If you look at any growth chart, there’s always a tendency to smooth the curve out. However, I think growth in any area is instead marked by long period of relative stasis or slow growth and then short bursts of rapid growth.
Depending on the field you’re talking about these short periods go by different names but they almost always result from some sort of fundamental paradigm shift.
I’ve explored the concept of table selection in business before but it’s something that I consistently find myself coming back to.
While I think it’s absolutely the case that you have to put in a lot of work to see the opportunities present and the tables that are available, you always get the most leverage by moving to a better table sooner rather than later.
I believer there are two reasons for this.
One is that you only get so many shots. Let’s say it takes 5 years to build a business and you’ve got 50 good working years in you. That means you get 10 shots at most so the longer you spend working on smaller opportunities, the less time you have to work on bigger ones.
The other is that it’s not really that I’m not sure that it’s much harder to build a 100 million dollar business or a billion dollar business than a 5 or 10 million dollar one. This may or may not be true. Based on my limited anecdotal observations and taking Mark Cuban at his word – it seems to be true. The problem it seems isn’t setting big goals and missing them, it’s setting small ones and achieving them.
This is something I talk to Ian about fairly frequently.
I’ve heard Terry Lin, Edmund John and Peter Keller talk about table selection in starting businesses and I’ve gradually put together my own list of criteria for businesses that I’d be interested in starting.
I’ve left out criteria for a lot of smaller opportunities that are relatively safe business ideas with low upside like building websites for SMBs and also opportunities which have extremely high upside but extremely low chances of success like starting the next Facebook.
I don’t believe these criteria area are small though, I think these types of companies can easily be $100 million+.
Disclaimer: This list is far from comprehensive and I’m speaking pretty much 100% from conjecture with a fraction of a percent at best from anecdotal observation and experience. In 5 years I expect this post will look nieve, but I’m interested in the thoughts and experiences of people with more experience and I think it’s an interesting thought experiment to make a checklist of ideal business and market conditions.
To the extent that it’s possible, you want to minimize the level of competition in the marketplace. I think one opportunity in building these kinds of businesses is that a lot of people that are capable of building them don’t just because they seem scary and they aren’t thinking big enough or they simple don’t want to for lifestyle reasons.
You don’t want to start a bar or a cafe since everyone is sitting around in their house wanting to start a bar or a cafe – there’s a huge pool of dumb competitors. While you certainly want to be able to build the highest quality team in the market, you don’t want a LOT of other competitors because statistically some of them are bound to get lucky.
This is one of the problems of social network or other “sexy” tech start-ups. It’s perceived as cool and so the marketplace is flooded.
The same thing happened to poker in the mid 2000′s. Poker Pros hate when they play with a bunch of amateurs. Even though all the pros are much better than the amateurs, a bunch of pros always get knocked out at the World Series of Poker because, statistically, there are just so many amateurs and some of them are bound to get lucky and get dealt good cards.
High Perceived Barrier to Entry
I was talking to Jono Slade about this on Thursday as it relates to sales channels. The disadvantage of businesses built on face-to-face or inside sales is that it’s very hard to scale profitably without a high LTV and a very large market. It also tends to be a much longer process from what I can tell. There are however hosts of examples of companies that have done this successfully (see Salesforce).
The upside though is that it’s hard freaking work and most people won’t do it. The barrier to entry to starting a blog with a buy now button is near 0 and a lot of people know it. It’s not actually that much harder to pick up the phone, but it feels harder and scarier so a lot of people still aren’t willing to get on the phone or pound pavement.
An Opaque, Confusing Market
The more opaque the market, the more primed it is for disruption and the less competition there is. If the market is extremely transparent then there is likely already a lot of competition and less upside.
A friend remarked to me after botching got on CNN that it was too late to get in. I don’t know if that’s true or not but he doesn’t seem to have missed the mark by much. As soon as people think they understand the market, it gets a lot more crowded.
The best analogy I heard was from a guy running a startup that he always looked for opportunities to “run uphill.” If you’re smaller and leaner then you can run uphill faster. Incumbents in the market lack the organizational flexibility to run uphill often because of organizational stasis and new players often won’t do it simply because it’s hard and confusing.
Another obviously example of this is manufacturing overseas vs drop shipping. It’s a lot easier to figure out how to call up distributors and set up drop shipping arrangements than it is to get on a plane to Shenzen.
Market opacity can also let you optimize for growth potentially since most opaque markets have offline distribution and if you can move the distribution online then your acquisition cost can potentially drop dramatically - letting you become more profitable and can grow faster.
High Growth Opportunity
Rising Tide Markets
If you enter a market that’s growing rapidly, then it’s a lot easier to grow. You can maintain market share and still grow very fast.
I have friends in the Crossfit and Paleo markets that are doing well just because those markets are growing so quickly that supply can’t keep up with demand.
The tide doesn’t necessarily have to be the market, it can also be the marketplace. For example, selling on Amazon or mobile applications are good opportunities in a lot of different verticals.
A Sustainable Competitive Advantage of Price, Speed, Quality and/or Relationships.
