THE STAR PRINCIPLE – SIMPLIFIED

THE STAR PRINCIPLE – SIMPLIFIED

Given the popularity of my last two posts – the 80/20 of 80/20, and SIMPLIFY SIMPLIFIED – I’m having another go, this time with The Star Principle.

  1. What will make you successful? What will make you rich?  Preposterous as it sounds, there is a magic formula. There is a way to get several times more money and fun out of a business.

By finding a star venture.

  1. What is a star venture? It has two qualities.  One, it operates in a high-growth market.  Two, it is leader in that market.
  2. When I wrote The Star Principle I thought it was tempting fate to say my net worth was north of one hundred million British pounds (about $130 million). The Sunday Times (of London) Rich List 2018 says I am joint number 312 in their list with a net worth of 410 million pounds ($533 million).  I have got there almost entirely by investing in star businesses – with the slight qualification that recently I have invested mainly in star businesses with strong network effects.
  3. What determines your success? Is it your ability?  No, it is not.

Is it how hard you work?  No.  Millions of people work very hard and never get rich.

It’s not a lot of other things that people assert are essential to make serious money.

The really potent, consistently successful answer is ‘positioning, positioning, positioning’.

Provided the positioning truly is exceptional.  Provided the venture is a star business.

  1. Why is a star business so attractive?

It is the combined effect of niche leadership and high niche growth that makes a star venture so wonderful.  Leadership means that the company and its products are preferred by the niche’s customers.  Like Apple, therefore, the company’s products may command a price premium.  But even if they don’t, the high volume should mean that a market leader has lower costs than its rivals.  A leading firm should have higher prices, and/or lower costs, and therefore higher profits and cash flow, than a similar business which is a follower.

Market growth compounds those profits and cash over time.  As Albert Einstein said, the strongest force in the universe is compound interest, a concept so simple that very few people really understand it (I said that last bit, not dear Albert).

If you grasp these two ideas, you have a huge insight into the future.  That’s why Apple, Amazon, and all the most valuable firms in the world, are so incredibly valuable and have increased their value at rates that seem incredible.

  1. Are there pitfalls for a star venture?

Only one, but it’s huge.  The trap is that a star stops being a star by losing leadership in its niche.  If that happens, a venture worth a fortune can suddenly become almost worthless.

The danger is acute, so you had better monitor your rivals and if one if catching up, move heaven and earth to draw well ahead again.

  1. How rare are stars?

There can only be one market leader, but there can be many followers in a market niche.  For new ventures, perhaps one in four is a genuine niche leader.

Few niches grow at least 10 percent a year – the cutoff point generally defining a star business.  (In fact, you want growth to be much higher.  Most of my star companies are growing by at least 30 percent, and some by more than 100 percent.)

Typically, only 5 percent of large companies’ products’ markets grow even at 10 percent a year.  For new ventures, I estimate it’s only about 20 percent.

Multiply these two probabilities together.  Of the 20 percent that are growing fast enough, roughly a quarter – 5 percent of the total – are likely to be stars.  About 1 in 20 start-ups is a star.

So stars are rare.  But they are not so rare that, with a bit of patience and careful thought, you can’t discover one – or create one yourself.  If you look intelligently for a star, you will find it.

  1. What’s the power of the star idea?

I’m not the only entrepreneur or investor who’s made a fortune out of star businesses.  Virtually every share in the public markets that has made people rich – excepting only special situations such as mining that are not truly competitive markets – has been a star business, that is, a niche leader in a high-growth niche.

Amazon was and is a star business.

eBay was and is a star business.

Microsoft was and is a star business.

Dyson was and is a star business.

Apple operates almost exclusively in niches where it is the market leader and obtains a significant price premium, as well as having the advantage of higher volumes and lower costs in those niches.  Apple is a star business.

Uber is a star business, albeit one in danger of losing its niche dominance.  Many people think Uber is overvalued but my guess is that investors will do just fine.

