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On Compound Growth (Part II)
20/ When we get stuck at something, it is usually because of some bottlenecks that we cannot overcome . The way to overcome the bottleneck, may be direct, using brute force, or maybe something completely different than renders the bottleneck irrelevant, the latter we can not always imagine/predict ahead of time.
21/ The first official exploration of the Pacific Northwest of America, Lewis & Clark expedition, started in St Louis in May 1804 and the team arrived at the pacific coast in Oregon in November 1805, that took a whopping 18 months. In the 1840s, many Americans went west from Missouri via the Oregon trail, facing numerous obstacles on the road. Pioneers had to cut through heavy timber to clear a trail. At one point on the trail near Mt Hood, Oregon, wagons had to be disassembled and floated down the Columbia River. The trip took a minimum of five months over a distance of 2000 miles. Death rate on the trail was at least over 4% due to disease.
22/ Everything changed when the Panama railroad was completed in 1855, and crossing the Panama Isthmus took less than a day. Now going from the east coast to Oregon/California via Panama could be done in less than two months.
23/ Then in May 1869, the transcontinental railroad was finally joined in Utah, everything changed again. By 1876, a train leaving New York city could arrive in San Francisco in 83 hours.
24/ In the late 90s when many people were still using 56 K modem to get on the internet, the bottleneck was the low-bandwidth of the network, and it's not obvious how and when the bottleneck would be fixed. If you wanted to do a start-up providing streaming video then, it would not work. Unbeknownst to most consumers, the turning point came in the summer of 1998, when a company called Global Crossing finished construction of new optic fiber cables under the Atlantic, instantly doubling the data carrying capacity between America and Europe. And Global Crossing was able to immediately undercut their closest competitor's price by more than 60%.
25/ Before the advent of iPhone and mobile internet, the bottleneck was that people were not always next to their desktop PC, so they did not have access to internet 24/7. It was not obvious how mobile internet would work, people sneered at the iPhone in 2007 because it did not have a keyboard, and thought the $600 price tag was too high. Even in the first couple of years after its release, it was not entirely clear iPhone would win. If you wanted to do a Uber-like service before the emergence of iPhone, it would not work.
26/ It is important to acknowledge that most experiments and explorations would result in failures and losses due to various bottlenecks and fierce competition. The trick is to find the right balance: commit more resources when there is no longer any bottleneck and you have no serious competition ; If the situation is clearly not ready, limit your losses , scour for more information and resources and find other, easier things to do, be patient and don't force things , until you get that unexpected positive feedback.
27/ When you get unexpected positive feedback, something wonderful happens in your brain: dopamine rushes. Our reserve of mental energy is limited. We can work hard without reward for only so long. Periodic dopamine rushes, no matter how small, will keep you motivated and sustain your experiments and exploration for a long, long time.
28/ Eventually you will find yourself in a virtuous cycle of
More effective/efficient input, More effective/efficient output
=> Have a more global vision of the opportunities that are available, can run experiments in a larger search space
=> Can run more experiments because of lower unit cost of testing.
=> More experiments in a larger search space leads to more profitable opportunities
=> New profitable opportunities give us dopamine rushes , which keep us happy and motivated
=> More profit can be reinvested to make one even more efficient and effective with input/output/experiments
29/ Once you get into this virtuous cycle, positive feedback and dopamine rushes will become systematic and more frequent. You will find that there are more days when you get up in the morning, you feel so pumped up, as you have something new and interesting to look forward to, this is such a wonderful feeling.
30/ A few things to review to make sure you are on the path to build compound growth: First, You need to make sure that you are putting yourself in the most open and free environment in the world. The more open and free, the less bottlenecks there are. If you are unlucky to get trapped in a place that has poor transportation and communication infrastructure, heavy censorship, restriction on the freedom of movement and commerce, then you need to first figure out how to get out of there asap.
31/ Whatever you are building and creating, always make sure that reuse is a priority. Build tools that will be reused, create work that will be referenced again and again. Marginal cost of production, and cost of distribution, are also important factors in reuse, which tend to favor virtual products and services. Reuse drive down the cost of your creation, which allows you to experiment more. Reuse also expand your profit opportunities dramatically, as any revenue you received on a product/service that has zero marginal cost and zero distribution cost will be pure profit. SpaceX can be where it is today (over 50% market share in commercial satellite launching market), because it designed everything with reuse ( rocket engines, first-stage rockets, rocket fairings) in mind, which required some extra effort, compared to someone who just want to launch quickly with no regard to reuse and long term cost. Reuse => higher efficiency => more adoption / market penetration => drive down unit cost => more adoption => till market saturate, and no more increase in efficiency .
32/ When you look at the history of how old industries was disrupted by new technology, you will realize that fundamentally, it's about the inability of the old technology to grow along a certain dimension, usually due to an insurmountable engineering limit. Nokia and Blackberry were disrupted by iPhone, because its hardware and OS did not have the capability to support feature-rich third-party apps. Gasoline cars are currently being disrupted by EVs, because the former has already reached the engineering limit of energy efficiency, not to mention that the hodgepodge of hardware/software from various legacy OEMs making it next to impossible to build and deploy world class software applications.
33/ Companies like Netflix, refused to wait for others to disrupt itself. It found creative ways to reuse its existing product and service infrastructure and grew in new markets. It turned to streaming media in 2007 once DVD rentals stopped growing, then turned to building its own original content in 2013 once it realized that content would be a major limiting factor to its growth. Building unique original content is costly upfront, but that content would be reused again and again. When you amortize that cost over many years and 44 millions of subscribers (in 2013), the math starts to make a lot of sense, and it gets better and better as its subscriber base quadrupled to over 200 million in 2021, plus Netflix was able to increase the monthly subscription fee by 75% (from $8 in 2013 to $14 in 2021).
34/ The lesson here is clear: Reuse is key to higher efficiency, and compound growth ; Be creative in the way you explore and create new markets to reuse things. As long as you can improve you efficiency faster than others, no one can disrupt you.
(To be continued)