100 years ago, The Campbell’s Soup Company had a breakthrough.
For 30 years, the business sold little else besides produce, canned tomatoes, vegetables, jellies, condiments, minced meats, and of course, soups. Business was good, but there was nothing “radically different” about these products. Canning had been widely accepted as a method for sealing food since the early 1800s, and even when pasteurization was invented in 1864, fresh foods were difficult products to scale. Soup, for example, while cheap to make (its primary ingredient being water), was still heavy and expensive to ship.
Until, in 1895, a chemist within the company named John T. Dorrance came up with a radically different idea.
If Campbell’s halved the water in each can, the business could produce and ship exponentially more soup (since the excess water was no longer needed)! Simultaneously, the company could drop the price of a can of soup from 30 cents to 10 cents, expanding both their distribution and lowering the barrier to entry for new customers in a way no other food production company had been able to.
As a result, Dorrance and Campbell’s invented “condensed soup.”
This insight fundamentally transformed the business. Today, the company (with a $15 billion dollar market cap) is referred to as The Campbell Soup Company, with Campbell’s condensed tomato, cream of mushroom, and chicken noodle soups remaining some of the most popular shelf-stable foods in grocery stores all across the United States.
If Campbell’s was a food startup today, marketers and branding experts, other founders, executives, and even venture capitalists would likely attribute the company’s success to a wide variety of things. “Campbell’s successfully achieved product-market fit,” they might say. Or, “Campbell’s found white space in the market and stood out from the competition,” while pointing at Andy Warhol’s remarkable designs and contributions to the company’s branding (which came 60 years after the invention of condensed soup).
But are any of those reasons truly why Campbell’s was so successful? Was Campbell’s differentiating factor really the design of its cans?
We would argue, no.
What made Campbell’s successful was John T. Dorrance’s ability to move the world from the way it was, to the way he wanted it to be — a world where soup became inexpensive to ship, still easy to prepare, and just as flavorful for the customer. Campbell’s didn’t lean on a new flavor (tomato soup already existed). Campbell’s didn’t spin up a new marketing tagline (“Mmm Mmm Good” is hardly a breakthrough). And Campbell’s certainly didn’t beat out the competition by running 2-cents-off promotions.
So, what happened?
How did a company known for canned tomatoes, vegetables, jellies, condiments, minced meats, and watery soups, become the undisputed champion of the entire shelf-stable aisle of every grocery store in the United States of America?
And more importantly, if you are an entrepreneur with an idea, an executive running a company, or an investor betting on the future, how can you do what Campbell’s did more than 100 years ago, today?
How can you move the world from the way it is, to the way you want it to be?
You can’t research a breakthrough.
In our last letter, Did The Roaring 2020s Just Start?, we made the case for why we could be entering into a period of unprecedented economic growth.
We also explained why right now is no time to be working on the incremental.
The question is how — how do you set out to create a “different” future?
Most people (including some of the smartest, highly compensated executives in the corporate world, or even the most celebrated high-flying founders in Silicon Valley), don’t know how to think about designing a category breakthrough, especially when they’ve already found something that “works.”
Instead, they venture down the road of what we like to call “Better, Faster, Smarter, Cheaper.” They invest years of runway, gob-loads of money, and the collective brain power of their entire organization on figuring out how they can get 1% more customers in their market to buy their “proven product” instead of a competitor’s. Their entire existence is rooted in comparison to someone else’s.
Said differently, they would rather compete over the past instead of challenging themselves to create the future.
Remember how Google+ was going to unseat Facebook in the social networking category?
Or how Red Bull was going to kick Coke’s tin can by launching Red Bull Simply Cola?
Or how in the ’80s, Colgate (the toothpaste brand) launched Colgate Lasagna?
Each of these are perfect examples of how you can’t just take your brand, stroll up into someone else’s category, and expect for customers to care. And like the Campbell’s story elucidates, if you want to experience an exponential outcome, if you want to become a category king and reap two-thirds of the category’s economics as a reward, then you can’t compete your way to victory. (Not in any traditional sense of the word competition). You can’t play someone else’s game. You can’t research the market for “condensed soup” before it has been invented.
You have to create it. And then you have to frame it, name it, and claim it!
Which means you can’t number-crunch and research your way to a breakthrough.
You have to take an educated leap.
Or, as our friend Mike Maples, Co-Founder of Floodgate Ventures likes to put it: you have to stand in the future and “backcast” your way there.
The VC Game: An Exercise In Category Creation
So, let’s assume the Roaring 2020s have begun.
Corporate America is sitting on its largest stockpile of cash ever.
Consumer spending and travel are on the rise. Household income is relatively stable.
