This post discusses the seven questions every entrepreneur must answer to build a valuable company that can stand the test of time.
In 2009, a California-based educational startup, Kno, launched double-panelled e-textbooks with interactive study materials, including adaptive features and social-sharing tools for students. Kno was the first company to launch a 14.1” touchscreen textbook with single/dual panels on WebkitOS and Linux. However, it quickly diminished from the market with the advent of iconic iPads. Before its downfall, Kno had raised around $80 million in venture capital and was sold to Intel for only $15 million. All of its employees, except for the CEO, went to work for Intel.
Silicon Valley is full of such examples. Startups that failed due to competition, mismanagement of funds, poor product, poor management, legal challenges, and lack of funds. I picked up Zero to One to seek answers that would help me figure out how to not make the same mistakes. Mistakes that could jeopardize years of hard work and break our spirit to carry on.
Very few books offer critical insights regarding building and managing a high-value business, and Zero to One is one of them. The author, Peter Thiel, is one of the founders of PayPal and many other successful businesses, so he speaks from experience. The book doesn’t give you a formula for success (as none exists), but it tells you what to do and avoid to create a favorable environment for a monopoly business that would last. There are some very detailed examples of companies to help entrepreneurs understand why some companies failed while others thrived under different economic conditions. I read this book to understand the characteristics of a valuable company, so I will not go into other details. Here’s how to build a valuable company, according to Peter Thiel.
What is a valuable company?
Companies either exist in monopoly or perfect competition. Companies that become monopolies run the market without worrying about the competition, while companies in perfect competition sell the same homogeneous products and make no economic profit.
A valuable company is a monopoly business in a league of its own. Successful entrepreneurs create monopolies by thinking from first principles rather than formulas. Not all business people think from first principles, which is why there are way too many similar companies within an industry, creating competition for each other.
Google is an example of a monopoly, while agricultural markets where farmers are selling identical products exist in perfect competition.
“The value of the business today is the sum of all the money it will make in the future.”
A valuable company is any business that has the potential to stay profitable in the future. Most technology companies lose money in the beginning but have the potential to scale. For example, The New York Times, an established and trusted publication, earned $133 million in 2012, while Twitter, a social media platform, lost money. But when Twitter went public, it was valued at $24 billion.
Difference between Monopoly and competition
The author believes monopolies are a good thing, and it makes sense. Monopolies make enormous profits that can go into research and development for new products and services that could change the world. In a competitive business, everyone is fighting to sell the same product and does not have enough profit to invest in other products. Therefore, monopolies drive progress. On the other hand, competition kills both profits and ambition. When you are constantly pitted against someone, you lose the drive to become unique and rather waste time competing with your rivals.
To create something valuable, competition should be avoided as it can drive people crazy, even professionals like Bernard Loiseau, who ended his life because of a bad review.
Monopoly businesses like Google don’t have to worry about competition, bad reviews or even changing economic environment; monopolies thrive in any condition. And because of that, they are in a position to take ethics and progress seriously. (Google’s motto is ‘Don’t be evil’.)
How to build a monopoly business or a valuable company?
A valuable company always goes from 0 to 1 rather than 1 to n. 0 to 1 means creating something new, while 1 to n entails scaling an existing formula.
There are only two ways to progress: horizontal and vertical.
Horizontal progress entails copying formulas that have worked in the past. China is progressing horizontally.
Vertical progress focuses on creating success from new things. Tech companies progress vertically.
To build a valuable company, you must focus on the vertical path.
How to create vertical progress or build a valuable company?
To build a valuable company, every entrepreneur must answer 7 critical questions.
1. The engineering question: Can you create breakthrough technology instead of relying on a formula?
Nothing beats proprietary technology. Companies like PayPal, Twitter, and Google started with unique technology that no one had at the time.
2. The timing question: Is the timing right to start the business?
Do your research, understand your audience, and have a plan before you launch your business. If you go to market too soon, your audience may not be ready for the product, and if too late, someone else will take your market share.
3. The monopoly question: Are you starting with a big share of a small market?
Facebook started with Harvard students. Tesla started with high-end luxury sports cars. To answer the monopoly question, you need to make sure that you are super focused on your niche.
4. The people question: Do you have the right team?
Founders and partners should have good chemistry; a good dynamic. You need more than just talent.
