From 0 to 1: unlocking the secrets of business and the future

Chapter 9 Late-mover advantage (1)
Avoiding competition will help you create a monopoly, but only a future-proof business is successful.Compare the value of The New York Times Company to Twitter, both of which employ thousands of people and provide millions of people with access to current events.But in 2013, as soon as Twitter went public, its market value reached $40 billion, more than 12 times the market value of the New York Times.Before that, in 2012, the New York Times had just earned $1.33 million, while Twitter was at a loss.So, how to explain Twitter's high premium?
The answer is cash flow.That sounds odd, since the New York Times makes a profit and Twitter loses money.But the success of a business depends on its ability to generate cash flow in the future.Investors believe that Twitter can reap monopoly profits in the next 10 years, while the monopoly era of newspapers will end.

Simply put, the value of an enterprise today is the sum of the profits it will create in the future. (To correctly value a company, it is necessary to convert the future cash flow into today's value, because the present value of the same amount of funds is more valuable than the future value.)
By comparing the present value of cash flows, we can see a clear difference between low-growth companies and high-growth startups.An old company (such as a newspaper company) can maintain its value if it can maintain its current cash flow for five or six years.But any company loses profits when it competes with its peers.Nightclubs and restaurants are typical examples: successful people may make a lot of money today, but cash flow may decrease in a few years, because customers will always choose newer and trendier places to spend their money.

Tech companies go the other way—often losing money for the first few years.Because it takes time to create something of value, benefits are delayed.Most of the value of a technology company will be reflected in the next 10-15 years at least.

In March 2001, PayPal became profitable and our revenue was growing 3% per year.But when I projected future cash flow, I found that 100% of the company's current value came from profits in 75 and beyond - unbelievable for a company that has only been public for 2011 months, but the fact is that in the end Proving that its value is still undervalued, now that PayPal continues to grow at a rate of 27% per year, and the discount rate is lower than it was 15 years ago, it now appears that most of the company's value comes from 10 and beyond.

LinkedIn (a social networking service for business customers) is another typical example, and its value also comes from the distant future. In early 2014, LinkedIn's market cap was $245 billion—very high for a company that had revenue of less than $2012 billion in 10 and net income of just $2160 million.Looking at these numbers, you might think investors are crazy, but this valuation only makes sense if you take into account LinkedIn's projected future cash flows.

This focus on future profits is counterintuitive even in Silicon Valley.For a company to be valuable, it must not only grow, it must be sustainable, but many entrepreneurs only see short-term development.They have their reasons: growth is easy to quantify, but no one knows how long a company can last.Quantists obsess over weekly active users, monthly revenue targets, and quarterly revenue reports.But while you can get those numbers, you're missing the deeper, harder-to-quantify issues that threaten your company's longevity.

For example, the short-term rapid growth of Xingjia (Zynga, a social gaming company) and Groupon (a global group buying company) caused managers and investors to ignore long-term challenges.Xingjia gained an early advantage in virtual farming software and claimed to have a "psychological engine" that could rigorously measure the popularity of new releases, but they ended up going bankrupt for the same reason as every Hollywood studio: how can you be sure you Create pop culture that can always satisfy fickle audience tastes? (Nobody knew.) Groupon's product took off as it was tried out by hundreds of local businesses, but keeping those businesses coming back was harder than you might think.

If you prioritize short-term growth, you miss the most important question: Will your company still exist in 10 years?Numbers alone won't tell you the answer: you have to think hard about the essential characteristics of the company.

Characteristics of a Monopoly Firm

What does a company with large cash flow in the future look like?Every monopoly has its own characteristics, but they usually combine the following characteristics: patented technology, network effects, economies of scale, and brand advantages.

But that's not a checklist to check off when you're building a company -- there are no shortcuts to a monopoly.However, analyzing your own company according to these characteristics can help you think about how to make your company last longer.

1. Patented technology

Patented technology is the most substantial advantage of a company, which makes it difficult or impossible for your product to be copied by other companies.For example, Google's search algorithm, the search effect is better than other search engines.Ultra-short page load times and ultra-accurate automated queries add to the robustness and defensibility of the core search product.Google was invincible at the beginning of the 21st century, but now it is difficult for a search engine company to do what Google did at that time.

Generally speaking, a patented technology must be 10 times better than its closest substitute in some way to have a true monopoly advantage.One would think that a product with little advantage is just a slight improvement, and few would buy it, especially in an already crowded market.

The clearest way to make a 10x improvement is to create something entirely new.If you create something of unprecedented value in a field, theoretically, the value of the company will grow infinitely.A drug that safely eliminates the need for sleep, or a cure for baldness, for example, would prop up a monopoly.

Or you can radically improve something that already exists: if you can make it 10 times better, you can avoid the competition.For example, PayPal has increased business on eBay by at least 10x.It took at least 7-10 days to mail a check before, but PayPal allows buyers to pay as soon as they take an item.Sellers get their money right away, and they know cash is better than a check.

The 10x improvement Amazon has made is visible to everyone: they offer at least 10x as many books as other bookstores. When it went public in 1995, Amazon announced that it would become "the world's largest bookstore."Unlike retail bookstores, which can only stock 10 books, it doesn't need to stock any physical books—just get them from suppliers after customers place their orders.This improvement in inventory has worked so well that Barnes & Noble (Barnes & Noble, the largest physical bookstore in the United States) filed a lawsuit in the first three days of Amazon's listing-claiming that Amazon is not a "bookstore" but a "bookstore". broker".

You can also make a 10x improvement with a superior integrated design. Before 2010, tablet computers were not practical in life, and there was almost no market.Microsoft first launched the "Microsoft Windows XP Edition Tablet PC" in 2002, and Nokia released the "Network Tablet PC" in 2005, but neither of them worked.Then Apple released the iPad.Design improvements are hard to measure, but Apple has improved everything dramatically: the tablet went from bad to useful.

2. Network Effects
Network effects make a product more useful as more people use it.For example, if all your friends use Facebook, it makes sense for you to have a Facebook account.And if you just use a different social network tool unilaterally, it will seem strange.

Network effects are powerful, but unless your product has value to early adopters when the network group size is small, you cannot receive network effects.For example, in 1960 a quixotic company called Xanadu began developing a two-way communication network between all computers—a prototype for the World Wide Web.But in vain for more than 30 years, Xanadu eventually folded just before the web was even starting to catch on.Their technology may work at a certain scale, but only at a certain scale: every computer needs to be connected to the network at the same time, and this cannot happen.

Paradoxically, businesses that enjoy network effects must start with very small markets. Facebook's original users were just a bunch of Harvard students—Mark Zuckerberg's first product was meant to get his classmates to sign up, not to appeal to the entire planet.That's why successful Internet businesses rarely start companies for the sake of starting companies like MBAs do. Their initial market is so small that it doesn't seem like a business opportunity at all.

3. Economies of scale
Monopolies get bigger and stronger: the fixed costs of developing a product (design, management, office locations) need to be amortized by higher sales.Software development enjoys very large economies of scale because the marginal cost approaches zero if the product is simply repeated.

Many enterprises have only obtained limited benefits in the process of expanding their scale, and it is especially difficult for service enterprises to become monopoly enterprises.For example, if you open a yoga studio, you can only have a certain number of customers.You can hire more yoga teachers and expand the training venue, but the profit is still limited. You will never be able to form a core team of excellent talents like a software engineer to provide valuable products to millions of customers. Profits are beyond reach.

A good start-up should be designed with the potential for large-scale development in mind.Twitter now has 2.5 million users, it doesn't need to add custom features to get more users, and there is no inherent reason for it to stop growing.

(End of this chapter)