And as crazy as this sounds, Americans gained $12 trillion in new wealth during 2020.
While the coronavirus pandemic inflicted massive pain and suffering, it also transformed our idea of what is “possible”. The number of Bannister Breakthroughs that have happened is stunning.
- The stigma around working from home is gone.
- The idea that we can’t produce a meaningful drug in less than 7–10 years has been disproven.
- Bitcoin is now considered a reliable store of value.
These are all Bannister Breakthroughs that have fundamentally changed the way we live, work, relate to one another, and see the world.
So, how can you leverage these opportunities to your advantage?
We have a recommendation.
Back in “the old days” of the dot-com boom (when Pirate Christopher was just a young buccaneer chasing booty in his britches), he would walk companies through what he called “The VC Game.”
Imagine for a moment you’ve just been fired from your company — whether it be a global enterprise or a garage startup. No one is hiring. You have a kid on the way. And your only option is to create a new and different future for yourself.
The good news is: you have all the assets of your former employer with none of the liabilities. You don’t have to worry about payroll or customer retention. You don’t have to protect existing market share, profits, etc. Your mission is to create a new category or redesign the existing category such that you put your old employer out of business and you win. (Ahah, a true pirate!Cleave that old Grog Blossom to the brisket!)
To facilitate a productive and powerful brainstorming session, work through these questions in order:
- “What does our business look like today? What’s happening in the world, and how might we expect the future to play out?”
- “What business models do we believe will be most successful ten or twenty years from now?”
- “What products will the world want based on all the new tailwinds in today’s economy?”
- “What new category could we create that would inherently leave the old category to die?”
- “What new and different future can we invest in that would fundamentally change the trajectory of our category and business?”
- “What different future would crush ‘old employer’s’ category?” (For example: hey, broadband providers,Elon’s trying to make your category go away by creating a new one. Powered by satellites. Bummer about your investment in all those wires.)
- “What are the 3–5 future scenarios that incorporate all of the above?” (We recommend using the Category Design Scorecard here.)
Scenario 1 = Incremental changes to the current category
Scenario 2 = Demand shift leading to new products, but same business model
Scenario 3 = Demand AND business model breakthroughs
Scenario 4 = Demand AND business model AND data flywheel breakthroughs, where demand can be anticipated well in advance of it materializing
Scenario 5 = Turbo-charged scenario 4 with such gravitational pull that we re-invent not only our category but several adjacent categories around us
- “What must be true to believe in each scenario?”
NOTE: This is not “what is true” or “what will be true.” This is a bar that is too high for anyone. Instead ask, “What else would you need to believe for this scenario to come to fruition.” It’s a lower bar, and also a signal you can spot earlier — much like feeling an ache in your bones before it rains a day later.
The VC Game Example: The “Work From Home” Category
Now, before we begin this next section, let us explain what’s about to happen and why we’re asking you to continue reading.
Playing “The VC Game” is how you form a category thesis — which inevitably leads to an investment thesis. Before any professional investor or partner at a VC firm makes an investment, these are the sorts of questions they are asking (and rigorously stress-testing) before writing up their rationale for why the firm should make an investment.
If you want to see how this works at the highest level, read the investment memo Roelof Botha wrote to Sequoia’s investment committee in 2005 encouraging them to make a seed investment in a budding startup called YouTube. In it you will find more research and information on the emerging category of “user-generated video content” and tangentially relevant categories like “online photo sharing sites” and “video entertainment websites” with strong tailwinds than you will the product itself.
That’s because the $1 million Sequoia chose to invest wasn’t just a bet on YouTube as a company, team, or product.
It was a bet on their leadership position in an exciting emerging category — in the context of all the surrounding headwinds and tailwinds of their broader industry and the economy at large.
So, strap on your scuba gear, matey. We’re going deep.
To give you a sense of how this exercise works, the three of us pirates hopped on a Zoom and went through this process ourselves. “If we were out of a job today, what new category could we create such that our previous employer would be put out of business?”
One tailwind we are particularly interested in is this new trend of Working From Home (WFH).
Here’s how we worked through the questions:
“What does our business look like today? What’s happening in the world, and how might we expect the future to play out?”
Right now, there are two different realities unfolding.
- WFH becoming the new way of living life: Twitter and Square have said they will allow employees to work from home forever. FastCompany calls this “a permanent shift,” and so many companies have already decided to remain 100% remote or move to “remote-flexible” that a directory has been created to track just the remote policies of companies all over the world.
- WFH reverting back to the stigmatized trend it was before the pandemic: Netflix has called working from home “a pure negative.” And Google CEO, Sundar Pichai, has said, “having a sense of community is super important when you have to solve hard problems and create something new so we don’t see that changing,” explaining why Google is working toward bringing employees back to the office.
