How Would You Beat?

How Would You Beat Equity Value Using Jobs-to-be-Done?

March 29, 2022 thrv Season 2 Episode 5
How Would You Beat?
How Would You Beat Equity Value Using Jobs-to-be-Done?
Show Notes Transcript Chapter Markers

In this episode, we're going to look at how you can beat your equity value multiple. So why is this important if you're a CEO and investor or board member, or a team member? And what is your equity value multiple? How does this work? And how does it relate to jobs to be done? Let's discuss these things! 

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Key moments from today's topic on how you would beat equity value:

00:00 What exactly is equity value? 

05:09 Jay's story about equity value and Steinway and Sons

08:00 What's an exit multiple?

10:08 Creating equity value and lessons from other companies

22:20 Jared talks about being careful not to miss opportunities in what your investors are thinking about (AOL Example)

25:15 Making sure your company meets an unmet need

30:29 Prioritizing Your Roadmap 

33:03 Segmenting Your Market

39:03 Competing with yourself & new product development teams 

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Jay Haynes:

Welcome back to How would you beat where we discuss how you can use jobs to be done innovation methods to beat your competition and win in your markets. In this episode, we're going to look at how you can beat your equity value multiple. So why is this important if you're a CEO and investor or board member, or a team member? And what is your equity value multiple? How does this work? And how does it relate to jobs to be done? So a lot to talk about here. Of course, companies exists, ultimately, at the end of the day to create value for different stakeholders, their customers, their communities, their employees, team members, and their shareholders, of course, and shareholder value has gotten a lot of attention over the decades and whether or not that should be the only focus of companies is a good question. But what is equity value and shareholder value? Why is it created? And why is it so important? These are critical questions that we'll look at for companies and for their investors? And how can jobs to be done helped to create more equity value? Those are some important questions that we want to look at today.

Jared Ranere:

Yeah, great. I think starting with what is equity value? How do you define it? How do you calculate it? And how does it play into your company's fate? Maybe maybe start there?

Jay Haynes:

Yeah, that's great. And equity value? Probably the most common form that anybody can see is just look at the stock market, you know, the value of Apple or Google or Facebook or Amazon has a value, it's the market value of the company. But but the question is really what creates it? And and also for private companies? How do you value those private companies, I used to work for a private equity firm called GTCR. In Chicago, and one of the founders there, Stan Golder was actually a real pioneer in the 60s and 70s, in valuing private companies, even even as recently, the 60s and 70s, people really didn't know how to do it, he created a method called the first Chicago, the Chicago method, I believe it was called. But the basic idea today is that your company is out there selling products, and those products are helping people get jobs done. And that's the core of the jobs, you've done innovation theory, and makes a ton of sense. Obviously, the the value that you're creating is really the profitability, and the cash that you're generating from selling a product or service to your customers. So really, at the end of the day, your job as a company is to create customer value. And that customer value at the end of the day turns into equity value because you generate profitability, which generates cash. And if you were to value a company, there's there's really only a few components that are critically important. One is, of course, the company's profitability, but also its growth rate. And growth rate is incredibly important. Because when you're trying to figure out the equity value of a company, you're discounting the growth of those profits over time, back to the present day. So when you're looking at all those cash flows, what Warren Buffett calls owners earnings, you can discount them back today and say, am I paying too much for this company, or too little. And this was this was really our our analysis using jobs done to value Apple back in in 2014. And we'll put links to that if anybody wants to see the model, we can even send you the spreadsheet if you want to learn how to do this stuff. But this is really, really important for for any company, it's really the same whether you're a private company, whether you're a VC backed company, whether you're private equity owned company, or whether you're a public company, that at the end of the day, the goal is to generate equity value.

Jared Ranere:

Yeah, and I think one really simple way to think about this is your equity value is an estimate of what somebody should purchase your company for, or an ultimately a share of your company if they're buying just a share of it, if you were to sell it. And so the equity value translate to translates to the cash you can get if you were to sell the whole company or piece of the company. And so if you work at a company and you own stock in that company, the equity value matters to you because it directly impacts how much money you get for selling that stock. And whether you're selling in stock in the public markets, or your company has an exit event by selling to a private equity firm, a strategic another company that wants to buy for strategic reasons, or it has a public offering where it sells to the public markets. The equity value of the company is how director impacts how much money you will make from that transaction. And so it has an impact on even though it seems like a very high level financially driven calculation. It has a direct impact on employees and anybody who owns any shares in the company.

