by Manuel Stagars, CFA, CAIA, ERP
Most entrepreneurs say money is not a motivation for them. If believe this is true. Financial reward alone is not sufficient to instill in you the entrepreneurial fire that will push you forward in rough times. A paycheck will motivate you enough to complete a certain task and then leave the office at five o’clock, but you will not compete on a global scale this way. At the same time, it would not hurt if one’s entrepreneurial efforts paid off as well. If you have been working one-hundred-hour weeks for several years without much to show for it, you will undoubtedly ask yourself if this is worth doing. If you have a PhD, you will wonder whether your friends who took a cushy job at a university or consultancy did not make the better choice. In such cases, you may briefly think of other entrepreneurs for whom such toil paid off handsomely. The prime example is Mark Zuckerberg, now worth about twenty-eight billion dollars. Many others exist, not only in the tech space. How did they get there? Which forces did they leverage to attract such massive wealth? Here is an attempt at an explanation.
Overcome Social Norms
Mark Zuckerberg earned three billion dollars on average each year over the last ten years. Is this possible by playing nice, obeying all the rules, and making many friends along the way? Author Martin Fridson finds the two primary obstacles to amassing a billion-dollar fortune are the menace of competition and the obstacle of social conventions. To enter the billion-dollar club entrepreneurs must overcome market forces and conventional wisdom. Walmart founder Sam Walton violated the age-old convention of cordial relationships with sellers. He went around the wholesalers and bought directly from manufacturers. Not only this, Walton publicly stated that he stole all of his good ideas from competitors. He broke the social norms expected of a business person and Walmart pulled away from the pack.
Conventions come in many forms. They almost brand becoming wealthy as a crime. Ask anyone if they believe that it is ethical to travel by private jet. They may find this is snobbish and wasteful, which is the expected answer that most people will be comfortable with. But being compatible with the majority is not going to help you if your goal is a billion-dollar company. You will never be able to attract this kind of money with conventional wisdom. This is not a value judgment about people’s personal opinions, just a simple statement of the mindset needed to earn a massive fortune.
Do Something Old and Do It Better
Many startup entrepreneurs think they have to do something no one else has ever done before. They believe that success comes down to creating an entirely new product that serves a new market. Coming up with a disruptive invention may be one path to a billion-dollar company. But Twitter founder Evan Williams disagrees. He believes that success comes down to fulfilling age-old needs, simply in a better way. In a speech he mentioned the example of car sharing service Uber, valued at eighteen billion dollars at the time of this writing. The need to get from A to B is by no means original, yet the popular app manages to connect passengers and drivers in a more effective way. Compared to hailing a cab in the old-fashioned way Uber took out several steps in the process and streamlined the experience. In Williams’ view, the Internet is just a machine that gives people what they want. It is not a utopian world, simply a tool to do old in a things better way.
Create Frictionless Markets
Software, technology, and automation have removed much friction from processes that were previously cumbersome. Authors Eric Brynjolffson and Andrew McAfee find that the most radical progress in robotics and 3D printing happened in the last few years, after a frustratingly long period of slow development. The advances are opening the door to near-frictionless markets in various applications that were previously safe from automation. The authors point towards middle-class jobs like medical diagnostics and low-skilled manual labor like picking fruit, which computers and robots could automate away soon. Technology reduces inefficiencies, cost, and increases transparency. The same goes for the rapid digitization that is taking place today. Sharing digital files is much easier than distributing physical product. This happens online, where file sharing disrupted the music industry to the core. The communication industry also took a hit: Worldwide video conferencing is now freely available to anyone through Skype. When technology takes over, network effects kick and the change speeds up even more. This allows the newly emerging frictionless market to produce more profits than the market it replaced.
If your company replaces established processes with new technology, it could potentially earn billion dollar revenues. Timing is obviously crucial, as the old market may be too powerful to suppress the new technology, or people are not ready to give up their established habits just yet. The technology may also still be on the flat part of the curve, not ready to deliver the promised gains in efficiency yet. But when you hit the right entry point to launch a disruptive product in the market, just where the exponential curve takes off, then chances are high you will succeed. To hit this ideal entry point, it probably more an art than a science, and it is again easy to spot in hindsight.
Ride the Market Expansion in a Subsector
Addressing an existing market and riding its current growth rate will not make you a billion dollars over night. It may allow your company to become profitable over a long period of time. Yet unconventional returns need massive leverage. So what is there to be done? Author and venture capitalist Damir Perge reminds us that in certain subsectors of an existing market, the rate of change will be much higher than in the main market. If you catch the right entry point, your company can surf a large expansion of that subsector, which happens very quickly. Compare the social media sector with the mobile social media sector, which has witnessed an explosion in the past two years. Social media still grew rapidly, but the newly emerging subsector grew much faster. An example for this is the mobile social messaging app WhatsApp, which Facebook bought in 2012 for $19 billion in cash and stock. Tesla Motors is another example. Becoming an innovator in the hybrid automobile sector, a subsector of the automobile industry, the company went public and now has a market cap of over $28 billion (Q2, 2014). Riding the market expansion in a subsector looks something like this:
If your product exists in an established market, yet serves a newly emerging subcategory of the existing base of customers, then explosive growth is possible. This is incredibly hard to engineer and plan, but always easy to explain in retrospect. One thing is certain though: If find out that your product serves a declining established market, then the chance for explosive growth is small.
Take Advantage of Disruption
A common case of market disruption takes place when governments privatize certain sectors. After the Cold War, the energy industry in Russia underwent rapid privatization, in the process minting many billionaires. Legitimate or not, the privatization process explains how immense wealth can flow to one single person. Whenever a legacy market becomes stale and inefficient, after a sustained decline in profitability, new players come in through deregulation or privatization. These new players introduce free market thinking into the former state-owned enterprise and bring it back up to speed. The following recovery of the market is profitable. Market A in the graph below serves as an example.
A crash is another example of market disruption (market B). Prominent market crashes occurred with beginning of the Great Depression in 1929, the Asian financial crisis in 1997, and the global financial crisis in 2007/8. In a market crash, a fire-sale of distressed assets takes place. Newly available assets often look unattractive at first sight, as they are either run down, deep in debt, or otherwise considered worthless. However, what could possibly be easier than buying an asset that nobody wants, and later selling it when everybody is clamoring for it? This is not to suggest that the disruption scheme always ends in billion-dollar success. However, it is a mechanism that has enough leverage to enable it. Anyone with sufficient courage and liquid funds can potentially buy low and sell high when a market crash occurs. If they pick the right assets and play it smart they make headlines and the Forbes list a few years later.
These concepts just begin the explain some of the mechanics that underlie billionaire wealth. It already has become obvious, that becoming a billionaire is no small feat. By just looking at the examples above it is apparent there is much more to it than working hard and paying your dues. Most of all, achieving massive success will force you to become extreme individual. A group thinker has never achieved great wealth. Nor has someone too concerned with what others are thinking about him or her. Making up your mind to become successful and super rich subordinates all else. Whether this is advisable is another question. It needs an intense focus that will dominate not only your work but your entire life. This will inevitably alienate some of your old friends, and will make you a target for much envy and ridicule. Until, of course, you have achieved your goal.