#168: Seek Arbitrage Opportunities
#168: Seek Arbitrage Opportunities
This week on Seeking Wisdom, David and Adam talk about arbitrage opportunities. And we're not talking about paying for clicks on Google or looking for a spread. For DC, arbitrage means finding bigger opportunities. It means being contrarian. It means looking for value where others see none. In other words, invest when others won't, hold back when others are greedy. Tune in to hear more now.
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Adam SchoenfeldVP at Drift
David Cancel: Before we get to the show, did you know you can get more insights, just like the ones you're listening to right here on Seeking Wisdom, delivered right to your inbox? Sign up to get my weekly newsletter, it's called The One Thing at drift. com/ dc. And we're back, we're brought to you today by whatever products happen to be in Adam's hair.
Adam: It's a lot, that's many products.
David Cancel: And if you can't see his hair, that's because you're not subscribed to our YouTube page on the YouTube. Make sure to subscribe on YouTube so you can see Adam's hair, make sure to click on the notification bell so you get notified about every new podcast before all your friends do. What are we talking about, young Adam?
Adam: We're talking about the things you wish you knew when you were younger. And this one is... I mean, really excited about this one, it's seek arbitrage opportunities. Invest when others won't, hold back when others are greedy.
David Cancel: How would you define the word arbitrage? To make sure we're all on the same page.
Adam: So this is why I'm so excited about this one, because I think when I first hear arbitrage, I start thinking about, I'm going to buy clicks on Google and I'm going to sell something and there's a spread. And I don't think that's what this is about, I think this is about finding kind of bigger opportunities to be contrarian and right, and finding kind of the arbitrage that others aren't seeing. I don't think this is just a math game of how you get clicks.
David Cancel: So the definition on Wikipedia and I don't know crosstalk-
Adam: Oh, here we go, Wikipedia.
David Cancel: ...arbitrage is defined as this, in economics and finance arbitrage is the practice of taken advantage of a price difference between two or more markets striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market price at which the unit is traded. Obviously, that is the financial definition for arbitrage. The way that I think about arbitrage is, it's basically opportunity, right? So it is this opportunity that you have and this disproportionate opportunity that you have because of how they set it, this imbalance in the systems, there's some sort of imbalance that's leading you. And this imbalance, and if you believe in market theory, over time, as more people discover the imbalance, the imbalance will be averaged out, right? So it's like a temporary imbalance in the system, in whatever system you're operating in that gives you this ability to profit, and profit can be defined in any way. And so when I think about arbitrage, and most of the people that listen to this podcast are in the marketing sales business kind of context. And in marketing I think about arbitrage kind of similar to what you were thinking about, Google Ad words and Facebook Ads and all this stuff, advertising based systems, because advertising based systems are a great example of an arbitrage based system. Why? Because you're paying X for, you're looking for imbalances in the system, because let's say you're paying a dollar for a click, but you are paying a dollar for a click because you believe that you can convert a certain percentage of those dollars into$5, let's say on the other side, or$ 10, a$100 or$2, whatever economics are. And so that's the only reason that you would pay for anything in an advertising based system, because you believe that there's an arbitrage opportunity for you to convert that in one market into profit on the other side of the market, that's why advertising systems work. And the arbitrage opportunities are super important in the business sense and in the marketing sense, because we always say that you have to, if you're a marketer, you are one trying to first understand how people make decisions and appeal to them and get them to care, creating the hook, creating the emotional connection, creating the reason for them, the why behind why they should take action. And then you're using some sort of arbitrage based system, it doesn't have to be advertising, it could be capturing leads, doing whatever to create profit for your business, and so it's a super important term. And arbitrage opportunities are interesting, they're disproportionate in markets that are undiscovered. And so you always want to be looking for undiscovered markets, undiscovered pockets, undiscovered niches because that's where the big arbitrage opportunities are. And what happens though in most businesses is that they look for arbitrage in perfect markets and massive markets. And in those markets, by the time you can identify those things, the arbitrage has been removed out of those systems. And so it's a super important term. How do you think about arbitrage, young Adam?
