At Volt Equity, our core strategy is to invest in the best disruptive companies that are poised to win their markets. Stated another way, Volt does not simply invest in any and every company working on new technologies and innovative products. We identify and focus on the best, the winners, the companies that will dominate their industry. We have explained this investment strategy elsewhere since we believe it delivers the best return on investment.
So, the crucial question is, How do we identify the best disruptive companies?
The easiest way to answer this question is to turn to successful investors in disruptive companies and to successful entrepreneurs who started disruptive companies. Such people have a track record of success in identifying and/or creating disruptive companies.
Turning to Peter Thiel for Help Identifying Disruptive Companies
Peter Thiel is one of the most successful investors in disruptive companies. He is also a consistently successful starter of disruptive companies. His investments and companies have led to his multi-billionaire net worth ($6.74 billion as of April 2021, according to Bloomberg). Thiel co-founded PayPal in 1998 (working alongside Elon Musk), he was the first outside investor in Facebook and remains a board member, and he founded Palantir Technologies. Thiel has proven himself both as an entrepreneur and an investor, so we should listen well when he speaks on the topic of successful, disruptive companies.
Peter Thiel’s 2014 book, From Zero to One: Notes on Startups, or How to Build the Future, is an important work for understanding disruptive companies that have and will change the world.
We will look at some of the key ideas in the book.
Disruptive Companies Will Always Be Monopolies
To most people, the word “monopoly” conjures up images of the famous board game, or of sinister, oppressive companies that bully their competitors. Or, some might think of government-created monopolies, such as the public school system or utilities in certain regions.
But Peter Thiel has a positive meaning when he uses the term monopoly. He says,
“By ‘monopoly,’ we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute. Google is an example . . . it hasn’t competed in search [engine] since the early 2000s, when it definitively distanced itself from Microsoft and Yahoo!” (Peter Thiel, From Zero to One, pp. 24-25).
Later on, Thiel says, “every business is successful exactly to the extent that it does something others cannot . . . [yet] all happy companies are different: each one earns a monopoly by solving a unique problem” (From Zero to One, 34).
Grant Cardone, author of The 10x Rule: The Only Difference Between Success and Failure, expresses similar ideas as Peter Thiel. Cardone says, “One of the great lies perpetuated by mankind is the idea that competition is good. Good for whom–exactly? It might help provide customers with choices and compel others to do better. However, in the business world, you always want to be in a position to dominate–not compete.” (The 10x Rule, p. 77, emphasis original). Later on, Cardone says,
“Competing with others limits a person’s ability to think creatively because he or she is constantly watching what someone else is doing. . . . Forward thinkers don’t copy. They don’t compete–they create” (Grant Cardone, The 10x Rule, p. 78).
Thiel and Cardone speak in generalities here: monopolies are so good at what they do that there are no good alternatives, monopolies do what others cannot, monopolies solve unique problems, monopolies create new things.
However, later in Peter Thiel’s Zero to One book, he gives four specific characteristics of monopolies:
1. They create/own proprietary technology (unique products that are difficult to copy)
2. They have network effects (their products become better as more people use them, for example, Facebook would be terrible if only 1,000 people used it)
3. They have economies of scale (the company gets stronger and more profitable as it gets bigger, for example, owning 10,000 restaurants would be extremely difficult, whereas selling 10,000,000 copies of an app is extremely profitable with almost no additional cost to produce each new copy)
4. They have good branding (for example, Apple is well-known for its minimalist design, iconic products such as the iPhone and iPad, and its hip advertising campaigns)
In this post, we will focus our discussion on proprietary technology.
Monopolies Create Products that are 10x Better than Competitors
Although Thiel laid out four characteristics of monopolies, there is a sense in which proprietary technology is the most important characteristic of a monopoly. The other three characteristics flow out of this first one.
A company’s best products are difficult or near impossible to copy. This creates a “high moat” that makes it extremely difficult for competitors to enter and survive in their market/industry.
But how does a company create proprietary technology?
As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market” (From Zero to One, p. 48, emphases added)
Thiel gives the examples of Google’s search engine, PayPal’s ease of use for buying and selling on eBay, Amazon’s claim in the 1990s that it was “Earth’s biggest bookstore,” and Apple’s iPad popularizing and simplifying tablet computing.
Later, Thiel expands on the example of Apple: “When Steve Jobs returned to Apple [in 1997] . . . he slashed product lines [by 70%] to focus on a handful of opportunities for 10x improvements” (From Zero to One, 53).
Jobs slashed dozens of product lines into just four: two versions of a desktop computer (PowerMac and iMac) and two versions of a laptop (PowerBook and iBook). This allowed Apple to focus on quality and innovation, rather than just quantity. And this allowed Apple to simplify choices for consumers and eliminate the “tyranny of choice,” the anxiety we feel when there are too many choices in front of us (think: cereal).
Each of these companies and their best products are very difficult to replicate and were at least 10x better than existing products when they were launched. Here we walk through three specific examples.
