Focusing on a Small Market and Using Difficulty to Your Advantage


#1

I’ve always enjoyed reading the thoughts of successful venture capitalists as it relates to investing in the right founders and also their thoughts on competition. In Peter Thiel’s book, Zero to One, he talks about how a company’s goal should be to become a monopoly. For a small company to do this they should focus on a small market that is expanding rather than a large one. When these companies can dominate a small market, their happy customers end up pulling them into other markets where they are underserved. I’ve found this to be a very powerful strategy in investing in microcaps as well. Here is Peter Thiel’s lecture at Stanford University, “Competition is for Losers”.

This ties in well with another famous venture capitalist's thoughts on competition.

[Photo from Warner Bros.]

In 2004, Paul Graham wrote an essay, How To Make Wealth. Below is an excerpt from this essay which I thought was a powerful concept for smaller companies looking to compete or take share from larger rivals:

We are delighted in forcing bigger, slower competitors to follow us over difficult ground

Use difficulty as a guide not just in selecting the overall aim of your company, but also at decision points along the way. At Viaweb one of our rules of thumb was run upstairs. Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. Running upstairs is hard for you but even harder for him.

What this meant in practice was that we deliberately sought hard problems. If there were two features we could add to our software, both equally valuable in proportion to their difficulty, we'd always take the harder one. Not just because it was more valuable, but because it was harder. We delighted in forcing bigger, slower competitors to follow us over difficult ground. Like guerillas, startups prefer the difficult terrain of the mountains, where the troops of the central government can't follow. I can remember times when we were just exhausted after wrestling all day with some horrible technical problem. And I'd be delighted, because something that was hard for us would be impossible for our competitors.

This is not just a good way to run a startup. It's what a startup is. Venture capitalists know about this and have a phrase for it:barriers to entry. If you go to a VC with a new idea and ask him to invest in it, one of the first things he'll ask is, how hard would this be for someone else to develop? That is, how much difficult ground have you put between yourself and potential pursuers? And you had better have a convincing explanation of why your technology would be hard to duplicate. Otherwise as soon as some big company becomes aware of it, they'll make their own, and with their brand name, capital, and distribution clout, they'll take away your market overnight. You'd be like guerillas caught in the open field by regular army forces.


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#2

I’m not surprised to see a similar strategy described by General George Patton:

“Never attack where the enemy expects you to come. It is much better to go over difficult ground where you are not expected than it is to go over good ground where you are expected.”