In the wild, there’s a power in being nimble.
Being nimble allows you to move quickly; and provides advantages in how you can interact in different situations. While being small is seen as a disadvantage; the disadvantage is counter-leveraged with the power of being flexible and nimble.
This can help explain a concept we understand, but don’t consider:
Doubling a dollar is easy.
Doubling a billion dollars is f***ing hard
Doubling a dollar is considered easy. There is a huge opportunity space of leverage, with an enormous opportunity available relative to the potential gains available. However, as we increase the total number of dollars, the total opportunity space decreases. This means there are only a few remaining options. Either you can takeaway from others; or you can create a new extra space.
In this blog post we will dissect this in more detail; and provide more context on why this is true.
Why doubling a dollar is easy
There is a huge opportunity space of leverage to double a dollar. Anybody can arrive at potential ideas that can accomplish this. Here’s 3 quick examples:
• Buy some fabric -> create a piece of clothing -> sell
• Bet a dollar on an outcome -> double your earnings
• Buy ingredients for a food -> cook a meal -> sell it
Obviously, these options are not perfect - but the key thing to illustrate here is that the number of opportunities is immense. There are large inefficiences at this level in the economy, which fuels the number of opportunities.
There’s a few reasons there are many inefficiencies at this level. First, people are not motivated to capture or arbitrage at this level of inefficiencies. For example, people are more likely to haggle $100 off the cost of a car. People are much less likely to haggle over $1 off the price of an orange.
Next, the major economic agents that chase these opportunities are companies. Companies are often built and motivate to chase and prioritize the largest opportunities. Given all the opportunities in the world, and all potential permutations available, companies are more likely to fight over the bigger opportunities than those that are available for a dollar.
What does this mean? It means there’s a lot of opportunity with smaller amounts of money to manoeuvre and make massive profit gains that would be considered unrealistic. It’s why there are almost an infinite level of opportunity for people to flip products from garage sales on the weekend. This is a distributed, hard effort that on an individual transaction level can cause large amounts of profit, but difficult to replicate.
Finally, you can move much quicker with just a dollar. Your assets are very liquid - it’s cash in your hands. You can quickly transfer from one agent to another. At these levels, you don’t need high trust. While the trust can help, the low monetary amounts mean people are less likely to need to trust / care about the outcome. Thus contracts (usually verbally worded) can move much quicker.
But while these details (the opportunity abundance and nimble) allow increased flexibility for individual transactions, it comes with a punishing price - it’s hard to scale. These opportunities do not have homogeneity, both from a supplier standpoint, along with the service needed. This handicap is a huge reason people don’t chase this at scale, and often it’s relegated to a few opportunities where there is enough opportunity for the “hustle” to be worth it, with the prime example being garage sale flipping.
What changes as we increase the total number of dollars
As we increase the total value of transactions and opportunities, there is 360 degree increase in complexity that increases logarithmically. There’s many reasons this difficulty increases as the transaction amount increases, and most of these reasons are the inverse of what makes small value transactions easy.
First, there are fewer opportunities to chase. There are millions of million dollar level industries. There are only a handful of trillion dollar industries. This means that as the size of the transaction increases, there are much fewer industries that can be chased.
One outstanding example of this is Apple and Amazon. As trillion dollar companies, and as companies looking for growth, there is a genuine need to be chasing massive bets that will cause the growth needed to fuel the high level of growth per company. Relative growth on that base will require much higher opportunities and massive bets.
For example, Amazon won’t be able to fuel a 10% growth year on year by optimizing on their existing business. They will need to expand. However, there is a very limited number of industries that Amazon can enter that will yield this kind of opportunity.
Amazon will need to swallow larger and larger fish in order to keep growing at their size. At this scale, there are very few markets that Amazon can enter that will enable this kind of growth. Where we are right now, which is 2020, the only existing markets that have a massive opportunity and remain unimpeded are education and healthcare.
If companies aren’t willing to enter adjacent or new markets, they will require innovating in a way that creates a brand new market that did not exist before. One outstanding example of this is Apple. Prior to 2008, there wasn’t a massive consumer market for phones. There are many reasons for this, but one that stands out is that the utility of a mobile phone to consumers was low.
People saw phones as a one-dimensional object. Phone represented an ability to connect to others, within phone calls or texts. However, with the invention and marketing of the iPhone, Apple created a brand new ecosystem that they could successfully capture. In this situation, they transformed phones into a multi-dimensional object, where the utility to the consumer expanded significantly. Instead of just a tool to call or text friends and families, you can now explore the web, interact with services and goods, order food or transportation, find love and many more other opportunities. This transformed the positioning of phones in the common market and opened a brand new market to fuel the growth for Apple.
As seen in the above examples, the bar of difficulty for growing at large transaction amounts increases much more as time goes on. In addition to these difficulties, the ability to manoeuvre becomes much more difficult.
With larger transaction sizes, the vehicles of assets explode in complexity. Assets become less liquid, and as a result take longer to move from one form to another. The level of trust decreases, which requires the introduction of complex contracts. The level of due diligence required as well is much higher, which slows down transactions. These factors all add substantial complexity to any transactions.
When allocating capital, you need to consider this concept as you explore transactions of different sizes. Be conscious of what space you are chasing, and if there is enough space for the size of transaction you are looking for. If you don’t believe there is enough space for the market, be prepared to either explore challenging or taking away from others or make extra space. If you are looking for unused space, try to ensure that you are chasing a massive undifferentiated industry or creating evergreen technologies or services.