehicle. It's about the entire ecosystem. It's about the charging stations. It's about, if you like, the service and dealerships and the entire vertical stack, right? So, it's much more of a technology play than it is sort of shipping boxes. Clearly they're shipping a car or a vehicle.

So, long answer to your question of why should VCs be interested in that. If you had have been part of the Rivian story in the early days, you would be a very happy person today. I bought at the IPO, and I'm an extremely happy person. That's the story of category potential, I think, played out in a real world example.

THE INVESTMENT THESIS DOCUMENT: (@25:25mins)

Andreas:

Have you seen investors, whether that's angel VCs, operator investors, doesn't really matter, kind of distilling this into a framework that they use in working with startups and ‘diligencing’ the startups? Have you seen that being done, and can you share some insights on that?

Al Ramadan:              

Yeah, I've seen a couple. When we engage with in particular Immerse clients, we generally do an interview of all the board members and investors. It's part of just our due diligence of kind of getting up to speed or getting into the heads of the leadership team. One of the things we always love to see is sort of the investment thesis document. We always ask for it. We often get it. So we have investment thesis documents for maybe 30 or 40 different companies, and we have seen the emergence of sort of trying to quantify category potential starting to show up in these documents in a way that they just didn't in 2016, '17, or anything like that, right?

Now you’re starting to see the investors themselves having a run at this, separate, apart from us. Forget us for a minute. They're on this idea that they're trying to figure out, "Actually, what could this become? What does this category represent? How big is that problem?" Right? They will do fundamental research into understanding the value of that problem for a particular user or individual or department or a company.

QUALTRICS AND THEIR XM CATEGORY: (@28:07mins)

Al Ramadan:

Mike Maples has always been ... and Ann Miura-Ko from Floodgate, for that matter have been early adopters, even in some ways co-conspirators in the early days when we were writing the book, for sure. They get this, and I know he's been ... he being Mike has been very vocal about this topic. Sequoia has been very focused on this area. I'm not sure how much they publish externally. I think they're a very private sort of company. That's been our experience. But there's a number of partners at Sequoia, I can tell you that, who absolutely understand this.

One in particular, Bryan Schreier from Sequoia, he was the individual who read the book and then called us and said, "Okay, we've got to get you together with Qualtrics," back in early 2016, I think it was. He was such a powerful force in that conversation. At the time, category design isn't what it is now. At the time, it was still an innovative design approach that had some success, but nothing sort of that was so giant that you'd sort of go, "What?" He helped Ryan and his brother, Jared , and dad, Steve, and many others at Qualtrics to understand that this was something important to try. He even sort of paved the way by helping with some of the economic conversations.

That went on to be just another one of those great examples, like the Rivian example, where here's a company that's the leader in a market, which is ... Round figure's $2 billion at the time. It was called market research. They were the high-end version of that. They had all the bells and whistles, if you like. But there were other strong competitors in there. There was SurveyMonkey. There was Medallia and a number of other different companies. Bryan kept pushing, I think, us collectively to consider, "What's the bigger problem here?"

Of course, as we got into this work, we realized that the bigger problem was is that there were many operational systems that could tell you whether the flight arrived on time at gate number 27. But why Sally, who was sitting in seat 27B, was pissed off was still a freaking mystery. So, this idea that you could start to measure experience or what we ultimately ended up calling X data became a really important thing, and that's something that Schreier got really excited about himself.

That story played out over a remarkable three or four years where we started with the company. They were plus or minus a billion dollars in market cap. They got acquired for 8 billion by SAP, and I got called the day before. So they were going public. You probably remember this. But this is back in 2019. Qualtrics had filed their S1. It was a brilliant piece of work, and at the time they were sort of talking 5 or 6 billion. They said to me, "What do you think?" I said, "That's cheap, man." I'm always going to be the advocate for the entrepreneur and the category value, so you've got to take a little bit of this with the perspective I have, right? Which is I see the future perhaps more clearly than many people do in that sense, because I've been inside the company. I understand what customers are saying about this and all that.

Then they call me the day before and say, "Actually, SAP just bought us 8 billion." I said, "That's too cheap, man. You just gave yourself away." People hated me for that. Everyone was stoked. Of course they were stoked. It was like a big, big outcome, but I was always thinking, "Oh, goddammit." I said at the time when they asked me how much, I said 30. So, the story plays out that the company can't really operate inside of SAP. The employees are all leaving, because the multiples of SAP's revenue are very different to the multiples of Qualtrics'. So, they have to spin them back out, which they do, to their credit. Then it ultimately goes public for $27.1 billion. That was the point at which people realized. "Hmm, okay. Maybe we did sort of undervalue this thing."

Now, they also executed brilliantly between 2019 and 2021, so I'm sure there was something ... Not I'm sure. There was definitely something with that as well. But the reason for telling that story is just that, is that that was a VC who believed that there was much bigger scope to this problem. Many VCs will call and say, "You know what? They've got an insanely great product, but I just think they don't have a perspective on the problem that's big enough." I mean, that's literally the words that come out of these great VCs. I'm talking about the Maples, the Schreiers, and these guys. That's what comes out of their mouth. That's not me saying it. That's them, right?

We thought, "Okay, well, if you are saying that, we're going to go and take a look." If we believe that, then we'll do the work with them, right? I think that's the trend that you're starting to see a lot more of, and just recently we had one of the preeminent private equity companies come work with us. They do obviously later stage, but they have this same concept, which is sometimes companies themselves have got this incredible problem, but they're only servicing a piece of the market. If they added one or two other pieces together, all of a sudden, this could be a much bigger category, right?

