[00:03:07] Hamilton Helmer: And if you’re sort of trying to think through theory, and I’m essentially a theorist. That’s just incredibly valuable. And then, and then to have all these very bright, motivated, engaging people to interact with just as very stimulative. 

[00:03:24] Kyle Grieve: So you’re the co-founder and chief investment officer of Strategy Capital.

[00:03:28] Kyle Grieve: And I know the seven powers concept is a key to your investing strategy. And I’d love to know more about the history of your formulation of the seven powers in regard to how you run Strategy Capital. 

[00:03:39] Hamilton Helmer: If the principal question of strategy is why are companies durably successful? You would think that that would probably have some value in thinking about whether a company was going to do well and.

[00:03:55] Hamilton Helmer: And if a company does well, you would think that’s reflected somehow in its price over time. And so that sort of sounds like it has an impact on investing. And so I’ve been an equity investor longer than I’ve been a strategist. So I started in my twenties, basically. I won’t tell you how many decades that’s been since, and so, they sort of went hand in glove in a way, and I think investing forces you to a discipline of thinking about what creates value, and so I think that the interaction of working with operating companies and smart business people over a duration of a career in strategy consulting of trying to examine companies and how they’re doing and interacting with students and writing those things all Contribute to sort of thinking about these things more carefully.

[00:04:51] Hamilton Helmer: So it’s been instrumental. I’d say 

[00:04:54] Kyle Grieve: So let’s move on to seven powers I really liked the simplicity of power a benefit and a barrier It seems like there is no shortage of businesses with benefits for the short term, but these benefits are able to be arbitraged away due to the lack of a barrier. How did you develop this concept of power that you outlined so well in your book?

[00:05:13] Hamilton Helmer: Well, first of all, I just want to flag the importance of your takeaway from that. I mean, you, you’ve reached a conclusion, which is maybe expressed well in the book. I’m not sure, but, but it is a very important observation, which is that benefits are common and barriers are not. And every cost reduction measure in a business or every measure to improve your product, there are benefits to all of those.

[00:05:39] Hamilton Helmer: They may or may not be material to the bottom line, but that’s the nature of benefits is that. And so there are something that are frequent. And then if you’re interested in durable success, you sort of want to do especially well, and that requires having something that you’ve done that does kind of move the needle and value that way.

[00:06:01] Hamilton Helmer: But that others have a more difficult time mimicking because the world is a tough place and if it can be, yeah, not a bad presumption is if it can be competed away, it will be, you might get lucky and the competition is ill informed or not very clever, but you don’t want to bet your, you don’t want to bet your business on that.

[00:06:23] Hamilton Helmer: So better to assume that our competitive arbitrage is very effective. And so that means if benefits are, are frequent and barriers are not, it means looking at the barrier. And so I think your, your question was around how did that formulation come out? And it was over a very long period of time to sort of distill it to that level of simplicity.

[00:06:48] Hamilton Helmer: As I mentioned to you earlier, you know, my. I’m in economic circles, not what you call as a Schumpeterian, which is Joseph Schumpeter was this very quirky, interesting economist. And then went through the first half of the 20th century and he took a different view of what really drives economic growth and his sort of bottom line, this is at least in his earlier views, which his views sort of changed over the period of the scholarship.

[00:07:22] Hamilton Helmer: But the early view was that entrepreneurs are the heart of, of what creates economic growth and everything. I was fortunate. Yeah, I in grad school to work under one of the most insightful people in the world about, you know, the origins of growth and so on. And I think I’ve came away with very much that same impression.

[00:07:46] Hamilton Helmer: And so if you’re thinking about what I think about is sort of the theory of all this, the question you ask yourself is, okay, well, you’ve come to that understanding. Why is it useful to entrepreneurs or to founders? And the answer to that ultimately takes you back to heuristics. You know, you have to be able to distill it sufficiently.