So, what do we know?
Opposite sides are forming. Bets are being made. And you can imagine the different types of realities that may play out depending on which companies choose which sides.
For example, what does the world look like if a company like Salesforce decides to sell off their buildings and move 100% remote forever? What does Apple do with its groundbreaking $4 billion UFO-style HQ? Similarly, what does the world look like if Twitter and Square decide a year from now, “You know what? We were wrong — everybody back in the office.”
Either the Netflixs and Googles of the world are wrong, and they lose the war for talent because engineers would rather live in a 3 bedroom house with a pool in the mountains of Wyoming than a 1 bedroom apartment in Sunnyvale (which we wrote about in a previous letter). Or Twitter, Square, and the onslaught of other companies opting for remote-first workforces lose the war on productivity and come to the conclusion that distributed teams aren’t as effective as they thought they’d be.
Our perspective here is that executives like Mr. Pichai are using a Native Analog lens to deal with a Native Digital tailwind. For anyone over the age of 30, the idea of running a company as large as Google 100% remote seems ludicrous. But to anyone under the age of 30, it kind of seems like it’s only a matter of time. He might very well be making it harder for Google to keep the hottest talent and continue to attract new Native Digital workers.
The reason we believe that is because the work you are reading right now was created 100% remotely. The three of us pirates live in three different places. We have only been together in the Analog World a few times. And yet, we consider ourselves brothers. We started collaborating long before we had ever “met” (a legacy word for the 1st time you see someone in the Analog World). And Google Docs is one of the primary ways we are able to work together.
As a result, we speculate one of the greatest digital companies in the world might be making a very large analog mistake.
“What business models do we believe will be most successful ten or twenty years from now?”
We aren’t real estate experts, by any means, but we are category experts — and the category of “housing” is in massive redesign right now.
For example, home ownership for Millennials is becoming less and less likely by the day. According to a report published by Apartment List, “74% [Millennials] said affordability was the main reason.” Second, Millennials do not see home ownership as part of their ideal lifestyle. Renting, flexibility, and avoiding the burdens of paying for home repairs are bigger benefits. The result here is an explosion in housing categories that provide more freedom — like the redesign of the “Van Life” category that exploded in 2020.
In addition, both unemployment rates and home prices rose in 2020 and the first quarter of 2021. The “American Dream” of owning a home and settling down is slowly (or, at this point, quickly) being eroded away. According to the National Association of Realtors, “Every metro area tracked by the NAR through the fourth quarter of 2020 witnessed home prices grow from a year ago.”
There’s a strong headwind happening right now (that will likely continue) where a substantial amount of people will want to rent, not buy.
Let’s keep going…
“What products will the world want based on all the new tailwinds in today’s economy?”
In a world where renting is more desirable than buying, there are 2 types of consumers:
- “Superconsumers”: Pirate Eddie coined this term with his legendary book, Superconsumers, which explains that the most dedicated 10% of customers in a category can drive anywhere between 30% and 70% of sales (and are usually willing to spend considerably more than the average consumer). A “superconsumer” in housing is someone who really loves the idea of owning a home, and so is willing to pay the premium to achieve that outcome.
- Regular consumers: Everyone else who isn’t obsessed with home ownership won’t bother. They aren’t the “supers.” They don’t really care whether they buy or rent — they just want to live somewhere nice, in a desirable neighborhood, and in many cases over-rotate on whichever decision gives them the most flexibility.
As we dream-and-scheme about potential category futures in WFH, we are starting to see some business opportunities here…
If the tailwind of Working From Home is going to remain (and more importantly, accelerate) over the next decade, we can expect the gap between these two types of consumers to widen even further. If you’re a “superconsumer,” you will be the one who buys a home and you’ll pay 2x, 3x, maybe even 5x in order to have the one you want. These home “supers” are also likely older, and therefore Native Analog.
If you’re not a “super,” then you’ll look for the best rental property in your price range and optimize for convenience, flexibility, and so on. Further, these non-home owners who don’t have the desire to become homeowners will likely drive a new category of lifestyle, meaning new “supers” in this emerging category of living will expand. They are likely to be Native Digitals.
“Supers” who have to pay 2–10x more to have the home they want will likely start thinking of ways to monetize their asset(s) to make up for the premium they had to pay to acquire them.
And regular consumers will likely start thinking of ways to rent other people’s assets in order to receive the same benefits but without taking on any of the associated cost or lifestyle anchors of ownership.
Still with us…?
“What new category could we create that would inherently leave the old category to die?”
