Why ChatGPT will be the next big growth channel (and how to capitalize on it) | Brian Balfour

The Future of Distribution: Is Chat GPT the New Frontier?

Introduction to the Discussion

• The speaker addresses common complaints about SEO and distribution, suggesting that a new platform is emerging.

• Predicts that Chat GPT will become a significant distribution channel, presenting a major opportunity for companies.

• Emphasizes the urgency for businesses to adapt quickly or risk falling behind competitors.

Strategies for Companies

• Highlights the importance of recognizing opportunities to disrupt established players in the market.

• Discusses different strategies for late-stage companies versus startups; late-stage can diversify bets while startups should focus on one approach.

• Uses Zynga's success on Facebook as an example of leveraging new platforms effectively.

Importance of Distribution Over Product

• Asserts that building a great product is necessary but not sufficient for success; effective distribution is crucial.

• Brian Balffor, guest speaker and CEO of Reforge, shares insights from his experience with various distribution channels like Google Ads and Facebook.

Predictions About Growth Channels

• Balffor predicts a new growth channel centered around Chat GPT will emerge within six months.

• Stresses that early adopters of this new channel will likely reap significant rewards.

Call to Action

• Encourages listeners to engage with their teams about these predictions and consider how they might adapt their strategies accordingly.

• Promotes subscription options for additional resources related to product development and growth strategies.

Sponsorship Messages

DX Platform Insights

• Introduces DX, an intelligence platform designed to help organizations navigate AI integration effectively by providing valuable data insights.

Base Camp Project Management Tool

• Describes Base Camp as a straightforward project management system aimed at simplifying business operations and enhancing productivity.

Key Trends in Product Growth

Insights from Brian Balffor

• Balffor discusses evolving trends in product growth, emphasizing the need for adaptability in startup strategies.

Startups and the Challenge of Distribution

The Concept of Escape Velocity in Startups

• Startups aim to achieve distribution before incumbents can replicate their success, a concept referred to as "escape velocity."

• The current environment has made it increasingly difficult for startups to gain this distribution advantage.

Challenges Faced by Startups

• Incumbents are now able to copy innovations more quickly, reducing the time window for startups to establish themselves.

• Organic distribution channels have diminished significantly; SEO effectiveness is declining, and social media platforms are restricting traffic flow.

• The rise of AI technology has intensified competition at the startup level, with many similar products emerging rapidly from accelerators like Y Combinator (YC).

Exceptional Cases and Opportunities

• Despite these challenges, there are exceptional cases where startups leverage AI effectively, such as Cursor overtaking GitHub Copilot in market share within nine months.

• Founders must understand how to achieve escape velocity amidst these challenges and identify new opportunities for growth.

Emergence of New Distribution Platforms

• New distribution platforms often emerge alongside technological shifts, providing startups an edge over slower-moving incumbents. This was highlighted in Casey Wyers' blog post about AI technology shifts lacking corresponding distribution shifts initially.

• Historically, significant technology shifts (e.g., internet, cloud) have led to new ways of distributing products; however, this does not always happen simultaneously with the tech shift itself.

Current Landscape and Future Predictions

• We are approaching a critical point where conditions favor the emergence of new distribution platforms due to ongoing advancements in AI technology.

• As new platforms arise, they typically follow a four-step cycle that entrepreneurs need to understand in order to succeed in leveraging them effectively.

Navigating Saturated Growth Channels

Overview of Existing Growth Strategies

• Traditional growth strategies such as SEO and paid advertising have become saturated; many founders express frustration over their diminishing returns on these channels.

Emerging Opportunities for Growth

Chat GPT as a New Distribution Platform?

Predictions and Market Dynamics

• The speaker predicts that Chat GPT will emerge as a new distribution platform, acknowledging uncertainty in this prediction but emphasizing the importance of understanding market cycles.

• There are two key components to consider: the Chat GPT search experience and the potential for launching a third-party platform on top of it.

• The speaker expresses confidence that a new distribution platform will arise, following a four-step cycle, regardless of whether Chat GPT is the exact winner.