[00:08:09] Hamilton Helmer: And so the things that you mentioned, investing and teaching and so on, distilling things properly so that you can get sort of reasonable, reasonably memorable heuristics out of it is, is sort of the theorist challenge. And so that’s, that’s what’s occupied me. 

[00:08:26] Kyle Grieve: So you talk a lot about strategy in this book, but you also make sure to define it in your own way.

[00:08:31] Kyle Grieve: How do you contrast strategy and power for those who might confuse the two terms? 

[00:08:37] Hamilton Helmer: So strategy is, as I say, it has one objective, I think, understanding the elements of durable success. A company’s success, right? So that’s inclusive and power is a key, an essential ingredient in that, but it is logicians would say independently necessary, but not submission.

[00:09:04] Hamilton Helmer: So there are other, so the three elements that create value. are power, market size, and operational excellence. And each of those has its own descriptors. And I’d say the thing about power is that it’s the thing that the founder and ultimately the company can create and has some control over. Market size, ultimately not operational excellence.

[00:09:32] Hamilton Helmer: They do have control over it and it’s critical for a strategy, but it is also something that from a statics perspective is arbitraged out. So from the point of view of kind of successful endpoints, it’s something that you normally can’t look to as saying. That will make you a better company. It’s essential.

[00:09:56] Hamilton Helmer: So if you think of having a great accounting system, if you don’t have it, you’re toast, but it’s also something that’s easily mimicked. Now, when you move from statics to dynamics, that conversation gets more complicated because operational excellence actually is fundamental to achieving power and is different over the timeframes, reasonable dynamic timeframes.

[00:10:22] Hamilton Helmer: So But power is a great way to sort of start theory about this because it tells you about that element of durable success. which is sort of controllable by the company. 

[00:10:37] Kyle Grieve: So now that we have a better understanding of power, let’s jump into some of the powers that you outline in your book. Let’s start with scaled economies.

[00:10:44] Kyle Grieve: You use the case study of Netflix versus Blockbuster in your book to show how Netflix could leverage its ability in exclusives and originals. which allowed it to utilize scale as a powerful source of leverage. Now that Netflix is a more mature business with lots more competition than it once had, do you think that its barrier is as strong now as it once was?

[00:11:04] Hamilton Helmer: For me, it seems like it hasn’t changed much. I think the external environment and people’s awareness of what’s going on has changed a lot in the sense that there was a while Netflix, you know, sort of experienced this huge stock price run up and And everybody sort of thought, Oh, you kind of get into streaming and, and it’s worth a lot and that’s what you do.

[00:11:30] Hamilton Helmer: And now, and then a lot of people did that sort of herd instinct, which is normal in business. That’s how arbitrage takes place really. And now I think there’s a realization that, that just because you stream, you know, it doesn’t make money. I think Netflix is the only one making money at it. So if you look at Disney+ or I don’t know, I don’t think Amazon prime’s financials are specifically broken out, but in general, it’s the one that’s doing well. And so I don’t think that’s changed you, but you can see the normal cycles of competition. So Netflix sort of initiated this and did, and executed very well and took advantage of that initiation, which isn’t always the case.

[00:12:11] Hamilton Helmer: It’s first in doesn’t guarantee that you end up the winner, right? I’d say it’s kind of 50- 50. And that ties back to that earlier comment of mine about operational excellence and. And the importance of establishing power because you companies break down, you know, the, sort of the poster child example of that is the Apple three, right?

[00:12:33] Hamilton Helmer: Apple was poised to own the PC market, but to do so they had to have great products and efficiently designed factories and all that and an appropriate pricing and they dropped the ball on all those fronts and the Apple three was just a disaster and it created. A window of opportunity that the IBM PC jumped into.

[00:12:54] Hamilton Helmer: And that’s an example of sort of operational in excellence, making it not the first in be the winner, but Netflix wasn’t like that. They were, I would say, operationally excellent and just phenomenal leadership and built up an incredibly good team. We’re very, very attentive to all the lovers of their business.

