Founders make many mistakes. That’s a given. Some mistakes come from what you believe. From your framework of reasoning. They are because you think in a particular way. These mistakes are hard to stop because you are doing all the right things according to your reasoning. I have made several such mistakes while building Future Startup.
One such mistake is not taking distribution with enough seriousness. My logic was plausible. Distribution doesn’t matter as long as you do great work. It is akin to product-level innovation for the folks who are building product companies. As long as I keep innovating and releasing superior products, distribution should take care of itself.
It is not an entirely pollyannish way of thinking. It is logical and the reasoning is solid. Focusing solely on your product saves you time and energy to do really good work. It reduces distractions and you can do more good work. It is apparently a self-reinforcing positive cycle.
But the challenge arises because a great product alone doesn’t guarantee success. A great product can give you a relative advantage in the market but it alone can’t help you win. Great products need a vehicle to get to customers. Unless you have that vehicle built, it is hard to achieve the expected success.
Moreover, product innovation is a relentless cycle. You have to continue innovating. There are many uncertainties involved. Other competitors can come in and get ahead of you and make your innovation obsolete.
Innovation is expensive. If your product is not selling enough, you’ll not be able to fund your continuous innovation, which can create real challenges for your business.
Legendary investor and founder of a16z Marc Andreessen explains it best in his interview with Elad Gil for Elad’s excellent book High Growth Handbook. From Marc:
“The general model for successful tech companies, contrary to myth and legend, is that they become distribution-centric rather than product-centric. They become a distribution channel, so they can get to the world. And then they put many new products through that distribution channel.”
This comes close to what Ben Thompson of Stratechery explains through aggregation theory where he explains how the internet allows demand aggregation for digital platforms that eventually led to excessive market power. Having distribution power is akin to having demand aggregation power.
Because as a distributor you are having a direct relationship with your customers. Now as a company if you don’t have that direct relationship with your customers at scale, it can cause real disadvantages.
Marc goes on to explain how a lack of distribution power can create an existential threat for companies:
“One of the things that’s most frustrating for a startup is that it will sometimes have a better product but get beaten by a company that has a better distribution channel. In the history of the tech industry, that’s actually been a more common pattern. That has led to the rise of these giant companies over the last fifty, sixty, seventy years, like IBM, Microsoft, Cisco, and many others.”
Per Marc, you can’t create a competitive moat using product innovation alone. You need both product and distribution. He explains:
“As far as defensibility, I think you construct defensibility through some combination of product innovation and distribution building. You construct it. You obviously want as much defensibility as you can get in your product, and so you try to get as far out ahead as you can. It’s the idealized Peter Thiel model of “build something nobody else can build.” Or the SpaceX model of “go get all the talent.”
The problem with that is true defensibility purely at the product level is really rare in the Valley, because there are a lot of really good engineers. And there are new ones every day, whether they’re coming out of Stanford or coming in from other countries or whatever. And then there’s the issue of leap-frogging. The next team has the opportunity to learn from what you did and then build something better. So I think pure product defensibility is obviously highly desirable, but it’s actually quite difficult.
I think the distribution moats end up being at least as important. At some point, whoever has the distribution engine and gets 100% of the market, at some point that engine itself is a moat. Again, that might be an enterprise sales team for a SaaS company, or it might be the growth team at a consumer company.”
10 Minute School comes to mind when we are talking about distribution superiority. Over the years, the company has built these excellent distribution channels through Facebook groups and other community-building efforts, but it is hard to break into its turf.
Having tens of groups with thousands and in some instances, millions of members means you can reach these people with relative ease and almost free of cost.
In edtech, you indeed have to offer excellent content. Quality courses should dictate some extent of your success. At the same time, given the noise on the internet, it is really hard for even the best content to break out without significant investment in distribution.
Making excellent content is not enough. You need to find a sustainable path to take that content to enough people. To that end, 10 Minute School has built excellent defensibility. The strength of its distribution alone can make it difficult for a new player to compete against it.
In a recent interview with Future Startup 10 Minute School founder and CEO Ayman Sadiq explains how having distribution superiority allows the company to contain its customer acquisition cost:
“For us, it helps that we have 25,000 free videos, and 28 million social media subscribers, which gives us a significant mileage. We get a lot of new users through organic and direct searches. There is none at our scale in the industry. Given our scale, our CAC is still low compared to ed-tech companies in India or Indonesia. CAC is an interesting factor when you are thinking about unit economics.”
He then goes on to explain the extent of 10 Minute School’s distribution superiority:
“Many of our instructors at 10 Minute School have a larger social follower base than the official 10 Minute School social channels. For example, I have 5.4 million followers on Facebook, while 10 Minute School has 2.8 million. Our popular teacher Munzereen Shahid has some 4-5 million members in her different Facebook groups. There are other popular faces including Sadman Sakib, Sakib bin Rashid, etc.”
Later in the interview, Ayman explains how this massive distribution advantage works as a competitive moat:
“We have a social subscriber base of 28 million. We capitalize on that. Since our students are mostly young people, we are always updated on new trends in the market. Many of our instructors have hundreds of groups with over 100,000 members in each. This is an incredible advantage and how we scale things up. We have teams who monitor and manage these groups and upload content regularly.
These groups are one important part. This is one Facebook marketing model that we have been able to crack. When we talk about brand market fit, we refer to this.
Now a newcomer in the market will have to invest a lot of money to get this level of visibility which we get for almost free through these channels.”
This is what Marc Andreessen calls a distribution moat. When you have a free distribution channel at the scale of 10 Minute School, it is hard for other competitors to easily break into the market.
The distribution advantage also allows the company to launch more products successfully. You simply use the same distribution channel for launching new products. Without a strong distribution channel, launching new products and acquiring new customers can be expensive. It can create a competitive disadvantage to the extent that it can sink your company.
But how do you build strong distribution channels? 10 Minute School’s experience offers some useful lessons, particularly for people who are building digital businesses.
Building a strong distribution is not simple. It is a complex problem and requires a solid strategic direction. But the most important thing in my opinion is the willingness to invest in building one.
Most technology companies disregard distribution and view product innovation as the only path to success. So you have to come out of that myopic view. You have to decide that distribution can make or break your company.
Once you decide to invest in building and owning a distribution channel, now comes the question of strategy. Strategy can vary from company to company. Your product and the market you serve should dictate your distribution strategy.
Some of the great channels for digital products are newsletters, social media channels, etc. Ayman Sadiq offers an interesting idea:
“We provide a ton of high-quality content for free. We have done it across channels such as Facebook, Youtube, etc. On my own Youtube channel, there is no sponsored content. We have been doing this for the last 7 years.”
In another place he explains:
“The value we provide through our free tier is on a different scale and we receive a huge mileage from that as well. Content marketing is simple. Give people enough value so that you won’t have to tell them to buy your courses. If they like it, they will do it eventually. So our goal is simple. We do not want to sell our courses. We want to give our users enough value through free content so that they come back.”
Two ideas pop up from the 10 Minute School experience. One, you have to pick your channels, and what works in those channels aka incentives for the channel participants and follow-on. And second, you have to find a way to do it for a long time.
What are your thoughts on building a strong distribution? How should one approach the challenge? Let me know your thoughts.