Jay Haynes:

Yeah, that's, that's right. And what's fascinating, I'll just tell you a little story of how I got here in the first 10 years of my career when I was working in the finance industry for, you know, buyout firms. In the early days, this is in the 90s. In the early 90s. You know, we bought companies with a lot of debt. So you can create equity value as an investor in a few different ways you can use debt. So if you're paying $500 million for a company, but you only have to put 100 million of equity in, you can pay down that debt over time. And when you pay off that debt, the equity value accrues to you,

Jared Ranere:

right, in that example, you're borrowing 400 million from somebody else. That's right, and then paying that loan down over time.

Jay Haynes:

Yeah, and I worked for a firm and we did this very successfully. When we bought Steinway, we actually owned a company called Selmer, which people may know John Coltrane played Selmer saxophones, and they make band instruments and they own Ludwig drums and a bunch of musical instruments. And we had bought Selmer with a lot of debt and pay down the debt. And then we bought Steinway, and sons, the piano company for 100% debt, because we could use the combined balance sheet. So as equity holders, if you're buying something for $0, and equity, as soon as you pay down debt, you can create a lot of value. Now those what's the risk there? Yeah, the risk is that you default, and you can't pay back the debt. And then that obviously wipes out your your equity. And the reality is a balance sheet has a hierarchy to it. First, you've got to play back, you've got to pay your employees, you know, they have essentially a security interest in their paychecks, and then you pay down different levels of debt, and then at the bottom is equity. So the equity holders are taking more risk. So had we not been able to pay off the debt at Steinway, we could have lost all of our equity.

Jared Ranere:

Yeah. So in other words, if Steinway stopped generating cash, that would have lost all your equity, so at the end of the day, it comes down to your bet at the company can produce cash flows in some way that become larger than the debt you have.

Jay Haynes:

That's right. That's right. And any, you know, first year MBA student can run these spreadsheets. And and what What I found fascinating and interesting that people couldn't answer with accuracy was the growth rate. Because if you're projecting to pay down your debt, or not even just depend on your debt, let's say you bought for 100% equity, just your your returns on your equity are going to equal the growth rate of the company. So if the company is growing at 12% a year, you use no debt and you buy it in at an exit multiple of x, it grows for 12% a year, and you exit at an extra exit multiple of x the same multiple, you're going to generate a 12% IRR. Right, that's

Jared Ranere:

just for the non financial people. What is an Exit Multiple?

Jay Haynes:

Yeah, so if you're buying a company, let's say it has 100 million in revenue, and you pay 200 million for it, you're buying it at a multiple of revenue. You can also look at as a multiple of cash flow as well, whether it's EBIT, you can look at as a multiple of earnings, you know, public companies report their their earnings. So you're always looking at a multiple of something. And a multiple is really a shorthand way of looking at those discounted cash flows. So when you look at a stream of cash flows, and you discount it back, and you say, well, for that stream of cash flows, I would be willing to pay $100 million. And if the company has 100 million in revenues, you're paying one times revenue. So there are only a few ways you can generate equity value. Now, you can do it with debt like we did with Steinway. You know, essentially the company just kept growing at its normal rate. It didn't, it didn't accelerate its growth at all. So we use debt and we pay down the debt and made money. You can reduce costs, you can fire employees, or you can, you know, get better deals from vendors. You can improve your sales operations, you know, there's different ways to to improve the business. And you know, there are investors who fire employees when they buy it, that's because they they have no growth thesis. If they if they had a growth users, they wouldn't fire employees. And unfortunately, this does happen in the PE world a lot. You buy mature companies, you're like, Well, look, I can just fire a bunch of ploys and cut costs, and then I'll make more money. Right. That's really unfortunate. And that's where jossey done is extremely helpful because most markets there are growth opportunities. You know, having you know, Jared, you know, obviously we've studied hundreds and hundreds and hundreds of markets. and jobs you've done enables you to look into there and find segments of underserved customers that represent represent growth opportunities. Right. So