[00:13:15] Hamilton Helmer: And so they built a lot of market share in that business. And I think the competition has, has been dramatic. I mean, these huge companies jumping in, if you had to think of the competitors, you probably wouldn’t normally want to have think of, you know, Amazon, Apple, Google, Disney, and that’s, and that’s who Netflix has been up against, but they’ve done very well.

[00:13:40] Kyle Grieve: So you give an excellent case study of a business I’ve never heard of called Branched out in your chapter on network economies. The end of this business was due to its inability to maintain its barrier as it attempted to scale. Branched out was unable to draw customers off of LinkedIn and Facebook at the time because users of these social networks liked having their personal and professional lives separate.

[00:14:00] Kyle Grieve: Once branched out realized this, their inability to reach a tipping point spelled out their end. What are some key traits that you look for in earlier stage businesses that have potential power in network economies? 

[00:14:12] Hamilton Helmer: Well, the key thing is the value proposition, right? There’s a feedback mechanism that basically means if you’re on the network, I’m better off.

[00:14:23] Hamilton Helmer: And then that has to be met. And that happens with some frequency. But then the second thing is materiality is there are lots of we sort of Laugh in our business sometimes that people always talk about flywheels, you know, which is sort of like this, you do something and make something better and you get better and so on.

[00:14:43] Hamilton Helmer: And there are a lot of those around, but often they’re not material. And so what you’d look for is the character of the demand being satisfied in a way that where there is this feedback mechanism that if you’re on the network, I’m better off. So you have a telephone, I’m better off with having a telephone because I can now reach you.

[00:15:06] Hamilton Helmer: You’re on Facebook, and I’m on Facebook, and I, and that makes it more valuable to me because you’re my friend. And so you look at that, and then you try to determine, or try to understand whether that’s a material effect or a rather minor effect. 

[00:15:22] Kyle Grieve: Yeah, I really like that because flywheel is such a buzzword now and so many businesses use it, but I really liked how you brought into the material portion of that because that’s kind of what tells you that the flywheel is actually doing something versus, you know, just saying some words.

[00:15:39] Hamilton Helmer: Yeah, that’s very important. I find that you mentioned earlier, the construction of barrier and benefit. There isn’t, which I think is useful, but oftentimes when I’m talking to people, I use a alternative construct, which is identical in the sense that it maps one to one to barrier benefit and that’s sustainable, superior, and significant.

[00:16:04] Hamilton Helmer: And so with superior and significant. That’s the benefit and sustainability barrier and the reason I, that’s what I call 3S formulation and the reason that’s useful is it calls out significant materiality. 

[00:16:19] Kyle Grieve: So in a podcast episode with Patrick O’Shaughnessy, you mentioned that the earlier stages of network effects can look unattractive on a profit and loss statement as profits are hard in the early innings of a business.

[00:16:30] Kyle Grieve: What are some businesses that navigated this path very well that you admire? 

[00:16:34] Hamilton Helmer: Well, sort of big ones. I mean, Facebook, obviously, you know, Facebook’s P& L was kind of ugly before they went public, right? And even, I think, before they sort of figured out the ad model and put it into effect. Google’s another one.

[00:16:49] Hamilton Helmer: You know, I think one of the things that drives Google is its attractiveness, its network economies, and, and the initial aspect of learning how to follow what prior askers of a particular question did once, once they got certain search results. Using that to enable superior research results for others as they ask the same question later on as was, wasn’t evident.

[00:17:21] Hamilton Helmer: And so I think, and I’ll make a hypothesis. I don’t know if it’s true, but I’ll make a hypothesis. You identify any network business and network or businesses powered by that. And the early stage will be fraught with these decisions about trying to get the network up and running and that that’s that’s daunting and often has ugly P&Ls.

