How to Build the Next Trillion Dollar Company

2021-05-19

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How to Build the Next Trillion Dollar Company

Building mental frameworks from the basics

Musings of an MIT senior

Starting with the innovations of DARPA, Sun Microsystems, and Xerox PARC, computers and the internet have made the world improve by leaps and bounds over the past 70 years. What’s even crazier is that technology seems to be accelerating. Because we humans tend to isolate the past, present, and future as discrete periods, we sometimes struggle to understand ongoing change in the world around us. As a child, I remember hearing about Mark Zuckerberg and Bill Gates, two college dropouts who went on to create some of the most successful companies in the world. Then more groundbreaking entrepreneurs showed up. They came from all walks of life and created companies in any industry imaginable. They followed no pattern, they broke all the rules. I never thought it was possible for me to create any sort of company like these. I have since changed my mind. In fact, recent events have led me to believe that anyone could create a trillion dollar company. They just need to try hard enough in the right way.

If one systematically studies and categorizes business, art, technology, religion, philosophy as well as history, patterns and trends will emerge that will give us an ability to understand the next big thing.

Below are the themes that must be intensely studied in order to build the next $1 trillion company.

Everything has to do with two things, love and people.

Neither love nor people can exist without the other. These two terms are relatively abstract and delve deeply into topics of philosophy and religion. In order to be brief, in this article I will remain in the secular world and discuss solely the dynamics of technology and business. In a latter article, perhaps I will discuss what we can learn about business from religion and philosophy.

When we begin thinking about the most successful businesses there are two crucial themes and those two are customers and network effects. Everything revolves around these two themes.

Customers are always king

One trend that emerged when we consider entrepreneurs such as Sam Walton, Jeff Bezos, or Steve Jobs is that they obsessed over their customers. Sam once said that Walmart “will fail the day we forget to take care of our employees, who will then forget to take care of our customers.” The best businesses continue to be the ones that can consistently add value to customers.

This is a huge justification for capitalism. In a free market society, businesses are forced to add immense value to their customers in order to survive. As a result, the world sees an endless cycle of growth and improvement in the lives of people. If existing firms fail to serve their customers, competing firms will come in, add more value, and steal market share from the incumbent. Unfortunately, sometimes monopolies are formed and as a result the government needs to enforce anti-trust.

Prioritization of customers is extremely evident in the business models and ethos of Apple, Amazon, Tesla, Lululemon, Patagonia, Walmart, Costco, or any top business you can think of that has been around for a while. Here is how each of them fulfill their niche or “mini” monopoly.

Apple offers the best engineered products that have revolutionized our world. Amazon offers absolutely incredible selection and convenience. Tesla has a vibe similar to Apple of excellence in product and design. Aesthetics are extremely important for companies like them. Lululemon and Patagonia have sort of incredible brand ethos but also offer products that are very comfortable/warm/stylish and fulfill a deep need in their customers. Walmart offers incredible selection at dirt-cheap prices. Costco offers higher-end products in bulk. Retailers all have niches that are based off a thesis of how the world works. Sam Walton realized he could sell for less margins but higher volume and beat out incumbent retailers. Amazon took this idea of scale to an even greater level.

The best businesses love and satisfy a very simple and clearly defined need in their customers.

Network effects simulate and amplify the physical world with technology

Now, onto network effects. In the recent two decades, as outlined by most prominently NFX and Andreessen, network effects have created some of the most astounding companies in the history of capitalism. Facebook has an incredibly sticky user body. They acquired Instagram in fact for $1B when instagram had not a single dollar of revenue because of Instagram’s potential. They could see a future where Instagram takes over the monopoly that Facebook has. People love to ridicule WeWork. Adam Neumann had a vision that made rational sense for WeWork though. It just didn’t quite match up with the reality of their technology. Anyone could immediately see and understand what he was selling and trying to build. He got as far as he did due to his ability to sell an incredibly grand vision. Consistently, he told investors that they were building “the next Google”. We see this again to a different extent with Elizabeth Holmes and Theranos, another example of the power of vision and storytelling.

In terms of the famous Michael Porter’s five forces, the network effects of a marketplace have the ability to eliminate all five forces. These forces include threat of new entrants, threat of substitutes, bargaining power of customers, bargaining power of suppliers, as well as competitive rivalry. Network effects underlie the core offerings Facebook, Google, Twitter, Snapchat, Uber, Zillow, eBay, PayPal, Fiverr, Yelp, Costar, and Amazon. Tying in our concept of customers being the king of business, the core of Google is that they are the avenue for any businesses to attain customers. Across all industries, sizes, and sectors, Google is where you go to get customers. One can almost think of Google as a two-sided marketplace, with customers trying to find businesses and vice-versa.That’s the core of Google. A marketplace of customers and businesses. Many of its other offerings are SaaS such as Google Drive, Gmail, Maps (that are offered for free to consumers but paid for businesses) to increase reliance on their platform. When you realize this, Peter Thiel’s words come into play, you want “monopolies.” Google is honestly a completely free SaaS that operates a marketplace for all businesses and consumers of the world. In other words, there is immense power in offering SaaS. The free ones tend to do the best though :-). Once we think of Google as a SaaS product, you then can understand how and why their main income stream is advertising. Google is a SaaS that offers free services and as a result creates a marketplace.

