# I. Definitions 

Distribution is something of a catchall term. It essentially refers to 
how you get a product out to consumers. More generally, it can refer to 
how you spread the message about your company. Compared to other 
components that people generally recognize are important, distribution 
gets the short shift. People understand that team, structure, and 
culture are important. Much energy is spent thinking about how to 
improve these pieces. Even things that are less widely understood—such 
as the idea that avoiding competition is usually better than 
competing—are discoverable and are often implemented in practice.

But for whatever reason, people do not get distribution. They tend to 
overlook it. It is the single topic whose importance people understand 
least. Even if you have an incredibly fantastic product, you still have 
to get it out to people. The engineering bias blinds people to this 
simple fact. The conventional thinking is that great products sell 
themselves; if you have great product, it will inevitably reach 
consumers. But nothing is further from the truth.

There are two closely related questions that are worth drilling down on. 
First is the simple question: how does one actually distribute a 
product? Second is the meta-level question: why is distribution so 
poorly understood? When you unpack these, you’ll find that the first 
question is underestimated or overlooked for the same reason that people 
fail to understand distribution itself.

The first thing to do is to dispel the belief that the best product 
always wins. There is a rich history of instances where the best product 
did not, in fact, win. Nikola Tesla invented the alternating current 
electrical supply system. It was, for a variety of reasons, 
technologically better than the direct current system that Thomas Edison 
developed. Tesla was the better scientist. But Edison was the better 
businessman, and he went on to start GE. Interestingly, Tesla later 
developed the idea of radio transmission. But Marconi took it from him 
and then won the Nobel Prize. Inspiration isn’t all that counts. The 
best product may not win.

# II. The Mathematics of Distribution

Before getting more abstract, it’s important to get a quantitative 
handle on distribution. The straightforward math uses the following 
metrics:

- Customer lifetime value, or CLV
- Average revenue per user (per month), or ARPU
- Retention rate (monthly, decay function), or r
- Average customer lifetime, which is 1 / (1-r)
- Cost per customer acquisition, or CPA

CLV equals the product of ARPU, gross margin, and average customer 
lifetime.

The basic question is: is CLV greater or less than CPA? In a 
frictionless world, you build a great business if CLV > 0. In a world 
with some friction and uncertainty, you build a great business if CLV > 
CPA.

Imagine that your company sells second-tier cell phone plans. Each 
customer is worth $40/month. Your average customer lifetime is 24 
months. A customer’s lifetime revenue is thus $960. If you have a 40% 
gross margin, the customer’s lifetime value is $384. You’re in good 
shape if it costs less than $384 to acquire that customer.

One helpful way to think about distribution is to realize that different 
kinds of customers have very different acquisition costs. You build and 
scale your operation based on what kinds of things you’re selling.

On one extreme, you have very thin, inexpensive products, such as cheap 
steak knives. You target individual consumers. Your sales are a couple 
of dollars each. Your approach to distribution is some combination of 
advertising and viral marketing—hoping that the knives “catch on.”

Things are fundamentally different if you’re selling a larger package of 
goods or services that costs, say, $10,000. You’re probably targeting 
small businesses. You try to market your product accordingly.

At the other extreme, you’re selling to big businesses or governments. 
Maybe your sales are $1m or $50m each. As the unit value of each sale 
goes up, there is necessarily a shift towards more people-intensive 
processes. Your approach to these kinds of sales must be to utilize 
salespeople and business development people, who are basically just 
fancy salespeople who do three martini lunches and work on complex 
deals.

# III. The Strangeness of Distribution

## A. Fact versus Sales Pitch

People say it all the time: this product is so good that it sells 
itself. This is almost never true. These people are lying, either to 
themselves, to others, or both. But why do they lie? The straightforward 
answer is that they are trying to convince other people that their 
product is, in fact, good.  They do not want to say “our product is so 
bad that it takes the best salespeople in the world to convince people 
to buy it.” So one should always evaluate such claims carefully. Is it 
an empirical fact that product x sells itself? Or is that a sales pitch?