[00:17:45] Kyle Grieve: So counter positioning was probably my favorite power that you discussed in your whole book. I know it’s your favorite as well. It was one that was a little hard for me to understand at first, but the more I read and reread your book and listened to you talk about it, the more I started understanding it.

[00:17:59] Kyle Grieve: I like this model as it can be used in high flying tech names like Amazon or boring simple businesses like In N Out. Can you briefly discuss the power and what incumbents best strategies are in order to combat incoming businesses with radical new models that are attempting to succeed by breaking the mold?

[00:18:15] Hamilton Helmer: Yeah, it’s a fairly simple proposition. It’s just that If you’re starting up a business, you’ll often, some of the most daunting combination are behemoths that are much larger than you are. They have an advantage and a disadvantage. So they have all their resources and all their capabilities. But a potential disadvantage is they already have an established business and there are a lot of what economists call agency effects of that.

[00:18:50] Hamilton Helmer: You won’t want to give that up and the distribution of authority in the business, the way decisions are made is very shaded by that. You can imagine a boardroom meeting saying, let’s do this. And somebody said, no, no, no, that’s not going to work. And so not work is tied to that. It damages our current business.

[00:19:11] Hamilton Helmer: So you should think of talk about Netflix before you think of a blockbuster and Netflix. You can imagine a boardroom meeting at Blockbuster saying, well, let’s just start doing what Netflix says. No, no, no. We have all these stores out there and we don’t want to take away from the traffic to our stores.

[00:19:29] Hamilton Helmer: That’s just going to upend our business. And so those considerations are very real and frequent and make good business sense. And so incumbents are inhibited from competitive reaction of mimicking the new business model by a reluctance that’s created by the impact on their current business. And remember.

[00:19:52] Hamilton Helmer: When you’re making economic decisions, your uncertainty affects you. So you’re trading a certain profit for an uncertain outcome. And so that makes it extra hard even. And that turns out to be a very important thing that happens often, I’d say. And so it is, as you mentioned, it is my sort of favorite.

[00:20:15] Hamilton Helmer: Power me partially, maybe because I invented the concept, but also it’s frequent, I’d say, and the barrier is very, very significant. 

[00:20:25] Kyle Grieve: So what’s a good example of a business that was able to overcome counter positioning by a competitor? 

[00:20:32] Hamilton Helmer: This is a statement about the barrier. I saw you sent me that question.

[00:20:37] Hamilton Helmer: Ask me. I couldn’t think of one. I asked, there are other people in my company that are also extremely thoughtful about this kind of stuff. They couldn’t think of one either. And that speaks to the intensity of the power of that. And I could give you sort of a recent example of someone who it appears to me did all the right things and still wasn’t successful.

[00:21:03] Hamilton Helmer: So if you look at the dethroned CEO of Volkswagen, Herr Deese, who I don’t know personally, but admire his thoughtfulness, he did all the right things. He basically said the EV revolution is coming. This completely upends our business model. If we don’t become great at that, we will, we’ll really have a problem becoming great at that.

[00:21:30] Hamilton Helmer: That means that we have to become really good at software because an integrated software platform is essential for EVs. And so we have to invest a lot in that and make a commitment in company trajectory that we’re going to do this. And he was thoughtful about it outspoken and lost his job. And that’s not atypical.

[00:21:54] Hamilton Helmer: So there’s some, but that just gives you an idea of the intensity of that type of power. And you can imagine all the things going on. I mean, You know, there are powerful labor unions that sit on this board, you know, and they would say, Oh, well, these, this new direction that it won’t be as many jobs. And it is an intense form of power.

[00:22:13] Kyle Grieve: Yeah, it seems with that example you just gave too, that there’s so many different. Second order effects of making a change for the incumbents that looking in, you might not even really account for. And unless you, 

[00:22:27] Hamilton Helmer: It’s very daunting. It’s not a comment about how badly they run their business. It’s just how daunting.