Jared Ranere:

so just to back this up a little bit, I think looking at some examples of different types of companies, you know, what do you see in the news and what is happening. So for example, if you see that GE is laying off 10,000 employees, what what's happening there is they're looking to reduce costs, because they're not growing their revenue a lot. So the way to generate profit and cash is to reduce their cost. And so they decide they have to layoff a lot of people because there's some there a public company, a large public company, and there's some shareholders who are saying, we want our shares to be worth more, we need to generate more equity value. So please reduce a lot of cost. You see this in private equity backed companies like, I think there's a Sears is a good example, you might remember some of the details of where the company wasn't growing. And so they decided to sell the real estate to generate cash. And that was in the New York Times. And you know, I think it was maybe J Crew, there was a couple, there was a couple of retail brands that are well known that were bought by private equity and essentially disintegrated by the private equity companies. And what's happening there is they don't have a growth thesis, they don't think the company can grow. So they have to generate cash, somehow, they're selling real estate, they're selling access to the brand, they're, they're laying off employees. And that's what we see happening in the news, that pressure to create equity value is causing pressure to create cash in some way, and they can't figure out how to grow.

Jay Haynes:

Yeah, that's right. And the unfortunate thing about that is you can do a lot of financial engineering on the balance sheet side of the financial statements, which is essentially that are you selling assets? Are you using debt, you know, etc. But the the real value in anything comes from growth on the on the revenue side is looking for growth. And the Google's CFO, who's brought a lot of financial discipline to even Google because, you know, Google has a ton of projects that don't don't generate any ROI or value for the company. And what she said is great, she said, if you're not building strong, durable, quality growth, your company won't persist in the long run. And, of course, the examples of this are just, you know, too numerous to cite, you know, we always like to talk about Kodak and blackberry and Britannica, you know, kind of big, well known brands that effectively went away. Right? And that's because they couldn't figure out how to generate growth. So So what is the what is the true value of using jobs to be done to generate growth, and it there's really a couple different things that are super important for equity investors. One is to really be looking at new product development investment. So a lot of teams are working on their current product, they're selling it. I mean, this is exactly Google, Google's been tweaking search and, you know, AdWords forever, it's a main product, it generates almost all of their profitability and cash flow. And they've spent a ton of money on new product development. And you can go to the Google graveyard, I think the URLs like killed by Google or something. And those are all projects that didn't work out. They didn't generate growth, they all got killed at some point. But Google has spent I mean, it might, the number might be in the billions of dollars, 10s, and maybe even hundreds of million dollars that's so long have a history of

Jared Ranere:

and you can look at that through m&a as well, right? They've bought companies for billions that didn't pan out ended up writing them off.

Jay Haynes:

That's right. That's right. And, and so all of that new product development, in fact, the planet, the world is just very, very bad. And new product development. It's something like $2 trillion, a year that's invested in like new product development r&d, that that doesn't create any value effectively goes to zero. And so if you're an equity investor, and you just bought a company, and you're looking, let's, let's just take some, you know, kind of concrete number examples, let's say you've got in the company you just invested in there, they've got 3% of the revenue invested in new product development. Well, that actually is going to destroy value, equity value of the company, unless it accelerates the growth. And the reason is, of course, that if you got 0% growth acceleration, so let's just say the company is growing at 12% a year, you're unlikely to get an equity multiple increase out of that. Now, equity multiples change when the markets go up and down. But you can't control that. Let's just say you're you're looking at the true fundamentals of the company. So in order to really change your equity multiple you have to increase your growth rate. So if you accelerate your growth just 1% of years from two Well 213 14 1516, the IRR on that is just tremendous, you would go. And we can share the math and all this with everybody. But if you had new product development is 3% of revenue per year, and with no acceleration, you're essentially cutting your IRR from 12% to 9%, right? Because you're, you're spending that money and getting no return on it. But if you can change that growth, acceleration 1% per year, and get an equity, multiple increase of just point seven, so not even one times, but point seven, your IRR goes to 33%. You know, it's it's a huge multiplier. And the reason that it's a multiplier makes a ton of sense. Because again, back to the idea that what a multiple is, is a discount on these cash flows. Well, if your cash flows are all of a sudden growing at 16%, over five years instead of 12%, when you started, that's a enormous amount of equity value, right? And what sorry, good. Yeah,

