One of the most important heuristics (and possibly mental model) that I’ve been learning to apply when looking for great investments (in product and business) is how the management telegraphs and frames their position and/or product.
Peter Thiel’s series of lectures-turned bestseller, Zero to One, talks about how companies telegraph their competitive position based on a spectrum between perfectly competitive companies and those are intrinsically monopolistic.
Here Thiel explains what management teams at both ends of the monopoly spectrum would tend to say when asked about their business/products prospects:
“If you’re a non-monopolist, you will rhetorically describe your market as super small, you’re the only person in that market.”
“If you have a monopoly, you will describe it as super big, and there is lots of competition in it.”
Zero to One, Peter Thiel
Though later in the book Thiel suggests that startups (which Zero to One is more focused on) find a very small niche market that no one cares about and dominate it by being a big % market share of a smaller TAM.
Though I think what he’s saying is that to be a big monopoly is hard, but being a relatively big monopoly in a small market is easier to begin with and easier to operate in.
Regardless, noticing how management thinks and talks their book is important as to how they really think about their business and their future prospects.
Most recently on Focused Compounding podcast, Geoff Gannon talks about how this translates to how the risks portion of 10k company filings are sometimes great places to find nuggets of actual competitive advantages.
Conversely, what companies don’t say, minimize, bury in a footnote, or even sweep under the carpet, is probably worthwhile for further investigation.