I just finished reading Peter Thiel’s new book Zero to One. An easy read full of serious startup insights (worth the effort). But what I couldn’t help but thinking about was how similar it is to many other long standing business strategies. In fact, it reminded me the most Michael Porter’s Five Forces. But before we review these here’s my take on some of what Theil has put forward in his book in simple terms. All of which are spot on for startup entrepreneurs:
- Power and profit comes from being in monopoly positions.
- Monopolies start by occupying micro market segments first. Those often ignored by those chasing big markets.
- Creating new value is far more important than disrupting something. Chose the former first. It keeps you off the radar while the monopoly is built (It’s much like what we espouse at Pollenizer with the law of Focus).
And here is a reminder of the Five Forces first developed by Michael Porter:
- The bargaining power of the buyers?
- The bargaining power of suppliers?
- The threat of substitutes?
- The threat of new entrants?
- Competitive rivalry in the industry?
As soon as review this list we can see where any startups pain points can be, and we’ll have a clear understanding of what our monopoly potential is. In fact, the entire idea that Porter was trying to get across with his five forces, was ‘how attractive’ a company or industry might be to invest in. And if we overlay this with some of Theil’s ideas it is easy to see if what we are doing will result in an entirely new business model – taking the world from 0 to 1 as the title suggests, or whether we’ll be merely going from 1 to n – that is just building on something which already works.
Let’s start with the Buyers
If they have a lot of power, it points to a competitive industry. It usually results lots of choice, lower margins and profit being pushed down. If they buys have power, we can expect heavy price competition and switching.
What about the Suppliers?
How powerful are the people who provide the bits (virtual and physical) that go into your startup? Dopes your success or momentum depend on getting approval from some powerful player? If it does, then from day one we are at the mercy of others. Have a look at the now powerful startups you love, most of them didn’t need the tick for a third party. There was no permission required. Smart startups operate in a non permission environment, or at least don’t bother to ask before they start.
What about the threat of Substitutes?
How easy is what you’re making to copy? The reason popular social networks have power is because there are high switching costs. The reason a search engine has power is because other substitutes are not nearly as good. It pays to know which of these you’re aiming for. How invested will your users be if and when a substitute comes along? Or how willing will they be to substitute to you – Do you need the quantum of people or superior technology?
What is the threat of new Entrants & Competitive Rivalry?
If your startup is in a hot space, with low barriers to entry, you can be sure it will become a busy dance floor. IoT, 3D printing, Bitcoin startups, you name the latest trend and they’ll be a zillion other hopefuls rolling the dice. The more visible the space, the higher the threat of new entrants.
What does all this mean?
While we invent new words in startup land, the nature of business doesn’t really change that much. Thiel’s book was written in 2014 and Porters Five Forces came out in 1979 and the implications for profit and competition are no different.
This is also the type of things investors are considering, even if subconsciously, before they invest. But more importantly these are the type of concepts that dominate your thinking before you start and every time you pivot to find a business model that just might work.