Jared Ranere:

yeah, I'm just gonna say that having looked at these models, if you just play out the math of the cash, you have on hand at the end of that growth, assuming the investment remained stable, or at least knowable, it's a lot more cash. And which makes sense on why people would be willing to pay for that growth. And use this is you see examples of this in the public markets all the time, right? You see, Amazon's not profitable, but they have a huge market cap Tesla, is doesn't make as much revenue as GM, but has a much larger market cap. In other words, their equity value is much, much greater. Why is that? Well, they've got a growth story. And the investors are betting that that growth will continue to accelerate such that in the future, the value of the company will be much the cash flows will be much larger. And so they're saying today, I'm willing to pay more for this company in order to enjoy those cash flows in the future. And so that growth story is what the multiple what generates that multiple, which, which is what causes investors say, I'm willing to pay a higher rate against your revenue or your cash flows today, because I expect it to be larger in the future.

Jay Haynes:

That's right. Yeah, that's right. And, and if you look at those growth stories, under underneath that was in every single growth story was essentially a different way to get a job done. Right, so. So Amazon, clearly was a new platform to purchase products in a very, very different way, and very convenient way. So even though they started with books, obviously, they were going after different categories. And almost, I mean, a huge percentage of the products we buy can be shipped through Amazon to your house, obviously. So they just kept taking market share, even while they weren't profitable, they were, they had very high return on invested capital, just their internal metrics between their balance sheet and their income and cash flow statements. So that's, that's always, if you look at the growth story, it usually is a big transformation about a new way to get a job done. And that was true in Amazon's case, that's true in Tesla's case, right? getting from point A to point B in a car is entirely different when you're think talking about an electric motor instead of the internal combustion engine. And this, you know, you can see this, this is what happened to BlackBerry. You know, we always mentioned this, but people forget that BlackBerry had a bigger market cap, they had more equity value than Apple did when the iPhone launched. I mean, that's almost inconceivable to think about now, right? You know, Apple, so huge and dominant with $3 trillion market cap. But when we did our analysis back in 2014, using this type of multiple discounted cash flow analysis, it was pretty clear. The reason why was they were in huge markets, and able to get a ton of jobs done on a new platform. And that really was the payoff. Was it apple? We know Apple uses jobs to be done thinking, you know, Phil, Schiller's, you know, called it the grand unified theory of Apple. And they were willing to invest for the long term in, in that type of growth. So, growth can be really risky, especially if you're an investor. You know, your team comes to you and says, I have a great idea. We're gonna kill our cash, cow iPod, and we're gonna launch this new phone even though we've never been in telecommunications. So and that's the outside world really read apple that way. You know, of course, the famous Steve Ballmer, you know, who's gonna pay $600 for a phone? Comment. Then of course, people are not buying a phone or buying a portable supercomputer. So the reason the outside world looks at it as very risky, you know, it's apples never been in telecommunication, you know, all sorts of excuses. But internally, the goal is to mitigate all of those risks. And that's where jobs to be done is really, really useful if you're a board member sitting at the company, and you're saying, okay, the product teams coming to me and saying, I want to invest millions of dollars, you know, in larger companies, billions. Yeah, in this new product development. The first thing you should probably do as an investor is say no, because almost none of that pays off. It doesn't accelerate growth. So how do you then confront that because you don't want to be left flat footed, like blackberry and have your competitors just take your share. So this is where jobs feed on is so incredibly valuable as a risk mitigation measure. Because the market always wins, you cannot in this is a whole other conversation. But the idea that you're going to satisfy latent needs that customers don't even know they have is just, it's just so misguided, you know, it's worth that entire episode to talk about how misguided that is. People know what they need to get done. They know their goals, they know the jobs at Catan. And they know where to start, what solutions would make that work. That's right, they don't know what solution. That's right. They don't know what solutions are out there. But they know where they're struggling. And that those struggles are growth opportunities. So jobs to be done can help in in tremendously lower this risk before you even invest $1 in new product development. And that's really the key is using Delphi done way, way, way at the Front End of Innovation before you even have any ideas of what the product should do. You know, which is why we always like to say, you know, don't start with your ideas, start with your customers needs. And, and that is a risk mitigation system for investors, so that you can build confidence that that investment dollars and new product development, maybe it shouldn't be 3% of revenue, maybe should be 10% of revenue, right? Because the opportunity is so big. And the way that you're going to approach it is clearly going to create customer value. Right? And that's the key customer value at the end of the day.