[00:22:33] Hamilton Helmer: I mean, you could see it. You were, I don’t know if you’re, you’re maybe too young to remember the days that Nokia was a great business. And the iPhone came along, they is completely observable. They could see loss of market share. And it was a similar situation is that the iPhone is a software centric product and that Nokia is a hardware centric product.

[00:22:56] Hamilton Helmer: And they had all these supply chains and their huge business that was all based on their engineering model. Moving that to a software engineering model is very hard. I mean, you could see, you could see in Sony. They managed to overcome that, but only by the skin of their teeth, because the PlayStation was a digital business and they were an analog company, and there was a lot of pushback about doing the kinds of things they were thinking of doing.

[00:23:27] Hamilton Helmer: And they had some amazing leaders, a couple of different levels at Sony that pushed this through. But they almost didn’t do it. But I, but that was an example of counter positioning exactly because it was a new business. It didn’t threaten their old business. So that isn’t an example of successfully fighting counter positioning.

[00:23:47] Hamilton Helmer: It’s more example of successful example of transforming, which is successfully starting another business. But some of the elements are similar in that there was you know, in the corporate and corporate resistance. 

[00:24:02] Kyle Grieve: So another great power that you discuss is switching costs. You give the example of Apple in your book and how it used iTunes on its customers to prevent them from switching to another platform.

[00:24:12] Kyle Grieve: Otherwise, they’d forfeit their prior purchases. This type of switching costs no longer exists specifically with Apple, but I would say Apple definitely still has switching costs. Can you briefly discuss this power and explain how Apple is able to continually utilize switching costs, even though its products are in some rapidly changing industries?

[00:24:29] Hamilton Helmer: Switching costs is an interesting one, and I’ll give you a story that sort of fits with Apple. I was on a plane to Hawaii and we got near landing and I, and I’d been listening to something on my phone, you know, some downloaded music and I went to get my phone and I couldn’t find it. And I thought, where is it?

[00:24:50] Hamilton Helmer: You know, I need to find this before I land. And I, and I just couldn’t find it. And so I eventually thought, well, it must’ve fallen down in the seat somewhere. So I got up and I actually ended up taking the seat apart on the plane. And I still couldn’t find it, but fortunately, I guess it’s because the plane was from San Francisco.

[00:25:11] Hamilton Helmer: I had another sort of techie type person behind me. And he started helping me take the seat apart as well. I mean, we really, the stewardess was getting a little irritated. We were disassembling this thing, but he had his, another iPhone with him. And, and so he had a very intense light that he could shine on the innards of the chair.

[00:25:32] Hamilton Helmer: And we discovered that the phone had actually fallen down between in the chair mechanism. And then all those attempts that I had made to recline the chair, that seat that I was a little irritated because the seat wouldn’t recline properly, I actually was destroying my iPhone. So I crushed it. And so I got off the plane knowing I had to get a new phone and there was a question, well, do I want to get an iPhone?

[00:26:04] Hamilton Helmer: And the answer is everything for me was set up on an iPhone. I even had, you know, it saved many of the things and all the accounts and everything. And so would I get a Google pixel or something? No. The cost to me of switching was extremely high and the price they charge, which is phenomenal. I mean, Apple’s mark hardware margins are astonishing.

[00:26:31] Hamilton Helmer: It was capitalized on that and they’re, and not a thing I can do about it. You know, I think that continues to be true for Apple. I love that example. I did get a phone. I did get a new one and it was up and running and immediately. Yeah, that’s the beautiful part about it. I talked about counter positioning, the only hard part of the process was I had to persuade the salesperson that was an AT& T store that was doing it, that they could simply give me a replacement and bypass all the normal commissions and choose the plan nonsense and all the stuff that they try and put you through when you go in for a phone.

[00:27:12] Hamilton Helmer: That was the friction in the process as AT& T is switching costs. 

[00:27:17] Kyle Grieve: So one of the most powerful effects of switching costs is the ability, like you just mentioned, for the business to have pricing power for its products. But it’s going to have the second order effect of making customers angry if they feel they’re being overcharged for a specific product, even though switching would be even more painful.

