in A16z, Amazon, heuristics, high margins, Jeff Bezos, John Huber, low margins, low-cost production, Marc Andressen, mental models, Network Effects, niche, Nicholas Sleep, recurring revenue, SaaS, Saber Capital Management, Scale Economics Shared

There are Only ‘X’ Ways…

Maybe the business world is deceivingly complex yet simple or maybe my cognitive load cannot bear more than a list greater than 2 or 3 in it, but either way, these legendary thinkers sure make it easy for us to remember what they said.

(Think of all the 2×2 graphs you see where people layout where products and companies land across the quadrants … I digress)

You’ve probably heard these before …

“There are only two ways to make money in business: One is to bundle; the other is unbundle.”

Netscape and A12Z Founder Marc Andressen attributes it to his buddy Jim Barksdale.

“In my opinion there are two models that lend itself to this kind of positive reinforcement cycle over time: companies with low-cost production and scale advantages and companies with a two-sided network effect.”

John Huber from Saber Capital Management on finding companies will “moats”

“There are two ways to build a successful company. One is to work very, very hard to convince customers to pay high margins. The other is to work very very hard to be able to offer customers low margins. They both work. We’re firmly in the second camp. It’s difficult — you have to eliminate defects and be very efficient. But it’s also a point of view. We’d rather have a very large customer base and low margins than a small customer base and higher margins.”

Jeff Bezos generally about Amazon in Wired Magazine circa 2011, but found this quote from Nick Sleep’s letter to shareholders.

There may be more that I cannot think of but I’ve bookmarked and highlighted somewhere.

These have always resonated with me and I do keep these as part of my investing mental model toolkit.

Let me organize these into a list of heuristics (without using a 2×2 graph):

  1. Find companies with ‘network effects’
  2. Find companies with ‘scale economic shared’
  3. Find companies with ‘recurring’ (not just re-occuring) revenue
  4. Find products that can be whole business functions -as-a-service
  5. Find products that focuses on a very targeted niche
  6. Find companies that are capturing either the vertical or horizontal value chain

There may be more but you get the drift.

Which begs the question, why don’t we just find a business that has strong network effects that is also a low-cost producer with a large recurring customer base reaping repeatably consistent margins????

I suspect you all know there’s only ‘X’ ways to go about doing that…