The Impeccable Venture Types

Two concepts that appear to have a major bearing on long-term prosperity of a business are the notion of ‘distinctive competence’ and ‘market share.’


A company with larger market share in its particular line of business gets more practice in performing that business than a company with a smaller market share and consequently should be able to develop through that practice a higher level of competence. At the same time, by having a larger market share a company enjoys economies of scale—quantity discounts on purchases, thinner spreading of advertising costs, and justification for greater investment in tooling and automation and for more research and development. Consequently, it has an advantage in lowering unit costs, which in turn can allow it to lower prices and thereby outsell the competition to gain still more market share, and so forth. There are research data that indicate both that more sharply defined competence, often as a result of narrower specialization, leads to greater growth, and that larger market share leads to higher profits.


In evaluating prospective venture ideas it therefore makes sense to as, “What will the company’s distinctive competence be?” in other words, what will it be able to do better than other companies can and why? It also makes sense to ask what share of market the company will have as compared to competitors. If it seems likely to have only a very small share of market and competitors enjoy larger shares, then it will need either some major performance improvement such as a significant special innovation or else a lot of financing to increase its share and be able to survive.


One ideal approach is to begin early in a new industry. When the industry is small, it should be possible for the new company to obtain a significant share without having to be large to do so. As the industry grows, the company can then grow with it, still maintaining its market share, with consequent high profits. This type of enterprise is ideal not only from the entrepreneur’s point of view, because the company prospers, but also from a funder’s point of view, because rapid growth of the company will create a profitable application for capital to expand the company’s capacity to handle increasing business. Thus to capture a major market share at the opening stage of a new industry is an ideal pattern for a growth-oriented venture.


A second ideal type of venture is one that captures a major share of an existing but more mature industry. The major share will generate high profits, but if the industry, because of its maturity, is not growing, then the company will not have to grow in order to maintain its market share. This will mean that it will not need external funder. From a funder’s point of view it is not particularly attractive. But from entrepreneur’s position it is, because the profits will not have to be plowed back but can rather be taken as salary, dividends, and other benefits. The trick, of course, is to capture a major share in an existing industry, and this can be done by choosing a very small industry to start in, by entering through purchase of a going concern that already has a respectable share, or by entering with a strong innovation or other competitive advantage.


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