1. Amazon.com vs. Barnes & Noble
While Barnes & Noble might have stocked 100,000 books in a physical bookstore, Amazon.com boasted in its early logos that it was “Earth’s biggest bookstore” and could sell millions of books to its customers. Barnes & Noble was so upset about this claim that they sued Amazon, claiming that Amazon unfairly labeled itself a “bookstore” when it was really a “book dealer.”
2. Amazon Kindle vs. Physical Bookstores
In 2007, Amazon.com created another massive improvement on reading/books with the Kindle. Before you had to drive to a bookstore and could buy a few books to lug home with you. But with the Kindle, you could shop from home, pick from a large selection of books, and read on a device that weighs less than one book. Barnes & Noble attempted to copy the Kindle, but was unable to create a superior product.
3. Apple iPod vs. CD/cassette players
When Apple launched the iPod in 2001, it changed portable music players forever. Whereas before a cassette player or CD player could hold 15-20 songs (unless you carried a huge case full of CDs/tapes), the iPod could fit 1,000 songs in your pocket. And those songs could be carefully chosen by yourself rather than having many songs you might never listen to.
Amazon.com and Apple have stalled in innovation, even as they are the most valuable companies in the world
Today, Amazon.com and Apple are among the top three companies in the world in market capitalization: $1.66 trillion for Amazon.com and $2.19 trillion for Apple (as of April 8, 2021).
Who could have predicted this 20 years ago after the dot com crash?
Most would have sided with brick-and-mortar retailers rather than the tiny Amazon.com using a new technology: the Internet. And many would have picked Microsoft as the next tech innovator since they were in a dominant position with wide adoption of their PCs, Microsoft Windows operating system, and Microsoft Office software.
Fast forward 20 years:
Amazon.com and Apple are on top of the world. But their innovations have slowed considerably, even as their valuations are the highest in the world.
Investors often (wrongly) assume that the top companies today will somehow remain there.
But what companies will be among the top three in 10-20 years? What companies will disrupt industries that are in need of change?
Using the 10x Rule to Identify Disruptors: Lemonade Insurance
Disruptive companies create products and services that are so good, so unique, or so much better than what is already available. This 10x advantage means that competitors can’t figure out how to successfully copy them, or if competitors do catch up, it’s too late since the disruptor already has brand recognition and enthusiastic customers.
By identifying companies that will create 10x products and services before the wider market realizes, we can invest in the best disruptive companies for great investment returns.
We believe that there is one company making 10x improvements in an industry ripe for disruption: Lemonade Insurance.
Signing up in 90 seconds with 80% savings
Up-and-coming insurance company GEICO has a famous saying: “15 minutes could save you 15% or more.” GEICO’s statement was meant to be disruptive: you could sign-up faster for cheaper insurance than with traditional companies.
Lemonade enters and smashes GEICO’s “15 minutes could save you 15% or more.” With Lemonade, you can sign up for renters insurance in 90 seconds and pay 80% less. Lemonade is 10x faster and 5.33x cheaper than GEICO. The speed of signing up reduces friction (admit it, we're all lazy), and the cost savings delights customers.
Here is Lemonade's own video illustrating the sign-up process:
Filing a claim in 6 minutes and getting paid in 3 seconds
But Lemonade’s 10x improvement extends beyond its sign-up process. Lemonade’s speed extends to its claims process. Anyone who has dealt with insurance knows how frustrating filing a claim can be: your insurance company seems disinclined to believe you, so you might be tempted to exaggerate the claim. Your insurance company asks you for proof and documentation and photos and police reports, then it takes weeks or even months for an agent to get back to you, and then even more waiting before your claim is paid.
Compare this with Lemonade’s fully digital claims process and one of Lemonade’s real examples: Brandon’s coat was stolen. It was December 23, 5:43pm. Brandon entered the details into the Lemonade app: his Canada Goose Langford Parka cost $979 and he bought it from Saks Fifth Avenue. He spoke into the camera and described what happened (which took 61 seconds). At 5:49pm, he submitted his claim with no paperwork and no human agent involved. In just 3 seconds, Lemonade’s claims bot AI Jim reviewed Brandon’s claim, cross-referenced it against his policy, ran 18 anti-fraud algorithms, approved it, sent wiring instructions to the bank for the transfer of $729 (Brandon has a $250 deductible), and informed Brandon of the good news. 3 seconds!
Brandon gave AI Jim a 5-star rating, and sent Lemonade this note:
“I was shocked by how easy the process has been with Lemonade. I signed up for Lemonade because it was no frills, the most affordable option, and took no more than two minutes on my couch . . . I already assumed there was no way that I’d recover my losses: other insurers either pile paperwork or deduct tons of charges that I don’t understand. But this time was different. I signed an honesty pledge, answered a few questions, and Lemonade reimbursed me in a matter of seconds! The service is amazing and I am so happy that I signed up!”
Here is Lemonade's own video illustrating the claims process:
Conclusion on Lemonade Insurance
These massive, 10x improvements in the sign-up and claims process could help Lemonade to disrupt the insurance industry. The speed and ease of signing up and filing claims lead to customer delight. And the 80% cost savings attracts new customers.
This trifecta of speed, ease, and savings could be the key to Lemonade's disruption of the insurance industry.