Nobody should be looking at the clock or waiting for the day to be over. Your team should be willing to stay on board no matter what. This actually reminds me of a video by Simon Sinek. Watch below.
Any team should spend some time together before they start working together. One great way to retain people and measure their loyalty is to offer equity. Pick people who want equity, as they may believe in your company’s long-term growth.
5. The durability question: Will your market position be defensible in 20 years?
This ties to the monopoly question; is your idea unique enough to last a long time? While ideas do matter, other factors can enhance the durability of your business, including the ability of your founder to keep things interesting. Both Richard Branson and Elon Musk know how to keep their brands alive through constant engagement with their audience.
6. The secret question: Have you identified a unique opportunity?
A secret is anything that is hiding in plain sight; an opportunity that no one else has noticed. For example, before Uber, no one could even think about riding in a stranger’s car. Uber saw a unique opportunity.
7. The distribution question: Do you have a way to create and deliver your product?
Without a distribution plan, you’ll have to rely on a third-party service to fulfill your orders. And that can slow you down. See Tesla’s distribution example below.
Tesla answers all 7 questions.
Tesla’s example
1. The engineering question: Can you create breakthrough technology instead of relying on a formula?
Tesla’s technology is so good that other big car companies are using it. Daimler uses Tesla’s battery packs; Mercedes utilizes Tesla’s power terrain, and Toyota uses Tesla motors. In addition, Tesla is always working on something; there’s always new technology for upgrades.
2. The timing question: Is the time right to start the business?
In 2010, when Solyndra was still intact, Tesla managed to secure $465 million in funding from the U.S. Department of Energy. A half-a-billion dollar subsidy would become unthinkable after Solyndra’s collapse, and Tesla saw the opportunity at the right time. Without the funding, the company would be far from where it is today.
3. The monopoly question: Are you starting with a subset of a big market?
Tesla started with a submarket of high-end sports cars and expanded into a less expensive model S. Tesla only sold 3,000 units, but considering that they each were priced at $109,000, the company made considerable profits. After dominating the high-end user base, Tesla entered the sedan market.
4. The people question: Do you have the right team?
Elon Musk told his team, “If you are choosing to be at Tesla, you are choosing to be at the equivalent of special forces.” Which means his team has to be the best of the best. And given the progress Elon’s companies have made, there’s no doubt that his team is the equivalent of special forces.
5. The durability question: Will your market position be defensible in 20 years?
Elon Musk has built a solid reputation over the years. People trust him. Unlike other car companies, he is still attached to the company, which strengthens the brand’s value. Additionally, Leonardo Dicaprio and many other stars ditched their expensive luxury cars for Tesla Roadster, which further strengthens the brand’s durability.
6. The secret question: Have you identified a unique opportunity?
Tesla knows that people want to look cool while at the same time they want to stand up for the environment. So building cool electric cars with superb technology gives Tesla an edge over other car companies.
7. The distribution question: Do you have a way to create and deliver your product?
Unlike Ford and Hyundai, Tesla owns its entire distribution chain. The company not only creates its own technologies but also sells them in its own stores.
How to protect a monopoly?
Once you have worked hard to create a valuable company, it’s time to figure out how to protect it. The author lists three main ways to protect a monopoly business:
- Networking effects: High traction and constant signups are pivotal to maintaining a monopoly. Companies like Facebook and Twitter have high traction and engagement that keep them thriving.
- Branding: Create brand awareness through distinct branding. Branding helps your customers remember your brand and helps them recognize your products, which saves promotional costs in the long run. (But remember, branding doesn’t work without a good product or it’s underlying technology.)
- Economies of scale: Gain cost advantage by increasing your output. Reduce logistics costs, buy in bulk, spread risk, and reduce promotional costs to achieve economies of scale. Tesla is constantly upgrading its production processes to reduce costs.
Final words
It takes a lot to build a valuable company. But anybody can do it if they choose definite optimism, which hinges upon long-term vision and planing. Don’t leave anything to chance. Plan ahead and shape the way you want things to be. And most importantly, be consistent, and you will eventually build something great.
I recently shared a post on how Nike stays on top of its game by simply staying consistent. Check that out too, and let me know in the comment section about your own experiences with building a valuable company.