[HN Gopher] The Perfect Business (2014) [pdf]
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The Perfect Business (2014) [pdf]
Author : cs702
Score : 126 points
Date : 2023-07-10 13:47 UTC (1 days ago)
(HTM) web link (www.beterinbeleggen.nl)
(TXT) w3m dump (www.beterinbeleggen.nl)
| ninjaa wrote:
| I spent a long time thinking about business like this after a
| decade and a half of hard knocks in SaaS and marketplaces where I
| simply hadn't been thinking clearly at all. That's how we came up
| with Best Parents (www.bestparents.com) in 2020. It's the first
| marketplace for high-end, in person, short courses and travel
| experiences for teenagers worldwide. My wife has expertise in the
| education sales industry from Turkey and Europe, for me deciding
| to jump into this particular business with her involved reasoning
| from my first principles, which greatly overlapped with the ones
| presented here in this doc. So this post is my confirmation bias
| speaking!
|
| About Best Parents
|
| 1. It sells the world - we have customers from over 30 countries
| now
|
| 2. Demand is inelastic - families are always going to seek out
| programs for their kids abroad / away from home
|
| 3. Cannot easily be substituted or copied - the suppliers have to
| trust you, that trust has to be earned over years
|
| 4. Minimal labor requirements - our website is automatically
| translated into 4 languages with AI
|
| 5. Enjoys low overhead
|
| 6. Does not need big cash outlays
|
| 7. Cash billing - we have a 6 month billing cycle, we hold all
| the cash
|
| 8. Relatively free of regulation - also common sense prevails
|
| 9. Portable / easily moveable - we live in SF but have spent 3 or
| 4 months travelling this year
|
| 10.Loads of fun intellectually - thinking about how AI can guide
| teenagers to better and more diverse experiences, teach them and
| their families how to appreciate and contextualize those
| experiences, teach suppliers what to offer and how to improve
| their offerings ... v fulfilling. Feels like the real future of
| education
|
| 11.Leaves me with some free time now, prospectively lots later.
| Still just our startup's second year in sales, my first year
| full-time, lots of product to build
|
| 12.Income is not limited by personal output
|
| What I was surprised by was how little VCs in general seemed to
| respect my reasoning. I had not been anticipating that kind of a
| tepid reaction. There's a lesson I learned here - that the
| businesses VCs are generally looking for are far from the ones
| entrepreneurs logically probably want to consider. I believe that
| after the popping of the crypto bubble the whole ecosystem as it
| recovers will wend its way back to a more balanced, forward
| looking place where enriching the lives of children and helping
| families overcome their generational trauma by joining an
| international parenting community is seen plainly by many as
| exactly what it is - world-changing and relevant.
|
| Another thing I did come to realize was just how sweet a business
| B2B SaaS and Enterprise SaaS really is. Wow. It's a money
| printing machine, makes marketplaces look relatively paltry even
| though eBay was "The Perfect Store" like the book @Animats cited.
| Oh well, at the end of the day the business has to satisfy your
| intellectual and emotional needs for you (i.e. me) to give it
| that 150%. And this one's a winner with 20%ish gross margin and
| really decent basket sizes.
| xivzgrev wrote:
| Curious what businesses you sell to / makes this b2b? On
| surface this business looks b2c (selling to parents)
| ninjaa wrote:
| It's a B2C business with a B2B side (we also sell to schools
| and affiliate with SAT courses and college counselors).
|
| What I meant was that when going out for fundraising in
| Silicon Valley your financial model is often compared to that
| of a B2B SaaS as they are both asset-light web software
| companies. Having studied those, I now realize why investors
| are so gung ho on B2B SaaS. The relative predictability of
| success, high profit margins, stickiness and network effects
| are quite simply hard to beat.
| htss2013 wrote:
| Your criteria for a good business includes barriers to
| competition and low capital requirements that make venture
| capital unnecessary.
| rexreed wrote:
| Based on the above why are you even pursuing VC?
