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Two routes to something new
Starting something new has two routes. The first is to launch a competitor in a segment where businesses already exist. Those businesses have moats and staying power, so a newcomer is unlikely to take much of their market share. If it were easy, the segment would not be interesting in the first place.
The second is to invent something that barely exists yet, which is how startups win share when they succeed. The statistics there are dismal. At roughly $4 billion in revenue, a new product would need to reach at least half a billion to move the needle, and the chance that it does is probably one in a thousand. Winners typically need about ten years to get there, and in ten years the company would want that product at $5 billion.
The hidden cost of failure
The cost of the failures stays hidden. Very talented founders and early employees pour huge amounts of time into projects that fail, working for almost no money on a dream, and the few visible winners flatter the odds. The expected value of that bet is awful.
Buying instead of building
So Bending Spoons buys product market fit from companies that have already succeeded. Because it can operate them better than their previous owners, it can offer what looks like a high price and still deliver good returns to its shareholders.
Why does survivorship bias flatter startup odds?
During World War II, the mathematician Abraham Wald worked with a Columbia University statistics group studying where returning bombers had bullet holes. He recommended armoring the places with no holes, because planes hit there never made it back to be counted. Startup stories have the same blind spot: the founders who are interviewed are the ones who survived. The failures leave no visible record, so the winners seem more common than they are.
Why do established companies resist newcomers?
Incumbents hold customers through switching costs, habits, integrations, and accumulated data, so a rival has to be far better to pull anyone away. Clayton Christensen's 1997 book The Innovator's Dilemma found that incumbents are rarely beaten head-on. They are usually beaten by entrants that start with something simpler or cheaper at the edge of the market and improve from there. A direct clone of an existing product rarely follows that path.
How can a buyer pay a high price and still profit?
A business is worth different amounts to different owners, depending on how well each one can run it. An owner with better tools and lower costs can earn more cash from the same customers, so it can pay a price that looks steep to others. Economists call the extra value created by combining or improving businesses a synergy. The buyer profits as long as the cash it extracts exceeds the price it paid.
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