Understanding the Four-Step Cycle

• The four steps of the cycle include:

1. Step Zero: Market conditions are met.

2. Step One: Identifying a competitive moat.

3. Step Two: Opening up the platform for third-party development.

4. Step Three: Closing down for control and monetization.

Step Zero - Market Conditions

• In Step Zero, there is consensus about a new category emerging (e.g., AI chat platforms), but no clear winner yet; typically five to seven major players compete fiercely.

• This competition often leads to monopolies or duopolies due to high stakes and significant capital investment from companies like OpenAI, Claude, Gemini, and others.

Step One - Identifying the Moat

• In Step One, companies identify their unique advantage (moat) that allows them to gain defensibility and achieve escape velocity in their category.

• Companies need an ecosystem of third-party developers or content creators to help build upon their platforms effectively.

Steps Two & Three - Opening Up and Closing Down

• During Step Two, platforms open up for external development by offering incentives for third parties to create applications that enhance engagement on their platforms.

• In Step Three, companies begin closing off access to protect their interests—this can involve shutting down competing services or prioritizing first-party applications over third-party ones.

Conclusion on Platform Evolution

Understanding the Facebook Platform Cycle

The Initial Boom and Competitive Landscape

• The speaker reflects on their early career experience during the Facebook platform boom, highlighting the rapid rise and fall of social gaming applications.

• Facebook faced significant competition from platforms like MySpace and Friendster, which were larger in user base at the time of Facebook's launch in 2007.

• Despite being smaller, Facebook recognized the potential for direct network effects that would lead to user lock-in as more friends joined the platform.

Value Exchange with Developers

• When launching its third-party platform, Facebook offered developers a "canvas" for apps and games while seeking ad revenue through sidebar real estate.

• Developers gained access to notification channels for distribution, leading to a surge in social applications and gaming growth on the platform.

Erosion of Developer Benefits

• Over time, Facebook began to retract its initial value propositions by taking a percentage of developer earnings and limiting organic reach for applications.

• This shift culminated in absorbing popular use cases into first-party applications (e.g., events, photos), effectively shutting down third-party development opportunities.

Consequences of Strategic Changes

• By the time these changes occurred, competitors had already established themselves significantly due to earlier developer contributions on Facebook’s platform.

• The competitive landscape shifted dramatically as those who built upon Facebook's ecosystem found themselves outpaced by rivals who capitalized on early advantages.

Insights on Strategy Evolution

• The discussion highlights how identifying a "moat," such as the friend graph, can create user retention but also leads companies to evolve strategies organically over time.

• Not all companies have a clear plan; many adapt based on market pressures rather than following a strict step-by-step strategy.

Understanding the Dynamics of Competition in Business

The Nature of Competition

• The speaker discusses that competition in business is not inherently evil; rather, it requires understanding how to navigate the competitive landscape effectively.

• Capitalism drives incentives that often lead businesses in a specific direction, even if they wish to avoid it.

Case Studies: Google and Facebook

• Google’s rise involved slow but strategic competition against early search engines like Yahoo and AltaVista, focusing on optimizing content for their algorithms.

• Over time, Google shifted its focus towards monetizing ads by suppressing organic distribution and absorbing high-value use cases such as travel and restaurant searches.

Evolution of Distribution Mechanisms

• Mobile platforms like iOS created new distribution channels but eventually imposed restrictions similar to those seen with Google.

• LinkedIn initially encouraged companies to promote their pages but later reduced organic reach while pushing for ad revenue through company pages.

Patterns in Business Practices

• The cycle of increasing restrictions on organic distribution is consistent across various platforms, indicating a broader trend where cycles are becoming shorter.

• There exists a critical period when platforms are open to users, allowing rapid growth before they tighten controls again.

Navigating Competitive Environments

• Companies must adapt quickly as customer expectations evolve; failing to do so can leave them at a disadvantage compared to competitors who embrace new platforms.

• The speaker emphasizes that opting out of the competitive game is not feasible; businesses must engage proactively or risk falling behind.

Implications for Startups and Established Companies

• Many startups may feel reluctant to participate in these dynamics due to potential risks but must recognize the necessity of adapting strategies based on market conditions.

