The Perfect Business (2014) [pdf]
beterinbeleggen.nl
beterinbeleggen.nl
Start with a counterfactual with nobody in the market, run the numbers on what it would look like if it were true, and then manage the demand to fullfill it. Politicians are similar. They manage donors off voters, where their real promises are to the donors, and the story and hope is what they sell to voters. Makers make, but managers manage, and I don't think most of us on the maker side really have an apprehension of what managing actually is.
Really excellent read. Very amusing to see his analysis of Apple and Microsoft, which seemed basically accurate until the iPhone came out.
For point (6) about the capital, an argument can be made that large amounts of capital aren't necessarily bad. They can also lead to massive moats. Many great companies boil down to being able to significantly reduce costs over time. For example, Carnegie and Frick invested heavily in capital expenditures so that they could reduce costs over time. Once this happened, they could outprice the competitors leading to more money for Carnegie and Frick which lead to them being able to reduce costs further. A similar example nowadays is TSMC. They spend 36B on CAPEX in 2022.
Otherwise, if your business relies on scraping other peoples data and then presenting a nice UI around that, it could just as easily be replicated by others (no moat, as we're saying nowadays).
Of course, much like the niche chemical salesman, maybe the ideal scraping business would be to find such a niche that is small enough that other people wouldn't find it worthwhile to replicate your SaaS.
And even behind a login can still be scraped. (The proverbial "If I can do it anyone can" applies here along with "where there is a will there's a way")
The principle is excellent, but the concept of protecting your product with patents is entirely invalid since about 2001 when China was admitted into the WTO. I have personal knowledge of several, and I can't count the number of times I've read about businesses ruined or seriously damaged by China pumping out knockoffs, sometimes literally faster than the original product gets to market.
The concepts of quality and respecting intellectual property are literally foreign concepts to the Chinese.
It is quite simple: if your idea can be easily copied, the Chinese will do it very quickly. Your "valuable" set of patents is merely a ticket to a series of lawsuits, which China will ignore, and the business, even if you get a judgement years in the future, will simply dissolve and re-organize.
So, any idea that is protected by IP laws but merely injection-molded in plastic is, in a very real sense equivalent to public domain (regardless of your patent status). If you have a more complex (e.g., machined or chemically complex) product, do NOT have it manufactured in China, as you'll soon find copies sold out the back door and competitors setup selling your design even if you can stop the leaks.
To have the moat described in #3, you need some 'secret sauce', and you need to keep it secret.
But:
First, it is very hard to get an early preliminary injunction to halt sales, so they keep selling against you the whole time.
Second, the costs of pursuing a federal lawsuit are huge (typically six-figures+), it takes years to get to a judgement, and the result may be a pyrrhic victory where you are awarded damages and a cease-&-desist on a company that simply goes bankrupt and reorganizes under some other corp. entity.
Sure, if they got into a major US retailer instead of you, you might get something, but then you are still going up against not only the competitor's attnys but also the major retailers, so probably add a zero to the left of the decimal in your legal costs.
IOW, they still stole your IP, undermined your market, made money off of it, and suffered minimal penalties for doing so.
We should also notice that SpaceX explicitly stated that they are going the trade secret route vs patents, and said that patents would simply be treated by the Chinese like an instruction manual, and they could never stop them or recover anything.
As a lawyer who has founded a law firm, it's possible to qualify for all criteria, even item 12, which can be addressed by the founder knowing how to decouple the founder's personal labor inputs (e.g., time) from the firm's revenue and profit performance.
EDIT: not that it can't be a great business, it just "only" scores 10 out of 12 haha.
1. Selling the world: Kind of depends what is meant by selling the world. It is very difficult for a single law firm to provide local legal advice in many jurisdictions. A small number of law firms have global reach, but many of those operate franchise models and none of them, to my knowledge, are truly global (operating in every jurisdiction or even the large majority of jurisdictions). On the other hand, if we are talking about, for example, an English law firm providing English legal advice to clients throughout the world, then yes, that is possible.
3. Minimal labour requirements: I don't think this applies to corporate law firms. Transactional and litigation work is labour-intensive. Advisory work too, to a lesser extent. You can see that play out the last few years where the large corporate firms in New York and London are paying huge salaries to get bodies in the door, while associates were getting burned out from the insane hours demanded of them.
