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Lenny's 🏦 Vault

Smile Curve Retention Signals Escape Velocity

by Brian Balfour on August 17, 2025

The emergence of a new AI-powered distribution platform presents a significant growth opportunity for companies willing to strategically engage with it before the inevitable closing phase.

The Four-Step Cycle of New Distribution Platforms

Step 0: Market Conditions Are Met

  • Consensus exists about a new huge category emerging (AI chat platforms)
  • No clear winner yet established
  • 5-7 major players battling for dominance
  • Fierce competition as stakes are high (markets typically end in monopolies or duopolies)

Step 1: Identifying and Building the Moat

  • A player identifies what will create defensibility and help them reach escape velocity
  • For ChatGPT, the moat appears to be context and memory
    • "The actual difference maker is which one has more of your context"
    • "The more you use it, the more it's able to store memory around you which feeds more personalized context"
  • The platform needs to press this advantage as quickly as possible
  • They establish a third-party platform with incentives to build an ecosystem

Step 2: Opening the Platform

  • The platform offers a value exchange to third parties: "develop on our platform and we'll give you distribution"
  • Creates a gold rush period where developers and companies can grow rapidly
  • Preferred partnerships are established first to build credibility
  • The platform benefits from third parties bringing more users and use cases

Step 3: Closing for Control and Monetization

  • Platforms inevitably begin to close down and restrict access
  • This happens through:
    • Shutting down third-party access entirely
    • Developing first-party applications that absorb highest-value use cases
    • Artificially depressing organic distribution to push toward paid mechanisms
  • "They close it down for reasons of monetization and growth"

Why This Matters Now

  • ChatGPT appears poised to become the next major distribution platform

  • Signs include:

    • Superior retention metrics compared to competitors
    • The rare "smile curve" in retention (goes down, then up)
    • Hiring for roles related to a third-party "agent platform"
    • Beginning to form preferred partnerships with major companies

  • The cycles are getting shorter: "You actually have a smaller amount of time to play the game"

  • Companies face a prisoner's dilemma: "If you don't do it, your competitors are going to go to the new platform"

  • Customer expectations will shift: "There is no opting out of the game"

How to Approach This Opportunity

For Late-Stage Companies:

  • You can afford to place multiple bets across platforms
  • Wait to see which platform emerges as the winner, then focus resources there
  • Risk: Waiting too long can mean missing the opportunity entirely

For Startups:

  • You must make a focused bet on one platform
  • "You have scarce resources, scarce attention from the market"
  • This is the opportunity to disrupt incumbents before they can copy you

Criteria for Choosing a Platform:

  1. Look at retention and depth of engagement, not just MAUs
  2. Consider user quality and monetization potential
  3. Analyze the value exchange being offered
  4. Consider scale, but don't be fooled by vanity metrics

Planning Your Exit Strategy:

  • Immediately start thinking about how to exit when the platform inevitably closes
  • Build ways to own important parts of the user experience
  • Accumulate specialized data and context the platforms don't have
  • Create micro-network effects that persist beyond the platform

"Building a great product is one of those things that's necessary but not sufficient, and actually the separation is between those that build really great distribution."

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