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Ep. 5 - Network Bonding Theory — Transcript

by NFX · 3,641 words · 538 segments · language en · Watch on YouTube

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0:00(bright lively music)
0:03- Okay, so now we're gonna talk
0:04about Network Bonding Theory.
0:06And I know that sounds a little bit boring,
0:08but this is actually
0:09the heart of how networks get formed.
0:12Now, years ago, we could see
0:14the effects of network effects,
0:16but we couldn't see exactly how they were constructed,
0:18like Legos or piece by piece.
0:20But now we can, because of Web3,
0:23we've been able to see the software
0:25and the math and the people
0:26and the nodes of the networks, all interacting.
0:29And now that we can see it,
0:30we can put language to it
0:32and we can describe it
0:32and make it a tool for us to build our startups.
0:35So network bonding.
0:37Look, software used to be the hard part
0:39about your startup.
0:41Software is getting a lot easier.
0:42What's hard now is community building,
0:45is building the network,
0:47is getting people and other things
0:48to bond to your networks,
0:51which is how to bond people
0:53to the network of your company,
0:55because your company itself is a network.
0:57And companies have forever, made implicit decisions
1:02about what to compensate people,
1:04how to pay nodes to bond to their network,
1:07particularly in the form of shares and salary compensation.
1:11And at the beginning of a company,
1:14you will pay someone a lot more equity
1:18to cause them to bond to the network
1:20and then you pay less and less,
1:21and really a power law of geometrically declining rate
1:25at which you give out equity in your company,
1:27because once that network gets bigger and stronger,
1:29more and more people will join to that network.
1:32Now, what I'm proposing
1:33is that by being able to language it
1:34and see it and understand it,
1:36we can now make it a tool for building your companies.
1:39We want to take these historically implicit calculations
1:42that networks are making and make them explicit
1:46so that we can see them,
1:47and let me walk you through that right now.
1:48(bright lively music)
1:52So there's a mindset shift that you need to have
1:55in order to see what I'm talking about,
1:57which is, you've gotta go
1:58from the idea of a single player game
2:01to the idea of a multiplayer game.
2:03So if you're building a game of solitaire,
2:06that's a single player game.
2:07If you're selling a SAS tool to an enterprise company,
2:10they buy your tool, they use it for their data.
2:13That's it, that's all it is.
2:15But if you think about how
2:16to turn everything you're doing
2:17into a multiplayer game,
2:18or think of how, what you're doing is a multiplayer game
2:21and you didn't see it that way,
2:22you will start, that's the easiest way I've learned
2:26to help founders start
2:27to see what I'm talking about,
2:29which is how do I add other people
2:32into this game with me?
2:35What am I compensating them?
2:36What are they getting?
2:37What are they giving?
2:38What's the implicit arrangement we have
2:41with each of the nodes and the network we're bonding
2:43into this multiplayer game?
2:45So just keep that in mind
2:46as we walk through the examples I'm talking about,
2:49about how we can turn everything into a multi-player game,
2:51particularly your company.
2:53(bright lively music)
2:57So let's talk about a network that you're familiar with,
2:59which is your startup.
3:01So you've got people you want
3:03to bring in, employees,
3:05you've got customers you want
3:06to bring in to your company,
3:07you want recognition in form of press,
3:09or social media talking about them,
3:11and you want investors,
3:12you want people to bring capital
3:13into the business so that you can grow it.
3:16So these are four nodes.
3:17There's more, but lets just say, look,
3:18you've got four different types of nodes
3:20that you are trying to bond to your network.
3:22You call it a company,
3:23but it's really a network.
3:25And at the beginning of that process,
3:27you might find a co-founder,
3:29and you split the company 50 50.
3:30So you've basically given 50% of the company
3:33to the very first node that's willing to join with you.
3:36Now, the next person that comes along,
3:37who's the third person,
3:39how much equity do you think you're gonna give them?
3:41Maybe, 8%? And then the fourth person,
3:44what do you give them? Four?
3:45Fifth person, what do you give them? Two.
3:47So you've got this asymptoting declination
3:50of your willingness to pay people
3:52to join onto your network.