4. Low overhead: This specifically includes "high-priced employees" as an example and I think that would include lawyers.
7. Cash billings: In theory this should apply to law firms. In practice, in my experience, it is more complicated, with lawyers often getting paid only at the end of big deals or cases or offering contingent fees, etc.
8. Free of regulation: Definitely not true for law firms.
9. Portable or easily moveable: Also not true.
It's hardly the best business ever though. Dropshipping only works well in a low-competition world, but since its barrier to entry is so low (all you need is an instagram account) you can be assured that competition will pop up very quickly and all your profit will be competed away.
- minimizing risk
- maximizing profit
- making as much money as possible
Up until the 80s, capitalism would optimize for this result with businesses that still somehow benefited society in one way or another. Once the computer revolution made it possible to operate at a higher abstrac level, especially on financial markets, the optimization game has become a many-times derivative of the basic needs of functioning societies.
Today the perfect business responding to those tenets is very much a business that could potentially be detrimental or world-ending for society, especially with the advent of AI. In some ways, the pesky humans are an annoying hindrance in the process of extreme optimization.
We still look at this maximization problems with the frameworks and cultural upbringing we solidified with pre-internet-revolution capitalism, with the winners dwelling on their survival bias, and the losers being pushed further down, inequalities growing rampant, and societal fabric being sacrificed at the altar of capitalist absolutism.
This warrants emphasis, as this is the logical outcome of how the socioeconomic systems are nowadays. "Evil people conspiring together" are absolutely not necessary. And equally no amount of "good people" will remove that end condition.
About Best Parents
1. It sells the world - we have customers from over 30 countries now
2. Demand is inelastic - families are always going to seek out programs for their kids abroad / away from home
3. Cannot easily be substituted or copied - the suppliers have to trust you, that trust has to be earned over years
4. Minimal labor requirements - our website is automatically translated into 4 languages with AI
5. Enjoys low overhead
6. Does not need big cash outlays
7. Cash billing - we have a 6 month billing cycle, we hold all the cash
8. Relatively free of regulation - also common sense prevails
9. Portable / easily moveable - we live in SF but have spent 3 or 4 months travelling this year
10.Loads of fun intellectually - thinking about how AI can guide teenagers to better and more diverse experiences, teach them and their families how to appreciate and contextualize those experiences, teach suppliers what to offer and how to improve their offerings ... v fulfilling. Feels like the real future of education
11.Leaves me with some free time now, prospectively lots later. Still just our startup's second year in sales, my first year full-time, lots of product to build
12.Income is not limited by personal output
What I was surprised by was how little VCs in general seemed to respect my reasoning. I had not been anticipating that kind of a tepid reaction. There's a lesson I learned here - that the businesses VCs are generally looking for are far from the ones entrepreneurs logically probably want to consider. I believe that after the popping of the crypto bubble the whole ecosystem as it recovers will wend its way back to a more balanced, forward looking place where enriching the lives of children and helping families overcome their generational trauma by joining an international parenting community is seen plainly by many as exactly what it is - world-changing and relevant.
Another thing I did come to realize was just how sweet a business B2B SaaS and Enterprise SaaS really is. Wow. It's a money printing machine, makes marketplaces look relatively paltry even though eBay was "The Perfect Store" like the book @Animats cited. Oh well, at the end of the day the business has to satisfy your intellectual and emotional needs for you (i.e. me) to give it that 150%. And this one's a winner with 20%ish gross margin and really decent basket sizes.
Now we're more looking into nondilutive funding and our lines of credit are burgeoning so it's possible VC won't be needed altogether. Not ready to close the door yet though, especially to the most selective programs and institutions both now and down the line. If we got into YC we would definitely accept, or even some other selective program like NFX FAST we would definitely consider very seriously.
What I meant was that when going out for fundraising in Silicon Valley your financial model is often compared to that of a B2B SaaS as they are both asset-light web software companies. Having studied those, I now realize why investors are so gung ho on B2B SaaS. The relative predictability of success, high profit margins, stickiness and network effects are quite simply hard to beat.