Why we only have a few monopolies. And how you can create a monopoly with your idea.
Monopolies. We all hear of the big multinationals having a monopoly over a certain area of business. How do these monopolies come about? And why are there so few of them? This transcript describes the reasons certain companies can acquire the monopoly status and what processes lead to that status acquisition.
The Secret behind Monopolies
One common factor that most monopolies have is that during their initial days, the founders value their company very highly. This in turn led to buyers usually rejecting that sale offer. But companies like facebook and google stood strong to their valuation and refused to sell their company. Entrepreneurs who reject offers of large sums of money, confident in their company’s value, typically possess the attitude of a startup.
Venture capitalists (VC) don’t invest in creative startups like google and facebook during their early days which is why we don’t see many of such businesses. VC’s follow an old fashioned method of investing, some may call it old school, whereby they invest large sums of money into one or two companies they believe in.
VC’s also don’t invest their own money. They invest the money of a number of individuals, firms and businesses, which is also a reason they have to be more careful while investing because one wrong move can land them in a lot of trouble.
There is another group of investors called angel investors. These people are given the title because years before companies like Google and Twitter became as big as they are, they invested large sums of money into said companies, potentially helping them become as big as they are.
Investing is constantly taking new forms through implementing new strategies. As the cost of starting a business now is significantly cheaper than it was in the past, VC’s can afford to diversify their investments. Innovation is constantly being transformed, ideas are being put out faster than we can say investment and any of these creative startups can become the new monopoly with careful planning and execution.
Access the complete transcript here 👇
That may seem wonderful, but it's not true. The original Google creators were amenable to selling. To put it simply, they wanted more than what the customers were willing to pay.
Facebook met the same criteria. Although they were prepared to sell, Yahoo mishandled the deal by offering a poor offer.
A piece of advice for prospective purchasers is to consider raising your offer if a startup rejects it since there's a good chance that the outrageous sum they're demanding will ultimately seem like a good bargain.
My research has shown that startups that reject takeover offers often have more success. Usually, there is a better offer on the table, however this is not always the case.
Naturally, not all acquisition offers undervalue companies, which may be why startups do better when they reject them. This is most likely because businesspeople who have the bravery to turn down a substantial offer usually enjoy significant success. That mindset is perfect for a startup.
Facebook has so far managed to stay independent for the same reason Google was able to survive and develop into a huge, independent company: acquirers undervalued them. I'm sure Larry and Sergey truly want to improve the world.
Corporate M&A is a peculiar industry in that way. The best way to predict whether a firm will prosper is to reject good proposals, yet doing so usually results in missed chances.
What is the root reason of the Google shortage? Strangely, the same feature that makes Google and Facebook independent is also the reason why the most innovative businesses are undervalued by the financial community.
There aren't more Googles because investors don't pressure innovative businesses into selling out; instead, they forbid them from receiving any funding. Over the course of the three years we spent at Y Combinator, we regularly dealt with VCs directly, so I've learned a lot about them. The thing that has astonished me the most is how conservative they are. VC firms are known for actively encouraging innovation. Few of them actually do, and those that do are less liberal than you might expect from reading their websites.
I used to think of VCs as brash but dishonest pirates. Upon closer scrutiny, they prove to be more like bureaucrats. They are less courageous but more upright than I had previously believed (at least the decent ones). The VC industry may have transformed. Perhaps they had more courage back then. However, I think that the startup industry has changed, not them. Due to the low cost of starting a business, the typical good bet is riskier now, yet the bulk of VC firms continue to function as though they were backing hardware startups in 1985.
According to Howard Aiken "Don't worry about your ideas being stolen by others. If your ideas are worthwhile, you will need to impose them on other people." I have a similar feeling when I try to convince VCs to fund businesses that Y Combinator has supported. The creators are wary about really original ideas if they aren't excellent salesmen.
But the bold ideas are the ones that turn a profit. The majority of people will dismiss any really original ideas because if they were great, someone would already be implementing them. But the bulk of VCs are driven by agreement—among themselves as well as with other VCs. The major factor influencing a VC's opinion of your business is how other VCs feel about it. This method will prevent them from hearing any of the best ideas, but I doubt they will comprehend it. The more people a new idea needs to convince, the more outliers it loses.
Whoever the next Google is, VCs are probably telling them right now to come back when they have more "traction."
Why are VCs so conventional? There may be further contributing factors. Because of the size of their assets, they are cautious. Additionally, because they are investing other people's money, they worry about the repercussions if they take a risk and it doesn't pay off. Furthermore, the bulk of them are entrepreneurs rather than technical professionals, thus they are not familiar with the roles played by the companies they finance.
Market economies are intriguing because chance equates to stupidity. In this case, it is the same. Startup funding is a significant unexplored market. New firms can receive seed funding from Y Combinator. VCs will help them after they are already starting to flourish. However, there is a considerable distinction between the two.
There are companies that will put $20k into a startup led by the founders alone, and there are companies that will put $2 million into an established enterprise. To invest $200k in a firm that seems to have a lot of potential but is still ironing out some issues, there aren't enough investors, though. The majority of this sector is occupied by individual angel investors, such as Andy Bechtolsheim, who provided Google $100,000 when they seemed promising but still needed some time to figure things out. Although most of them only invest part-time, there aren't nearly enough angel investors, which is why I like them.
Despite the fact that it is becoming more inexpensive to establish a business, this sparsely inhabited location is increasing in value. Nowadays, a lot of business owners don't want to raise millions of dollars in series A rounds. They neither need nor desire the annoyances that come with possessing so much money. Most Y Combinator startups aim to raise $250k to $500k. They have to demand more when approaching VC businesses since they are aware that VCs are not interested in such little agreements.
VCs are capital managers. They are attempting to decide how to use a large sum of money. The startup sector is, nevertheless, departing from its current framework.
Startup costs have dropped. That suggests that they are both more numerous and less expensive than before. Because of this, it is still feasible to get great returns on large quantities of money; you just need to spread it out more.
I've tried to convey this to VC firms. Instead of one $2 million investment, make five $400k investments. That would mean serving on an excessive number of boards, right? Don't sit on their boards. Does that suggest conducting excessive research? Do less. When investing at a tenth of the valuation, you simply need to have 10 times the confidence.
It looks to be easy. But when I advise other VC firms to set aside some money and designate one partner to make more conservative bets, they react as if I had advised the partners to all get nose rings. How dedicated they are to following their customary course of action is astonishing.
But there is a big hole here that will be filled someday. As VCs grow, they will either cover this gap, or more likely, new investors will step forward to do so. When that happens, it will be advantageous since the nature of these new investors' investments will require them to make bets that are 10 times riskier than those made by VCs currently. As a consequence, we will get a lot more Googles. At least for as long as acquirers are still stupid.