The truth is that selling things—whether we’re talking about 
advertising, mass marketing, cookie-cutter sales, or complex sales—is 
not a purely rational enterprise. It is not just about perfect 
information sharing, where you simply provide prospective customers with 
all the relevant information that they then use to make dispassionate, 
rational decisions. There is much stranger stuff at work here.

Consider advertising for a moment. About 610,000 people work in the U.S. 
ad industry. It’s a $95bn market. Advertising matters because it works. 
There are competing products on the market. You have preferences about 
many of them. Those preferences are probably shaped by advertising. If 
you deny this it’s because you already know the “right” answer: your 
preferences are authentic, and ads don’t work on you. Advertising only 
works on other people. But exactly how that’s true for everybody in the 
world is a strange question indeed. And there’s a self-referential 
problem too, since the ad industry has had to—and did—convince the 
people who buy ads that advertising actually works.

The U.S. sales industry is even bigger than advertising. Some 3.2 
million people are in sales. It’s a $450bn industry. And people can get 
paid pretty well. A software engineer at Oracle with 4-6 years 
experiences gets a $105k salary and an $8k bonus. But a sales manager 
with 4-6 years experiences gets $112k and a $103k bonus. The situation 
is very much the same at Google, which claims to be extremely 
engineering driven; at a $96k base, $86k in commissions, and a $40k 
bonus, Google salespeople earn quite a bit more than their engineering 
counterparts. This doesn’t mean everyone should go into sales. But 
people who are good at it do quite well.

## B. Salesman as Actor

The big question about sales is whether all salesmen are really just 
actors of one sort or another. We are culturally biased to think of 
salespeople as classically untrustworthy, and unreliable. The used car 
dealer is the archetypical example. Marc Andreessen has noted that most 
engineers underestimate the sales side of things because they are very 
truth-oriented people. In engineering, something either works or it 
doesn’t. The surface appearance is irrelevant. So engineers tend to view 
attempts to change surface appearance of things—that is, sales—as 
fundamentally dishonest.

What is tricky about sales is that, while we know that it exists all 
around us, it’s not always obvious who the real salesperson is. Tom 
Sawyer convinced all the kids on the block to whitewash the fence for 
him. None of those neighborhood kids recognized the sale. The game 
hasn’t changed. And that’s why that story rings true today.

Look at the images above. Which of these people is a salesman? President 
Eisenhower? He doesn’t look like a salesman. The car dealer in the 
middle does look like a salesman. So what about the guy on the right?

The guy on the right is Bill Gross, who founded IdeaLab, which was more 
or less the Y-Combinator of the late 1990s. IdeaLabs’ venture arm 
invested in PayPal. In late 2001, it hosted a fancy investor lunch in 
southern California. During the lunch, Gross turned to Peter Thiel and 
said something like: “I must congratulate you on doing a fantastic job 
building PayPal. My 14-year-old son is a very apathetic high school 
student and very much dislikes writing homework assignments. But he just 
wrote a beautiful e-mail to his friends about how PayPal was growing 
quickly, why they should sign up for it, and how they could take 
advantage of the referral structure that you put in place.”

On some level, this was a literary masterpiece. If nothing else, it was 
impressive for the many nested levels of conversation that were woven 
in. Other people were talking to other people about PayPal, possibly at 
infinite levels on down. The son was talking to other people about those 
people. Bill Gross was talking to his son. Then Gross was talking to 
Peter Thiel. And at the most opaque and important level, Gross was 
talking to the other investors at the table, tacitly playing up how 
smart he was for having invested in PayPal. The message is that sales is 
hidden. Advertising is hidden. It works best that way.

There’s always the question of how far one should push this. People push 
it pretty far. Pretty much anyone involved in any distribution role, be 
it sales, marketing, or advertising, should have job titles that have 
nothing to do with those things. The weak version of this is that sales 
people are account executives. A somewhat stronger version is that 
people trying to raise money are not I-bankers, but rather are in 
corporate development. Having a job title that’s different from what you 
actually do is an important move in the game. It goes to the question of 
how we don’t want to admit that we’re being sold to. There’s something 
about the process that’s not strictly rational.