I was talking to Steven Moody about this last week. He pointed out that the secret to Chet Holmes Ultimate Sales Machine is that he was able to increase sales at companies w/o actually improving speed, quality or relationships. They were all essentially commodity businesses that he grew through the hidden 4th factor – relationships.
However, relationships can’t build huge businesses because you’ve got to build them one at a time. Relationships only scale if you can do it via the internet as a distribution channel. Blogging, podcasting and online publishing in general let you build relationships at scale. Have you ever met someone whose podcast or blog you’ve read for a long time and treated them like an old friend even though they’ve never talked to you before?
As trust and attention grow scarcer and the ability to create products becomes easier – publishers will gain more and more leverage over producers.
This is what JackThreads, an ecommerce plaform selling excess men’s apparel inventory, did by partnering with Thrillist, an online publishing platform targeted at the same demographic.. They leveraged a publishing platform to build relationships at scale by using the internet as a distribution channel and the power of tribes. That partnership took them from a $1.5 million to a $50 million business in 2 years.
Price and Speed
Price can be dramatically dropped by leveraging technology. Moving from self-hosted to cloud hosted software and data storage has been a revolution for small and medium sized business. A small business owner has access to tools now that they couldn’t even come close to affording 10 years ago because of SaaS and cloud services.
Speed is the same way. Improving technological infrastructure makes things faster. We often get people that complain about 2 or 3 week lead times because everyone is so used to Amazon and the infrastructure they have built to get products anywhere in the world in 2 days.
Quality is probably more under company control than anything else, though existing technology still plays a major role. Leveraging existing expertise like design or industry knowledge to build a substantially better product can give you an advantage, but it has to be substantial if you’re going to get people to move from an existing solution.
Since all 4 of these differentiators are largely based on technology – I suspect the best criteria to look at is what technology has changed recently that would let you dramatically change the price, speed, or quality of an existing product in a market.
If you’re going to grow fast, you have to be able to fulfill fast.
If you’re relying on physical products then you need a big enough cash reserve or credit line to avoid cash flow issues. Usually this means you have to have venture funding like companies like Digital Ocean, an SSD-based cloud provider that just raised $37.2m from Andreessen Horowitz and is growing like crazy, or just have a ton of money you’re willing to put in personally like Elon Musk.
Digital products are more appealing because there’s not the same cash flow issues. If you’ve designed a piece of software, then you can turn around and sell as many copies as you want since there’s no inventory cost.
If you have an inventory business then it’s a lot harder because cash flow and inventory. However, inventory businesses are also harder to get into because of capital requirements which raises the perceived barrier to entry. That’s why you see so much competition in drop shipping and still not nearly as much in manufacturing.
Scalable Marketing and Distribution
The internet. The internet. The internet. The internet has revolutionized our ability to scale distribution because it’s dramatically dropped the customer acquisition cost by letting one talk to many – blogs, podcasting, online publishing in general.
You can still scale using more traditional methods like cold-calling as long as the biz model allows for it (again, see SalesForce). However, I think this will be less and less the case.
The internet is making markets more and more transparent. If you can leverage the one to many power of online publishing, then you can distribute much faster and you can reduce the price to the end user.
If a company has to have an inside sales team to sell their products or go through a layer of distributors, they have to build that into the pricing. If they can just write a blog post once a week, then all of a sudden their overhead goes way down and they can gain a sustainable competitive advantage on price without sacrificing speed or quality.
High Profitability and Long-Term Upside
Stay out of commodity products.
This is the probably the most obvious. If you’re trying to win big then the pie has to be big enough to facilitate that. This doesn’t necessarily you have to start in a big market though. In fact it makes much more sense to start in a narrow market -either geographic or by industry - to gain early traction then expand into other markets.
Campaign Monitor did this by starting as email marketing exclusively for designers but now services a much broader market
Solves a Major Pain Point Close to the Money
My main project right now, Valet Up, is revenue control software. The beautiful thing about revenue control software is that once people recognize they’re literally leaking revenue, they’re very motivated to stop the leaking.
The sales cycle gets shorter. While this eliminates opportunities like building the next Facebook, it assures at least some measure of success if it’s well executed.
Builds on Core Competencies
This one isn’t totally necessary, but it’s a much longer road to hoe if you pass it over.
If you already have an inventory business with a warehouse, customer service team, sales team, etc. then it’s a lot easier to start another inventory business because you can leverage existing resources.
Not the case if you move into a separate model such as software - however this might still make sense in the long run, but it’s certainly a longer term play.
The Mythical Perfect Business
So the optimal situation is one where you enter a large, opaque, un-sexy market with a high perceived barrier to entry that can be disrupted by a high margin product leveraging recent technological advances solving a pain point close to the money and that can be distributed and fulfilled at scale. Ideally, it would also build on you or your teams existing core competencies.
The problem of course is that this business opportunity almost certainly doesn’t exist. There’s always a tradeoff like holding inventory (ostensibly bad) increases the perceived barrier to entry (ostensibly good).