The Element of Certainty — A Universal Framework for Wealth Creation Through Entrepreneurship and Investing

Problems: Opportunities for Wealth

Fundamentally, wealth is created by (1) creating value for customers, often through solving a problem for them, and (2) capturing a share of the value that has been created. As solving bigger problems creates more value, it is often desirable to find these big problems and then invest to capture them. Typically, investors invest cash while entrepreneurs without cash invest their time. Both are looking for these problems, which brings us to the question of where to find them.

Market Inefficiencies Get Exploited by Entrepreneurs over Time

Opportunity Selection

Picking the right opportunity ultimately comes down to risk preference. Many entrepreneurs are typically best advised to focus on a concise problem for which their specific experience and skills positions them nicely to win. People who follow this approach become lifestyle entrepreneurs, similar to what’s advocated by thought leaders like Tim Ferriss or Tai Lopez.

Unicorn-Entrepreneurs: AFMs and CLMs

Framework for Opportunity Selection

Aggressive First Mover (AFM)

I call the first class the “Aggressive First Mover” (AFM). These entrepreneurs see an obvious market opportunity that arises, often through societal or technological changes. Therefore, barriers to finding an AFM opportunity are initially lower. However, success as an AFM requires both to jump on a train early (which requires good judgement) as well as being extremely aggressive in building your business. Additionally, the intense competition with the AFM strategy brings along a specific type of risk around competitive pressure. Thus, typically speed and execution skills determine the winners.

Contrarian Last Mover (CLM)

I call the second class of entrepreneurs “Contrarian Last Movers” (CLM). Becoming a CLM is initially harder because it requires more efforts in two key regards: timing and unique insight. It also carries a specific risk around being wrong about your assertions on business opportunities. However, when done correctly, there is an opportunity to create a large monopoly business without the fierce competition associated with AFMs.

The Element of Certainty

In essence, gaining the EOC is aimed at ensuring a start-up’s success prospects ex-ante when making the investment of cash or time. Ideally, you also want to be comfortable that you know something about the opportunity others are missing so that you can predict its success in the market.

1. Knowing Present Reality: Grounding in the Here and Now

Looking at the first piece, you first need to understand that reality is subjective, and that each and every person has his or her own version of reality. Here, reality is the sum of your experience and knowledge, which shapes your vision of the world. However, knowledge and experience are ambiguous, thus reality is different for each and everyone. Therefore, some people make really questionable decisions about starting new companies or have questionable beliefs like that the earth is flat. Their vision of reality and product market fit is misaligned.

2. Knowing Future Reality: An Iterative Process

Now considering the second piece, you need to understand that the future reality is just an iteration from present reality with a large number of steps. Each of these steps represents a subjective reality in the future at a certain point in time. People who successfully extrapolate their reality eventually end up with a likely subjective version of the future.

3. Gaining the Element of Certainty (EOC)

Based on these considerations, you should do two things to gain the EOC. Firstly, you need to derive a comprehensive and detailed vision of present reality. Secondly, you need to extrapolate this into the version of the future that you expect to become reality.

Case Study: Warren Buffet

Arguably, world-famous investor Warren Buffet is one of the best people in the world when it comes to knowing where the ball currently is. Buffet spends 80% of his day reading and he recommends reading 500 pages a day. He attributes most of his success to building these knowledge assets and has said that reading operates similar to compound interest.

Case Study: Elon Musk

One of the most heralded entrepreneurs of the 21st century is Elon Musk. He utilises a technique called “First Principles” to analyse how technology trends will shape the world, i.e. where the ball is going. This methodology is geared towards finding fundamental truths and then deriving business opportunities that exploit these truths, which have been discovered.

Case Study: Paul Graham

Finally, one of the world’s most successful investors is the founder of Y-Combinator Paul Graham. He gives the following advice to entrepreneurs: “Live on the edge to the future and build what’s missing.” Picking up this thought from an investor’s perspective, you can simply invest in what is missing in your life.

Case Study: Rocket Internet

A large part of Rocket Internet’s success can be attributed to the AFM strategy. For those unfamiliar with Rocket, they became famous for copy-catting so-called proven business models, typically from the US, and bringing them to new geographies in Europe and emerging markets. This has been very successful for Rocket. They have had multiple IPOs and trade sales totalling over USD 20bn in enterprise value. The fact that these are spread reasonably evenly across several ventures strongly implies that there is a well-working method behind their success.

Wrap-up

There are two main ways to go about capturing the wealth of new technologies: 1. Be an Aggressive First Mover (AFM) and enter into the intense competition to dominate market share, or 2. Be a Contrarian Last Mover (CLM) who uses intimate knowledge of current conditions to predict and act on a game-changing problem/solution pair.

More where this came from

This story is published in Noteworthy, where thousands come every day to learn about the people & ideas shaping the products we love.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Christian A. Schröder

Christian A. Schröder

Founder & CEO of 10x Value Partners. One of the world’s most successful angel investors. Follow me to learn my secrets.