To think through how to come to an organizing principle for a company’s 
distribution, consider a 2 x 2 matrix. One axis is product: it either 
sells itself, or it needs selling. The other axis is team: you either 
have no sales effort, or a strong one.

Consider the quadrants:
 Product sells itself, no sales effort. Does not exist. Product needs 
selling, no sales effort. You have no revenue. Product needs selling, 
strong sales piece. This is a sales-driven company. Product sells 
itself, strong sales piece. This is ideal.

## C. Engineering versus Sales

Engineering is transparent. It’s hard. You could say it’s transparent in 
its hardness. It is fairly easy evaluate how good someone is. Are they a 
good coder? An ubercoder? Things are different with sales. Sales isn’t 
very transparent at all. We are tempted to lump all salespeople in with 
vacuum cleaner salesmen, but really there is a whole set of gradations. 
There are amateurs, mediocrities, experts, masters, and even 
grandmasters. There is a wide range that exists, but can be hard to pin 
down.

A good analogy to the engineer vs. sales dynamic is experts vs. 
politicians. If you work at a big company, you have two choices. You can 
become expert in something, like, say, international tax accounting. 
It’s specialized and really hard. It’s also transparent in that it’s 
clear whether you’re actually an expert or not.

The other choice is to be a politician. These people get ahead by being 
nice to others and getting everyone to like them. Both expert and 
politician can be successful trajectories. But what tends to happen is 
that people choose to become politicians rather than experts because it 
seems easier. Politicians seem like average people, so average people 
simply assume that they can do the same thing.

So too in engineering vs. sales. Top salespeople get paid extremely 
well. But average salespeople don’t, really. And there are lots of below 
average salesmen. The failed salesman has even become something of a 
literary motif in American fiction. One can’t help but wonder about the 
prehistory to all these books. It may not have been all that different 
from what we see today. People probably thought sales was easy and 
undifferentiated. So they tried it and learned their error the hard way. 
The really good politicians are much better than you think. Great 
salespeople are much better than you think. But it’s always deeply 
hidden. In a sense, probably every President of the United States was 
first and foremost a salesman in disguise.

# IV.  Methods of distribution

To succeed, every business has to have a powerful, effective way to 
distribute its product. Great distribution can give you a terminal 
monopoly, even if your product is undifferentiated. The converse is that 
product differentiation itself doesn’t get you anywhere. Nikola Tesla 
went nowhere because he didn’t nail distribution. But understanding the 
critical importance of distribution is only half the battle; a company’s 
ideal distribution effort depends on many specific things that are 
unique to its business. Just like every great tech company has a good, 
unique product, they’ve all found unique and extremely effective 
distribution angles too.

## A. Complex Sales

One example is SpaceX, which is the rocket company started by Elon Musk 
from PayPal. The SpaceX team has been working on their rocketry systems 
in Southern California for about 8 years now. Their basic vision is to 
be the first to send a manned mission to Mars. They went about doing 
this in a phenomenal way. Time constrains make it impossible to relate 
all of Elon’s many great sales victories. But if you don’t believe that 
sales grandmasters exist, you haven’t met Elon. He managed to get $500m 
in government grants for building rockets, which is SpaceX, and also for 
building electric cars, which is done by his other company, Tesla.

That was an even bigger deal than it may initially seem. SpaceX has been 
busy knocking out dramatically inferior rocket technologies for the past 
10 years, but it’s been a very tricky, complicated process. The company 
has about 2,000 people. But the U.S. Space Industry has close to 500,000 
people, all distributed about evenly over the 50 states. It’s hard to 
overstate the extent of the massive congressional lobbying that goes to 
keeping the other space companies—almost the entire industry—alive. 
Things are designed to be expensive, and SpaceX’s mission is to cut 
launch costs by 90%. To get where it is now—and to get to Mars 
later—SpaceX basically took on the entire U.S. House of Representatives 
and Senate. And so far, it seems to be winning. It’s going to launch a 
rocket next week. If all doesn’t go well, you’ll certainly here about 
it. But when things go well, you can predict the general response: move 
along, nothing to see here, these aren’t the rockets we’re looking for.