[00:27:32] Kyle Grieve: How do you view switching costs in relation to a business’s relationship with its customers? 

[00:27:38] Hamilton Helmer: Yeah, it is fraught with that. And one of the pleasures of my work is that I get to interact with company founders who I find. Imaginative, intelligent, fun to deal with, and I love what they’re doing. And so I’m often asked this question about switching costs, about can I initiate them somehow?

[00:27:59] Hamilton Helmer: And the response that I, I often give is that the wrong way to think about this is. I’m going to lock in my customers. The right way to think about this is what can I do for my customers that creates value that then has a lock in characteristic. Rather than sort of how do I retro lock them in? And that is the correct perspective, I think, how you do it in the first place.

[00:28:26] Hamilton Helmer: And then later on, so you can somewhat, but not completely avoid this difficulty by always thinking about value creation for your customer. And that goes hand in hand with it. Now for super intense switching cost companies like ERP, like Oracle or something that’s a little difficult. I mean, they, they do it by offering more and more services and stuff, but there is that, that conflict is kind of built in and you have to deal with it.

[00:28:57] Hamilton Helmer: There’s a balance as a business person, you want your customers satisfied, but you also want to make what money you can from them. And so there is that conflict and you have to manage it, but that’s one way to sort of at least help a little bit. 

[00:29:12] Kyle Grieve: I like that. That’s kind of, you kind of reframing the question then that that’s a great insight.

[00:29:16] Kyle Grieve: So I loved your definition of branding through the lens of Tiffany’s. Tiffany’s uses branding as an asset that confers positive emotions to the customer, which leads to an increased willingness to pay up for a product. This is a tougher power to identify in terms of durability because many retailers are in highly competitive industries.

[00:29:33] Kyle Grieve: You point out that the tenure a brand has displayed signals its strength. But as investors, how do you determine when a brand is getting stronger versus weaker? 

[00:29:42] Hamilton Helmer: It’s important to distinguish between brand as power, branding as power and, and brand awareness. So I can buy a Super Bowl ad and get brand, but I paid for it.

[00:29:53] Hamilton Helmer: I’ll brand awareness and I paid for it. So that doesn’t work as brand power. So I, I think for me, the key thing that you would look at would be if of loss of that would be loss of market share in your target segment. So let’s say you are Hermes and we’re able to sell handbags to a certain segment for $25,000 a pop, right?

[00:30:18] Hamilton Helmer: You wouldn’t look at Walmart selling a 20 handbag, but if you saw that that segment that you were selling to, that you were losing market share in that segment to an unbranded competitor. Then that would indicate that there’s the warm feeling that your customers get who are willing to pay for that warm feeling from having your product has been lessened.

[00:30:46] Kyle Grieve: So another one of my favorite powers was cornered resources. You defined it as quote preferential access at attractive terms to a coveted asset that can independently enhance value unquote. This is an advantage that is less discussed by most investors. Why do you think most investors aren’t actively searching for this power in potential investments?

[00:31:05] Hamilton Helmer: Yeah, to come back to your question before about how teaching helped, that very careful articulation of that, one of my students, David Hsu, wrote a paper on trying to very explicitly define a cornered resource. And so I have to give him some attribution there and it is very thoughtful. So I would say that in sort of the large scale places where cornered resources are evident in value, I would say they’re easy to identify and the market prices them as so, for example, the probably the most prevalent example The most prevalent example is pharmaceuticals.

[00:31:49] Hamilton Helmer: Patents are a way in which you take advantage. That’s the barrier. You know, there’s a formal barrier and legal barrier. So if you took a blockbuster drug, And you, one pharma company bought it from another one. You still get the same cashflow from it. And so it’s, it’s a corner resource. And, and so I think historically patents have kindly kind of only worked in two areas, chemicals and pharmaceuticals.

