All posts by Paras Chopra

Capitalism rewards rare and valuable. Making something that customers value is important, but so is making something rare. Markets are competitive and initial success usually leads to other companies or new startups trying to copy and replicate such success for themselves. The last thing you want is for someone else to come along and capture your entire market for themselves.

It’s true that copying by competitors may or may not happen, and such copying by others may or may not be successful. But why leave that to chance? In fact, companies that are copying your business will likely use all their unfair advantages to crush you. If they have more funding, they can out-market you. If they have better engineers, they can develop a more stable product. If they have a brand name, they will use it.

Entrepreneurs have to be confident in their abilities, otherwise, they’d never take the risk of starting a business. However, this confidence can backfire if it’s adopted as a company strategy. If you think you’re smarter or more hard-working than your competitors, your competitors are also thinking the same.

Competitive advantage arises out of true and exclusive advantages that give you an edge over competitors. Believing you’re the best or the most hard-working is probably neither true nor exclusive to you. Invest in actually building some real, hard-to-copy advantages in your business. ...  Read the entire post →

Proven physical theories are called laws because they dictate how our world operates. If there were such a “law” of capitalism, it would probably be the fact that profits attract competitors who try to eliminate it by offering customers either a lower price or a higher quality. This law thus allows for only two types of businesses to exist: cost-focused business or quality-focused business. Think of a McDonald's v/s your neighborhood gourmet burger restaurant. Any business that tries to be both doesn’t work out in the long run.

Switching costs determine how valuable your business is because investors value a business equal to its expected future profits. If your customers are able to switch easily to a competitor, potential investors see that as a risk, and they will not value the business highly as potential future earnings of a business can easily be taken away by a competitor

If building a business is hard, building a defensible business is harder and that’s why they’re rare. Warren Buffet’s top criteria for evaluating a business is the presence of moats. In old times, castles were protected by trenches filled with water which were known as moats. Such moats protected against an enemy attack as they were not easy to cross. In business, moats are whatever deters a potential competitor from taking away your customers. .

End customers typically get value through a series of businesses adding value on top of each other. For example, imagine the value chain required to bring a laptop to the end customer. The production begins with suppliers of metals and raw materials which are used by computer part manufacturers to build components like CPU, screens, and disk drives. These components are then assembled to build a laptop. The laptop needs software that’s typically written by some other supplier like Microsoft. And, finally, the fully functional, ready-to-use laptop is shipped by a logistics company to a warehouse. Customers transact with an online or offline seller of laptops which is typically yet another company (Amazon or BestBuy).

The entire value chain of a laptop comprises different businesses at different stages who all compete for a share of the $1000 price of the laptop.

The key question is who gets what share of this $1000?

Picking problems to solve is a function of attention. Wherever and whatever you're paying attention to is going to reveal problems in that domain to you. Solving such revealed problems is going to absorb you and will reveal even more problems worth solving in that domain.

So this creates kind of a feedback loop.

Because every domain of life has such richness, it's easy to get lost in this feedback loop and spend an entire life solving problem after problem in that domain. I think there's nothing wrong with that if one is mindful and conscious of this. However, in my experience, very few people consciously choose what problems to solve because very few consciously choose what to pay attention to.

Can an app built on top of Facebook become bigger than Facebook itself?

It’s easy to believe that the size of the businesses on which your business is built will limit how big your business can become. But that’s not true. An app built on top of Facebook can become bigger than Facebook because the customers and desires that Facebook serves is very different than customers and desires that the business that’s built on Facebook is set out to serve. Facebook, in this case, is simply an enabling platform while the real value to the customer is being created by the app.

No business delivers value to the end customer all by itself. In reality, a business does very few things within its boundaries. Everything else must come from other businesses: from renting servers on AWS to leasing offices, and from advertising on Google to buying laptops from Dell. Most of the time, such dependencies emerge naturally and evolve without any conscious effort. However, sometimes some business dependencies can (and should) be deepened explicitly through partnerships.

If nurtured well, business partnerships create positive feedback loops that help rapidly grow a business. Consider the case of Apple, a famously vertically integrated company that makes its own OS, processor, and many other phone components that other companies typically purchase from vendors. However, their iPhone App Store is proof that even Apple realizes that it can’t thrive without partners. Apple supports many thousands of 3rd party software developers who create millions of amazing app for the iPhone. These apps wouldn’t have been possible without the underlying technology supplied by the iPhone. Similarly, the iPhone wouldn’t have been as successful as it, if it didn’t provide the multitude of functionality that its users have now come to expect because of all the 3rd party apps available on the platform. So, the iPhone helped the developer community build a business on top of it, and with that, iPhone benefitted massively. ...  Read the entire post →