Adam: Similar. I mean, I think, yeah, that there's some kind of qualitative part of this that isn't just looking at the spread. When I hear you talk about it and when I hear, that you have this Munger... You say this is a Munger- ism, right? This whole, investment when others won't and hold back when others are greedy, right? And I think the difference between that and sort of the short term kind of spread optimization is timeframe. So the way I think about it, and when I hear you talk about it is, okay, I'm really looking for arbitrage on a long time scale that will last. Because there's lots of places where there might be a little bit of arbitrage, but then it's a very fast race to the bottom, and it's like, now that's gone. That spread is gone. And those aren't really the opportunities that I think are good or that we want to be looking for.
David Cancel: Yeah, mm-hmm(affirmative), mm-hmm(affirmative). And so have you ever heard of Munger talking about this idea of be fearful when others are greedy and greedy when others are-
David Cancel: Yeah, and what do you think about that when it comes to money?
Adam: Well, history proves that to be pretty true if you look at his domain of the stock market, right? If you had pushed a bunch in when peak fear on COVID, you would have made a lot of money.
David Cancel: Yeah, and we've seen that in other financial markets that people might be participating, whether it's the housing market, when bubbles are rising, the cryptocurrency market, obviously the stock market, those are easy places to see it, but it also exists inside of your business. And so I always say from a marketing, because when I talk to marketers, this is not marketing specific, but when I talk to marketers, I'm like," You should always be on the hunt for new... It doesn't mean you need to participate in all of them, but you should always be evaluating new channels or channels that are fallen out of favor, because those are where you can find big arbitrage opportunities." That's where you could find big opportunities because others are, for some reason, as Munger said, fearful of those markets. They're usually fearful in a marketing sense, because they're messy, they might involve a lot of manual work. And so they may be subscale, so they're not at scale yet. They may be unproven. And so because of all of those reasons, they may be out of favor, and so they don't think about those areas anymore, because of all of those reasons that people are fearful of it, that's why there is arbitrage there. Versus where you may be spending all of your energy today, if you were that same marketer, which is like on, let's say Google Ad Words, which you mentioned, or Facebook Ads or whatever, but the arbitrage in Google Ad Words was in 2004, 2005, 2006,'07. I mean, the arbitrage in most categories, most keywords has just been run out of those systems. It doesn't mean that you can't convert dollars there into more dollars on your end, it just means that there's very small margins and very, very small opportunities there that exist there anymore. Versus maybe, I don't know if TikTok even has advertising or C l ubhouse-
Adam: Clubhouse, yeah.
David Cancel: ...or one of these things, that's where you might find arbitrage opportunities. It doesn't mean that it'll work, it doesn't mean that they'll ever reach massive scale or have a massive impact in your business, but you always have to have an eye out for those because that's where you can find the big bump.
Adam: What are some of the arbitrage opportunities you saw or have seen in building Drift that have proven to work out?
David Cancel: I think in the early days, one of them was... They were all the things, and we wrote a free book, which is called This Won't Scale. It's available on the drift. com website, you have to go find it, I don't remember the link. Go find it, it's free. And it has, I believe, 52 plays that we used in the early days of Drift to build a brand, build a following, build a customer base without spending money on advertising. Those are the things that worked, and I've reviewed that, recently have a copy of it. Actually, on that table over there, I should have brought it for this, and they are still entirely relevant and then we'll still work today. So a lot of the things that we did in the early days were things that were manual, things where in terms of reaching... A manual thing we would do is, one- to- one, we would say hand- to- hand combat. We would reach out to people one at a time, we would try to build a following one person at a time because we thought that's how we could build personal relationships with people. It would be memorable because no one else was doing it. And other people in our category or in our world would avoid doing it because of the manual nature of it. We invested heavily in this idea of building a brand when no one else was talking about that. We invested heavily in the idea of building a category. Again, no one was talking about it at the time. Now, if you go on LinkedIn, everyone's talking about brand building and category building and all this kind of stuff. Not because of us, just because of what we spotted was that we were at a point in the cycle, especially in software, where to stand out you would need a brand, to build a brand because there is thousands of alternatives in every category. So it's just the same lesson that we learned in history from a consumer packaged goods companies, was going to happen here in software. And so because of that, we invested heavily. Those are huge arbitrage opportunities for us that we invested in, none of them had to do with paid advertising or any of that. I don't think we have ever found many useful kind of paid approaches to marketing arbitrage.