Work From Home + Native Digitals + Rent, Don’t Buy = Tons Of New Category Opportunities
When we combine all this information together, we can imagine a world where some people have incredibly valuable home offices (“superconsumers” who buy and over-invest in their WFH setups), and others who maybe can’t or choose not to invest in fully equipped home offices (not worth doing in a rental property, don’t want to buy all that equipment when they’re optimizing for a renter’s lifestyle, etc.).
We can also then imagine a world where “superconsumers” who have to pay 2–10x more for their homes, and who choose to over-invest in their home offices, want to subsidize their purchases by renting out their home offices to other people in their neighborhood. These customers are the Native Digital renters who want to enjoy the same benefits but without incurring the overhead costs and making the investments themselves.
For example, Pirate Eddie is retrofitting his home office as we speak to be a modern home TV studio so he doesn’t have to fly to New York every time CNBC wants to hear his hot take on Tesla. And Pirate Christopher hosts Lochhead On Marketing and Follow Your Different in a state of the art podcast studio built above his garage.
If Pirate Eddie and Pirate Christopher are both home owners and WFH “superconsumers,” why couldn’t they rent their home studios to other professionals, executives, even Millennial and Gen-Z podcasters in their areas to subsidize their costs? More importantly, what might we call (now let’s Frame, Name, and Claim the category) this type of person? Are there enough of these types of people where we might be able to create a marketplace for this new type of customer?
Could this category be the “AirBNB meets WeWork” of the home office?
(For additional context: this is already happening with mansions in LA and Instagram, TikTok, and YouTube influencers.)
Now we’re cookin’…
“What new and different future can we invest in that would fundamentally change the trajectory of our new category and business?”
If we believe all of the above to be true, then it would be in our best interest to begin investing in this new and different future as soon as possible.
In 2008, the number of people who believed in a future where living rooms and spare couches were rented out to make a few extra bucks was essentially zero. Nobody thought Airbnb was a good idea. And yet, the reason Sequoia gave Airbnb a $585,000 seed investment was because one of the startup’s founders, Brian Chesky, was working in San Francisco but couldn’t actually afford to live in the city. As a result, he needed to find other ways to support his income. (Sure sounds familiar to today’s tailwinds).
Sequoia figured, “If you have this problem, chances are, a lot of other people do too.” Brian had to get Sequoia to take a big mental leap to write that check. They had to believe Brian could create a different future — because AirBNB did not “fit” into any existing market category. And like many breakthrough startups, they were addressing a zero billion dollar market.
Side note: most people think designing and investing in zero billion dollar categories is insane.
What they would rather build is something that addresses big existing markets, with big existing demand. Sounds logical right? Most CEOs and investors think this strategy “de-risks” their new venture. In reality, attacking an existing market category with a “Better, Faster, Smarter, Cheaper” strategy is the riskiest thing you can do. Colgate Lasagna, anyone?
This category thinking is so counterintuitive, so against what most of us get taught, it explains why most people never become category designers.
It also explains how and why category designers are able to kick most competition-drunk companies to the curb while creating a different future. Blockbuster, anyone?
Investing in a mechanism to rent home offices (which we could say is a “niche down” of the larger “home rental” category that has been created and designed over the past decade) makes a lot of sense. If more and more people are going to start working from home, and this next generation of home buyers isn’t going to be able to afford a home and/or want to invest in a super valuable home office, then we can assume there may be interest in wanting to rent other people’s home office setups for remote events, special interviews, presentations, TV & podcast recordings, and so on.
So, is any of this a good idea? No clue.
But we do know that if we were entrepreneurs or VCs, “different future categories” are always worthy of exploration and consideration. Remember, every breakthrough is a stupid idea — until it’s not.
There is a fine line between stupid and clever.
And category designers know that in order to design a different future, being 100% right or 100% wrong is better than being 1% right and still 99% wrong.
More importantly, we wanted to show you the thinking not to share a new category idea (and “give you the answer”), but to give you a practical, detailed example of how you can play “The VC Game” with a new category idea you might be thinking about in the context of your business.
You can’t research a breakthrough. But you can game it out.
When a “market” of people doesn’t currently exist, that’s great news.
That means you have the opportunity to create the category, define the rules, educate customers on the “from-to” (the problems with the status quo and the benefits of this new and radically different solution), and create demand as a result.
This is what makes it a leap.
Companies, entrepreneurs, and investors who pay attention to tailwinds, proactively facilitate these types of unconstrained creative discussions, and are willing to strategize and build what doesn’t exist yet are the ones who escape the rat race of competition and enter the promised land of creation.
The way it is now, is the way it is, because someone else replaced the way it was.
Now is no time to be working on the incremental.