Palantir also has a unique distribution setup. They do government sales 
and sales to large financial institutions. Deals tend to range from $1m 
to $100m. But they don’t have any salespeople—that is, they don’t employ 
“salespeople.” Instead they have “forward deployed engineers” and a 
globetrotting CEO who spends 25 or 26 days each month traveling to build 
relationships and sell the product firsthand. Some argue that the 
traveling CEO-salesman model isn’t scalable. It’s a fair point, but the 
counterpoint is that, at that level, people really only want to talk to 
the CEO. You certainly can’t just hire army of salespeople, because that 
sounds bad.  So you have forward deployed engineers double up in a sales 
capacity.  Just don’t call them salespeople.

Knewton is a Founders Fund portfolio company that develops adaptive 
learning technology. Its distribution challenge was to figure out a way 
to sell to big educational institutions. There seemed to be no direct 
way to knock out existing players in the industry. You would have to 
take the disruptive sales route where you just try to come in and 
outsell the existing companies. But much easier is to find a 
non-disruptive model. So Newton teamed up with Pearson, the big textbook 
company. Without that partnership, Knewton figured it would just be 
fighting the competition in the same way at every school it approached, 
and ultimately it’d just lose.

## B. Somewhat Smaller Sales

As we move from big, complex sales to sales, the basic difference is 
that the sales process involves a ticket cost of $10k-100k per deal. 
Things are more cookie cutter. You have to figure out how to build a 
scalable process and build out a sales team to get a large number of 
people to buy the product. David Sacks was a product guy at PayPal and 
went on to found Yammer. At PayPal, he was vehemently anti-sales and 
anti-BD. His classic lines were: “Networking is not working!” and 
“People doing networking are not working!” But at Yammer, Sacks found 
that he had to embrace sales and build out a scalable distribution 
system. Things are different, he says, because now the sales people 
report to him. Because of its focus on distribution, Yammer was able to 
hire away one of the top people from SalesForce to run its sales team.

ZocDoc is a doctor referral service. It’s kind of a classic internet 
business; they are trying to get doctors’ offices to sign up for the 
service at a cost of $250/month. Growth is intensively sales-driven, and 
ZocDoc does market-by-market launches. There is even a whole internal 
team of recruiters who do nothing else but try to recruit new 
salespeople. Toward the lower end of things—and $250 per month per 
customer is getting there—things get more transactional and marginal.

## C. The Missing Middle

There is a fairly serious structural market problem that’s worth 
addressing. On the right side of the distribution spectrum you have 
larger ticket items where you can have an actual person driving the 
sale. This is Palantir and SpaceX. On the extreme left-hand side of the 
spectrum you have mass marketing, advertising, and the like.  There is 
quite possibly a large zone in the middle in which there’s actually no 
good distribution channel to reach customers. This is true for most 
small businesses. You can’t really advertise. It wouldn’t make sense for 
ZocDoc to take out a TV commercial; since there’s no channel that only 
doctors watch, they’d be overpaying.  On the other hand, they can’t 
exactly hire a sales team that can go knock on every doctor’s door. And 
most doctors aren’t that technologically advanced, so internet marketing 
isn’t a perfect solution. If you can’t solve the distribution problem, 
your product doesn’t get sold—even if it’s a really great product.

The opposite side of this is that if you do figure out distribution—if 
you can get small businesses to buy your product—you may have a terminal 
monopoly business. Where distribution is a hard nut to crack, getting it 
right may be most of what you need. The classic example is Intuit. Small 
businesses needed accounting and tax software. Intuit managed to get it 
to them. Because it nailed distribution, it’s probably impossible for 
anyone to displace Intuit today. Microsoft understood the great value of 
Intuit’s distribution success when it tried to acquire Intuit. The 
Department of Justice struck down the deal, but the point is that the 
distribution piece largely explains Intuit’s durability and value.

## D. Marketing

Further to the left on the distribution spectrum is marketing. The key 
question here is how can one advertise in a differentiated way. 
Marketing and advertising are very creative industries. But they’re also 
quite competitive. In order to really succeed, you have to be doing 
something that others haven’t done? To gain a significant advantage, 
your marketing strategy must be very hard to replicate.