3:54Then, you go to an investor and you say,
3:56"I need to raise $2 million."
3:58And that investor gives you a seed check.
4:01And for 2 million, maybe they buy 15% of your company.
4:05But the next firm that comes along,
4:08they might give you 6 million for 15% of your company.
4:12And the next firm might give you $25 million
4:14for 15% of your company.
4:18And again, you've got a geometrically declining amount
4:21of equity you spend
4:23in order to get that new investor node
4:25to bond to your network.
4:28And we've been doing this implicitly for ever.
4:31But let's make it explicit.
4:33Let's understand that
4:34that is a process you're going through.
4:36And I believe that over time, we're gonna have software,
4:40spreadsheets that will help us measure
4:42the value impact of every new employee,
4:45every new customer, every new investor,
4:47every new press release we get, that gets published around,
4:51and we're gonna be able
4:52to calculate what we should be willing
4:54to pay and when to walk away from a deal,
4:56or to bring a new node into your network.
5:00I mean, this is true, as you know, with your customers.
5:03If you were to land Nike as a customer,
5:06you'll be able to tell everybody else,
5:07"Nike is a customer.
5:08They've made the decision to work with our software.
5:10They've made the decision to join our network."
5:12That's gonna help you land other customers.
5:14You know, there's a value there.
5:15Nike knows it too,
5:16and they want you to charge them less,
5:19or, but we don't have a formula for it.
5:22In the future, I believe we will have formulas
5:25for all these things,
5:26because we will understand all
5:27the math about all this specific tactical network bonding
5:31that we're doing to companies.
5:33For instance, a skeleton we can use for this is,
5:37to use maybe four factors
5:38in determining what you should be willing
5:40to pay a node to bond to your network.
5:41Number one, time.
5:42Time since inception of the company.
5:44The longer it is from the such of the company,
5:46the less you're gonna be willing to pay.
5:48Number two, the promise of the node.
5:50The node has some following on Twitter,
5:53they have some performance
5:54they've had in the past.
5:56There's some promise to them
5:57that you could probably measure
5:58in calculating what you should be willing to pay them.
6:01Number three is the engagement
6:03and performance they have after they bond
6:06to your network.
6:07So for instance, if we use Twitter as another example.
6:10You could pay someone
6:11with a big following to join your Twitter network,
6:13to grow out the graph,
6:15and to grow attention into that ecosystem.
6:18But if they don't tweet,
6:19that's a huge problem for you.
6:21People will go to their profile,
6:22they'll see that they haven't tweeted,
6:23and they'll think,
6:24"Oh, this Twitter thing is dead."
6:26This isn't cool enough for Kobe to be tweeting"
6:29And so without Kobe tweeting,
6:32it actually hurts your network
6:34to have Kobe having bonded in your network.
6:36So you actually want to compensate each node
6:39for their performance after their initial bonding.
6:41And then, the fourth thing to look at is,
6:43there's different curves you can use
6:45in declining how much you're willing
6:47to pay somebody.
6:48But again, these four elements
6:50are a skeleton toward thinking
6:51about how you build a spreadsheet
6:53or even software to help you calculate what a new node
6:56is worth to your network.
6:58(bright lively music)
7:03And so once you've figured out
7:04what you think a node would be worth to you to bond,
7:07then you have to figure out what type
7:09of compensation to give them.
7:10And actually, there's a lot of different types
7:12of compensations.
7:13And I'll walk through the list with you
7:15so you can see the variety
7:17that we've already been dealing
7:18with over the last three years
7:19in building the companies we're working with.
7:21The most obvious one
7:22is the value of using the product.
7:25So the value of your product
7:27is actually the first
7:28and most useful thing
7:29that you can still do going forward.
7:31The second thing,
7:32you could consider is giving them cash.
7:35US dollars, or Euros, or Bitcoins,
7:37or whatever they might wanna get paid
7:39to join your network.
7:40You can see this in a lot of entertainment products,
7:44with celebrities, and whatnot.
7:46Of course, you can consider giving equity shares,
7:48traditionally, to your employees.