• Engaging with emerging technologies (like ChatGPT integrations), despite initial hesitations, becomes essential for meeting evolving customer demands.

Understanding the Competitive Landscape of AI Startups

The Importance of Timing in Startup Growth

• Emphasizes that being early in a competitive environment is crucial for startups to seize opportunities before others do.

• Highlights the risk of missing out on significant growth if one does not act promptly, referencing successful companies like Zynga as examples.

• Discusses the emergence of new distribution channels, such as live streaming on Twitter, which can create unique opportunities for engagement.

Analyzing ChatGPT's Position in the Market

• Introduces ChatGPT and its competitors, noting the current lack of a clear market leader amidst intense competition.

• Suggests that context and memory are becoming critical differentiators among AI models, impacting their effectiveness and user experience.

The Role of Context and Memory

• Argues that while many models produce similar outputs, those with better context and memory will outperform others over time.

• Describes how increased usage leads to improved personalization through memory accumulation, creating a beneficial feedback loop.

Retention vs. Distribution: A Historical Perspective

• Predicts that ChatGPT will succeed due to its strong retention metrics rather than just distribution power, drawing parallels with historical tech successes like Google and Facebook.

• Cites data showing superior retention curves for ChatGPT compared to competitors, indicating stronger user engagement over time.

Signals Indicating Future Developments

• Notes that historical trends show platforms with high retention often achieve greater success than those with merely high distribution.

Understanding the Current AI Landscape

The Rise of Preferred Partnerships

• Discussion on how larger companies forming partnerships lends credibility to platforms, encouraging smaller players to join.

• Emphasis on ChatGPT's significant user base and engagement metrics compared to competitors like Claude, influencing developers' resource allocation.

Predictions for AI Platforms

• The speaker expresses confidence in ChatGPT's potential success based on current trends and user engagement.

• Acknowledgment of alternative platforms like Gemini from Google as potential contenders but with less certainty about their execution capabilities.

Competitive Landscape Analysis

• Speculation that Apple could be well-positioned due to its extensive data access through devices, though execution remains uncertain.

• Google's strengths in context ownership (email, search, Chrome, Android) are noted; however, concerns about user retention and engagement metrics are raised.

Insights into User Engagement

• Observations about Google's products potentially attracting "flyby users," indicating a lack of deep engagement with their offerings.

• Mention of Google acquiring talent from Windsor as part of their strategy but uncertainty remains regarding effective implementation.

Future Directions for Smaller Platforms

• Reference to Anthropic's focus on developer tools and backend solutions as a niche strategy amidst competition from ChatGPT.

• Discussion on the emergence of smaller platforms within the AI ecosystem that cater to specific niches similar to social media evolution.

Market Dynamics and Revenue Models

• Example of Udemy’s shift in revenue share model impacting course creators highlights market dynamics affecting platform growth.

Agent Platforms and Market Dynamics

Emergence of Agent Platforms

• The speaker notes that many companies are pursuing the development of agent platforms, indicating a trend among horizontal productivity tools like Notion, Airtable, and Monday.com to follow suit.

• ChatGPT is highlighted as having significant momentum in the consumer space, with other tools focusing on niche areas. The speaker expresses appreciation for both Claude and ChatGPT.

Distribution Channels in AI

• The discussion emphasizes the emergence of various distribution channels driven by AI advancements, suggesting that platforms like LinkedIn can be highly valuable for targeted audiences despite not being as large as Google or Facebook.

• The speaker references a conversation with Brett Taylor about why many companies are building agents, particularly due to the potential for outcome-based pricing which allows businesses to directly attribute ROI from agent performance.

Monetization Opportunities

• Agents provide substantial monetization opportunities through outcome-based pricing models where businesses can charge per successful resolution of issues.

• A question arises regarding the sustainability of this model amidst competition; it’s suggested that while margins may initially be high, they could decrease over time due to market pressures.

Competition and Pricing Power

• There is speculation about whether competitive forces will drive prices down significantly (e.g., from $1 to $0.50), leading to discussions on disruption theory within the industry.

• The conversation touches on how durable pricing power might emerge if companies leverage unique data advantages over time.