Jared Ranere:

Yeah. And I think that when you're a pm in a large company, or you're working at a VC back startup, it's you can lose sight of this, you can start to think like, well, you know, I'm under payroll, they're going to keep paying our team unless something drastic happens and layoffs are created. So what does equity value mean to me. And I think that if you don't understand how to how investors are thinking about whether or not they should invest in your division in your unit, you're missing a big opportunity. So I can give you an example of this when, when I worked at AOL, and you can look this up. There was an activist shareholder, that made our lives very difficult for a year because they didn't like the investment that AOL was making in the unit that I worked for. And the what does that mean activist shareholder didn't like the investment, it basically means they didn't think that that was going to lead to growth, that the just like Jay was saying, like you're investing 3% in product development, and it leads to no growth, you're destroying equity value. So they thought that this investment was destroying equity value. And so we had to go to them. My colleagues, I didn't actually wasn't in the meetings, but I've helped them prep for the meetings, presented the shareholder and say, here's what we're going to do for new product development that we believe is going to drive growth. We ended up making them believe that for a little bit, and then it didn't pan out. And then the unit got dissolved and sold to a private equity fund. I think I've told the story a few times in this podcast now. But I never talked about the activist, shareholder. Good story, I don't think Yeah, and I learned a lot from it. And what I one of the big things I learned from this was that we didn't, I don't think we had great language in that present that series of presentations in that product strategy for, for defending our position and for coming up with a great position, a great strategy that would drive growth, right, we needed more focus on the unmet needs, we needed a better better understanding of the market. We were in we needed a better understanding of the market size, this target segment we were going after and what was going to deliver growth. And that's part of the reason why I do this. If I had had that language then that I have now I think the whole thing would have gone better. And it's you know, it's are you sitting there calculating your equity value every single day as a product manager? No, you need to ship but you need to know how what you're shipping could drive equity value could solve problems and large markets. And if you can do that the people senior executives around, you will recognize that, we'll see that you understand how this game is played, and will start to give you more and more responsibility over time. And you can accelerate your career during that.

Jay Haynes:

Yeah, that's great. And, and that's, that's why we think it's so important for everybody to understand equity value creation, it's not a role for, you know, finance people, or the CFO, or just the CEO. Everybody should understand what drives equity value. And, and I in my early career, you know, 30 years when I started out, and I was building LBO models, it's funny, you build these LBO models to figure out how much equity you're going to create, you're trying to calculate IRR. So is this deal going to generate, you know, 7% IRR 27%. And, you know, that helps the investment decision, the one cell in the spreadsheet that is absolutely the most important is the growth rate, right. And if you're, you know, working in a firm, and you're, you're looking at the growth rate, you type in whatever number you know, comes up, you know, hey, this 15% Would be great, or 20% would be even better. And you know, you can run sensitivity analysis and all that kind of stuff. The problem with that is what really drives that number. That is the mystery. Now, some of it is you've got to share in the market, and they're more customers, and you're just selling your existing products to more customers. And you could grow that way. That's fine. Yep. And that could that could work great. You know, the problem comes from new product development, when your team is saying, Okay, we're going to be accelerating our growth, based on this investment in something new. And in today's world, you really do want to be building something new it is, it's technology changing so fast, and so rapidly in positive ways that help customers get their jobs done faster, and more accurately, as we always say. But so you do need to be investing in it. But that risk, you're exactly right, Jared comes from well, here, we just told the board or the investors or the activist, whoever, here's our idea, and you can, you know, you can kind of wing it and you know, hope fingers crossed, hopefully it works, the vast majority of new product investment fails and fails to generate any accelerate growth. So that's really the risk. And that is where jobs done is just exceptionally powerful, because it's just increasing your probability of success. By starting not with what idea you should have what nifty new machine learning or AI or tech or you know, augmented reality, or crypto or blockchain, whatever, you know, whatever it is buzzwords, you want to go after your customer doesn't care about any of those, they care about getting their job done. And if those technologies help them get their job done faster, and more accurately, that's where you you create customer value. Right? So if if, at the end of the day, it really is explaining customer value, because that's how you create customer. Sorry, equity value. Peter Drucker, you know, one of my favorite quotes is the role of a business is to create a customer, like, at the end of the day. That's it.

