Every startup starts small. Over time, some startups show great growth and dominate a large portion of the market. Some remain small, fight to survive every day, and some dwindle. The difference comes from the mindset of the entrepreneur. Most small business models revolve around improving on something that already exists. It was possible to succeed along this route about a century ago when the market competition was minimal. Mc Donald’s has had this kind of success. They started by making better and faster hamburgers. In the beginning, there was only one McDonald’s, but then Ray Kroc expanded the brand all over the country. There have been dozens of businesses that have emulated the McDonald’s business model since then, but only a few have been successful. Owning a restaurant is a very hard business to succeed in. The business is unlikely to succeed if it loses sight of competitive realities and focuses on trivial differentiating factors.
Building Natural Monopolies and Avoiding Competition
In his book Zero to One, Peter Thiel explains how businesses can find a niche and make money. Sustainability in business is really about building natural monopolies and avoiding competition.
A company can create a natural monopoly in one of two ways:
1) By solving a unique problem that leads to the creation of an entirely new product line. Airbnb, for example, allowed people to rent out extra rooms in their homes for the first time.
2) Doing something so well that nobody can match it. Google, for example, has invested so much into its search engine it’s almost impossible for anyone to compete with it.
In other words, success is about doing something no one else has done before. Businesses need to develop unique ways to create new things. Peter Thiel referred to this as Zero to One. From zero to one is a vertical progression, which is more difficult to imagine since there is no precedent. Generally, businesses restrict their progress horizontally, which is easy to envision. Making one typewriter slightly better by adding features to it, is horizontal progress. In contrast, a word processor prototype built from a typewriter is vertical progress.
For entrepreneurs, the lesson is clear: if you are looking to capture value, avoid building an undifferentiated commodity business. Companies that succeed all solve a unique problem to gain market dominance. Businesses that fail, fail because they cannot escape competition.
Every Monopoly Is Unique
Monopolies are all unique, but they usually share some of the following characteristics.
1) Proprietary technology: to make a real monopolistic difference, proprietary technology must be at least 10 times better than its closest substitute in some important criterion.
2) Network effects: unless a product is valuable to its very first users when the network is small, it will never reap the benefits of network effects.
3) Economies of scale: An effective startup should have the capacity to grow rapidly.
4) Branding: A brand is a promise. The value of trusted brands extends beyond consumers to suppliers, employees, and other partners.
Business Needs Branding
Phil Knight, the founder of Nike, tells an inspiring story of entrepreneurship in his book Shoe Dog. His story is a great illustration of the power of branding. His company was the US distributor for a Japanese shoe company called Onitsuka Tiger when he started it. He sold Tiger shoes made by Onitsuka Shōkai throughout America and helped make them popular. However, one day Tiger Shoes decided to give their US distribution rights to someone else and end their contract. Phil realized he had no control over the shoes he was selling. He thus rushed to fix the mistake by launching his brand, Nike. The Nike brand is currently the #1 in the athletic goods industry and is the 14th most valuable brand in the world.
“Let everyone else call your idea crazy… just keep going. Don’t stop. Don’t even think of stopping until you get there, and don’t give much thought to where there is. Whatever comes, just don’t stop.” — Phil Knight
The most important thing for entrepreneurs to do is to start small in a niche market, with a unique idea. Most disruptive or innovative ideas that are accepted by the majority today were once ridiculed. Napoleon Hill writes in the classic success book Think and Grow Rich that fear of criticism is one of the biggest reasons people do not become wealthy. To be accepted by those around us, we tend to bury our more unconventional ideas. Former aerospace engineer Frank Rudy had invented pressurized airbags that could be put inside shoes. Adidas rejected his concept, but Nike adopted it. Nike eventually turned the idea into its Air Max line of shoes, a truly unique product.
A startup that creates something new is most valuable and game-changing. Their inventions change the world from zero to one. Offering innovations as ‘Emotional Benefits’ is a sure path to profitability. Most business owners can use this wisdom to refocus their strategies towards greater success.