Future Predictions in AI Development

• The speaker predicts that upcoming developments in AI will unfold rapidly over the next six months, including enhancements related to ChatGPT's recently launched agent mode.

• It is anticipated that specific use cases will require tailored user interfaces and data inputs for effective implementation, highlighting challenges with broad-use tools.

Next Steps for Agent Platforms

• Following recent updates, there is an expectation that announcements regarding partnerships or preferred partners will occur soon, potentially involving initial users who will help refine agent functionalities.

Understanding the Future of Platforms and Betting Strategies

The Role of Credibility in Platform Development

• Establishing credibility through partnerships with well-known brands can attract more users to a platform, creating a desire for others to join.

• Defining the value exchange is crucial; platforms must clarify what they offer users and how they incentivize participation.

Monetization Mechanisms and User Incentives

• Recent developments include deeper attribution in search results and integrating shopping features into the user interface, which will lead to new monetization strategies.

• To sustain free usage while managing AI costs, platforms need effective monetization mechanisms that do not rely solely on subscriptions.

Strategic Decision-Making for Startups

• Startups must make strategic bets during this cycle; unlike established companies, they cannot afford to spread resources thinly across multiple options.

• Historical examples from social networks illustrate that aligning with successful platforms (like iOS or Android) can determine success or failure.

Risk Assessment in Betting Strategies

• Late-stage companies have the luxury of diversifying their bets, while early-stage startups must commit fully to one strategy due to limited resources.

• Early-stage startups face higher risks but also potential rewards; they need a focused approach rather than attempting multiple strategies simultaneously.

Key Takeaways for Founders and Product Teams

• Founders should integrate with emerging technologies like ChatGPT or Gemini as part of their growth strategy; opting out could lead to losing competitive advantage.

Miro's Innovation Workspace and the Future of Startups

Miro's Role in Team Collaboration

• Miro is an intelligent platform that integrates AI with human potential, enabling teams to collaborate effectively and transform ideas into actionable projects.

• The platform allows users to convert unstructured data (like sticky notes or screenshots) into organized diagrams, product briefs, and prototypes quickly, enhancing productivity without needing advanced AI skills.

• Users can leverage their existing work within Miro’s canvas as prompts for AI-driven outputs, streamlining the creative process.

HubSpot's Strategic Data Sharing

• Discussion on HubSpot’s strategy regarding data sharing highlights a proactive approach to integrating with new technologies rather than waiting for competitors to catch up.

• Emphasis on the importance of early adaptation in technology cycles; companies should develop exit strategies while navigating these changes instead of delaying until it's too late.

Disruption Opportunities for Startups

• Reference to Alex Rampaul’s quote about startups finding distribution channels before incumbents can replicate them; this presents opportunities for disruption against established players like Salesforce.

• Notable examples of companies achieving "escape velocity" by aligning themselves with emerging platforms are discussed, indicating a trend towards leveraging new technologies for growth.

Personal Experiences and Timing in Tech Adoption

• The speaker reflects on their own experience joining Substack early, illustrating how taking calculated risks can lead to significant advantages over those who enter later.

• Acknowledgment that it often feels "too late" when entering new markets or platforms; however, many opportunities remain untapped despite perceptions of saturation.

Criteria for Choosing Distribution Channels

• Advice on selecting distribution channels emphasizes understanding audience needs and company strengths rather than relying solely on vanity metrics like user sign-ups.

Understanding Platform Monetization and User Quality

Key Factors in Platform Selection

• The importance of user quality and monetization potential is highlighted, using iOS and Android as examples. Despite Android's larger device share (70%), it only captures 30% of market revenue, contrasting with iOS's smaller user base but higher profitability.

• Betting solely on Android may lead to losses, while focusing on iOS can yield significant returns due to its monetization capabilities despite a smaller audience.

• Analyzing the value exchange between developers and platforms is crucial. Understanding the rules of engagement allows developers to leverage opportunities effectively.

• Scale is a critical factor; even if other criteria are met, a platform with significantly greater scale should be prioritized for development efforts.

