Discover your core added value

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This is article #4 in my series How not to build a business. I open up about all the mistakes I made building a software as a service and all the lessons I learnt in the process.

My mistake: I did not concentrate on what was important

Building a business is chaotic and it is easy to get carried away doing things that do not generate value. As the universal Pareto Principle teaches: 20% of the work will provide 80% of the value. It is hard to find and focus on that 20% of tasks which actually move the needle.

Building iMenoo, I was not immune to this reality, often focusing on what I did not have to. In my head, the product was so good that we would be making hundreds of sales per month (the scrappy financial model we built certified this), so I had to figure out how to make the sales team efficient. Bear in mind we did not have a sales team yet, since it was just my co-founder building and me selling.

I was constantly talking with people I thought I could learn from. In a conversation with a successful entrepreneur, he showed me an awesome app that they had built at their company to track sales; gamifying the experience for their sales team in order to push them to make that extra sale. Of course, that was the solution I had been looking for. I started to design the sales app instead of focusing on making more sales myself. It was a terrible decision. It goes without saying that we never ended up building a sales team.

My learnings:

#1 Focus on your core competence

I was so obsessed with making iMenoo big that, instead of doing the things that mattered, I got carried away trying to make more efficient processes that did not even exist yet. Of course it was more bearable to think about my imagined hockey stick growth than dealing with how little I could accomplish myself as a one-man sales team. Talking with more customers would have helped us realise that our product was a nice-to-have (a vitamin). We could have tried to address other problems which may have been more critical for our customers.

After a few years, I have realised that in order to avoid this issue, it is critical to focus on the business’s core competence. That is, the part of the business which, if removed, renders the company meaningless. It becomes the most valuable asset of a company and occasionally can act as a moat that protects you from the competition.

#2 Depending on your business the core competence is different

Depending on your business line, the core competence is different. Having said that, let’s analyse from first principles the core competences that exist:

💻 Technology

Technological added value is what we all want to have for our companies. Obtaining it requires having the know-how to develop that certain technology which sets you apart from the competition. Since the tech boom of the last 20 years and the riches that came with it, there are many companies that call themselves “startup” and say they have developed great technologies in order to push their valuation, but in reality they have no real discernible tech. This is what happened with WeWork; a company which tried to sell its main added value as being technology when it is nothing more than that of real estate (more on that added value later). Conflating the core competence was such a critical mistake that eventually WeWork took a hit in its valuation, from 40 billion to less than 10.

There are many kinds of technologies, belonging to the physical or the digital world. You can have unique recipes, unique industrial processes, deep technologies such as the blockchain or computer vision and much more.

Examples of businesses where technology is the core competence:

Excel spreadsheets: each cell has an immense amount of technical functions that no man could emulate manually.

Spotify’s reproduction algorithm: it enabled such a fast streaming of songs that it provided 10x more value than other competitors of its time, such as The Pirate Bay.

Tesla’s computer vision algorithm: this is the technology which enables cars to understand the objects that surround them when driving autonomously. Without this advanced technology, Tesla would not be able to provide this differentiating feature.

💰 Scoring

This category of added value is very specific to two types of services: lending money and insurance. There are many companies that provide value to users in the form of money. For example, loan providers such as Capchase, Pipe or banks in general. The truth is that money is equally green everywhere, regardless of where it comes from. The value added for customers is completely fungible, so differentiation is hard. The interesting thing here is that, as opposed to other categories, the core competence is inward facing, for internal use of the company. Based on data available, how do companies decide who to provide loans to and who not to? These kinds of companies normally require some secondary added value, such as a clever origination strategy which provides them with leads. Nevertheless, there will always be people looking for money, so finding customers is not always an issue.

Examples of businesses where scoring is the core competence:

Klarna credit scoring: the known buy-now-pay-later platform. They have a proprietary scoring of the people they offer financing to.

Bcas employability algorithm: Bcas (the company I work at) loans students money to carry out courses that help them land a job. The particularity is that students do not have to return the loan until they get that job. We have developed a proprietary employability algorithm which helps us decide who to provide loans to.

Capchase’s revenue scoring: they do an analysis of their customer’s churn, MRR and different variables to calculate the capacity of repayment.

📦 Content

The added value is content when you are trying to entertain your users. This means that, regardless of your form of delivery, content is king. An important factor to bear in mind is how, together with technology, content is one of the most scalable added values due to its fixed cost of production and its infinite reproducibility. It takes me a few hours to write this blog post, but once it is done, getting one reader costs me the same than getting a hundred.

An aspect of content I think is relevant is to distinguish evergreen content from one-off, timely content. It is not the same to listen to a podcast by Joe Rogan, featuring a conversation with Naval offering timeless advice, than listening to the All-in podcast. Both are of great quality, but I would argue that after some time, the All-in podcast episodes lose relevance against timely content of the current date.

Examples of businesses where content is the core competence:

Joe Rogan: arguably the #1 podcast in the world. It started on Youtube in 2009 and after it moved to Spotify. In the end, the medium is nothing more than a distribution strategy. After a deal with Spotify, his content is now exclusively on that platform. The distribution medium has changed, but the business still works because quality content is being delivered.