[00:32:22] Hamilton Helmer: I think that I’ve got the research in there. You know, and so I think investors don’t need to call it a common resource. They just know that there’s an asset there that’s valuable and protected. And I think they price that look at the what’s happened with these weight loss drugs and what that’s done to the market cap of the companies that are doing it.

[00:32:41] Hamilton Helmer: You know, they price it very quickly. And so I think that it’s an area that although they may name it differently as well understood. 

[00:32:50] Kyle Grieve: You mentioned pharmaceuticals there and obviously how they could sell one drug to another drug and they would get the same cash flow and that made me think about intellectual property and how that isn’t necessarily a corner resource, but I guess it kind of could be depending on its makeup on a case by case basis.

[00:33:06] Hamilton Helmer: So the key things there are materiality and imitability, right? So there’s, there’s lots of IP that you can get it. You can do it a different way. I mean, I’ve never seen a business that has power based on algorithms, for example. And if you think of sort of that may be tested by a generative AI, but so far I’ve never seen it and the reason, and so that’s very important IP central to the company.

[00:33:35] Hamilton Helmer: Necessary conditioner for their success, but largely imitable. It’s the inimitable IP that’s, that is material. So that’s a high bar, right? And in the case of a, of a molecule for a pharmaceutical, that you meet that part. And then the non imitability part is not because it’s not easy to do a generic, it’s because you have a patent.

[00:33:59] Hamilton Helmer: And so the barrier there is, is Fiat. And IP is unbelievably important to companies. But it’s a necessary condition for success, but not even close to sufficient. 

[00:34:14] Kyle Grieve: So the final power that you outline in your book is process power, which I think might be the rarest of all the powers that you outlined. You wrote extensively about Toyota’s use of processing power in your book, but I’m interested in a more recent example of this power at work.

[00:34:28] Kyle Grieve: What is a well known business today that is utilizing processing power at a high level? 

[00:34:33] Hamilton Helmer: So it’s very rare. I think many, many companies fall into the trap of saying, we run a tight ship and that’s power. And the funny thing about it is, is that running a tight ship is incredibly important. It’s just not power.

[00:34:52] Hamilton Helmer: It can be imitable, you know, basically. And, and so you and as I said before, in terms of, The dynamics of strategy of getting to power, it is even has vital role. Apple to example I gave earlier. So I continue with my statement that it’s extremely uncommon and easy to fall into the trap that you have a current business.

[00:35:17] Hamilton Helmer: Maybe Inditex, you know, Fast Fashion, Zara, there’s a lot of, the bar for it is so high because the business has to be very complex so that it can have many, many steps, making it hard to imitate and that there’s a certain opacity to understanding what those steps, so complexity and opacity are the two requirements for it.

[00:35:41] Hamilton Helmer: And so maybe that. I mean, I can think of extremely complicated businesses, but I wouldn’t say that they have process power. So think of Apple’s supply chain in China. I mean, that’s really hard to execute, right? But I wouldn’t say that’s Apple’s sources of power. I mean, Apple has lots of power, but that’s not it, but it is absolutely vital for the success of their business.

[00:36:08] Hamilton Helmer: And maybe I just don’t understand it well enough. Maybe it is, maybe it isn’t imitable. I mean, it is outsourced. So you would think that others could dial into that outsource and, and so it wouldn’t end up being material, but maybe it is, and I just don’t understand it well enough, but there’s something that’s really complicated.

[00:36:28] Hamilton Helmer: Really important, but it’s not power. So it’s real. So I’m sort of digressing to avoid your finding an example because they’re just so few. 

[00:36:38] Kyle Grieve: One of the questions I had about processing power that you outlined as well was that it requires a lot of time to develop that power. Now you probably don’t have, there’s probably no correct answer to this, but what, like, what amount of time do you think a company would need?

[00:36:54] Kyle Grieve: For instance, like Toyota, like how long did it take them to develop their processing power? Decades? 

