Dominance Friction

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.

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 i... See more

A great test of alignment is whether the company benefits or suffers from increased transparency. If your model will suffer from perfect transparency with customers, you’re not in an unbeatable position. And in a world where information is everywhere and word travels quickly, this is a very precarious position to be in.

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.

We call this a double bind. It’s often caused by a misalignment — where what’s good for a critical value chain participant, like a distribution channel, isn’t good for customers. 

Any misalignment between a company and its customers or its value chain is a source of “dominance friction.” Why? Because a company whose business model is not ultimately aligned with its customers’ interests is vulnerable to another competitor beating them with better alignment.

For founders in search of a dominant model, the trickiest situations are when the value chain of an industry doesn’t allow for customer preferences to be the top priority.

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 companie... See more