Interest rates are the greatest equalizers – we’re about to learn who was buying growth versus who was creating value

Google’s product managers learned the trade when profits and growth were hard to come by – Uber and the like will hit it or suffer the consequences.

Interest rates have been low for almost 20 years. Google was founded in 1998 and went public as a profitable company in 2004. It had to endure an environment where money was 6 times more expensive than what Uber’s product managers had endured ( IPO from 2009 to 2019). Google’s product minimized time to value (TTP) while Uber’s time to value (TTV) was minimized.

The “growth at all costs” mentality was allowed because money was cheap; product managers must now focus again from users to investors.

PayPal co-founder Peter Thiel and LinkedIn co-founder Reid Hoffman sum up the belief that the key to success is speed of growth.

This belief has guided technological thinking for at least 15 years and has created many strategies (Product Led Growth, Freemiums, attempts to achieve Flywheels and others).

I think for a really valuable business you have to at some point try to outrun the competition, and so if you, if you could incredibly fast scaleon the one hand you you have to run very hard to evolve quicklybut the advantage is that you reach black hole escape velocity i.e. hyper concurrency – PIERRE THIEL

I’m Reid Hoffman, co-founder of LinkedIn, investment partner at Greylock and your host. I believe if you want your business to grow, your goal is not to beat the competition.​Your goal is to completely free yourself from the competition —REID HOFFMAN

If the priority is user growth, the goal is to convince them to buy. You can achieve this by giving customers great value or simply by giving value for free. If the user gets value for free, that means the investor is paying.

When money is cheap, investors don’t “need to get their money back” quickly; think of it as an interest-free loan. You will not be in a hurry to get reimbursed.

In Uber’s case, that translated to nearly $13 billion in funding used to propel growth, ahead of its 2019 IPO. 382 times the amount of money Google raised ($34 million) before it went public in 2004.

It’s user-centric, investor-funded growth. The investor buys the user.

Google’s product managers used the amount of money that is 0.26% (1/382) of what Uber had, and made it a profitable company during the IPO (Uber didn’t is still not profitable to date).

The key was sales-led growth using distribution partners.

Google runs a two-sided market with consumers on one side and advertisers on the other – it needed the eyes of consumers and a value differentiator from other search engines. He partnered with major marketers and solved their problem of weak search engines and inability to generate proper ad revenue.

Google solved the distributor problem by “white labeling” its solution as “powered by Google.” He took the path of patience realizing that he could not afford to build the bilateral market alone.

Yahoo was the first major distributor of “powered by Google”. in 2000, Google signed with Yahoo, then the main search engine. He did this even though Yahoo was a competitor. It’s almost as if Uber signed on with Lyft to expand its reach.

Once Google proved it could monetize Yahoo search, it began to expand to Yahoo competitors such as AOL. To further increase its reach, it entered into an agreement with Netscape.

What Google’s product managers realized was that they had to use the limited resources they had to win big customers and get their product out there – their traffic cost kept going down as their revenue grew, mostly thanks to AdSense.

All of these deals had one thing in common: to grow using someone else’s cost base, someone else’s investment, just because Google couldn’t afford to. alone, because investors would not pay for it.

When funds are limited, product managers join others, sacrificing speed for profitability – product matters yes, but its distribution matters even more

Uber, powered by investor funds, has adhered to the mantra of “growing as fast as possible”.

Faced with a problem similar to Google of having a bilateral network (Google has consumers and advertisers, Uber has drivers and passengers), Uber could have partnered with taxi drivers, slowly growing its business by solving their weak points, then maybe move to a more proprietary network of locked down drivers.

Instead, Uber simply paid the drivers because money was cheap.

Since the funds were cheap, this was the quickest way to ensure that when you open the app you have drivers available to take you at all times.

The problem is that drivers are financially incentivized with investor money and have limited brand loyalty or switching costs – they can trade at any time.

Now that silver is getting more expensive, investors will 1) be more skeptical about investing more 2) start demanding a return on their money (i.e. their money back).

Cheap money has enabled massive global adoption – however, Uber is still not profitable, 13 years after its inception; the next few years will reveal whether Uber manages to follow Google’s path to monetize its great product or lose its large user and driver base

However, whether we want to slice it, give away a product for free or sell it below the cost of building it, as is the case with Uber, sets market expectations.

The price tells the customer how much to pay and how much the service is worth.

By offering strong driver incentives and selling lower cost rides (Uber routinely beats taxis in cost), Uber has created a very low margin business and, as the real cost of money rises, Uber’s profitability will sink further into the red.

Uber product managers will learn what developers have always known: Tech debt is painful.

Technological debt is generated mainly by two causes:

• Internal business decision to accelerate development at the expense of quality
• External advancement in technology that requires constant upgrades

Having millions of drivers or customers accustomed to free or below cost fares is a debt-customer-expectation. Similar to tech debt, this will impede rapid progress and hamper Uber’s progress.

Customer suspense debt was created when Uber’s product managers chose to cut profitability to accelerate growth. This amounts to incurring technical debt for a faster launch.

External “progress” in the economy (or simply “change”) with rising interest rates has changed the environment in which Uber’s product managers will have to operate. They will be faced with both types of debt at the same time. The self-inflicted (cutting corners to run faster) and the external (interest rate)

Uber can’t just remove incentives without a massive investment in additional value that will compensate its drivers – i.e. if you don’t incentivize drivers with money, you need to incentivize them with another value.

This investment in pilots, just to satisfy them, will not generate any growth in the number of users, but will simply stem the attrition – the product managers will feel in the boardroom what the engineering managers have felt for years: being criticized for needing investments only to fill the “technical debt” (customer-expectation-debt) which does not add value compared to the competition.

Interest rates increase results: the focus on user growth becomes a retention goal. The free becomes paid. The user at the center becomes the investor and his profits at the center.

If you’ve been lucky enough to achieve significant growth, now you’ll need to monetize, even at the cost of losing users and divesting from features and products.

Understand how your actions drive direct bottom line value and know that the patience of investors and executives for “growth at all costs” is the opposite of the cost of money.

If you don’t prioritize the paying user, you deprioritize them and they will deprioritize you at the first opportunity.