Betfair’s betting exchange business was a star business for more than a decade, and helped to make me rich (many thanks!).  The market growth appears to have slowed, so it is probably now just a cash cow – not bad, but not as great as being a star.

Facebook is a star business.

Google’s search business is a star.  That single business out of many, many businesses owned by Google (now called Alphabet) makes nearly all the profit and cash.

Waze, YouTube, and WhatsApp are also star businesses.  Sadly you can’t buy shares in them anymore, as the first two were bought by Google, and WhatsApp by Facebook – all for tons and tons of money, which, of course, Google and Facebook have so much of that they don’t know what to do with it all.

Star businesses needn’t be anything to do with technology.  The longest-running star business is surely the Coca-Cola Company, incorporated in 1888 and a consistent star business until the 1990s.  For over a century, despite two world wars, the stock market crash of 1929 and the ensuring Great Depression, Coca-Cola remained a star.  The global market for cola increased on trend by more than 10 percent a year and Coke remained the dominant player in that market.

McDonald’s was a star business from 1948 until the 1980s.

The list goes on.  IKEA, Southwest Airlines, Auto Trader, Nike, Dell Computer, Reuters, Red Bull, Instagram, ARM, Charles Schwab, Tetra Pak, the Boston Consulting Group, Bain & Company, Goldman Sachs, and McKinsey – all are or were star businesses for a long time.

  1. Finally, stars are for everyone. Marshall McLuhan said it well – “There are no passengers on spaceship earth.  We are all crew.”

Even if you have no money (yet), you can benefit from star businesses.

Because working in a star business is much more fun and you will earn much more money.

Why?

Before long, if not already, a star business will be coining money hand over fist.  It can afford to be generous.  It will reward loyalty and skill much more than an ordinary firm.  It will be successful. And there is nothing in business – I know from first-hand experience replicated several times – that’s so much fun as working in a burgeoning, hugely successful star business.  It’s easy to be a star in a star (I mean someone at the hub of the organization, not as a driver for Uber or a low-level worker for Amazon.  And I also mean someone who gets in on the ground floor, before the venture gets big.).  It’s easy to get promoted.  It’s easy to get fat bonuses.  And, if you get a few shares or share options early enough, you may end up with a surprisingly large nest egg.  Even more important, you get a massive high from accomplishing something, for changing a market, from thrilling customers, and from being part of a winning team.

It need not stop there.  Take your winning from a star business, and invest in another that’s still growing very fast.  You’ll likely multiply your money.  Before long, you’ll be rich.

Above all, be part of the team that starts a star business.  In the book I tell you how to get the idea for one.

Conclusion

The sky is full of stars.  True, the distances between them are – well – astronomical.  Far more of the sky is not composed of stars than is.  Yet, on a clear night, away from city lights, you can always find stars.

So it is in business.  Stars are rare.  But you can find them.

Whether you are an employee, a wannabe venture leader, or an investor – of grand or modest means – a star will give you a new and far richer life.

Go do it!

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4 Responses to “THE STAR PRINCIPLE – SIMPLIFIED”

  1. Knut Arne Karlsen says:

    Great post, as always. Amazingly simply. And so true.

  2. This short article contains some of the most valuable and potentially life-altering business insight I’ve ever read.

  3. Since I read the Star Principle I’ve been on a different journey. It really changed my thinking for the better.

    Its made me a lot more focused and I’m hoping my investments a lot more fruitful in years to come!

    Had I not understood this principle, things I guess would have been very different. Keep it going!!!!

  4. Paul Zdzitowiecki says:

    Hi Richard,

    Your Star Principle book is excellent.

    I am curious, how do you find star businesses? Do you seek them out through your professional network, advertise for them in the financial press, or do they seek you out for early stage investment?

    Also, my follow up question is, do you only invest in companies where you deeply understand the industry, the economics, and the market? .. ie: Warren Buffett refers this to his ‘circle of competence’.

    Thanks,

    PS: I very much enjoyed reading all yours books. They are very insightful.

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