Adam: J ust as maybe a mini case study, and thinking about how you decided that brand building in B2B was this arbitrage opportunity, what was it, what were the signals that you saw out in the world that made you think there was an imbalance there that you could capitalize on?
David Cancel: Being someone who has been in the S aaS world since 2000, so back when there was no term called SaaS, we called it selling software via e- commerce on the internet, so that was a mouthful. And no one knew what that was. To today, gaining the perspective to understand that we had gone from a world where there were very few people doing what we do in terms of building any type of software, or SaaS based software online, very few people in the world to everyone in the world being able to build it, everyone in the world being able to copy it. And that was the case in 2015, when we started Drift, if you were to look at every given category of type of software, I would see tens, hundreds of companies in there. And the rate at which new companies were entering was blinding, it was a blinding thing. There used to be in the 2007,'08,'09 was kind of the emergence of a website that many of you may know, TechCrunch. TechCrunch was critical for back then, and the whole web 2. 0 moving, because that was the discovery place. That's a place you could find out about stuff. That's how few things there were that you needed a spotlight to go find these things, otherwise it was hard to find it. And then after TechCrunch came Product Hunt, which is another variant now. I don't even know how there could be a real Product Hunt or TechCrunch today because the number of companies is blinding, right? And so, because of that, I thought, oh, wow, this is the ultimate, we've reached the third phase in the market where it's super mature, the entrants are going to keep coming in, and there's no way to stand out on a paid standpoint, because all the arbitrage has been rung out of the systems we talked about. And there won't be enough money to do it in those systems, so how else are you going to do it? And so we looked and we studied history and we looked at it, how other people were able to, or other companies were able to do it in markets that look like ours, which were highly competitive, low cost of entry, and those were lessons in building brand affinity. This idea of brand building, again, I mentioned consumer packaged goods, so T ide soap or Ivory or Perrier. The importance of building a brand, and then I would go to the store, this is free product placement, Perrier, please send me some merchandise, where I would go buy Perrier because I have some affinity to it versus I would buy some generic version of this or some variant of this, I' would be less likely because this has brand affinity. Even though the water could be the exact same water I'm going to pay more for this Perrier bottle than I will for something else. That's the power of brand right there.
Adam: I love that. We're big LaCroix drinkers over in my house, so I won't get into the water.
David Cancel: crosstalk. You said it and it's interesting, have you ever heard the way that they actually pronounce it?
Adam: No, how is it? I don't know, I'm just reading it. crosstalk-
David Cancel: Not LaCroix.
Adam: What is it?
David Cancel: It's LaCroix.
Adam: Oh, there you go.
David Cancel: Because, LaCroix, if you go to their website, there's an audio clip of it on how you pronounce it, is from... Where is it from, Michigan? Or I can't remember where-
Adam: It's somewhere in the Midwest, yeah. Like Wisconsin or Michigan.
David Cancel: It's a Midwest based company. Yeah, it might be Wisconsin, you're right. And there's somewhere in there, because everyone who popularized LaCroix were from the coast, right? They were like,"Oh, it's French, LaCroix." And so there the guy who, the CEO or whatever says it, and it's the least continental pronunciation ever. It sounds like LaCroix. So go check that out. You're learning facts, you're learning crosstalk-
Adam: All right, all right, I just got schooled.
David Cancel: Yes, and because of the power of the brand, this here thing that I'm holding that you could only see on YouTube, is worth more. This thing right here, I'm holding. Again, you can't see it unless you go to our YouTube channel, is worth more to people than if it didn't have this on it. That's the power of brand. Look at that. Boom.
Adam: So early on in Drift, you saw this arbitrage opportunity with building brand and B2B SaaS, when there's all these players, a hundred people on Product Hunt every day. And so you invested in all these things like podcasting, unproven, messy, no way to measure it. Building events, writing a book, all of those things that kind of are about brand, community, Drift Insider, right? Nobody's doing owned communities at that time.
