Understanding Startups 101

A startup messed up at its foundation cannot be fixed

Recently, I came across a book called, Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel. He is the co-founder of Paypal and has made successful investments in companies like Facebook, SpaceX, and LinkedIn. The counter-intuitive notions that he brings to the table are what makes this so fascinating. If you’re reading this, I assume that you possess an entrepreneurial mindset and must have heard of the first-mover advantage? 

Photo by Daria Nepriakhina on Unsplash 

Along the course of this post, I will address this question and many alike with the help of the counterintuitive thoughts as proposed by Thiel. 

The Two Options

For anyone who is looking to start off a business or launch a product, the underlying fundamental can be: 

  1. Creating Value (which was non-existent) 
  2. Enhancing Value (of a product or service that already exists) 

Try taking an example of a product around you. Did a product that served a similar purpose exist before it or is this the first of a kind? You’ll be surprised to find out how easily you can classify everything around you. Which brings me to my next point. In order to establish a sustainable startup, you have to understand what your product is, whether it creates new value, or just enhances it. 

Whether you are looking to invest in a startup or simply establishing one, make sure to understand where the product is headed- it gives you a realistic perspective. 

Identifying The Diamond In The Rough 

Profitability is NOT the most important business metric when it comes to trying to predict the future of a company. A more realistic account of the state of the company is its cash flow statements. 

If you discount back the cash flows, you can develop a comparative model of whether the startup is a low-growth or a high-growth business. This allows you to gauge the amount of risk you are willing to take as an investor and the dividends you can reap. As a rule of thumb in the investing world, low-growth businesses tend to be safer bets and are only exposed to the systematic market risk whereas high-growth businesses tend to be exposed to not only systematic risks but also an idiosyncratic risk. 

There’s always the added risk that comes with the extra returns but that’s the trade-off in a competitive world, right?

A startup messed up at its foundation cannot be fixed.

 — Peter Thiel 

If your decisions are based on the profitability metric, technology companies often lose money in the initial few years before breaking even. Does this mean that they are not going to be successful? 

No. It is not that straight-forward. However, one can account for the delay in revenue as the opportunity cost of developing market value. 

Last Mover Advantage

To address the question that I put forth, is it wise to be the first mover and overlook developments? Let us consider this example. 

In terms of search engines, Google was definitely not the first to enter the market, but when it did, it made sure that no new mover could emulate the level of the product it had created. 

Google’s competitive and accurate search algorithms meant that it would be very hard for anyone to emulate, let alone do one better on the product’s robustness. 

It is therefore a much better proposition to enter into a market when you feel that your product is at least 10x times better than something that exists to gain a monopolistic advantage over other suitors. Anything lesser will be a marginal development and will be harder to sell. 

‘Escaping competition will give you a monopoly, but even a monopoly is only great business if it can endure in the future’

In today’s world where plagiarism has led to complacency and mediocrity, try to find a purpose to your cause and work relentlessly towards it. 

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.


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