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June 16 - July 25, 2023
For a company to be valuable it must grow and endure, but many entrepreneurs focus only on short-term growth.
growth is easy to measure, but durability isn’t.
Zynga scored early wins with games like Farmville and claimed to have a “psychometric engine” to rigorously gauge the appeal of new releases. But they ended up with the same problem as every Hollywood studio: how can you reliably produce a constant stream of popular entertainment for a fickle audience? (Nobody knows.) Groupon posted fast growth as hundreds of thousands of local businesses tried their product. But persuading those businesses to become repeat customers was harder than they thought.
If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now? Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business.
Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.
Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate.
As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market.
The clearest way to make a 10x improvement is to invent something completely new.
Or you can radically improve an existing solution: once you’re 10x better, you escape competition.
You can also make a 10x improvement through superior integrated design.
Network effects make a product more useful as more people use it.
Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small.
network effects businesses must start with especially small markets.
This is why successful network businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all.
A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales. Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.
A good startup should have the potential for great scale built into its first design.
A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly.
Beginning with brand rather than substance is dangerous.
No technology company can be built on branding alone.
Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market.
If you think your initial market might be too big, it almost certainly is.
The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Any big market is a bad choice, and a big market already served by competing companies is even worse.
Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.
Originally, “disruption” was a term of art to describe how a firm can use new technology to introduce a low-end product at low prices, improve the product over time, and eventually overtake even the premium products offered by incumbent companies using older technology.
However, disruption has recently transmogrified into a self-congratulatory buzzword for anything posing as trendy and new.
Indeed, if your company can be summed up by its opposition to already existing firms, it can’t be completely new and it’s probably not going to become a monopoly.
As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.
if you’re the first entrant into a market, you can capture significant market share while competitors scramble to get started. But moving first is a tactic, not a goal. What really matters is generating cash flows in the future, so being the first mover doesn’t do you any good if someone else comes along and unseats you. It’s much better to be the last mover—that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits. The way to do that is to dominate a small niche and scale up from there, toward your ambitious long-term vision.
to succeed, “you must study the endgame before everything else.”
success results from a “patchwork of lucky breaks and arbitrary advantages.”
“half luck, half good timing, and the rest brains.”
“Success is never accidental.”
already successful people have an easier time doing new things, whether due to their networks, wealth, or experience. But perhaps we’ve become too quick to dismiss anyone who claims to have succeeded according to plan.
Every company starts in unique circumstances, and every company starts only once. Statistics doesn’t work when the sample size is one.
“Shallow men believe in luck, believe in circumstances…. Strong men believe in cause and effect.”
If you treat the future as something definite, it makes sense to understand it in advance and to work to shape it.
Indefinite attitudes to the future explain what’s most dysfunctional in our world today.
Process trumps substance: when people lack concrete plans to carry out, they use formal rules to assemble a portfolio of various options.
A definite view, by contrast, favors firm convictions. Instead of pursuing many-sided mediocrity and calling it “well-roundedness,” a definite person determines the one best thing to do and then does it. Instead of working tirelessly to make herself indistinguishable, she strives to be great at something substantive—to be a monopoly of one.
An indefinite pessimist looks out onto a bleak future, but he has no idea what to do about it.
Europeans just react to events as they happen and hope things don’t get worse.
The indefinite pessimist can’t know whether the inevitable decline will be fast or slow, catastrophic or gradual. All he can do is wait for it to happen, so he might as well eat, drink, and be merry in the meantime: hence Europe’s famous vacation mania.
A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it.
China can grow so fast only because its starting base is so low. The easiest way for China to grow is to relentlessly copy what has already worked in the West.
Outsiders are fascinated by the great fortunes being made inside China, but they pay less attention to the wealthy Chinese trying hard to get their money out of the country. Poorer Chinese just save everything they can and hope it will be enough. Every class of people in China takes the future deadly seriously.
To a definite optimist, the future will be better than the present if he plans and works to make it better.
Each generation’s inventors and visionaries surpassed their predecessors.
You can still visit the Bay Model in that Sausalito warehouse, but today it’s just a tourist attraction: big plans for the future have become archaic curiosities.
To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans. He expects to profit from the future but sees no reason to design it concretely.
Instead of working for years to build a new product, indefinite optimists rearrange already-invented ones.