Advertising used to be a much more iconic and valued industry. In the 
1950s and ‘60s it was iconic and cutting edge. Think Mad Men. Or think 
Cary Grant, who, in the classic movie North by Northwest, played the 
classic advertising executive who is cool enough to be mistaken for a 
spy. Advertising and espionage were debonair enterprises, roughly equal 
in glamorousness.

But it didn’t last. As the advertising industry developed in 70s and 
80s, more people figured out ways to do it. Things became much more 
competitive. The market grew, but the entrants grew faster. Advertising 
no longer made as much money as they had been before. And ever since 
there has been a relentless, competitive push to figure out what works 
and then dial up the levers.

Advertising is tricky in the same way that sales is. The main problem is 
that, historically at least, you never quite know if your ads are 
working. John Wanamaker, who is billed as the father of advertising, had 
a line about this: “Half the money I spend on advertising is wasted: the 
trouble is I don’t know which half.” You may think your ad campaign is 
good. But is it? Or are the people who made your ad campaign just 
telling you that it’s good? Distinguishing between fact and sales pitch 
is hard.

In most ways, Priceline.com represents certain depressing decline of our 
society. It points to a very general failure. But one specific thing 
Priceline does well is its powerfully differentiated marketing, which 
makes it very hard to replicate or compete against. PayPal once staged a 
PR event where James Doohan—Scotty from Star Trek—would beam money using 
a palm pilot. It turned out to be a total flop. It turns out that 
Captain Kirk—that is, William Shatner—is in a league of his own.

Advertising’s historical opaqueness is probably the core of why Google 
is so valuable; Google was the first company that enabled people to 
figure out whether advertising actually worked. You can look at all sort 
of metrics—CPM, CTR, CPC, RPC—and do straightforward calculations to 
determine your ROI. This knowledge is important because people are 
willing to pay a lot for advertising if it actually works. But in the 
pre-internet magazine age before Google, ad people never really had a 
clue about how they were doing.

Zynga has excelled at building on top of Google’s ad work. Everyone 
knows that Zynga experienced great viral growth as its games caught on. 
Less known is that they spent a lot of money on targeted advertising. 
That allowed them to monetize users much more aggressively than people 
thought possible. And then Zynga used that revenue to buy more targeted 
ads. Other gaming companies tried to do just viral growth—build games 
that had some social element at their core. But Zynga went beyond that 
distribution strategy and got a leg up by driving rapid growth with 
aggressive marketing.

The standard bias on the internet is that advertising does not work. But 
that’s an interesting double standard. There are an awful lot of 
websites whose businesses model is ad sales. And then they turn around 
and say that they don’t actually believe ads are good way of getting 
customers. The Zynga experience shows that creatively rethinking the 
standard narrative can be quite lucrative. There is a lot of room for 
creativity in distribution strategy.

## E. Viral Marketing

Viral marketing is, of course, the classic distribution channel that 
people tend to think of as characteristic of Internet businesses. There 
are certainly ways to get it to work. But it’s easy to underestimate how 
hard it is to do that. William Shatner and James Doohan seemed similar. 
In fact they were a world apart. Salesmen may seem similar. But some get 
Cadillac’s, while others get steak knives. Still others get fired and 
end up as characters in novels.

[Section on viral marketing math excluded. You can learn about this 
stuff elsewhere, e.g. here. The gist is twofold: first, viral cycle time 
is important. Shorter is better. Second, there is a metric called viral 
coefficient, and you need it to be > 1 to have viral growth.]

PayPal’s initial user base was 24 people. Each of those people worked at 
PayPal. They all knew that getting to viral growth was critical. 
Building in cash incentives for people to join and refer others did the 
trick. They hit viral growth of 7% daily—the user base essentially 
doubled every 10 days. If you can achieve that kind of growth and keep 
it up for 4-5 months, you have a user base of hundreds of thousands of 
people.