7:51But increasingly, people are wondering whether
7:53it should be shared beyond employees.
7:55Fourth thing you consider would be just discounted fees.
7:58We've seen that premier placements
8:00and traffic and attention,
8:02extra traffic and attention to people.
8:03People are willing to bond
8:04to you if you promise them things like that.
8:06You give them status symbols in the system.
8:09You give them early access to various pieces,
8:11or to different communities within your product.
8:16You might give them some voting or decision making,
8:18the ability to edit things or to change things,
8:20really power in your network.
8:22The ninth thing you might consider
8:24is giving them premier software features.
8:27Functionality like power that other people don't have.
8:30Number 10 could be membership into this valuable click,
8:33or access to other nodes
8:36they wouldn't normally get access to.
8:39Another thing could be real world perks like dinner,
8:41or tickets to the ball game.
8:42We've seen that repeatedly, certainly in the sales process.
8:46Another thing you can give people
8:47is really a belief in the mission.
8:48This is a right brain compensation.
8:50It's a intrinsic motivator,
8:52but you've gotta put it on your list,
8:54because some of your businesses will have the ability
8:57to create belief in the various nodes who want to join.
9:01Another thing to think of is a commitment
9:04to a set of human relationships,
9:05another right brain intrinsic thing.
9:07And then, now we're getting into fungible tokens.
9:11Just people are adding tokens
9:12to certain marketplaces and saying,
9:14"If you continue to run your labor through our marketplace,
9:18you will earn more tokens,
9:19which will be worth money in the future."
9:22And then, the last thing to consider
9:23is non-fungible tokens.
9:24NFTs, so far have been mostly about art
9:27and art communities and whatnot.
9:28But increasingly, these are just ways
9:31of owning unique things that are digitized.
9:36And so you can see that companies
9:37in the future will be compensating both customers
9:41and employees and users of the product
9:44with non-fungible tokens as well.
9:46So that should go on your list.
9:48So there's lots of ways of compensating the nodes,
9:50some of which you're experience with,
9:51some, maybe you're thinking about differently now.
9:53(bright lively music)
9:57In addition to making it a multi-player game,
10:00another big mental concept you've gotta grab
10:03is that not all nodes are created equal.
10:05In fact, they're very different, very unequal.
10:08I believe that in the future,
10:11almost all marketplaces and network businesses
10:13are gonna have fungible tokens
10:15to compensate the various nodes of the network to bond
10:17and stay bonded to their networks.
10:19And I'm gonna give you an example here
10:20that is a real world example we've seen
10:22in the last couple years that demonstrates this.
10:25PSG, Paris Saint-Germain,
10:28the big soccer team in Paris has recruited Lionel Messi
10:33to leave Barcelona and join them
10:35for the last years of his career.
10:37They didn't give him shares in PSG,
10:39but what they did do is they gave him fan tokens,
10:42millions of fan tokens
10:45that they had distributed out to the fans.
10:47The fans were buying them as part of the network
10:50to bond to the tribal network effect of this,
10:52of this soccer team.
10:54Now, think about it.
10:56It's just a soccer team, but it's not.
10:57It's actually a network.
10:58And in this case, we know it's a tribal network.
11:01And these fans were buying these tokens
11:02to get access to t-shirts,
11:03or get to go in early into the stadium.
11:06They were getting compensated
11:07for their tokens in various ways.
11:10And when it was announced
11:11that Lionel Messi was joining PSG,
11:13the value of those tokens doubled.
11:15So if they gave Lionel Messi 2 million tokens,
11:19and those tokens were worth $4 a piece, €4 a piece,
11:22suddenly they're worth €8 a piece,
11:24and they just compensated Messi
11:25almost 16 million euros with fan tokens.
11:30That's gonna be a significant part of his compensation.
11:33And this is just the beginning,
11:35because these types of fungible tokens
11:36are just beginning.
11:37So you can imagine what
11:38it's gonna be like 10 or 20 years from now.
11:40They're gonna be used more and more.
11:42Now, think about,
11:43did Messi get compensated enough for joining PSG?