SaaS is great. That’s what Salesforce is, that’s what Slack is, that’s what a bunch of very successful companies are. Once you’re on a software, you enter in your own data, you create protocol and systems (e.g. Salesforce ecosystem) that mire you deeper and deeper into their offering. I used to work at a company that used Microsoft access as our CRM. The version we had was from 2004 but we still used it because all of our data was already engrained into it and switching costs were way too high. SaaS is incredibly sticky. Unfortunately, Salesforce has already capitalized on the most important service for businesses around keeping track of customers. The only bigger service is getting customers. And Google is the top tech company that does that. The only companies that could win against Google or Salesforce will be a company that can either keep track or obtain customers for businesses better than them.

Salesforce supplies SaaS for managing and understanding customers, Google provides the ability to get customers. eBay, Fiverr, Yelp, and Amazon provide avenues to acquire customers as well. Google is the king of all the customer acquisition companies though.

Back to network effects. Amazon is an incredible firm, but why? And how incredible are they? The disadvantageous position they are in right now is that they need to compete on price with the likes of Costco, Walmart, BHPhotoVideo, BestBuy, Target, etc. This reduces their network effects severely. Jeff Bezos made a great move creating a marketplace where other parties could buy and sell, this is a prime example of a network effect that has the potential to capture an entire industry. Luckily for the consumer, Walmart and BHPhotoVideo and BestBuy had enough sense to revamp their online offerings are therefore force Amazon to match prices at retail prices. They sell with minimal margins, creating a ton of value for customers. They take Walmart in 1970s to a whole another level, perhaps cents on every sales but at a scale so large that Amazon may in fact make more money than anyone else. Competition has unfortunately lead Amazon to start selling their own products through Prime and shift away from the marketplace more. They didn’t create a marketplace soon enough. However, Bezos still went for another sticky mechanism of Prime that still works. Similarly to Costco, by selling a membership, the cost of membership can subsidize slightly cheaper prices for items and encourage repeat customer behavior.

Consumer brands don’t really matter. People are finicky. Look at the top clothing and electronics brands, they change often. People go to wherever they get the most value. Brands that last consistently either can consistently provide top-notch customer value (which is a forever changing mission and requires playing an infinite game) or create network effects that lock customers in.

AI/ML/Big Data is mostly bullshit. At MIT, we think mathematics and computer science will change the world. Maybe someday, but as of now, too many leaders continue to hail from Harvard/Princeton/Yale and have never studied engineering in their lives. Until that technology can clearly and immediately provide value to customers such as detecting cancer in a more effective and reliable fashion than doctors, it has no ability to create mega firms because good firms provide immense value to customers. Philosophy and religion proves the divine nature and infinite complexity of the human existence. Computers can never be self-aware or code themselves. That’s what will set humans forever apart from any machine. Still, every company will need talented engineers to build platforms.

There are at least 3 companies worth $100B at any given time that can be created by entrepreneurs

One of the most dangerous thoughts young aspiring entrepreneurs can have is that they’ve “missed the wave”. If the history of the world tells us nothing else, it should tell us that the world repeats itself. Nations fall and rise, generations fall and rise, markets fall and rise, and businesses most definitely fall and rise. The average length of time that a company remains in the Fortune 500 has shrunk from 61 years in 1958 to 18 years in 2016. You know what that means? There will be another Microsoft, Google, or Facebook. In a century, most of the companies that are around today will no longer be with us. Will the next trillion company sell operating systems, or be a search engine, or a social network? Most likely not.

The next trillion dollar company will be the company that changes the lives of people the most. There is no specific equation or formula that will lead us to the next breakthrough. The best we can do is seek to understand the world and the people who live in it through the lenses of history, art, religion, philosophy, and business. These categories have practically unlimited depth but as a result, unlimited potential. Only when we gain a better understanding of the world and the people who live in it, will we be divinely inspired to help people in ways never seen before and create the next breakthrough.

Concretely, all it takes to build the next big thing is unparalleled perseverance, intellectual humility, and kindness. We cannot love our customers until we become something greater than ourselves. Jerks can maybe fake it for the short-term. History and the future will tell whether they win long-term. The day there will no longer be more trillion dollar companies to build will be the day the world ends. As long as we exist on this earth, good companies that provide immense value to customers will continue to emerge and displace old, complacent companies that have forgotten to take care of their customers. As the CEO of Salesforce said, “we’re scared of the next startup, not our competitors.” What this world needs is more driven people who believe they can really change the world. We need risk-takers and crazy believers who are determined to change the world by helping people. The world will respond to their glorious visions. Utopia here we come.

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