If you have demand (aka, product market fit) the rest is are optimization problems. When you look at someone like Musk who is in multiple businesses, he's essentially the head of a private equity firm that manages products. He bets that certain unsolved problems are composed of solved ones, and where they aren't, it's a hack or an minor breakthrough away. Every breakthrough has non-linear effects, so it's a smart way to take risks.
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.
It's striking how much modern software development can match this theoretical ideal business, even though SaaS hadn't really taken off when he wrote this.
Really excellent read. Very amusing to see his analysis of Apple and Microsoft, which seemed basically accurate until the iPhone came out.
Agreed, but also don't underestimate Coca-Cola, McDonalds, or Starbucks. McDonalds for example, is mostly a real estate company which franchises the McDonalds brand, infrastructure, and IP. So, they (1) sell the world, (2) have relatively inelastic demand, (3) cannot be easily substituted due to their brand value, (4) requires minimal labor since you can ignore the employees at the franchises, (5) has low overhead, and (7) enjoys cash billings.
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.
True, it only misses to meet number 3 (it's easily copied and just getting cheaper to build software as technology advances).
I think the document also misses to mention saturation of the market, which software is also very saturated and this makes it hard for new businesses to get going...
The only thing I can think of that would prevent easy copying in the SaaS world would be to have most or all of your data generated by users, and then doggedly protecting that data from scraping, and/or hiding it behind a login.
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.
>> protecting that data from scraping, and/or hiding it behind a login
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")
He mentions that the original version is from the 1970s, and he added to it over time. So the original sensibility is pre-PC, but yeah SaaS would have been around by this last edit.
>>(3) The ideal business sells a product which cannot be easily substituted or copied. This means that the product is an original or at least it's something that can be copyrighted or patented.
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.
Even if you can't sue Chinese manufacturers violating patents, very few products are bought directly from China then shipped to the USA. There are USA middlemen and retailers involved. Why couldn't a patent holder go after the USA middlemen in court?
Sure, you can probably go after them for the US part of your market.
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.
Professional service organizations with cross-border capabilities can qualify for this.
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.
I'm not sure if this is true, at least for corporate law firms.
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.
I would think professional services organisations fall somewhat flat on points 3 and 4? The product of a law firm does not seem immune to being copied and it does not have minimal labor requirements. Taking on twice as many cases needs almost twice as many people, no?
EDIT: not that it can't be a great business, it just "only" scores 10 out of 12 haha.
By this metric, dropshipping is the best business ever then, and not just a zero-value-added activity for bropreneurs who are good at Instagram marketing.
Dropshippers are just outsourced marketeers for the producers of whatever it is they sell. There's nothing wrong with that, real world products in a competitive market benefit from being advertised and you might as well outsource that activity to people who are good at it (ie bropreneurs on instagram).
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.
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.
> the pesky humans are an annoying hindrance in the process of extreme optimization.
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.
The example is a chemical company, which still need a laboratory, some equipment and storage, and possibly some people (sellers) to keep the deals on with the other companies - I don't think other chemical companies will just click a button in a system, they will want to talk with a seller. Everyone here is reading with the lens of a software company, but I think rarely software fits 3 and 2.
I spent a long time thinking about business like this after a decade and a half of hard knocks in SaaS and marketplaces where I simply hadn't been thinking clearly at all. That's how we came up with Best Parents (www.bestparents.com) in 2020. It's the first marketplace for high-end, in person, short courses and travel experiences for teenagers worldwide. My wife has expertise in the education sales industry from Turkey and Europe, for me deciding to jump into this particular business with her involved reasoning from my first principles, which greatly overlapped with the ones presented here in this doc. So this post is my confirmation bias speaking!
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.
At the time, we didn't know where else to get $500K-$1.5M. Turns out $220K and some pain and hustling was enough. Thank God the fundamentals are really sound and upside is really there.
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.
Stability, runway, my father had a bankruptcy where he was accused of having his hand in customer funds. I strongly believe the right kind of partner can unlock incredible wealth in this case.
It's a B2C business with a B2B side (we also sell to schools and affiliate with SAT courses and college counselors).
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.
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.