How To Build A Startup Monopoly
It makes you a better entrepreneur. We preach it on the daily, and in doing so, we’re oft asked this question:
So what’s the best book I should read?
That’s a two part answer. The best startup business book of all time is The Lean Startup. If anyone says anything else, they’ve probably never read it, or have never built anything that can scale. But this essay isn’t about The Lean Startup, for its preachings permeate just about everything we have ever written. This essay is about a very different type of business book.
The second best startup book is Zero To One, by Peter Thiel. What follows a synopsis of its thesis, or better yet, our opinion of the four most important subsections of his thesis. So if you’re a Tulsa entrepreneur, or a Kansas City one…listen up!
Build A Monopoly
The word monopoly is a secretive dream of every capitalist. Admit it. It makes us think of the most iconic board game of all time; the one that simultaneously entertains, but also instills in each of us the concept of investments, patience, and a little bit of luck. But notice how we said it’s a “secretive dream” because technically they’re illegal. And even if they weren’t illegal, it’s borderline impossible to build one by the government’s definition. So when Thiel says that you should build a monopoly, he struck an instant chord in the business community. They all collectively rolled their eyes and scoffed at such a sentiment.
But let’s back-up and say that he’s not telling us to build some ‘Microsoft in the 90’s’ monopoly, but instead he’s using monopoly as a placeholder for alternative reasoning. We believe the world’s definition of a monopoly is a business that makes it impossible for other businesses to compete; and our opinion of Thiels definition is a business that is formed in a way where people simply aren’t competing. Not to dumb down the brilliant contention, but he’s speaking about the importance of differentiation and niching; at first, do something so specific that no one else is doing it, and then absolutely dominate it.
There are two main ways for which he says to do such a thing. The first is through radical niching. Take a giant market and break it down until it becomes a very small and winnable market, in a short amount of time.
An example. You want to build the next competitor to Uber. Start by only catering to Kansas City. Scratch that. Start by only catering to South Kansas City. Then pick an age group…let’s say the elderly. With those two simple differentiators it’s not out of the question to say that if you cater to that geographic region, and that age group, that within months you could be the leader of that hill. A couple well placed ads, a little press in 435 South magazine, some revenue shares with local assisted living homes, and some handicap accessible vans and boom! You’ve got a monopoly on your hands. Think about it…how could Uber compete with that level of specificity. They can’t…
INNOVATE In Orders Of Magnitude
The next step to building your monopoly is to build something that is 10X better (that he refers to often as “orders of magnitude”), relative to the value you provide, than whatever the pre-existing offering provides. So a single little feature that is better than your competition won’t be enough to make it a 10X innovation.
Examples: A “slightly cheaper” Uber, won’t work. An Uber with “slightly nicer drivers”, won’t work. An Uber that arrives “slightly faster”, won’t work. A “little better”, is not enough to get anyone to switch. It simply won’t be worth it to them.
There has to be something about the pre-existing offer that is not being accounted for at all. And in this cheesy example, it would probably be a fleet of cars that can accommodate for wheelchairs; or a tech system that works from text messages instead of an app (to account for a senior citizens understanding of technology). This offering is a lot better than Uber’s, and thus we could see a ton of people choosing it to get around versus a traditional cab, or an Uber.
GROW In Orders Of Magnitude
So now you’ve got a radical niche that is greatly innovating on the market’s pre-existing offering. Now you’ve got to start growing your monopoly. To do so, you start with one customer. From one customer you attempt to find ten customers. Once that’s been accomplished you fight for 100 customers. Then 1,000…and so on. These 10X growth strategies are important, and this is why: context.
If you set out to try and get 1,000 customers your first week, you’ll ask yourself how to do that. The only possible way to do such a thing is to buy radio ads, billboards, newspaper advertisements, etc. Essentially, a ton of very expensive stuff with no proof that what you’ve built is truly a 10X more valuable offering than whomever is currently at the top of the hill. But if instead you simply ask yourself how to get one customer, the answer is easier to come up with; more importantly, it’s easier to implement. Now you just have to search Craigslist until you find a guy that needs a ride. Or pick someone up that’s on the side of the road with a flat tire. Is this stuff gonna make you big bucks? No, absolutely not.
But once one customer is found, then go for ten. How do you get ten? Maybe some light Twitter advertising, maybe a partnership with a new assisted living home, etc. These things are harder than step one, but attainable nonetheless. Plus, when you go to do these things they’ll be easier given the fact that you’ve already had at least one customer. Once accomplished, reevaluate your strategy before you go for 100 people. Each time you seek another milestone farther down the growth chart, the answer for how you solve for that problem will be different. But the question will be asked under the right context – the attainable context.
Branch Out In Concentric Circles
So now you’ve got a monopoly. Albeit a small little monopoly; no one is contacting Obama to report an anti-trust violation, but a “monopoly” nonetheless. Yes, we get it. That still sounds silly. The word monopoly is hard for people to wrap their heads around. But let’s think about it, who is competing against you? Uber can’t keep up because they don’t have handicap vehicles. They also don’t “get” KC, or its citizens…especially the elderly. It’s also going to be hard to match your newly formed assisted living home partnerships. So Uber is done for – at least to seniors in Johnson County. The other taxi companies can’t compete for all the reasons that Uber blows them out of the water. When people think “modern senior taxi system in south Kansas City”….you’re winning.
But that’s not going to buy you a yacht.
Now it’s time to start branching out in concentric circles. It’s time to start finding drivers and customers in other areas around Kansas City, starting with the areas that touch the zip codes next to the ones that you have your monopoly in. The new zip codes that surround your monopoly are going to be easier to tackle than the first ones. The original work you did will have created enough momentum to get the next geographic ring around you to fall to the hands of your monopoly quicker/easier. Then, move on to the next ring. Then the next. Then the next. And so on – until you’re in China.
How About A Real Life Example
Let’s use Facebook. Who doesn’t like to talk about Facebook? This is a particularly relevant case study considering Thiel’s venture capital fund was Facebook’s first true outside investor. They did their first angel round of $500K which netted Thiel an ungodly profit.
First, they innovated something that was 10X better than whatever was available on the internet; which at the time, was MySpace.
Then, they niched so far down that it was easy to create a quick monopoly. They exclusively offered their product to students at Harvard. There was no competition for something like this exclusively to that group. They won that hill within weeks.
Next they started growing in concentric circles to other colleges around them that fit the same genetic makeup of Harvard. They kept iterating on their offering so as to continually strive for 10X better than other things; whilst keeping it exclusive to college students at selected universities.
They kept this up until it was available to every student in America. Keyword, ‘student’. By this time the rest of the world was salivating at getting on. When they finally opened the doors, Americans flooded the social network. Eventually the rest of the world followed suit. Never once would they have been considered ‘not a monopoly’ if the question was asked in the right context.
So hopefully this essay helped you calibrate how you think about building a startup, especially as a Kansas City or Tulsa Entrepreneur. Losing track of Zero To One’s thesis is essentially losing track of the context for which you need to frame your growth. Happy venturing!