Mr. Beast: an incredible youtuber who never disappoints with his content. If it was not as good, he would never have reached his success.

Netflix: content is a must-have here. Users are constantly demanding new TV shows and films and, whenever Netflix fails to deliver, its stock price plummets.

💻 Real Estate

This is one of the oldest value adds and it is simple. Whenever the user pays rent or is buying a place, the value add is real estate. The main factors that contribute when calculating its value are size, location, quality of the place, amenities etc.

Examples of businesses where real estate is the core competence:

WeWork: it did best when it understood that real estate was its core value. It would go to cheap locations (such as the Tenderloin in San Francisco) and improve on all of the other factors that encourage renters to pay more for a location (ie. incredible amenities). That way they would arbitrage on the price and make a handsome profit. Of course, it all went to s*** when they tried to sell that they were actually a tech company. They were not.

🕸️ Network/Marketplace

This value add consists of people interacting with one another. This is the value of social networks such as Twitter. Technology in these businesses is important, but I would argue that the number of people interacting on a repeated basis in your platform is even more critical. This is also the core competence in marketplaces such as Airbnb. You need enough people in both sides of the marketplace in order for it to work: both people searching for houses and people listing the houses of course.

One of the advantages of network added value is that the more people join a network, the more valuable the community becomes. However, it is difficult to get started. Normally, the right way to get a network going is to focus on a niche first. The cool thing here is that once a network reaches a certain size, countless features can be built on top and the business can become a money printing machine.

Examples of businesses where the network is the core competence:

WeChat: the biggest social network in China. It has become a super-app that people use to send money, schedule doctor appointments and much more.

Discord: an instant messaging social platform that focused first on the gaming world, becoming a behemoth in the social networking space.

⚖️ Having a license

There are certain industries which are strongly regulated. Often the regulator comes into play because the risk for the consumer is high. When buying a product or service in a regulated industry, the consumer accepts some additional hurdles and possibly a worse experience than he would have in an industry without regulation. In turn, regulation guarantees consumers that businesses comply with a set of baseline requirements, removing the risk posed by potential bad actors.

Some of the industries which fit in this category are banking, investment, insurance, food and drugs, among others. In this case, I would argue that having a license is the greatest value add. Competitors cannot enter the market until they manage to get that license and such procedures sometimes take many years to be completed. Therefore, in regulated industries, getting a license is the right strategy.

Examples of businesses where having a license is the core competence:

Revolut: Revolut has both banking and brokerage licenses. This enables users to trust them with something as important as their money and helps them grow it in the form of investment.

Securitize: Securitize’s main advantage is being fully regulated and as a result, being able to offer a full set of financial services. Even though it is a technology company with a tokenization protocol at its core, if it was not a regulated transfer agent and broker dealer, it would not be nearly as valuable as it is today.

🚌 Distribution & Logistics & Operational Efficiency

The world is messy. So figuring out a way to process operations efficiently can be a core competence of a business. When done properly, you are able to provide value to your consumers in the form of lower prices, for example. This core added value could be included in the technology area because operational efficiencies can be derived from algorithms and similar methods. However, I thought it deserved a separate category because of how hard they are to achieve.

Examples of businesses where distribution & logistics is the core added value:

Amazon: probably the king of operational efficiency. No one operates real world assets at the level Amazon does. When you order a package, they are always top of mind and the fact that they are able to deliver within a 24 hour window seems magical.

Zara: Fashion is fickle and depends on rapidly changing consumer tastes. Zara dominates this challenge with a process called just-in-time production. Instead of manufacturing products and storing them, the just-in-time production scheme consists in skipping out on the storage part altogether. The products go straight from the factories to the shelves. This way, Zara is able to change clothing lines on a weekly basis with an extremely efficient operation.

🎨 Multiple core competences

If you think about it, there are many companies that exhibit more than one core competence. I would argue that one always comes before the others and that, as the business grows, it consolidates on multiple areas and potentially can add more. This makes businesses even more robust, profitable and enduring.

Examples of businesses where there are multiple core competences:

Spotify: requires content and technology. It has to have the artists’ songs in order for it to have users willing to pay their services. Additionally, it needs the technology that ensures the user experience is top of class compared with the alternatives available in the market.

Netflix: very similar to Spotify.

Tesla: needs technology, licenses and operational efficiency. It needs technology to create cars that have enough battery and operational efficiency in order to be able to produce and deliver the cars. It also needs licenses to be able to launch features such as self-driving cars.

Conclusion

In the end, the most important principle to bear in mind when starting a business is to have clarity regarding what your core competence is. This will help you distinguish the noise from the signal and guide you towards the areas you have to concentrate on, in order to increase your chances of success. If you do not work on your core competences, you will fail. The more core competences your company has, the more difficult it will be to compete with you.

PD: If there is any core competence you think I am missing, I’ll be happy to add it to the blog entry!