How the Unimaginative Can Thrive in the Age of the Unicorn
Recap of Part 1: Startups and venture capital suck at ROI. Most investors are seduced by potential and blind to probability. You can read Part 1 here. Part 2 is the core of the Second Mouse Plan and provides some solutions.
The playbook
For many years, I was a trader. Although I always traded after “watershed events”, a notion that contains the seed of what I now call the Second Mouse Plan, this was a rather primitive, unreliable strategy. The very first time I had an inkling that investing after a milestone could have broader business applicability is when I learned about Valeant. Valeant CEO Michael Pearson had used the insight that pharmas were wasting money on R&D to build what was at one point the most valuable company in Canada. Valeant famously imploded, but the core insight of Michael Pearson is very Second Mouse. There were all kinds of other shenanigans that contributed to the downfall: excessive debt, unethical practices and they did not always buy high quality assets. For example, Valeant bought the “female Viagra” company for $1 billion before it had any sales. Nevertheless, I believe the core insight of not throwing money on low-probability, high potential R&D, avoiding all development risk and buying already approved drugs is right on point.
The ultimate, much cleaner refinement of a Second Mouse strategy in pharma is Royalty Pharma, founded by Pablo Legorreta. Royalty Pharma has built a portfolio worth over $15 billion, it earns royalties on seven of the 30 top-selling drugs.
Instead of placing long-shot bets on compounds, Royalty Pharma steps in later in the game: it buys rights to the royalties on drugs that have already been approved for sale by regulators. It buys them from patent holders, often hospitals or universities, that want to convert their future royalties into cash right now. The Canadian family behind the Future Shop chain has also invested a significant part of its wealth in drug and music royalties.
So what’s the “Second Mouse Plan” I keep talking about? Here’s the gist:
- Let other people blow their brains out trying to innovate, create, build stuff.
- Be alert, carefully watch for what has gained traction and is a quality proven asset.
- Be a copycat of, piggyback on or acquire the quality assets other people have come up with.
Let me expand on these points.
“I have not failed 10,000 times. I have not failed once. I have succeeded in proving that those 10,000 ways will not work.”
-Thomas Edison, total bullshit artist who reportedly stole ideas from Nikola Tesla
Strategy 1: Be a copycat
Plagiarizing gets you in trouble in school, but in business, it is often perfectly legal. Someone said:
“The essence of success is that it is never necessary to think of a new idea. It is far better to wait until somebody else does it and then to copy him in every detail except his mistakes.”
I couldn’t put it better myself, not that I bothered trying. China, for example, relentlessly copies what has worked in more advanced countries. Even their hybrid capitalist system with strong government control was inspired by a visit to Singapore by Deng Xiaoping. Given that the rise of China is the most stupendous instance of wealth creation in human history, right there, I win the debate.
Fashion is a very creative field. Who’s the wealthiest fashion mogul? Amancio Ortega, owner of Zara is worth some $70 billion dollars, placing him in the top 10 of richest people in the world. Zara, as is well known, goes to the major runway shows, sees what the high-end brands are doing and copies the latest trends for the masses at an affordable price point.
You can copy entire business models too. There’s a German online business called Rocket Internet, that watches for Silicon Valley businesses that are gaining traction and then clones them for the European market. For example Zappos was gaining traction as an online shoe retailer in the US, so Rocket Internet created Zalando. Rocket Internet is currently valued at $4 billion. Founder Oliver Samwer has said:
“On the Internet, there are Einsteins and there are Bob the Builders. I’m Bob the Builder.”
As is amply clear from the tone of this essay, the Second Mouse Plan is all about being humble! Steve Jobs said “everything is a remix”. Many Silicon Valley companies, though they superficially appear to be in the innovation camp, have Second Mouse aspects. In particular, competitors relentlessly copy each other. The other day, I heard an early Lyft backer complain that Uber was originally a black car limo service and only got into ridesharing after seeing Lyft take off. Microsoft and Apple famously borrowed the idea for the computer mouse and graphical user interface from researchers at Xerox’s PARC lab. Steve Jobs paid Xerox in Apple shares to have access to their ideas. Incidentally, I have since read that Xerox itself got the idea for the mouse from a researcher at Stanford Research Institute.
Strategy 2: Piggyback
The destruction that Internet companies wreak on traditional industries gets a lot of press, but every tech behemoth also creates a whole ecosystem of beneficiaries, sometimes creating entire industries. For example, there are now thousands of merchants who sell their wares on the Amazon marketplace. Many people have built 6 and 7 figure businesses on Amazon selling things like shoelaces or shower door trims. E-commerce in general has made warehouses a hot asset class - Blackstone is investing close to $20 billion in them. Apple has enabled a lot of app developers. Google has given rise to the ad tech industry, collectively worth billions of dollars. Facebook has created an entire new profession of “social media ninjas”. And Uber has enabled many people to earn some side income. The last example is not especially glamorous, but you probably have a far better chance of building a million or ten million dollar business by being alert to these emerging ecosystems and pouncing once the opportunity is visible, rather than trying to be one giant lottery ticket. Every large tech success story creates billions in value for others in the value chain. And I am not just referring to “pick and shovels” players like lawyers and accountants, although that’s certainly an option.
Getting involved with a franchise is a good example of piggybacking. Buying a quality franchise de-risks entrepreneurship considerably. Although some franchise deals are scams, it’s instructive that many people pay 6 figures for the privilege of learning how to operate a sandwich shop and make a success of it. Franchisees, like all Second Mouse investors, pay up, in order to avoid all the pitfalls of building something from scratch. Think of George Cohon, who acquired the McDonald’s license for Eastern Canada and eventually brought the chain to Russia. George didn’t invent the burger. He was nowhere near the “moment of creation” of McDonald’s. By the time he started McDonald’s in Canada, the parent company was already public on the NYSE and had a 1,000 stores in the US. I don’t know George Cohon’s net worth, but it’s safe to assume he is loaded.
Being a reseller or distributor is also Second Mouse. Nike founder Phil Knight’s interest in shoes was triggered at Stanford during his MBA, when he wrote a paper about the potential market for importing Japanese athletic shoes to the U.S. titled Can Japanese Sports Shoes Do to German Sports Shoes What Japanese Cameras Did to German Cameras? At the time, Japanese cameras were making a dent in the German-dominated camera market, while shoes were dominated by Germans Adidas and Puma. For the first 7 years of its existence, Nike (then known as Blue Ribbon Sports) was the US distributor of Onitsuka Tiger shoes. Phil Knight did not pioneer Nike’s eventual own shoes himself either. His track coach and 50/50 partner Phil Bowerman did, working with toxic glues and solvents that eventually caused him severe nerve damage and impaired his mobility.
The safest form of piggybacking is watching for a successful company gaining traction and joining it as an employee. That Tim Cook is worth $625m disproves the notion that nobody got rich working for someone else. Even Peter Thiel says there are too many startups and that it’s better to own 0.001% of Google, as you might through an employee stock ownership plan, than 100% of a startup failure. (0.001% of Google would be worth $8m). In terms of aggregate wealth creation, no recipe compares to your Mom’s advice to get a job with an established company. This simple advice has created more millionaires than all the other strategies combined.
Join me again for Part 2.2 here: The Second Mouse Plan Part 2.2 - The Playbook.