11:47And there are some indications
11:48that he was not compensated enough.
11:50One would be the fact
11:52that the French league, soccer league,
11:56their TV rights went from being worth $600 million
11:59to being 1.2 billion as soon as messy joined that.
12:03What percentage of that 600 million gain
12:06is gonna go to Messi?
12:07Arguably, all of it should go to him
12:09because he was the instance which caused
12:12that price to jump so much.
12:14But I'm sure he did not get all of that 600 million.
12:16And then, you were gonna have debates.
12:18And in the future, we're gonna have very open debates
12:21about this sort of thing.
12:22And his agents will be able to trail where in the network,
12:27not only is it gonna affect PSG
12:29and the value of their fan tokens
12:30and their fan base and the value of their tickets,
12:32but it's gonna affect all of the French teams
12:35that are gonna then play Messi
12:36and everyone's gonna wanna tune in.
12:38So that wider network,
12:40that bigger network will now all lift up
12:43because of this addition of this one node.
12:46So when you think about this sort of a thing,
12:49you've used to think about it as sports,
12:50but now, think about it as networks,
12:52and you can start to see the ripple effects,
12:54the value causation, the value capture,
12:57how that's all gonna work?
12:58You're gonna start to need to write
13:00that into your startup, just as Paris Saint-Germain
13:03and all the teams around the world
13:05are gonna need to write it into their plans
13:06and how they compensate people going forward.
13:09Think about all the other network nodes
13:11around Paris Saint-Germain, think about the fans.
13:14Should they be compensating
13:16the fans to wear outrageous outfits,
13:20or to be beautiful,
13:21or to be loud,
13:22or to be enthusiastic,
13:24or to greet people outside of the stadium?
13:26Well, now either you have fungible tokens
13:28that are not shares in the company
13:30and are not just outright compensation,
13:32you start to have ways
13:33of animating all the different nodes
13:35that make going to the soccer games amazing,
13:38following the team amazing,
13:40copying their stats and playing fantasy games amazing.
13:43It just is gonna ripple out and out and out.
13:45And it's a huge open creative area
13:47that we've now entered into
13:49now that we have this web three
13:50and these ownerships, these NFTs.
13:52Huge creative space over the next decades
13:55that is gonna reveal all these businesses as networks,
13:59and is gonna allow us to manage them as networks.
14:01(bright lively music)
14:06This is gonna require a bit of a mindset shift
14:08for founders, because the nodes
14:11that are unequal are going
14:13to start being able to see and understand,
14:17and then demand compensation
14:20for their participation in you network in ways
14:23that they haven't been able to in the past.
14:24I mean, think about shares.
14:2620 years ago, if you were living in Europe,
14:29most employees didn't even ask for shares.
14:32They didn't think about it.
14:33It was a Silicon valley thing.
14:35And then, as it spread East, it got to New York
14:38and then eventually it spread to Europe
14:40and now, most have learned to ask for shares,
14:43because they can see the shares,
14:44they've been able to track the shares,
14:45they've heard the stories of the shares.
14:48The same thing is gonna happen
14:49with tokens and with NFTs, Non-fungible Tokens
14:52in the future with all of your nodes
14:54expecting to get compensated
14:56for the value they bring to your network.
14:58So it's gonna require software spreadsheets thinking
15:01it's gonna require different mindset
15:03from founders to manage in this new environment
15:05as everything gets revealed as a network,
15:07and we have ways of measuring and compensating people
15:09for the value they bring to those networks.
15:11(bright lively music)
15:15A lot of people are getting
15:16into all this compensation stuff
15:17and tokens and incentives.
15:20And incentives are important.
15:21In fact, I think Charlie Munger says,
15:22"Show me the incentives and I'll show you the outcome."
15:25I just think that's incomplete.
15:27We are going to be subject to overcompensating,
15:31or over-indexing if you will, on incentive models.
15:35And we really shouldn't,
15:36we shouldn't forget the human part of this.
15:39And you see that and if you're gonna recruit a sports person
15:42to your team like Lionel Messi,
15:44does he like the people he's gonna be playing with?