Certain segments grow fasters than others. The goal is to identify the 
most important segment first, so that anybody who enters the market 
after you has a hard time catching up. Consider Hotmail, for instance. 
It achieved viral growth by putting sign-up advertising at the bottom of 
each e-mail in their system. . Once they did that successfully, it was 
really hard to copy with the same success. Even if other providers did 
it and had similar growth curves, they were a whole segment behind. If 
you’re the first mover who is able to get a product to grow virally, no 
one else can catch up. Depending on how the exponential math shakes out 
in a particular case, the mover can often be the last mover as well.

PayPal is a classic example. The first high-growth segment was power 
buyers and power sellers on eBay. These people bought and sold a ton of 
stuff. The high velocity of money going through the system was linked to 
the virality of customer growth. By the time people understood how and 
why PayPal took off on eBay, it was too late for them to catch up. The 
eBay segment was locked in. And the virality in every other market 
segment—e.g. sending money to family overseas—was much lower. Money 
simply didn’t move as fast in those segments. Capturing segment one and 
making your would-be competitors scramble to think about second and 
third-best segments is key.

Dropbox is another good example of a very successful company that 
depended on viral growth. Pinterest may be as well. It’s sort of hard to 
tell at this point. Is Pinterest actually good? Or is it a fad? Will it 
become a ghost town that no one uses? It’s not entirely clear. But it 
has certainly enjoyed exponential growth.

Marketing people can’t do viral marketing. You don’t just build a 
product and then choose viral marketing. There is no viral marketing 
add-on. Anyone who advocates viral marketing in this way is wrong and 
lazy. People romanticize it because, if you do it right, you don’t have 
to spend money on ads or salespeople. But viral marketing requires that 
the product’s core use case must be inherently viral. Dropbox, for 
example, let’s people share files. Implicit is that there’s someone—a 
potential new user—to share with. Spotify does this with its social 
music angle. As people use the product, they encourage other people to 
use it as well. But it’s not just a “tell your friends” button that you 
can add-on post-product.

## F. The Power Law Strikes Again

We have seen how startup outcomes and VC performance follow a power law. 
Some turn out to be a lot better than others. People tend to 
underestimate how extreme the differences are because our generally 
egalitarian society is always telling us that people are essentially the 
same.

We’ve also heard Roelof Botha explain that LinkedIn was the exception 
that proves the rule that companies do not have multiple revenue streams 
of equal magnitude. The same is true for distribution, and exceptions 
are rare. Just as it’s a mistake to think that you’ll have multiple 
equal revenue streams, you probably won’t have a bunch of equally good 
distribution strategies. Engineers frequently fall victim to this 
because they do not understand distribution. Since they don’t know what 
works, and haven’t thought about it, they try some sales, BD, 
advertising, and viral marketing—everything but the kitchen sink.

That is a really bad idea. It is very likely that one channel is 
optimal. Most businesses actually get zero distribution channels to 
work. Poor distribution—not product—is the number one cause of failure. 
If you can get even a single distribution channel to work, you have 
great business. If you try for several but don’t nail one, you’re 
finished. So it’s worth thinking really hard about finding the single 
best distribution channel. If you are an enterprise software company 
with a sales team, your key strategic question is: who are the people 
who are most likely to buy the product? That will help you close in on a 
good channel. What you want to avoid is not thinking hard about which 
customers are going to buy it and just sending your sales team out to 
talk to everybody.

Distribution isn’t just about getting your product to users. It’s also 
about selling your company to employees and investors. The familiar 
anti-distribution theory is: the product is so good it sells itself. 
That, again, is simply wrong. But it’s also important to avoid the 
employee version: this company is so good, people will be clamoring to 
join it. The investor version—this investment is so great, they’ll be 
banging down our door to invest—is equally dangerous. When these things 
seem to happen, it’s worth remembering that they almost never happen in 
a vacuum. There is something else going on that may not be apparent on 
the surface.

## G. PR and Media

PR and Media add yet another layer to the distribution problem. How the 
message of your company gets distributed is worth thinking hard about. 
PR and media are very linked to this. It is a sketchy and very 
problematic world. But it’s also very important because we live in a 
society where people don’t usually have a rational idea of what they 
want.