David Cancel: And most of the things that you mentioned, if I were to start a company now I would not do any of those things. I would not start a podcast. I would not try to build a brand in the same way that we did. I would not invest in events in the same way. I would not do all those things, because now the market has incorporated those things. The market again, has squeezed the arbitrage out of those tactics and everyone is doing them. So now you have to go find something totally different.
Adam: So I have a couple follow- up questions in this. The first one is, all those things are very hard to measure, right? And a lot of consensus thinking about, go to market and generating customers and demand would say," Oh, I need this funnel, and I need to measure the steps. I need that attribution." So how did you get past that and have confidence to invest aggressively in what you saw was an arbitrage opportunity, without being able to month over month in the early days measure," Oh, is this driving MQLs and whatever into our funnel?"
David Cancel: You know why, because I believe in the power of conversations, in conversational marketing and conversational selling, that's why. And I always found it funny, I believe in conversations, building relationships, because the way that I always knew these things were working was because people were literally telling me. Our prospects would reach out, our fans and our community were reach out. They would message me. They would email us. They would show up at events. They would fly from around the world to come to our events and be there. And because of that, I was there and it always would make me laugh. People would ask me this question," How do you know it's working?" I'm like," Because a customer is telling us. Look, they said this,'X, Y, Z.' Look, read it right here." But the closer that they were to this idea of attribution modeling and being a traditional marketer, demand gen marketer, no matter what I would say to them at the end of the conversation, they would always ask me one question. And that one question was," How do you know it's working?" And then I would just give up. I said," I already told you, they're telling us." Because it does not live in Google Analytics and attribution model or some spreadsheet, does not mean that something's not working, right? It's a ludicrous idea. There's so many things in your life, in your relationships that you have that you know whether something works or not. Adam can testify to some things that work or don't with his kids, with his wife, even though they don't exist in an attribution model.
Adam: You were sitting there doing all those things and nobody's reaching out? Nobody's saying," Oh, crosstalk.
David Cancel: Then you would know.
Adam: You would know, right? Because it's just crickets.
David Cancel: Yeah, it was just crazy to me, because people kept asking me," How do you know it's working?" They are literally telling us.
Adam: They're telling you.
David Cancel: I can show you the word, the actual words that they're saying like the," I signed up because blah, blah, blah, blah, blah. I went to Hypergrowth, so I became a customer." That's how I know. Does that exist on some spreadsheet? No, but they're literally telling us. It's crazy. We're in crazy town now.
Adam: You don't want to go in crazy town.
David Cancel: No, they were in crazy town because people are so obsessed with measuring everything that they cannot see the thing that is right in front of their eyes, because they can only... Their view into the world, their view into existence is whether something registers a click or an event that can be logged in a spreadsheet somewhere or in a database crosstalk.
Adam: Right, just because it doesn't go in your spreadsheet or attribution model, doesn't mean it doesn't exist. You can say that better than me, you can turn that into a better Tweet than I can.
David Cancel: crosstalk better Tweet. I know here's the Tweet that we all want, this is the universe is only six star rated podcasts, the only one. The first, the only, the entire universe, I have not gone beyond this universe, so I don't know if there's another six star worthy podcast. But don't forget to leave a rating, comment on... Adam has a new camera, so I hope you're watching us on YouTube. Go on YouTube, subscribe, hit the notification bell so you get alerts whenever there's a new episode here. And you can be the first person on your block to catch up on this here, Seeking Wisdom. And if anyone comments on the video on YouTube and tells me what this is that I'm holding up, I will send you this, plus some hand- selected merchandise, limited run that no one has and I'm wearing some of it right now, and you can see it on YouTube. Look at that. All right, thank you, Adam. Peace. Let me know what you thought of this episode by texting me at 1- 212- 380- 1036. Again, 1- 212- 380- 1036. Now, if you're looking for more leadership insights, sign up for my weekly newsletter, The One Thing at drift. com/ dc. Every week, I'll share a habit, tool or mental model that's helping me reach my goals. I hope to see you there, text me, hit me up.