I would like to begin by mentioning what is the basic idea of how to create value. So, what makes a business valuable? It is a very simple formula which I think everyone knows (You don’t need a degree from a fancy IIM for that).

Value created = A Business Creates X  Rupees of value and captures Y % of X .

X AND Y are independent variables.

So, If you have a valuable company, two things are true –

1. It creates X Rupees of value for world and

2. You capture Y % of X .

The critical thing that people miss is that these X and Y are independent, X can be very big and Y Can be extremely small or Y can be reasonably big also .

To make this concept more understandable  or  intuitive, let’s look an example –

If you compare the above companies , what do you notice ?

Indigo should make much more profit margins, in fact their market cap is much higher than Zerodha’s.

If you are given a choice that do you want to get rid of air travel or stock brokers , what would you say? it would be stock brokers. But the profit margins say a different story altogether.

Globally, airlines don’t make much money and a stock broker is very valuable .

I am sure everyone has knowledge of perfect competition. It is basically the below –

All professors in economics like perfect competition, because it is much more efficient than duopoly , monopoly and other kind of markets. The consumer surplus is captured in perfect  competition etc. It is not good for companies though

MONOPOLY :

Other kind of business are the monopoly . Below are the pros and cons 

These businesses  are more stable and have more cash flows to show for. The extreme binary view of the world is, there are business which are perfectly competitive and there are business that are monopolies. There is shocking little that is in between, this is actually not that visible in the market because the people are constantly lying about the nature of the businesses they are in.

It is most important business IDEA that people are not aware of , that there are only two kinds of business in the world.

People are lying all the time.

So, imagine there are two spectrums of competitions. The one who is in on the left  side will say that they are in a perfect competitive kind of environment and one on the right  will say that they are a monopoly with very high cash flows etc. Both are lying to us.

This distortion happens because  of the lies people tell about their businesses. Below are some of the lies people say about the business they  are in.

Non – Monopolies	Monopolies
We are in a narrow market	We are in huge market

Non Monopolist will define their business as the intersection of the markets while the monopolist will describe their business as the unions of the multiple markets.

So , Imagine the above two example of Indigo and Zerodha

If someone asks what is Indigo all about, you will hear that they are a low cost airline company, that means that they are in working in a very niche segment and are the market leaders.

Just look at the market share of indigo airlines, almost 56 % , and they will create an aura about them that they are a monopoly in their market.

Now, look at the stockbroker Zerodha, it will talk about how small it is, if it compares itself with giants like Kotak etc.

But, if you compare their profits with these firms, they are miles ahead, I mean there is not even a close second. They are making supernatural profits. But, to the world they will represent themselves as an upcoming small player in the brokerage space. Also, this is just the beginning of the game, they will soon move to asset management space, and then there  so called market will be even larger to show to the rest of the world.

The narrative will be like that they will be competing with all the asset management companies, the competition is immense  etc. There are very powerful incentives to distort the markets.

How to build a monopoly : Start Small and expand

The way to begin in this area is to begin in the small markets first. A start-up wants to get to a monopoly stage ( Large share of the market). For that , you start with a small market and take over the whole market and then increase your horizon in concentric circles. Going after a giant market on day 1 is always a big mistake , there is too much competition. Almost all companies in the US which are successful now started off in small markets.

If you take Amazon, they started off as a bookstore. They projected it as the best bookstore in the world, and then they gradually expanded into e-commerce etc.

These companies start with a market so small that people don’t notice them much.

Facebook, for instance,  started in Harvard. They got initial users in the campuses of Boston and the market for online matchmaking at that point of time was too small. It almost had no value initially,  but they grew concentrically and became valuable.

Start Big and Shrink :

Most of the Solar companies, Ed tech companies in India and abroad started with huge Billion dollars’ worth of markets , but they have collapsed because they had just too many types of competitors to deal with.

You want to be a one of a kind company in your ecosystem, you don’t want to be the fourth Ed Tech company or 10th largest Pet food company or 100th restaurant in your category.

Very large markets have tons and tons of competition and it is a counter intuitive thing to do , but starting with smaller markets is best way to remain hidden and create a monopoly.

Last mover advantage :

On other characteristic of monopoly business is that there is always a moment which happens only once. For instance, the next Zuckerberg will not have a social network , the next bill gate won’t build an Operating system. IF you are copying them you are not learning from them.

To summarise , if you want to be a successful start-up and scale up into a big monopoly, you should look for  smaller markets which are around your core competency. For instance, if you have an Agri background begin with food processing in  a small market , and grow your market in concentric circles by moving slowing to become a monopoly in food processing , then move into related markets like Agri – Tech, where you can leverage your existing monopolist position in your existing markets in the new connected market, become an monopoly there and then move ahead with other connected markets.

In this way, you will be a monopoly and always can tell the outside world that you are still a small firm in a large market.

Written By: Ankur Kushwaha, Sr. Consultant, Invest Punjab | Govt. of Punjab.

DISCLAIMER: Views expressed are personal.