KEY ADVICE TO VC’s: (@32:40mins)

Andreas:

I'm actually super curious, Al, because I'd love to have your advice here. If I'm a first-time VC fund manager raising, let's say, a small 15 million fund in name a small country in Europe, I probably don't have the luxury of calling Al and having that exact conversation that you're describing. What would be your advice for these guys that are outside of the Silicon Valley bubble? The understand what you're saying. They understand. They read the book. They get it. But they don't really have experience using it.

Al Ramadan:

What I'd say to that is you can always call us. Mary will always take a call. There are a group of category designers inside of Play Bigger who specialize in what we call our therapy option, which is a much more approachable and affordable sort of option. We totally understand that use case and want to help that. So that's part one.

Part two is that you can create sort of a category design capability within your firm or portfolio sort of environment, where we've seen a couple of these show up, too, where VCs actually create essentially their internal category design group. There's a group in New York. I can't really name them, but they have been very successful with doing that. So, they provide that service to their portfolio.

But as an individual, you want to get experienced in some of the use cases that I just described, Rivian, Qualtrics, Celonis, some of these companies where you can actually see from start to finish what the transformation for that organization was.

For a pre-Series B, so call it sort of seed Series A, it's less clear, because they haven't yet got product-market fit. They don't truly understand the problem that they're solving. So, in our opinion, you just need to get close enough to what the category could become so that when it goes from being in the early stage of categories, there's that time we were talking about, which is the definition phase. Its value is zero by definition, because it's a new category. But there's many competitors.

So, it's the opposite to what happens at the other end, right? So lots of people are talking around the same kind of problem, but you've got to be the one to anchor the conversation, as we call it in our book, and really be the evangelist for that problem. If you do that and you do it well, more often than not, you are going to end up being one of those companies that gets into the develop phase and ultimately has a potential to become the dominant player.

THE MAGIC TRIANGLE: (@37:10mins)

Al Ramadan:

In our book, the first book, we talked about what we call the magic triangle. That's this confluence of product design, company design, and category design. The three of those things came together, have to come together, and the great companies that went on to be these category kings, as we called them, had a great way of combining those three different functions. So don't do one of them at your peril. If I said to you, "Hey, you've got a good company design and a great category design, but your product's sh*t," you're not going to be happy investing in that. Same with got a great product and category, but terrible company. That's not going to work, either. If you've got a great product and company and no category, that's risky, too. So, it's this idea that the three of those things really do need to come together.

PANDEMIC GENERATIONAL SHIFT: (@38:00mins)

Andreas:

What categories excite you the most that probably other people don't really feel that excited about?

Al Ramadan:

I don't know if other people feel excited about them or not, but there are two that really get me fired up at the moment. One of them is sort of this idea that there's new ways of working I think is a generational shift like we've never seen before. I know that's going to sound like sort of parable or marketing speak, but it's truly true.

There's a great article written that the pandemic itself has been the biggest influence on this world since World War II, and I truly believe it. In this particular article, they went on to say that at the end of World War II, sort of you established the command-and-control structure inside of companies, the top-down organizations. The idea of a headquarters in an office and all that sort of stuff came essentially from World War II and maybe the previous wars and that the pandemic has done the opposite. It's blown that up. Now you have distributed teams everywhere, in some cases, everybody at home. How do you manage? How do you drive an organization in that situation is just such a remarkable question.

So that's one, and then the other one that I'm really passionate about is just this whole idea of mobility. What is this world going to look like? Do we even own a car, or how do you own a car in the future and what kind of a car it is? So, there are two that I'm really stoked about right now.

MOST COUNTERINTUITIVE THING YOU LEARNED IN CATEGORY DESIGN: (@39:15mins)

Andreas:

Second question of the quick-fire round, in your time working with category design, what is the most counterintuitive thing that you've learned?

Al Ramadan:

The most counterintuitive thing is you actually want a lot of competitors in your category. I think what most people say is, "No, no, no. I want to be the only one in that category." It's like, "Actually, you don't." You want to have a whole bunch of people in that category sort of reinforcing. CRM when it first came out is a great example of that. All of a sudden, you want to have a lot of people in that category. You just want to be the leader. You want to be the thought leader. You want to be the one that's leading, not following.

THE FOLLOW UP TO “PLAY BIGGER” THE BOOK: (@40:00mins)

Al Ramadan:

I think a couple things you can be sure we're focused on. One is the second book I think is underway, and it's going to take the next five years or six years of learning that we've had. We're moving to be more to declarative about the design thinking nature of category design and how it actually does drive innovation, how it does drive growth, and sort of being a little bit more prescriptive about the kinds of sessions and things like that. So that's one thing for sure that's coming, which we're really, really excited about.

PLAY BIGGER’S NEW INNOVATION METHODS

Al Ramadan:

The other thing is that we are dedicated to innovating the different kinds of methods that we deliver category design to companies with, and that is absolutely something that you'll see more of from us.

You already saw a big step from one to three different methods. I think you're going to start to see tweaks on those methods and different ways of delivering them. Most of our category design done today is by necessity done virtually using Mural. With Mural, we've just found how to create some incredible methods. That's actually even more productive than it was in person. So, I think you're going to start to see a lot of innovation on how these methods are actually applied.