Modest Proposal – Better, Cheaper, Faster: Why Companies that Reduce Friction Win - [Invest Like the Best, EP.193]

Episode Summary

Executive Summary: Patrick O’Shaughnessy and Modest Proposal argue that modern investing is increasingly about underwriting the future, not the past. They explore how qualitative strategy, scale, and friction reduction create durable winners in digital markets, then apply that lens to marketplaces, e-commerce, COVID supply shocks, and Interactive Corp.

Main Topics: Underwriting the future vs. the past (Priority: 10/5): The guests argue rearview-mirror valuation is losing power as markets reward future qualitative insight. Competitive strategy and uncertainty (Priority: 9/5): Business analysis, scale dynamics, and comfort with uncertainty are now essential investor tools. Friction removal creates nonlinear adoption (Priority: 9/5): Digital products win by eliminating painful steps, which unlocks behavior changes and demand. Marketplaces, ads, and monetization (Priority: 8/5): Large engaged audiences can later be monetized through ads and related services. COVID’s second-order effects (Priority: 8/5): The pandemic may permanently alter demand in some categories while damaging long-tail supply in others. Local and home services as a new marketplace frontier (Priority: 9/5): Home services may be the next big on-demand category if existing demand pools can solve cold-start problems. Interactive Corp as a repeatable digital acquirer (Priority: 8/5): Interactive’s edge is acquiring and monetizing users across large online end markets over and over.

Key Arguments: Value investing’s rearview methods have weakened as markets increasingly price the future. Competitive strategy and uncertainty tolerance matter more than simple quantitative screens. Businesses can “escape the base rate” when scale and product fit change the economics. Increasing returns to scale helped explain the rise of digital platforms like Facebook and Airbnb. Removing friction in consumer processes produces nonlinear adoption and demand. Even if a product starts unprofitable, a big audience can later support ads and ancillary economics. COVID may permanently boost online grocery and digital fitness while reshaping offline competition. Home services may work if an existing demand pool beats the cold-start problem. Interactive Corp’s advantage is repeatably entering large digital end markets and monetizing users.

Data Points: Canalist institutions using product: over 300 institutions - Used to describe Canalist’s client base Canalist market coverage: virtually every investable public equity - Detailed company-specific models across public equities US taxi market size estimate (2014): $11 or $12 billion - Aswath Damodaran’s pre-Uber estimate Projected US taxi market size (2019): $14, $15 billion - What the 2014 estimate implied by 2019 Uber + Lyft US gross bookings (2019): $31 billion - Combined bookings cited for 2019 Lyft bookings (2019): around $11 billion - Used in the ride-sharing adoption example Uber bookings (2019): roughly twice Lyft’s size - Estimated from card data and comparison to Lyft US home sales annually: five and a half million - Used to frame iBuying’s addressable market HomeAdvisor annual service requests: around 26 million - Existing demand pool for home services Households in HomeAdvisor network: 15 to 18 million households - Demand-side scale already in place HomeAdvisor service providers: 250,000 or 220,000 - Stated provider network size for the marketplace Current HomeAdvisor verticals/markets: 500 services and 400 markets - Illustrates complexity of the local services matrix Department store prestige beauty sales: $7 or $8 billion - Example of offline supply disruption aiding Ulta Match advertising spend: $400 million - Spent over a decade building the Care.com brand Care.com acquisition price: $500 million - Referenced as a strategic purchase by Interactive Corp Citi? no, Cisco market share: 16, 17% share - Cisco’s share in food distribution to restaurants Lyft contribution profit per ride (Q4 2018): losing like 20 cents a ride - Pre-profitability per-ride economics at IPO period Lyft contribution profit per ride (end of 2019): something like a dollar plus or minus - Illustrates unit economics improvement

Pivotal Quotes: "underwriting the future now has been what's successful" — Modest Proposal: Core thesis on why qualitative forward-looking analysis matters "when you remove friction, you unlock nonlinear behavior" — Modest Proposal: Explains why digital products can scale so quickly "The consumer is speaking with their actions that we want this product." — Modest Proposal: Describes consumer signal as evidence of product-market fit

Implications: Investors should watch where demand is already signaling, but the bigger edge may come from spotting supply-side shifts and businesses that can turn audiences into ecosystems.