Jared Ranere:

Yeah. And I think that, you know, part of what you're saying is, you can create growth through improving marketing and sales. But if your new product that you're trying to market and sell doesn't satisfy any unmet needs, it's a lot less likely marketing and sales is going to overcome that. So if you want to take a risk mitigated growth thesis, you should include satisfying some unmet needs in that risk mitigated growth thesis, because just throwing dollars after products, where you're it's really unclear if they're solving an unmet need, if there's if they're solving a customer problem. And if there's a willingness to pay to have that problem solved, is a very high risk bet. If you're going to just rely on your marketing team to convince the world they have a problem they don't know about.

Jay Haynes:

That's, that's right. That's right. That's exactly right. And, and the reason companies need to do this, and investors need to have the companies present this kind of investment thesis and customer value creation is because in markets, the the technology and the products are changing incredibly rapidly. So maybe you have such a good product and a platform that you just need to continue to build on it. And that's certainly true. I mean, of the dominant companies in the world today, you know, Apple, Google, Amazon, you know, Microsoft, they've got these tremendous platforms. You know, the phone is a portable supercomputer. It's a great platform. I mean, the reason there's an app for that is a memorable marketing phrase, because it's basically there's a solution to the job you need to get done. That's what as long as you buy this piece of hardware, you buy this piece hardware. So those are great examples of where you can continue to improve the platform for years and years, decades, you know, search is still just incredibly fundamentally important all of our lives. Google did that one thing incredibly well, and it created a, you know, multi trillion dollar company essentially out of that one thing, because all there is so many other other products have failed. But yeah, that one thing AdWords

Jared Ranere:

Right, yeah, the ability to find find solutions to problems you have that you're willing to pay for.

Jay Haynes:

Yeah. And so that's great that that is definitely you know, you should keep them if you get a platform like that, keep building it, keep iterating it and the same process, figure out what the unmet needs are for search or for phones or different applications, no, etc. But if if you're an investor, and you just bought a portfolio company, and you're looking and you're saying is this is this the next Google or Apple will great, you know, if that's true, continue to, you know, put fuel into that engine. But oftentimes companies really need to look at what are the new things that they're going to invest in? That that's currently not on their radar. And, and it can usually be two things current, if there's a current product roadmap, and that product roadmap is going to accelerate growth, you know, great, continue to invest in it. It could be that you need to reprioritize your roadmap, because things that are way down on your roadmap, and we've seen this a lot, you know, features that are, you know, number 27. And your roadmap should be number one. And that prioritization or roadmap, which also teams struggle with a lot the, you know, political debates of Jays idea, or Jarrods idea or Susan's idea, whoever it is, you know, who has more political capital to get the ideas at the top. As we as always like to say you shouldn't prioritize your roadmap, your customers should prioritize your roadmap, right? Where are they struggling?

Jared Ranere:

And that's the way you can answer that prioritization to the equity value is to make sure a you're playing in a big market, in other words, is, are you serving a job that people are willing to pay a lot for a lot of people are willing to pay a lot to get done? Do you have the key struggles with that job in focus? And are you targeting a segment that's struggling so much, they might rapidly adopt a new solution. And if you have those things, those those elements stipulated in your product strategy, then the question just becomes how much of your roadmap is aligned with solving those problems, if a lot of it is aligned with solving those problems, then you're much more likely to generate growth out of your new product development, if very little or none of your roadmap is aligned with a job to be done. That's a big market and the problems with that people have with that job, then you're a lot less likely to generate growth out of new product development, you're essentially guessing. And I think that's the key, right? Is your that the ability to generate that customer value, that growth drives the equity value, and so you have to align with with important problems and big markets.

Jay Haynes:

Yeah. And that that really is the key. And that's where jobs, you know, so helpful is in segmenting those markets and identifying, first and foremost, who are the most underserved customers, those though, that's where you want to target and then what is the size of that segment. And this is where jobs done. market sizing is so much better, because you you might be under estimating the market that you're actually in. And I'll give you a great example that I think people know really well is nest, right nest created a thermostat. And the thermostat market at the time was some consulting firms had done some analysis of the market size. And they said, Okay, it's x 100 million dollars a year because there's this many thermostat sold at 30 bucks apiece. So that massively underestimated the size of the supposed thermostat market. Because as jobs theory shows, there is no such thing as a thermostat market. Thermostat is a product, the job is to achieve comfort in your home. And in that case, people were willing to pay almost 10 times the price of a thermostat. I mean, if you find a market where you can sell a product for 10x the product of the current product, that's probably a good market.