15:46Does he like the management?
15:47Does he like living in Paris?
15:49Does his wife like living in Paris?
15:52There's still human factors in compensating if you will,
15:56these nodes to bond,
15:58and let's not forget them.
15:59(bright lively music)
16:03So that being said about the right brain needs of people,
16:07we are going to enter a new era about now,
16:10which is that, for the last 25 years,
16:13we've watched the internet create networks
16:18that have attacked the scale effect businesses of the past.
16:21And it's been an unfair fight.
16:22It's been like mammals versus reptiles.
16:24Mammals end up dominating.
16:25So we've been able to defeat the newspapers
16:27and the radios and the TVs with new media.
16:29We've been able to defeat the old non,
16:31the scale businesses with networks
16:33and new online marketplaces and whatnot.
16:36But going forward, as you're starting your company,
16:39you're gonna be building networks
16:41and you're gonna be increasingly competing
16:42against other networks.
16:43So we're gonna get all this network on network files.
16:45We're gonna get network wars.
16:47And you're gonna wanna learn tactics
16:49for how you take down those networks
16:51and you're gonna learn tactics
16:52to how to defend your networks against other networks.
16:56So we're gonna be writing more about this
16:57and publishing it in the future,
16:58but the basic idea for the masterclass is this,
17:02the nodes you have are not created equal.
17:04So you need methods for measuring
17:07and understanding who your most valuable nodes are
17:10so that you can defend,
17:12or you can attack the ones
17:14that are in the other networks you need.
17:15You need to understand how to measure.
17:17Secondly, look at your take rate.
17:20A take rate makes you vulnerable.
17:22Whatever that friction is that you've introduced
17:25into your network to, maybe, get compensated,
17:27or for other reasons,
17:28any friction makes you vulnerable
17:30to an attack from another network if you've got one.
17:33And any network that has a bunch of friction,
17:36or too high of a take rate is an opportunity for you.
17:39The third thing is if there's network pollution.
17:42So if there's bad actors,
17:43if the networks you're in aren't really clean,
17:46you're vulnerable.
17:48And likewise, they're vulnerable to you
17:50if you can provide something better.
17:51And then the fourth thing to look at would be status.
17:54So a lot of networks start out pretty high status,
17:56but then they decline over time as they grow.
17:59And when that happens,
18:01there's often an opportunity to attack from the top.
18:04And if you've gotten too big,
18:05they can attack from the top as well to find a niche,
18:08to find a minimum viable cluster,
18:11and grab that from you
18:13and then build out their network around that.
18:16And so a fifth thing would be
18:17if the nodes in your network are fungible.
18:19Like, if they're willing to multi-tenant,
18:22that makes you vulnerable to another network attack,
18:24'cause they can go and try out
18:25the other network and decide they prefer it.
18:27(bright lively music)
18:31So an example of this would be how SiriusXM went
18:35and paid a $100 million to this incredible node,
18:37Howard Stern, to bring him over to their network,
18:40put him behind their paywall,
18:42and hopefully bring all of his customers with him.
18:44And from that, they were able to get more people,
18:47because they wanted to join the network that node,
18:49or Howard Stern was on.
18:51And that's one example.
18:52Another one would be SushiSwap.
18:55So SushiSwap basically copied Uniswap,
18:57but then went after their top node saying,
19:00"Don't trade your crypto there,
19:02don't hold your crypto there.
19:03Do it on our site,
19:04and we will compensate you
19:06with our fungible token in order to move over."
19:08And when they did,
19:09when they staked their assets over on SushiSwap,
19:12this was what is now called a Vampire Attack,
19:14where they went into the most fab and just took them away
19:16and created a lot of value,
19:18multi-billion dollar company was formed
19:19in just a few months
19:21by doing just such a network on network attack.
19:24And that is one of the first examples
19:26that we're gonna see
19:27about widespread network and network violence
19:30that we're gonna see again and again and again
19:32over the next 25 years,
19:33and you'll be involved with.
19:34(bright lively music)
19:39So now you've seen how not all network affects.
19:40(voice goes mute)

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