Consider an example from the VC world. It’s almost never the case that a 
company finds just one interested investor. There are always zero or 
several. But if the world were economically rational, this wouldn’t be 
true at all. In a perfectly rational world, you’d see single investor 
deals all the time. Shares would be priced at the marginal price where 
you get a single highest bidder—your most bullish prospective investor. 
If you get more than one person interested in investing, you’ve done it 
wrong and have underpriced yourself. But investors obviously aren’t 
rational and can’t all think for themselves. So you get either zero 
investors or many.

It’s easy and intuitive for smart people to be suspicious of the media. 
For many years, Palantir had a very anti-media bias. But even if media 
exposure wasn’t critical for customers or business partners, it turned 
out to be very important for investors and employees. Prospective 
employees Google the companies they’re looking at. What they find or 
don’t matters, even if it’s just at the level of people’s parents saying 
“Palantir? Never heard of it. You should go work at Microsoft.” And you 
can’t just plug yourself on your own website; PR is the art of getting 
trusted, objective third parties to give you press.

## H. On Uncertainty

It’s fairly difficult to overestimate how uncertain people are and how 
much they don’t know what they actually want. Of course, people usually 
insist that they are certain. People trick themselves into believing 
that they do know what they want. At the obvious level, “Everyone wants 
what everyone wants” is just a meaningless tautology. But on another 
level, it describes the dynamic process in which people who have poorly 
formed demand functions just copy what they believe everyone else wants. 
That’s how the fashion world works, for instance.

# V. Distribution is Inescapable

Engineers underestimate the problem of distribution. Since they wish it 
didn’t exist, sometimes they ignore it entirely. There’s a plot line 
from The Hitchhiker’s Guide to the Galaxy in which some imminent 
catastrophe required everybody to evacuate the planet. Three ships were 
to be sent into space. All the brilliant thinkers and leaders would take 
the A ship. All the salespeople, consultants, and executives would take 
the B ship. All the workers would take the C ship. The B ship gets 
launched first, and all the B passengers think that’s great because 
they’re self-important. What they don’t realize, of course, is that the 
imminent destruction story was just a trick. The A and C people just 
thought the B people were useless and shipped them off. And, as the 
story goes, the B ship landed on Earth.

So maybe distribution shouldn’t matter in an idealized, fictional world. 
But it matters in this one. It can’t be ignored. The questions you must 
ask are: how big is the distribution problem? And can this business 
solve it?

We live in a society that’s big on authenticity. People insist that they 
make up their own minds. Ads don’t work on them. Everything they want, 
they want authentically. But when you drill down on all these people who 
claim to be authentic, you get a very weird sense that it’s all 
undifferentiated. Fashionable people all wear the same clothes.

Understanding this is key. You must appreciate that people can only show 
tip of the iceberg. Distribution works best when it’s hidden. Question 
is how big the iceberg is, and how you can leverage it. Every tech 
company has salespeople. If it doesn’t, there is no company. This is 
true even if it’s just you and a computer. Look around you. If you don’t 
see any salespeople, you are the salesperson.

Corporate development is important for the same reasons that 
distribution is important. Startups tend to focus—quite reasonably—on 
the initial scramble of getting their first angel or seed round. But 
once it scales beyond that—once a company is worth, say, $30m or 
more—you should have a full-time person whose job it is to do nothing 
but travel around the world and find prospective investors for your 
business. Engineers, by default, won’t do this. It’s probably true that 
if your company is good, investors will continue show up and you’ll have 
decent up rounds. But how much money are you leaving on the table?

Say your company could reasonably be valued at $300m. Valuation is as 
much art as it is science. At that range it can fluctuate by a ratio of 
2:1. If you raise $50m at $300m, you give away 16% of the company. But 
if you raise that $50m at $500m, you give away 10%. A 6% delta is huge. 
So why not hire the best person you can and give them 1% of the company 
to make sure you capture that value?

A similar thing exists with employee hiring. It’s trickier to know what 
to do there. But traditional recruiters do not take the distribution 
problem seriously enough. They assume that people are always rational, 
and that by giving them information, people will make good decisions. 
That’s not true at all. And since the best people tend to make the best 
companies, the founders or one or two key senior people at any 
multimillion-dollar company should probably spend between 25% and 33% of 
their time identifying and attracting talent.