Strategic Considerations for Entering and Exiting Platforms

• Once entering a platform, it's essential to consider exit strategies early. This includes owning key aspects of user experience or accumulating unique data that major platforms lack.

• Creating micro-network effects can enhance defensibility against competition. Developers must think strategically about how they will maintain their value over time.

Building on Emerging Technologies

• The discussion shifts towards building applications on top of large language models (LLMs), likening this approach to creating a "GPT wrapper." The focus is on establishing long-term value beyond initial technology reliance.

• For those looking to make immediate bets in the current landscape, developing Minimum Viable Products (MVPs) that integrate LLM capabilities could be beneficial, although timing remains critical as platforms evolve.

Navigating Early Development Challenges

• It may still be too early for some developers to fully engage with emerging platforms. Evaluating potential partnerships with established players like OpenAI could provide strategic advantages.

• Developing preferred relationships with key players in the industry can open doors for collaboration and access to new tools or resources that enhance product offerings.

Adapting Strategies in Real-Time

• As new platforms launch, flexibility in strategy becomes vital. Leaders must be prepared to pivot quickly based on emerging opportunities without causing disruption within their teams or projects.

• Staying informed about developments in the tech landscape is essential for timely decision-making and capitalizing on new trends as they arise.

Observations from Current Trends

• A personal anecdote highlights how traffic sources have shifted unexpectedly; ChatGPT has driven more traffic than Twitter recently, indicating changing dynamics in content consumption patterns.

Reforge's Transition to AI Tools

The Importance of Recommendations vs. Blocking Content

• Discussion on whether it's better for creators to recommend their own content or block it off, emphasizing the competitive nature of market share.

• Acknowledgment that if one does not take action, competitors will seize opportunities.

Reforge's New Direction: Building SaaS Products

• Introduction of Reforge's shift from solely offering courses to developing actual SaaS products aimed at product teams.

• Notable differences observed in companies effectively adopting AI tools versus those struggling with implementation.

The Journey and Evolution of Reforge

• Background on how Reforge began by encoding knowledge from industry leaders into practical learning formats.

• Recognition that mere learning is insufficient without actionable implementation; demand for tools to bridge this gap led to new product development.

Launching AI Native Products

• Overview of the first product, "Reforge Insights," which utilizes AI to aggregate and analyze feedback for product research.

• Plans for launching additional major products before year-end as part of a broader platform for AI-native product teams.

Observations on Company Transformations Towards AI Adoption

• Insight into how companies approach transformation challenges, particularly in becoming more AI native.

• Companies are increasingly seeking solutions for significant business problems rather than just educational resources.

Key Factors Influencing Successful AI Integration

• Highlighting the importance of establishing hard constraints within organizations as a means to drive effective change towards being AI native.

AI Transformation in Companies

Constraints on Hiring and Innovation

• Companies are setting benchmarks for team sizes, limiting hiring to a specific level which encourages the adoption of AI solutions instead of expanding teams.

• Some companies, like Shopify, impose strict conditions where new headcount is only allowed if it's proven that tasks cannot be accomplished with AI.

• Executives may require multiple prototypes before approving product reviews, creating a culture of innovation through constraints.

Group Dynamics in Transformation

• In organizational transformations, employees can be categorized into three groups: catalysts (leaders), converts (those needing structure), and anchors (resistant individuals).

• Catalysts lead change independently while converts require clear guidelines and support to adapt to new processes.

• Anchors create friction within the organization; strategies vary from passive engagement to setting hard deadlines for transformation.

Cultural Shifts and Employee Exits

• Companies face challenges when a significant portion of their workforce resists cultural changes necessary for AI adoption.

• CEOs view this transformation as a fundamental shift in company culture rather than just adopting new tools; maintaining cultural density is crucial for success.

• Less than 10% of companies take a hard stance on exiting non-adaptive employees, but those that do often see greater success in AI integration.

Insights on Executive Awareness

• Many executives are disconnected from the actual state of AI adoption within their organizations; they believe changes are happening naturally without realizing the gaps.

• Conversations with end users reveal that most teams have low participation rates in using new tools, indicating a disconnect between executive perception and ground reality.