Jared Ranere:

Yeah. So what does it nest retails at like 250 or 250? Yeah, right. I mean, 4x $60 thermostat, right? Yeah, well,

Jay Haynes:

it's almost 10x $30 There was that That's right. That's right. So so it's, it's huge, and also they targeted the right customer. Remember thermostats for sold HVAC contractors, not not known as consumer friendly interfaces? Great for HVAC contractors, but you know, they just stick this thing on your wall and you don't even know how to program it and no one uses it the right way, etc. So, Nest was clearly targeting unmet needs in the market for Achieving comfort in your home. And they went directly to the job beneficiary, as we call it the you know, the homeowner. That's why the market exists not because of HVAC contractors. So that was such a good example of where you could have assessed that market in advance. To say, this is a big opportunity, people are trying to achieve comfort in their home, they struggled to do it efficiency and efficiently and save energy etc. And that's, that's really true in in every single market is doing this analysis based on the customer's job, not the current product in the market is the way to identify growth opportunities. And that gets back to equity value, are you going to continue to create equity value, and it's a good way to analyze competitors who enter your market as well. So if you were an H, thermostat, company, and nest launched their product, you could say, oh, I'm going to dismiss that. It's, it's too high of price of a thermostat exactly what Steve Balmer did towards the iPhone, Oh, it's too high price of a phone. Well, that you're probably missing what the job is, because people are not buying nest as a thermostat, they're buying it to achieve their goal, which is comfort, you know, efficiently in their home. Right. And, and in nest did a great job. They targeted unmet needs, right? No one wants to program their thermostat. So they got rid of having to program and all it did was automatically program by, you know, adjusting thermostat. And then it figured out, you know, when you want it hot when you

Jared Ranere:

want it. Yeah. And I think, you know, the iPhone and the nest are great examples where the incumbents kind of kind of laugh at the disrupter and say, Oh, that they're making ridiculous decision, there's no way this market is going to tolerate that kind of price or that usability, and then suddenly, the incumbents dead wrong. And I think that's an interesting thing to think about when it comes to the App Store and the iOS platform, because it's very easy to look at that and say, it's an enormous platform, it's incredibly successful at getting jobs done, it's incredibly profitable for Apple so clear, they should keep investing it in it, and sustain its ability to get those jobs done very well, for developers to keep them on the platform. At the same time, if I ran Apple, I would have a team looking at is there another platform out there that peep developers could build applications on that would satisfy unmet needs better than what we're doing in the app store right now? And if so, how are they doing it? What unmet needs? Are they satisfied that we can't? And how do we build something new to disrupt the App Store? They might not find it then the next year, but they should be allocating some resources towards that bet. And one of the things I think about there is web three. So web three is essentially a new platform for developers to try to satisfy consumer and business needs through new applications. And it's difficult to use. There's a small audience on it right now. But the question is really, can it satisfy someone that needs that the App Store can't? And if so, what is the App Store going to do about it? Are they going to create another a different platform that competes with web three, and satisfying those unmet needs? Or are they going to change the way the App Store works in order to do that, and you know, some of the unmet needs that web three might satisfy or, you know, increasing the profitability of the revenue that developers can take, because the App Store famously takes I think, what is it 30% Cut of every transaction, and web three, doesn't take a cut, it's much lower right, as a platform. And then there's privacy needs as well, and data sovereignty needs. And so the question is, how many people in the market care about that today? And will that grow? And is it a threat to the App Store?