[00:36:59] Hamilton Helmer: Yes, decades. And I’d say that’s the right time constant. It’s not single years, it’s decade or more decades. That’s the right time constant for that. If it can be developed in a year, almost by definition, it’s not in power, because that’s, you’re basically saying it’s immutable within reasonable time frame, right?

[00:37:19] Kyle Grieve: You have a really simple power progression graph that moves through the origination, takeoff, and stability phases. Can you break down these three areas and describe where you like to spend most of your time analyzing? 

[00:37:32] Hamilton Helmer: As I said, my interest is helping founders really. And so that’s more in the takeoff phase.

[00:37:39] Hamilton Helmer: And that has particular strategic significance because that’s when you have the most degrees of freedom in strategy. So it’s when my advice is sort of most useful, I’d say. And it’s not completely true because the other phases are, have their own challenges and so on. But, but that’s the area that interests me the most.

[00:38:01] Kyle Grieve: So from your experience, are you noticing that more businesses, depending on which phase they’re in are staying private past this takeoff period? And why do you think the reasoning is for this? 

[00:38:12] Hamilton Helmer: Yeah, for sure. You know, I think before the change in interest rates, I don’t know what the number is now, but there were a thousand unicorns right now, you could argue that that was overdone a bit.

[00:38:24] Hamilton Helmer: But that’s an astonishing statement about companies that, you know, two decades ago probably would have gone public already. And so, yeah, and I think it’s a capital market phenomenon. I don’t think there, you know, there’s some pundits that would say that. Regulatory requirements have made being public just too onerous.

[00:38:46] Hamilton Helmer: And there’s, there’s, it has gotten a bit tougher and there are scale economies and going public and that’s, it’s, it’s a bit of a nuisance, but I’d say it’s more just that the late stage private equity. Is now there’s an incredible availability of capital in that that didn’t exist before. I mean, think there’s this book that came out recently.

[00:39:10] Hamilton Helmer: I can’t remember its title. Maybe it’s the title was BC by a guy from Harvard, sort of going through the history of the venture capital business. And, and it was very instructive because it wasn’t that long ago, depending on how old you are, I guess it wasn’t that long ago when policymakers in this country were.

[00:39:28] Hamilton Helmer: Worried that there was no venture money and they didn’t try and answer it. They created tax incentives and they did these set up small business investment companies and all this stuff. And that was a real concern. And I’d say one of the great strengths of the U S economy is the amount of risk capital that’s available to people.

[00:39:50] Hamilton Helmer: Think of the big successful companies that provide so many jobs of the future, you know, like Amazon and Google and Microsoft and all those, but they all, almost all of them had, had a risk capital component that was very important and that were very important. So I’d say that, that, that is, that’s really a driver and that, and that’s been hugely beneficial for our economy.

[00:40:15] Kyle Grieve: Hamilton, thank you very much for joining me today. Before we say goodbye, where can the audience connect with you and learn more about your book and your fund? 

[00:40:23] Hamilton Helmer: Yeah, so just, you might mention the title of the book and just, you know, the place, the easy place to get it is is just to get it on Amazon.

[00:40:32] Hamilton Helmer: It’s available now in foreign language editions, but I don’t, you know, Korean and Japanese and Chinese and so on, but I assume that most of your listeners are English speakers for that. Just go on Amazon and look for seven powers and, and they’ll get it to quickly. 

[00:40:50] Kyle Grieve: If you enjoyed this episode of we study billionaires and have a passion for discussing business strategy and competitive advantages, you’ll love the TIP Mastermind community. Just a few weeks ago, the community had a wonderful discussion on Moats where Hamilton’s concepts were brought up regularly. You can find out more about it at theinvestorspodcast.com/mastermind. 

[00:41:08] Kyle Grieve: Okay, folks, that’s it for today’s episode. I hope you enjoyed the show and I’ll see you back here very soon.

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