The downside of seeking the wrong type of competition

• News story: (1) Digs raises $7M for its collaboration platform for home builders, (2) How Microsoft Catapulted to $3 Trillion on the Back of AI

• Resources: Web design

• StratupAI Generated Idea: AI-Powered Personalized Language Learning Platform

• The downside of seeking the wrong type of competition

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Digs raises $7M for its collaboration platform for home builders (Techcrunch)

According to TechCrunch they focus on, “helping builders, vendors and homeowners share documents, using AI and computer vision to help them better understand those documents. At the core of that is a modern real-time collaboration platform and document storage service.”

How Microsoft Catapulted to $3 Trillion on the Back of AI (WSJ)

The WSJ article discusses the current and future prospects of Microsoft given the at present close relationship with OpenAI.

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The downside of seeking the wrong type of competition

Peter Thiel, co-founder of Paypal and author of the successful startup book Zero to One, gave a 50-minute talk at Stanford in 2014 on the topic of competition. It's available on YouTube.

The crux of Thiels' talk stems from the observation that “the most important business idea that people don’t understand is that there are either perfectly competitive companies, or monopolistic companies, with little in between.”

Since this is usually not our perception, as Thiel notes, he explains it by saying the incentive of these companies is to craft an outwardly projecting narrative that moves their appearance closer to the mean than where they really are. 

According to the Department of Justice (DOJ), “It's illegal to monopolize or conspire to monopolize a market for products and services.” According to the FTC, “obtaining a monopoly by superior products, innovation, or business acumen is legal; however, the same result achieved by exclusionary or predatory acts may raise antitrust concerns.”

This means that somewhat monopolistic companies will have an incentive to argue they are not that big relative to the total market, and companies in competitive industries are “tempted to say they are doing something unique.”

He addresses a couple well known examples, such as restaurants being highly competitive. For search engines, Google had a 66% market share per the data he presented in 2014. 

One of Warren Buffett's more subpar investments was a textile manufacturer, which is where the name Berkshire Hathaway comes from. 

Thiel says that despite the growth of the textiles industry in the 19th and 20th centuries, the competitive nature of the industry meant any individual company didn’t really have a moat. It was more or less a commodity. When the growth of textile manufacturing at scale occurred in countries with cheaper labor it spelled more trouble for American textile companies.

Since Buffett is focused on profits for the long term, he focuses on companies with moats, or somewhat monopolistic companies, such as a city with one newspaper. 

To build a profitable business Thiel argues one should begin by target smaller markets. For example, Amazon began as an online bookstore and PayPal began by addressing the needs of a specific type of customer. 

The key characteristics of a monopolistic company that he addresses are (1) proprietary technology (2) network effects, (3) economies of scale, and (4) branding. 

Theil states that “everything in tech only happens once”, and gives the example that the next Bill Gates probably won’t be creating an operating system.

Creating solutions

For companies that come to be large, profitable, and successful in the long term, their service tends to be more of a “quantum leap”. Instead of doing “massive surveys’, it is sometimes more about ‘figuring it out ourselves’ he says.

This reminds me of a quote often attributed to Henry Ford which is usually raised in this context. A Harvard Business Review article covers this.

This does not preclude the importance of talking to future customers, but it is something to think about, depending on what one might be working on.

The problem is false signals, and overvaluing or misusing the opinions of the crowd. He says this is more of a problem with some extrovert-type people, and contrasts that to the founders of some successful companies who were less influenced by what other people said, in part because of their innate personality type. 

That’s all for today, thanks for reading. See you on Tuesday.

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