There are a number of startups that I am working with that have the potential to become real monopolies. This blog post is for them
I think I have listened and read Peter Thiel‘s book Zero to One about a 100 times now. There are very few books that really impact you that way, especially as it relates to contrarian thinking. Startups are for contrarian thinkers: There is nothing fundamentally more counter culture than working with startups. I am not talking about those who are “Wantrepreneurs” i.e they are doing it because it is cool, but those of us who have a burning feeling inside us that just will not stop given what comes our way. There are a number of startups that I am working with that have the potential to become real monopolies. This blog post is for them. I decided that instead of referring to the book, I will just write it myself – a good way to see if I remember the book:
Building a Monopoly
Brand, scale, network effects, and technology in some combination define a monopoly; but to get them to work, you need to choose your market carefully and expand deliberately.
No brainer here, there is a reason that I live and work in Iceland – the market.
Start Small and Monopolize
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. Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one. If you think your initial market might be too big, it almost certainly is.
Iceland is a very small market; you can even say it is tiny. It is not bigger than a small city in terms of population. Two thirds of the population lives within 10 square kilometers and almost everyone is on Facebook. Do you think if you bring a technology or solution to this market you can dominate it? Absolutely. If you are a startup in Iceland, this should excite you. Come up with a clever way to dominate this market with a plan to expand globally.
Small doesn’t mean nonexistent. We made this mistake early on at PayPal. Our first product let people bean money to each other via Palm Pilots. It was interesting technology and no one else was doing it. However, the world’s millions of Palm Pilot users weren’t concentrated in a particular place, they had little in common, and they use their devices only episodically. Nobody needed our product, so we had no customers.
This is so easily verifiable in Iceland, I even advise founders to stop building and just make mockups using the Design Sprint methodology created by Google Ventures. Validate this without wasting time. As Peter says in the book, the Lean is a methodology and not an end in itself. A bold plan can still be validated in stages.
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. This is why it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market. In practice, a large market will either lack a good starting point or it will be open to competition, so it’s hard to even reach that 1%. And even if you do succeed in gaining a small foothold, you’ll have to be satisfied with keeping the lights on: cut-throat competition means your profits will be zero.
This is also true in Iceland. Once you get to a certain scale you need to make sure that you are not disrupting the existing ecosystem. When someone’s livelihood is threatened they become very vicious.
Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets.
Simple enough for a startup in Iceland to do. The other markets close to Iceland are the UK, Germany, Norway, Denmark, Sweden and Finland.
Sometimes there are hidden obstacles to scaling – a lesson that eBay has learned in recent years. Like all marketplaces, the auction marketplace lent itself to natural monopoly because buyers go where the sellers are and vice versa. But eBay found that the auction model works best for individually distinctive products like coins and stamps. It works less well for commodity products: people don’t want to bid on pencils or kleenex, so it’s more convenient just to buy them from Amazon. eBay is still a valuable monopoly; it’s just smaller than people in 2004 expected it to be.
This is so important, knowing what category your market logically lends to and how to capture it. The mistake I see many startups make is that they think just because it works for some market category that it should automatically work on others. Not true: You need to deliberately think, strategize and execute.
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.
Word! Nothing more I can say.
If you think of yourself as an insurgent battling dark forces, it’s easy to become unduly fixated on the obstacles in your path. But if you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create. 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.
I also believe if you try to improve on a product or service that already exists, then you will have a bias in your creative process. I believe it leads a race to the bottom.
As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.
The Last Will Be First
You’ve probably heard about “first mover advantage”: 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 flow 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 of 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. In this one particular at least, business is like chess. Grandmaster José Raúl Capablanca put it well: to succeed, “you must study the endgame before everything else.”
That is a great way to finish. End game matters, and thinking about the end game is recommended. I always encourage startup founders to think about the end game. It is a good thought experiment.
This post was originally published on Startup Iceland.
Featured Image Credit: Heisenberg Media / Flickr