| ninjaa wrote:
| At the time, we didn't know where else to get $500K-$1.5M.
| Turns out $220K and some pain and hustling was enough. Thank
| God the fundamentals are really sound and upside is really
| there.
|
| Now we're more looking into nondilutive funding and our lines
| of credit are burgeoning so it's possible VC won't be needed
| altogether. Not ready to close the door yet though,
| especially to the most selective programs and institutions
| both now and down the line. If we got into YC we would
| definitely accept, or even some other selective program like
| NFX FAST we would definitely consider very seriously.
| rexreed wrote:
| Why can't you fund the business out of cash flow?
| ninjaa wrote:
| Stability, runway, my father had a bankruptcy where he
| was accused of having his hand in customer funds. I
| strongly believe the right kind of partner can unlock
| incredible wealth in this case.
| Mistletoe wrote:
| I guess Hacker News does have ads.
| camillomiller wrote:
| The definition of ideal here is based on:
|
| - minimizing risk
|
| - maximizing profit
|
| - making as much money as possible
|
| Up until the 80s, capitalism would optimize for this result with
| businesses that still somehow benefited society in one way or
| another. Once the computer revolution made it possible to operate
| at a higher abstrac level, especially on financial markets, the
| optimization game has become a many-times derivative of the basic
| needs of functioning societies.
|
| Today the perfect business responding to those tenets is very
| much a business that could potentially be detrimental or world-
| ending for society, especially with the advent of AI. In some
| ways, the pesky humans are an annoying hindrance in the process
| of extreme optimization.
|
| We still look at this maximization problems with the frameworks
| and cultural upbringing we solidified with pre-internet-
| revolution capitalism, with the winners dwelling on their
| survival bias, and the losers being pushed further down,
| inequalities growing rampant, and societal fabric being
| sacrificed at the altar of capitalist absolutism.
| drbig wrote:
| > the pesky humans are an annoying hindrance in the process of
| extreme optimization.
|
| This warrants emphasis, as this is the logical outcome of how
| the socioeconomic systems are nowadays. "Evil people conspiring
| together" are absolutely not necessary. And equally no amount
| of "good people" will remove that end condition.
| toss1 wrote:
| >>(3) The ideal business sells a product which cannot be easily
| substituted or copied. This means that the product is an original
| or at least it's something that can be copyrighted or patented.
|
| The principle is excellent, but the concept of protecting your
| product with patents is entirely invalid since about 2001 when
| China was admitted into the WTO. I have personal knowledge of
| several, and I can't count the number of times I've read about
| businesses ruined or seriously damaged by China pumping out
| knockoffs, sometimes literally faster than the original product
| gets to market.
|
| The concepts of quality and respecting intellectual property are
| literally foreign concepts to the Chinese.
|
| It is quite simple: if your idea can be easily copied, the
| Chinese will do it very quickly. Your "valuable" set of patents
| is merely a ticket to a series of lawsuits, which China will
| ignore, and the business, even if you get a judgement years in
| the future, will simply dissolve and re-organize.
|
| So, any idea that is protected by IP laws but merely injection-
| molded in plastic is, in a very real sense equivalent to public
| domain (regardless of your patent status). If you have a more
| complex (e.g., machined or chemically complex) product, do NOT
| have it manufactured in China, as you'll soon find copies sold
| out the back door and competitors setup selling your design even
| if you can stop the leaks.
|
| To have the moat described in #3, you need some 'secret sauce',
| and you need to keep it secret.
| htss2013 wrote:
| Even if you can't sue Chinese manufacturers violating patents,
| very few products are bought directly from China then shipped
| to the USA. There are USA middlemen and retailers involved. Why
| couldn't a patent holder go after the USA middlemen in court?
| toss1 wrote:
| Sure, you can probably go after them for the US part of your
| market.
|
| But:
|
| First, it is very hard to get an early preliminary injunction
| to halt sales, so they keep selling against you the whole
| time.