Jay Haynes:

Yeah, I mean, and web three is a whole, you know, discussion on its own. But, um, but I definitely agree with you that what companies should be doing is looking to compete with themselves. And that's really hard to do if you are trying to, if you are defining the market by the product. So if you continue to say, Oh, we're in the thermostat market, or we're in the iPhone market, or we're in the keyboard, device market, like Blackberry or the encyclopedia market, like Britannica, or the film market, like Kodak, you know, you can go through, you know, all the historical examples, you're gonna find it really, really hard to compete with yourself. And that is where you need the new product development investment in almost a team and of course, famously, Apple this is what they do in their culture. They take a team and, you know, all the way back to Steve Jobs created the Macintosh and the pirate flag and all that, you know, Create a team that's isolated or insulated from the rest of the company and say, Okay, you're going to your mission is to put us out of business with a new product. And that is so powerful because it tells you and maybe the answer is you don't need to invest in it right now. That's right. You're we got a great platform, keep going. And there's just, you know, technical reasons that you can't develop a better solution today than you have on your platform. That's, that's certainly true. But you can see how true innovators who generate growth are doing this type of thinking, you know, Amazon's even a good example. You know, Jeff Bezos famously says, like, his customers are always unsatisfied. And they just, they're just incredibly focused on speed and accuracy. To the extent that like, you know, Amazon's platform is, applications where you order stuff, and then their incredible logistics supply chain of, you know, planes and ships and trucks who have robots in warehouses yet robots delivering the package to your house, right from wherever it came in China or wherever. And but even that, he's like, Well, let's, let's use a new platform, let's create an army of drones or not, that's a good idea. We'll be allowed by regulators. That's another question. But you can see that they're already thinking, Okay, well, who could beat us? Well, what if you ordered a package, it doesn't come in one day, it comes in one hour, because it's flown by a drone from a local distribute, that's a new platform, it is effectively, right. And, and, you know, Apple's doing this internally, whether it's you know, glasses or, you know, some sort of other technology they're looking at. So companies need to be doing this, it's, it's incredibly important to put your customers job front and center, because that's how you not only de risk the new product, development investment that you should be undertaking, but you de risk the idea, or the the ability of a competitor to come in and take share in your market. And that's really, those are the two parts of of equity value that you definitely want to get right. Make sure you're accelerating your growth, new product development, and you're also defending yourself against competitive threats. And that means taking a team and turn to a company and have them just obsessively focused on the customer's job. Yeah, you know, examples we've talked about a lot are, you know, in the music market, of course, Microsoft spent a ton of money building an iPod competitor, right? That was a huge failure. I've only met a few people that had an actual Microsoft Zune. I think the majority of them got it in a promotion to actually buy. But, but at the time, remember, that's when Pandora launched and was signing up 90,000 people a day, you know, we mentioned that example times. But what you, you also could see is that was just the real beginning of the acceleration of everything into the cloud, you know, streaming audio first, because the file sizes were smaller, of course, but then, then video as well, you know, this is the era of Netflix transitioning to, you know, shipping you DVDs to becoming a full streaming service, and everything was going that way. And that may be true of web three, or machine learning or AI, you may want to look at those technologies and say, Okay, well, where are we using these technologies, because just like streaming exploded that eventually took over everything in digital media. That's happening now with new technologies, but the technologies on their own aren't useful if they're not helping you get the job done faster and more accurately, right. And that's the key is using those customer metrics and that customer value to figure out how to accelerate your revenue growth.

Jared Ranere:

Yeah, and if as I think as we've shown in this podcast, if your product development is not contributing to growth, it's contributing to a decrease in your equity value, there's there's only two ways it can go. Yep. And getting aligned with the customers job is a great way to increase the likelihood that your product development is going to lead to growth.

Jay Haynes:

Yeah, that's great. And, and that's what we'll do is also leave some links that people who who want to see these kinds of spreadsheets in this analysis and learn how to do this stuff can do it because your equity investors are thinking this way. And as if you're a private equity backed company, and you're you're presenting your investment thesis in new product development, this is a great way to do it, so that you can make sure that you're lowering your risk and increasing your probability of accelerating your growth. As Jared mentioned, if you're on a product team and a much larger company, this is also a way to get more funds allocated to your team, because you've got a better investment thesis and you know, effectively a big company is a giant venture capital firm, allocating capital to different projects within in the company, right? So either way, whether you're a PE or even you know venture backed or you know large public company this analysis is exactly the same you have to figure out how much accelerated revenue growth you can generate with your investment and new product development

What exactly is equity value?
Jay's story about equity value and Steinway and Sons
What's an exit multiple?
Creating equity value and lessons from other companies
Jared talks about being careful not to miss opportunities in what your investors are thinking about (AOL Example)
Making sure your company meets an unmet need
Prioritizing Your Roadmap
Segmenting Your Market
Competing with yourself & new product development teams