The Star Principle: How it can make you rich

by Richard Koch

What is a star venture? It has two qualities. One, it operates in a high-growth market. Two, it is the leader in that market.

the pessimist, the person who has the vision and puts her foot down on the accelerator, and the person who has her feet on the ground and can stamp on the brake when money is tight or something foolish is being attempted.

There is something to the idea that all new businesses need a visionary (the entrepreneur), a technical person who is expert at what the business does (the doer), and someone to organise the people and run the show (the manager). No new venture will succeed without the right mix of people.

The key is to select the ventures that are likely to succeed anyway. Without superhuman people. Without perfect balance between the skills of the people. Without blood, toil, tears and sweat.Without the need to keep chopping and changing before the correct formula emerges.

The useful answer is not ‘people, people, people’. The really potent, consistently successful answer is ‘positioning, positioning, positioning’.

Main idea

Positioning will. A star business will.

it is the leader in its market niche; and ★ the market niche is growing fast, at least 10 per cent a year.

sufficiently different way of doing business. Sufficiently different from what? you may ask. Sufficiently different from how all other car manufacturers conduct their business.

It follows that you can tell whether or not niche leadership really exists by seeing whether the niche leader is very profitable and cash-positive.

per cent a year. More precisely, the niche must grow at least 10 per cent a year, on average, over the next five years, and preferably for decades.

Why do we take the growth rate of the market niche,

To have a valuable firm in the future, whatever its size and profitability today, all you need is leadership in a fast-growth niche. Provided the firm is tolerably well run, leadership will make the firm profitable and cash-positive. Growth will make it big. If you grasp these two ideas, you will have huge insight into the future. That is all it takes to find a wonderful place to work or to put your hard-earned cash.

highly successful restaurants. They pioneered the limited menu and highly automated, consistent food delivery that has been the backbone of McDonald’s success right up to today.

Cities and city-states can also make themselves into valuable stars, almost invulnerable to challengers.

back? How is it that most people work so hard going nowhere much, while the few supercharged star ventures create so much with so little?

Yet it is so. Stars are where the universe creates good fortune. Stars are the source of wealth. Stars are the place to invest. Stars are the place to work.

there is nothing in business - I know from first-hand experience - that’s so much fun as working in a burgeoning, hugely successful small venture.

therefore very small - its business idea and character derive from the interactions of up to 20 early employees.

I love entrepreneurial firms.They are creating all the jobs and all the wealth of America, Europe and Asia, while the big established corporations are leeches on the body of the economy.

competitors can’t retaliate. Somebody has to deliver the product or service and please the early customers so much that they come back for more.

We are very selective about our investments, preferring to build up existing investments and hold them for a long time, rather than sell and move on to pastures new. ★ We take a very active role in working out the strategy of the ventures where we invest, and do not hesitate to give ‘guidance’ (or more) to our CEOs, and to replace them if necessary. ★ We have very high expectations for the performance of our investments and the price at which we will eventually sell them.

Find a baby star venture to join, one that’s just started or still has few employees. Be sure it really is a star, the largest firm in a fast-growing market niche (see Chapters 11 and 12). ★ Become one of the first 20 employees. ★ Try to find a firm that is generous with the right to buy shares in the company or with ‘options’ that give you shares in the future if you and the firm

investment in the star at any time, put as much of your money into it as you possibly can. Actively seek such opportunities. ★ Think like an owner. This is your company. Play a key role in it. Remember - you can be Somebody. As soon as you’ve signed up, you are Somebody. ★ Be sure that the venture will be hugely successful, and that you will be, too. It’s just a matter of working out how high the stars - you and the business -

Be the most ambitious, the most bullish, the most expansive, the most imaginative, the most forward-looking, the most visionary person in the firm. If other people think the firm can be this big or this valuable, add a zero or two to the end.

Work out whether the venture has yet translated its formula into action, along the four dimensions necessary: ✩ Has the product been made technically accessible for a large number of customers? ✩ Have early prospects bee...

Is the firm a smoothly oiled machine, with a consistent formula, a reliable way of working and excellent results repeated every time at low cost? If not, choose the missing dimension that is most needed, or where you can help t...

Do you have potential to start a great venture? Select the statement in each group that you think is most important to start a venture:

You have to state why and how your business is going to be the leader. If the niche already exists, so too does a leader. Displacing an incumbent leader is always possible, but it is difficult. It’s not something to bet on, unless you have a source of competitive advantage that is totally compelling.

brilliance, but because they are in the right place at the right time.

firms start to fail, the same is nearly always true in reverse. Even the world’s best executive stands a poor chance of reversing the capricious momentum of markets and rivals when they have it in for a firm.

reasons why the leader and the culture have screwed up. In reality, we are not explaining success or failure: we are just rationalising it.

with customers lining up round the block to get in. Welcome to the only venture I’ve ever known where it was clear after the first week that it was a star business where the sky was the limit.

The great thing about any branded retail venture - a restaurant, a shop, a bar - is that, if the first one works, the second one will, and the third, and so on.

Roll-out can ensure rapid growth. If the formula is high-margin and gives high return on capital, you can make a small fortune from a small investment, funding future growth out of the cash flow from the first outlet or outlets.

Wilful ignorance is one of my best investment tools. I don’t want to know too much before making an investment. I don’t want to cloud my judgement, or make

dividing an existing market into two: everyone else’s market and your new niche.

Step 2: Select a high-growth niche. This requires us to estimate future market growth in the possible niche. How confident can we be that it will grow at more than 10 per cent a year? Why? If we cannot be confident, we reject the idea and go back to Step 1 to select another niche.

Step 3: Target your customers. This step identifies the target customers’ preferences. They must be clearly identifiable and

Step 6: Name the niche you plan to lead. Unless you define your niche carefully, you cannot have a clear idea of who are your niche competitors - the firms you should really worry about - as opposed to firms in the main market, with which you compete only indirectly.Your

name short, memorable, easy to recognise, appealing to the target market and associated with the niche.

Next, the ability to bet against an outcome, to say it won’t happen.

7: ‘Betfair’ is a great brand, because it says clearly and succinctly what is the benefit of using the firm. ‘Flutter’ was a poor

still growing at 10 per cent a year. We saw the possibility of regaining massive market share. Once again, this illustrates the wisdom of looking at the business and the category separately.

Step 1: Belgo divided the UK restaurant market into ‘the Belgo or similar-to-Belgo market’ and all other restaurants. The new niche comprised Belgian restaurants with a monastery theme, different food and drink, and fast service.

The secret to creativity is knowing how to hide your sources.

An original idea. A baby business that has found a gap in the market - the creator of a new way of doing business. A star venture will be doing things differently.

Baby is a leader. In its gap, in its own business arena, it is the largest. It may have one or two even younger imitators, but most likely it is still unique. ★ Baby’s customers are different. You can see why the baby business appeals to particular customers, who can’t get anything as attractive to them elsewhere.

A baby business that you can imagine being extremely profitable when it grows up. There must be hard economic...

High expectations are the key to everything. Sam Walton

Aim to grow your star at least 20-30 per cent a year. During the first decade, 50-100 per cent is more like it. Another way: take your current growth rate, and aim to double it.