|
| Second, the costs of pursuing a federal lawsuit are huge
| (typically six-figures+), it takes _years_ to get to a
| judgement, and the result may be a pyrrhic victory where you
| are awarded damages and a cease- &-desist on a company that
| simply goes bankrupt and reorganizes under some other corp.
| entity.
|
| Sure, if they got into a major US retailer instead of you,
| you might get something, but then you are still going up
| against not only the competitor's attnys but also the major
| retailers, so probably add a zero to the left of the decimal
| in your legal costs.
|
| IOW, they still stole your IP, undermined your market, made
| money off of it, and suffered minimal penalties for doing so.
|
| We should also notice that SpaceX explicitly stated that they
| are going the trade secret route vs patents, and said that
| patents would simply be treated by the Chinese like an
| instruction manual, and they could never stop them or recover
| anything.
| blitzball wrote:
| Professional service organizations with cross-border capabilities
| can qualify for this.
|
| As a lawyer who has founded a law firm, it's possible to qualify
| for all criteria, even item 12, which can be addressed by the
| founder knowing how to decouple the founder's personal labor
| inputs (e.g., time) from the firm's revenue and profit
| performance.
| WJW wrote:
| I would think professional services organisations fall somewhat
| flat on points 3 and 4? The product of a law firm does not seem
| immune to being copied and it does not have minimal labor
| requirements. Taking on twice as many cases needs almost twice
| as many people, no?
|
| EDIT: not that it can't be a great business, it just "only"
| scores 10 out of 12 haha.
| NoboruWataya wrote:
| I'm not sure if this is true, at least for corporate law firms.
|
| 1. Selling the world: Kind of depends what is meant by selling
| the world. It is very difficult for a single law firm to
| provide local legal advice in many jurisdictions. A small
| number of law firms have global reach, but many of those
| operate franchise models and none of them, to my knowledge, are
| truly global (operating in every jurisdiction or even the large
| majority of jurisdictions). On the other hand, if we are
| talking about, for example, an English law firm providing
| English legal advice to clients throughout the world, then yes,
| that is possible.
|
| 3. Minimal labour requirements: I don't think this applies to
| corporate law firms. Transactional and litigation work is
| labour-intensive. Advisory work too, to a lesser extent. You
| can see that play out the last few years where the large
| corporate firms in New York and London are paying huge salaries
| to get bodies in the door, while associates were getting burned
| out from the insane hours demanded of them.
|
| 4. Low overhead: This specifically includes "high-priced
| employees" as an example and I think that would include
| lawyers.
|
| 7. Cash billings: In theory this should apply to law firms. In
| practice, in my experience, it is more complicated, with
| lawyers often getting paid only at the end of big deals or
| cases or offering contingent fees, etc.
|
| 8. Free of regulation: Definitely not true for law firms.
|
| 9. Portable or easily moveable: Also not true.
| IMTDb wrote:
| Funny how manufacturing and selling synthetic drugs is pretty
| much the definition of a perfect business
| Animats wrote:
| Read "The Perfect Store" (2003), which is about eBay. No
| inventory. No shipping. No credit risk. Just a cut of each sale.
| amadeuspagel wrote:
| And yet amazon is worth more then 50 times as much.
| camillomiller wrote:
| By this metric, dropshipping is the best business ever then,
| and not just a zero-value-added activity for bropreneurs who
| are good at Instagram marketing.
| WJW wrote:
| Dropshippers are just outsourced marketeers for the producers
| of whatever it is they sell. There's nothing wrong with that,
| real world products in a competitive market benefit from
| being advertised and you might as well outsource that
| activity to people who are good at it (ie bropreneurs on
| instagram).
|
| It's hardly the best business ever though. Dropshipping only
| works well in a low-competition world, but since its barrier
| to entry is so low (all you need is an instagram account) you
| can be assured that competition will pop up very quickly and
| all your profit will be competed away.
