There are certain businesses we believe are inevitable. What does that mean? It means businesses that almost no matter what are going to continue to become more valuable, have more market share and more “mind-share” of their consumers.
One of our favorite up and coming investors to follow is Jake Rosser of Coho Capital Management in Oregon. You can read his great letter on Amazon and inevitable businesses here. He discusses what makes a business inevitable is a self-reinforcing business model.
Self-reinforcing business models have the “flywheel effect”. The flywheel effect is what Jeff Bezos so famously drew on a napkin to convince the management team to sell third party competitor products on the site:
Amazon has a similar model with Amazon Prime. The more free services included within Amazon Prime the more value it creates for Prime Members. The more value Prime members get the more people sign up to be Prime members. The more revenue Prime deliver the more services it can within the membership, which adds more value…. The cycle repeats.
Google is another great example. Every search performed on Google (and there are 3 billion per day) refines future search results and increases the accuracy of Google’s algorithm. The more accurate the search the more value it delivers to its users. As people use Google it strengthens Google’s product, which makes it more valuable, which brings more users, strengthening the product, adding more value in an inevitable cycle.
Facebook also has a self-reinforcing business model. More users means more useful content which attracts more activity from users. More activity allows Facebook to gain more information about its users which allows it to create better targeted advertising. The more targeted the advertising the more value it provides to advertisers. The more advertisers that come on the platform the more it can lower its cost of advertising driving value even higher.
These are amazing self-reinforcing business models. What other businesses are you aware of that are self-reinforcing?? We’d love to hear from you!
All the best,
Your Fortis Capital Management Team