Dominance Friction

Jesse Beyroutey wants to build dominant companies. And his method for doing it is surprisingly generous.

So far, it’s working. At just 26, he made partner at IA Ventures. IA is quietly one of the most successful seed firms of the last decade, backing billion dollar startups like TransferWise, The Trade Desk, Komodo Health, Datadog, and Flatiron Health. Now, Jesse’s 30, and he plans to continue building IA for the next decade or longer.

So how does he find potentially dominant startups?

The first thing he does is define the term. When most people talk about “dominant” companies, they use it as a general word to mean “big” or “strong” or “intimidating.”

But when Jesse uses the word “dominant,” he’s thinking of game theory, which defines a dominant strategy as a way of playing a game that your opponents cannot beat, no matter how they play. Kind of like how there aren’t a lot of winning moves to compete against Google in search, or Amazon in ecommerce.

When Jesse evaluates investments for their ability to be dominant he actually inverts the question: he spends a lot of time assessing factors that could prevent a company from becoming dominant — what he calls “dominance friction.”

And dominance friction comes from a pretty surprising place: any time a company’s interests are misaligned with its customers’ interests.

Jesse believes that any misalignment between a company and its customers creates room for a competitor to enter the market with better alignment. And that the company with the best alignment — that’s most generous to their customers — is the company that wins.

This conversation was a real treat. Jesse rarely writes publicly, and doesn’t do many interviews.

In this discussion we’ll examine what it means to be aligned with your customers’ best interests, and look at some of the common ways a company’s strategy can create dominance friction.

So let’s get started :)

Jesse introduces himself

Hi, I’m Jesse Beyroutey. I just hit my eighth anniversary at IA Ventures, where I lead seed stage investments in startups.

I have two partners at IA, Roger and Brad, and at this point I've spent more time with each of them over the last 8 years than with any other human being.

I joined in my early twenties, and I fell in love with the way we think about and work with companies here. We’ve worked with technology companies in every sector from healthcare, to IT, to financial services, to real estate, to life sciences and more. And somewhere along the way it became my life’s mission to do this work.

What is “dominance”

We’re looking for companies that can be dominant in their category. And that has a very specific meaning to us that comes from game theory literature.

In game theory, a dominant player is one who is occupying a position in which you can’t be beaten by your competitors no matter what their next set of moves are. For example, in the famous “Prisoner’s Dilemma,” the dominant strategy is to confess, because it’s the best action to take regardless of what the other player chooses.

This might seem too abstract to be useful, but there are very real scenarios where companies put themselves in positions that are unbeatable, at least for a time.

The best examples from the last two decades are Google and Facebooks’s multi-sided network effects. People prefer searching and connecting with each other on these properties, so advertisers and content creators keep using them. It creates a virtuous cycle, and makes the self-interested move on every player’s part one that reinforces these companies’ continued success. It’s basically impossible to attack head-on without a major paradigm shift to break the chain.

Using dominance in this way helps us ask more useful questions than just “how large can this market be?” It’s necessary but not sufficient for a company to be able to grow to a large scale for it to be extremely valuable. It also needs to be very profitable when it gets to scale, and likely to retain those profits for a long time. Dominance ensures all of the above.