Nearly a decade ago, I was introduced to the concept of the Keynesian Beauty Contest. It is one of those concepts that I keep coming back to time and time again.
I recently participated in a two-month Product-Market Fit workshop led by Peter Nocchiero of Alternate Future and Koray Parmaks of Carbon Zero Capital. So I've been living and breathing PMF.
Here is a short monologue bonus video episode where I talk about the Product-Market Fit issues of climatetech and carbon removal, a now-outdated reference to how TSLA bears kept getting crushed, and relate them to my experiences as a founder of the Nori carbon removal marketplace.
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Full Transcript
Ross Kenyon: Hey, this is Ross Kenyon. I am a climate tech and carbon removal entrepreneur, and today I have for you a lesson in climate tech entrepreneurship. It’s actually more broad than that. It can apply to a lot of things, but it deals with product-market fit and a thought experiment that has long influenced how I’ve thought about product-market fit. This famous thought experiment is from John Maynard Keynes. He’s one of the most famous economists of the 20th century, and he posed this thought experiment to help explain stock market behavior. And it goes like this. Imagine there is a beauty contest where the judges are rewarded not for determining who is the most beautiful candidate, but who they think will be perceived as the most beautiful candidate. There’s like a recursive layering to it. What do other people think?
And this is a really interesting way of understanding the stock market, because people think about the stock market as something that you bet on the fundamentals of, and there are some people who have made fortunes doing that. Warren Buffett and Charlie Munger are very famous for reading fundamentals and making long-term investments on fundamentals. And that is a way that still can play out and work out successfully for investors. But for shorter-term investment, “the market can remain irrational longer than you can remain solvent” is a very famous line in investing too.
And even if the fundamentals are sound for an investment that you see and you think are undervalued, it’s not clear that other people are going to see things the same way. And the contrary case is true as well, that you might notice that the fundamentals for some stock are out of whack with its valuation, and yet it remains a highly popular stock. People lately have pointed to cases like maybe Tesla, just like that it is the most valuable car company in the world, even though not all of its sales numbers always add up in the way that you would think to be the most valuable car company in the world.
That being said, it hasn’t stopped bearish investors on Tesla from getting crushed over time trying to prove that thesis. So it’s one of those cases where sentiment matters here a lot, and it doesn’t necessarily matter on the fundamental rightness or wrongness of someone’s position. Perception here matters quite a bit. And so for product-market fit, something that I’ve been thinking about quite closely is my former company, Nori. We took very idiosyncratic positions, very strong positions on a number of matters, and my job as strategist was always to figure out: if we are right about this thing, and we think that we are, will we be able to get people to agree with us? And if not, will we isolate ourselves diplomatically and commercially by pursuing this way of thinking and being in the world?
Because you can be right about an issue and still be alone. You can win an argument and have no friends and have no spouse. You can be right about the potential relevance of a certain kind of durability or quality attribute and still have no customers. It really doesn’t matter at the end of the day. In some regards, maybe it matters spiritually that you stuck to your guns and did what you believed to be right. That could be true. But if what you care about is business success, you essentially need to give customers what they want.
Maybe you can give them the next thing they’ll want. Like, they may not know that they will want something that doesn’t exist yet, but once it becomes available to them, they’ll all jump to it instead of the thing that they were doing previously. That’s a case where it’s pretty right. But what happens if you deliver something that is so far in the future that people don’t even know that they want it yet, and in fact, it puzzles them? It’s unclear what they use this thing for then.
Even if you’re right, even if it is objectively better than the tech that they’re currently using, if they don’t have a story they can tell themselves to understand why this is better and improves their lives, they’re just not going to do it. I’ve seen a lot of people complain about the injustice of the whims of marketplace participants. They will value one approach over another for reasons that frankly seem short-sighted or inscrutable even, and that can be frustrating. But I think focusing too hard on the failure of customers to really get you is an unhelpful way of conducting business.
The job of the strategist is to know when you’re out too far ahead of your skis. Even if you have a great product, if you’re just too far ahead of what the world is ready for, it doesn’t matter. Well, the first thing I thought of was the scene in Back to the Future where he plays Johnny B. Goode, and it’s too early in the ’50s for distorted guitars and Van Halen and, like, really licky lead guitar licks. It’s just too early. And that’s a case where Michael J. Fox had bad product-market fit.
Peter Nocchiero, I hope you’re listening, because I’m channeling you right here, Mr. King of product-market fit and climate tech. So that’s the thing that I have focused quite hard on of the Keynesian beauty contest. I’m not actually trying to determine which strategy is the most beautiful for its own sake. I’m also trying to figure out which strategy is going to be the most beautiful in the eyes of others. And I want it to be just far enough ahead to be new, novel, to get acclaim for doing something, but not potentially so new or impossible to convince people that it’s difficult.
This is true of all companies as well. This isn’t just true of Nori. A lot of companies I’ve consulted with and spoken with have questions about this. And you’ll see this as well with companies that have bespoke methodologies. Whenever you meet with someone in carbon removal that has something that is not a straightforward something — like, I don’t know, okay, they’re a biochar company or they’re a direct air capture company — and the differences in the tech are not substantial enough to require the rewriting of an entire methodology or protocol, it’s understandable. There’s safety in numbers there.