| ninjaa wrote:
| Dropshipping is a great business idea. Amazon's price fixing
| has made it a zero sum game
| KeyXiote wrote:
| Thought good business was a positive sum game...
| WJW wrote:
| Positive sum for society and/or your customers, perhaps.
| Almost never for your competitors.
| system2 wrote:
| Dropshipping is not sustainable.
| Animats wrote:
| They have to advertise and price items. eBay does not. eBay's
| users do that for them, for free.
| jamestimmins wrote:
| It's striking how much modern software development can match this
| theoretical ideal business, even though SaaS hadn't really taken
| off when he wrote this.
|
| Really excellent read. Very amusing to see his analysis of Apple
| and Microsoft, which seemed basically accurate until the iPhone
| came out.
| ttoinou wrote:
| SaaS were doing well already in 2014
| jamestimmins wrote:
| He mentions that the original version is from the 1970s, and
| he added to it over time. So the original sensibility is pre-
| PC, but yeah SaaS would have been around by this last edit.
| borzi wrote:
| True, it only misses to meet number 3 (it's easily copied and
| just getting cheaper to build software as technology advances).
| I think the document also misses to mention saturation of the
| market, which software is also very saturated and this makes it
| hard for new businesses to get going...
| SCUSKU wrote:
| The only thing I can think of that would prevent easy copying
| in the SaaS world would be to have most or all of your data
| generated by users, and then doggedly protecting that data
| from scraping, and/or hiding it behind a login.
|
| Otherwise, if your business relies on scraping other peoples
| data and then presenting a nice UI around that, it could just
| as easily be replicated by others (no moat, as we're saying
| nowadays).
|
| Of course, much like the niche chemical salesman, maybe the
| ideal scraping business would be to find such a niche that is
| small enough that other people wouldn't find it worthwhile to
| replicate your SaaS.
| huijzer wrote:
| Agreed, but also don't underestimate Coca-Cola, McDonalds, or
| Starbucks. McDonalds for example, is mostly a real estate
| company which franchises the McDonalds brand, infrastructure,
| and IP. So, they (1) sell the world, (2) have relatively
| inelastic demand, (3) cannot be easily substituted due to their
| brand value, (4) requires minimal labor since you can ignore
| the employees at the franchises, (5) has low overhead, and (7)
| enjoys cash billings.
|
| For point (6) about the capital, an argument can be made that
| large amounts of capital aren't necessarily bad. They can also
| lead to massive moats. Many great companies boil down to being
| able to significantly reduce costs over time. For example,
| Carnegie and Frick invested heavily in capital expenditures so
| that they could reduce costs over time. Once this happened,
| they could outprice the competitors leading to more money for
| Carnegie and Frick which lead to them being able to reduce
| costs further. A similar example nowadays is TSMC. They spend
| 36B on CAPEX in 2022.
| mudiyan wrote:
| [flagged]
| a1o wrote:
| The example is a chemical company, which still need a laboratory,
| some equipment and storage, and possibly some people (sellers) to
| keep the deals on with the other companies - I don't think other
| chemical companies will just click a button in a system, they
| will want to talk with a seller. Everyone here is reading with
| the lens of a software company, but I think rarely software fits
| 3 and 2.
| motohagiography wrote:
| If you have demand (aka, product market fit) the rest is are
| optimization problems. When you look at someone like Musk who is
| in multiple businesses, he's essentially the head of a private
| equity firm that manages products. He bets that certain unsolved
| problems are composed of solved ones, and where they aren't, it's
| a hack or an minor breakthrough away. Every breakthrough has non-
| linear effects, so it's a smart way to take risks.
|
| Start with a counterfactual with nobody in the market, run the
| numbers on what it would look like if it were true, and then
| _manage_ the demand to fullfill it. Politicians are similar. They
| manage donors off voters, where their real promises are to the
| donors, and the story and hope is what they sell to voters.
| Makers make, but managers manage, and I don 't think most of us
| on the maker side really have an apprehension of what managing
| actually is.
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