Three Levels of Business Assessment: Profitability, Durability, and Growth

What kind of company do investors want to invest in? One that meets these three criteria: 1. #CanMakeMoney; 2. #CanKeepMakingMoney; 3. #CanKeepMakingMoreMoney. It can make money because it can #ProvideValueAndScarceResourcesToUsers. It can keep making money because, as the external environment changes, #TheCompanyMaintainsItsOwnMoatAndContinuedControlOfScarceResources. It can keep making more money because #TheCompanyCanAchieveMonopolyOrExponentialGrowthInCertainAreas. --- First: the ability to make money. How can a company make money? It must #UnderstandUserNeedsAndControlScarceResources. Providing something people need is not, by itself, enough to make money. Everyone needs oxygen, yet very few people make a living selling it. Are there exceptions? Yes. When a patient lacks oxygen, or a group of people goes mountaineering, selling oxygen can make money. Second: the ability to keep making money. What is the difference between “making money” and “continuing to make money”? Very often, changes in the external environment—especially technological progress—directly determine how scarce resources change. #TechnologyItselfWorksAgainstScarcity. Technology improves efficiency, turning many things once in short supply into a surplus and stripping them of value. Technological development brings two issues: First, resources that used to be scarce lose their value. As a result, those who previously controlled them can no longer keep making money. This is what happens with disruptive innovation: its emergence can suddenly render established giants worthless. Second, technology changes the supply relationships surrounding scarce resources. Even a company that currently controls scarce resources may not be able to keep making money. Technological disruption brings structural changes and opportunities, above all changes in supply relationships. Old scarce resources can disappear overnight, and new ones can emerge just as quickly. Technological disruption can therefore create a temporary supply vacuum. Supply and demand continue to change dynamically during this period. The first suppliers to enter the market can enjoy a window of outsized gains, but once the market is saturated, #ThoseWhoHaveNotBuiltBarriersToEntryWillGraduallyBeEliminated. Before the ecosystem finally settles, there is always a shakeout. The survivors are those able to #BuildDistinctiveBarriersAndAdvantagesUnderTheNewSupplyRelationships. So, #ToKeepMakingMoney, #BarriersMatter, as does #MaintainingLongTermControlOfScarceResources. For many founders, sustained profitability would already be a considerable achievement. Investors, however, have a third requirement: the ability to keep making more money. That requires a company, on top of #HavingBarriers and #ContinuedAccessToScarceResources, to have two more qualities: 1. #Scalability; #PursueExponentialGrowth #PursueMarginalEffects 2. #TheAbilityToMonopolize. #PursueThePremiumFromPricingPower