You know, there’s going to be policy support, likely there’s going to be a trade association for your particular type of carbon removal, there’s going to be pathways, and you will be understood. But some of the people I know that maybe have a harder time in carbon removal are those that are doing things really differently. And they might turn out to be right. Maybe in the medium term, maybe in the long term, you know, there’ll be a loop back and the world will suddenly be ready for the exact thing that they saw way ahead of everyone else. But it’s also possible the world doesn’t go that way.
And it’s a really hard position to be in, too, to be alone in that way where it’s highly polarized. They are either really right or really wrong, and there’s not a whole lot in between that. They either have a beautiful golden ticket and they’re going into the Chocolate Factory — it’s actually not that good of a place to go into, it’s pretty dangerous in there — or they are just cut off and they essentially die alone. It’s really important to have a sense of that.
And if you cannot get there currently, is there some — what can you do in the meantime? If the world is just not ready for you, I think you could do something else. Nori was founded around this idea of: the world needs to move huge amounts of mass, ridiculous amounts of mass. And what moves ridiculous amounts of mass? Commodity markets. And that’s where pork bellies trade hands, that’s where Brent crude trades hands, things like that that are just at that scale. That’s what we need for carbon removal.
And we worked backwards from that, trying to build a commodity market for carbon removal that the world seven years later is still not ready for. We still don’t have enough volume to justify a commodity market and market depth to support that. And that was very far in the future. It would not surprise me if three years from now, five years from now, 10 years from now, the time is ripe and Nori 2.0 came to exist to supply that need. It’s possible, maybe. Or maybe at that point just compliance markets that do this at that scale, or who knows what will happen in the future. That’s a fun thing to forecast, but hard to know. I’ll shake the 8-ball on it.
But it’s just one of those cases where the product-market fit just is not tight enough. The thing is, though, if you do all of the same things everyone else does, you end up in the same valuation. You end up selling the same thing, saying the same things, believing the same things. One thing I’ll leave you with is that there’s a very famous line from Aristotle in the Poetics where he says that an ending should be both unexpected and yet inevitable. I really loved that, because the best stories that you watch will often have that: in hindsight, it makes perfect sense.
There could be no other logical outcome to the story, and yet the entire way through, it felt like you were on the edge of your seat and it was unexpected. And that’s how it is with developing anything new as well, even if it’s in technology or in carbon removal or in business. Is that the sweet spot you’re trying to reveal in the future is such that it’s an obvious next step in development, but in hindsight, it seems inevitable. But if you build too far in the future and there’s no stepping stone to jump to, it can be very bad for you.
And if too small of a gap exists between the stepping stones, it’s just a minor incremental change and you’re stuck in the valuation with your peers. But if you are at a venture-backed company or venture-backable company, the goal is not to build something that’s the same that everyone else has built, because that is not going to deliver venture returns. The goal is to break out and to have a massive asymmetry against your rivals and to really generate serious value. And the way that one does that is by doing something differently.
Unfortunately, taking those risks can lead to being, as I mentioned earlier, polarized. You’re very right or you are very wrong. Just think very carefully about the kinds of asymmetry that you invite into your business, because it is a way of adding risk, and the risk can be good or it can be bad, and it will certainly allow one to break out from one’s rivals in one of two directions. But I think being able to think really carefully about what everyone is wrong about that you might have an answer to.
I mean, that’s the thing about being an entrepreneur, though. You wouldn’t start a company if you agreed with everyone about everything. Why wouldn’t you just join an established company at that point? You’re starting a company to do things differently. That is the point. And yet one has to be very careful about how many instantiations of that one needs to invite into one’s company and still be successful, and making sure that one is keeping track of the Keynesian beauty contest happening here.
Where, okay, is everyone going to change their minds here, that I support the candidate that everyone is going to realize is now the beautiful candidate we never saw in the right way until now? Or is this something that you are likely to remain alone on? You’re technically right on the fundamentals, but cannot persuade everyone to support you. Being right in that way is, as I mentioned, very similar to being wrong. Or, the distinction is not nearly as important as one might want.
People might all irrationally prefer something that you know in your heart and in your brain is foolish, and it ultimately doesn’t matter. As long as one isn’t producing some unethical result, then I think serving customers what they want and working along those incremental stepping stones, building towards a world that one does think is the correct way of understanding the world, is the strategy. I think that’s a lesson that I’ve been thinking a lot about from my time at Nori and just beyond. I’ve worked with so many companies since Nori — a lot of consulting and advising and mentoring and trying to figure out how they should go to market and how they should understand themselves. And I just keep coming back to the Keynesian beauty contest.
So I hope you enjoyed a fun little tour through a thought experiment. Maybe I’ll do some more of these. That was pretty fun, and there’s a lot to say, and there’s a lot of conceptual frameworks like this that I have found very useful in my work as a strategist, and I would love to share them with you. So thanks so much for listening. I didn’t even mention this at the beginning, but please become a subscriber. It’s five bucks a month. The link is in the show notes. Also a great rating in Apple Podcasts or Spotify means the world to me. It helps get the show out to more people. All of this helps grow the show and make it financially viable. Thank you for listening, thank you for caring about carbon removal, and have a lovely day.
