Modest Proposal - Better, Cheaper, Faster: Why Companies that Reduce Friction Win

Principles & Lessons:

• Investing success has shifted from underwriting the past to underwriting the future, which demands a fundamentally different epistemology. Modest notes that the traditional quantitative methods—relying on past performance and "rear-view mirror" metrics like price-to-book—are increasingly insufficient in a world dominated by businesses with intangible assets and uncertain trajectories. As he puts it, “the entire reason for the margin of safety and for the rear-view skills and process was to offset the inherent uncertainty about the future,” but now, investing requires a toolkit capable of confronting and analyzing uncertainty directly.
• The key to future-oriented investing is understanding businesses that can escape the base rate of competitive erosion. Modest points out that “capitalism inherently pulls down and attacks excess returns,” making durable outperformance rare. Successful investing, then, involves identifying companies that can defy this reversion through network effects, scale advantages, or strong competitive moats. The goal is to find businesses where base rate logic fails—where compounding excess returns are structurally supported, not competed away.
• Uncertainty is not an obstacle to be avoided—it is the field where differentiated insight creates edge. One of the most important muscles to build is comfort with uncertainty. Modest emphasizes that high-performing investors are not those who minimize uncertainty, but those who learn to selectively embrace it when they can develop high-conviction qualitative insights—particularly around novel or misunderstood business models. This often involves moving early in the innovation cycle, before consensus recognizes the opportunity.
• Skepticism toward early-stage ideas often stems from category errors and limited imagination, not reasoned analysis. Modest argues that many ideas that now appear obvious (Airbnb, iBuying, Uber) once seemed silly because people applied outdated mental models. “Ask yourself: are you solving a consumer problem?” is his reframing tool. The right approach is to interrogate consumer behavior—especially signals of demand—and reason forward from how friction removal alters the economics of markets, not backwards from traditional frameworks.
• Removing friction unlocks nonlinear consumer behavior, which invalidates traditional market sizing exercises. The explosive growth of Uber and Airbnb didn’t just capture existing TAM—they enlarged it by altering behavior. “By removing the friction of finding or calling a cab company, you enabled a nonlinear change in behavior.” Traditional forecasting methods often ignore this dynamic, leading to systematic underestimation of businesses that alter how consumers transact.
• Digital businesses gain leverage by accumulating audience attention, and many of them will eventually monetize that through advertising. Modest notes that in a world where “the scarce asset is distribution and audience,” firms that aggregate attention—even if they start with weak unit economics—can eventually command advertising dollars. The Instacart example is illustrative: a low-margin grocery logistics platform morphs into a high-margin digital shelf for CPGs. As he puts it, “on a long enough timeline, everyone sells ads”—because attention can be repurposed across monetization models.
• A major under-discussed second-order effect of COVID is the intensified digital competition from formerly offline players. Rather than focusing only on e-commerce winners, Modest warns that a broad base of offline companies was forced to develop digital capabilities, creating a more competitive playing field in the long run. “On the other side of the COVID spike… the competitive situation is just going to be very different.” Investors focused on short-term tailwinds may miss deteriorating long-term unit economics as competitive intensity increases.
• The next frontier for marketplaces is heterogeneous local services, but success here depends on frequency and initial demand aggregation. Using ANGI Homeservices as an example, Modest describes the unique challenges of building two-sided marketplaces for complex, irregular, in-person services. The failure of early companies like Homejoy illustrates the difficulty of solving the cold-start problem. The hypothesis: if a platform starts with existing aggregated demand (like HomeAdvisor’s 26 million service requests), it may finally make the “obvious” product—on-demand local service booking—economically viable. The open question is whether this can be done at scale.

Transcript