Final Thoughts on Adoption Strategies

• The discussion highlights ongoing challenges faced by companies struggling with productivity despite hearing about successful AI implementations elsewhere.

Insights on Organizational Transformation and AI Adoption

The Importance of Ground-Level Engagement

• A project manager (PM) shared an experience where they informed the CEO about a stalled experiment during a happy hour, highlighting the need for leaders to engage directly with ground-level operations.

• The CEO's immediate response to address the issue demonstrates how executive involvement can expedite processes that may be stalling due to lack of awareness.

• Companies like Shopify are noted for measuring actual adoption and usage closely, emphasizing the importance of understanding transformation at a granular level.

• Engaging deeply with product transformation is crucial; it’s not just about product details but also understanding broader organizational changes necessary for successful adoption.

Systemic Constraints in AI Adoption

• Fared Masavat's quote emphasizes that the slowest part of any system constrains overall output, which is particularly relevant in discussions around AI adoption.

• Common bottlenecks include IT, legal, and procurement processes that hinder swift implementation and adaptation within organizations.

• The conversation highlights how accelerating one aspect of product development (like engineering tools) without addressing other areas (like design or product management) leads to new bottlenecks rather than increased productivity.

• Understanding these systemic interactions is vital; organizations must identify and tackle their slowest components ruthlessly to facilitate smoother transitions.

Reflections on Current Trends

• The discussion reflects on the rapid changes in work practices and technologies, noting both excitement and exhaustion among professionals navigating these transformations.

Recommendations for Continuous Learning

• In a lightning round segment, Brian shares his struggle to find time for reading since becoming a parent but mentions valuable resources he follows instead.

• He recommends Jamon Ball's newsletter "Clouded Judgment" as insightful for market trends and stats, indicating its usefulness in staying informed despite limited reading time.

• Brian also references content from NFX as beneficial, showcasing his engagement with various thought leaders in tech and investment circles.

• He suggests listening to a podcast by Spark Capital’s Nibil Hyatt and Frasier as another way to stay updated on industry ideas through informal discussions.

Tips for Better Reading Habits

• Brian Johnson’s advice includes reading fiction before bed as a method to improve sleep quality while still engaging with literature.

Podcast Discussion on Movies, Products, and Parenting Insights

Favorite Recent Movie or TV Show

• The speaker recently rewatched Silicon Valley, noting its painful yet relatable moments from their own startup experiences.

• They appreciated the nuanced writing in the show, which resonated with their personal journey through various challenges in entrepreneurship.

• Additionally, they mentioned enjoying Owen Wilson's new Apple TV show about a former professional golfer as a calming entertainment option.

Recently Discovered Product

• The speaker has upgraded their workspace with an Ultra Gear super wide curved screen and a standing desk from Erggonafis.

• They highlighted the desk's stability and quiet operation as significant improvements to their work environment.

Life Motto and Philosophy

• The speaker reflects on a life motto inspired by "the man in the arena," emphasizing respect for those actively engaged in challenging endeavors.

• They acknowledge the changing landscape of competition and opportunity, valuing hands-on experience over mere influencer advice.

• Their long tenure at Reforge has provided insights into both successes and struggles within the industry.

Parenting Philosophy

• The speaker shares impactful parenting advice regarding fostering independence in children as they grow up.

• They emphasize that parents should encourage kids to make increasingly independent decisions throughout childhood.

• Practical examples include allowing children to understand money management through small purchases rather than making decisions for them entirely.

Reforge Insights and Personal Projects

Introduction to Reforge Products

• The speaker introduces Reforge's new offerings, specifically highlighting Reforge Insights available on their website.

• Personal writings by the speaker can be found on Substack, indicating a recent transition from previous platforms.

• For more information, the speaker provides two links: their main website (brianbellfor.com) and a blog site (blog.brianbalffor.com).

Podcast Announcement

• The speaker mentions collaborating with Ped Mosavat on a podcast titled Unsolicited Feedback, where they discuss product strategies in an informal setting.

• The podcast format is described as casual, resembling conversations over dinner, which adds a personal touch to the discussions.

Closing Remarks