The One-trick Pony and The Empire

The One-trick Pony and The Empire

Everyone wants to build the next “rocketship.” We all want to start businesses with an incredible growth trajectory and massive impact.

But when looking at the most successful startups, there’s a curious phenomenon that happens. A lot of early success often hurts a startup in the long run.

While all successful businesses succeed at finding product-market fit, they end up splitting into two very different types of outcomes: the one-trick pony, and the empire.

The One-trick Pony

One-trick pony startups build a wildly successful product, but then struggle endlessly to grow bigger. They effectively cap-out within their market, but rise to prominence because that market is so vast.

They share a few major characteristics

  1. strong initial traction, with good product execution
  2. a massive market
  3. additional products that don’t meaningfully reinforce the core business

One-trick ponies ride an initial wave, find a major need, and really execute well against it. And after that initial success, it feels like nothing can go wrong. The business has just ‘struck gold.’ And they start capitalizing on that goldmine well before anyone else can tap into it.

But then, things do go wrong. Because growth has been so easy, in most cases the business hasn’t built the discipline or processes required to grow systematically.

Twitter is the textbook example of this. They filled a significant need at a time when people were first discovering the power of mobile phones. But after building out the core product, they stalled. They killed off Vine. Moments wasn’t driving the traction they wanted. And their developer platform wasn’t able to capture the amount of ad revenue they needed.

Dropbox is another case. They built an amazing product that generates an incredible amount of revenue. It was exactly the right time for the company to enter the market as more and more people started owning multiple laptops and mobile phones. But amongst Mailbox, Carousel, and Photos, Dropbox hasn’t yet been able to successfully expand outside of the core product.

Now, I’m not saying that you can’t be an incredibly successful business as a one-trick pony. Many of these startups have multi-billion dollar market caps, employ thousands of people, and have products used by billions of people across the world.

The fact we’re even talking about them in the first place is because these companies are so valuable. But it does create problems for the business down the line. Namely when it comes to fundraising, valuations, and attracting talent.

More on that later.

The Empire

On the other hand, there’s the class of businesses that I would call ‘empires.’

Like the Roman or British Empire, the empire business is heat-seeking. It has lofty visions of what the future will look like–but that doesn’t dictate the day-to-day operations.

Instead, the empires always focus relentlessly on just one goal: how to build a bigger business.

They systematically build on their core competencies and reinforce their core products. When it makes sense to enter a bigger market, they go for it–but only if the empire can leverage some competitive advantage.

Empires run this playbook again and again until they’ve actually created the fundamentals of a business: a repeatable process for expanding the reach of the organization.

It doesn’t really matter how they get there, because the key is that the empire has built the underlying system to follow the market forces and leverage their competitive advantage.

Amazon is perhaps the best example of an empire in recent history. They started as an online bookstore. And then moved into all online retail. Then doubled down on their own distribution efforts with Prime and robotic distribution centers. And then they started leveraging their scale to build the worlds most popular compute platform.

Facebook and Google are also good examples. Most new aspects of their business complement the main source of revenue: advertising. Instagram and Youtube both provide more surface area to actually show ads to users. Messenger and Chrome provide a more complete dataset for better ad targeting. Their expansive product offerings are greater than the sum of their parts.

Even Microsoft started as little more than a company building a BASIC interpreter, but gradually became the business behemoth that we know today.

Regardless of the business, the empire relentlessly pursues growth. The empire will shapeshift and adapt even to the point that it no longer resembles the original business.

It’s laughable now to imagine Amazon as just an online bookstore. Or Microsoft having only a single product line. And that’s because they are constantly expanding.

Financial Impact

Ultimately, the biggest tangible difference for empire businesses is a very different outcome when it comes to raising money and the market cap.

A one-trick pony may be in a massive market. But if they can’t break out of that market, there exists a hard cap on the valuation of the business.

As Ben Thompson often reminds Stratechery readers, the public value of a stock is based upon the expectation of future earnings. The price not only reflects the current revenue and profit margins for the business, but the price blended across a 10-15 year time horizon.

For a one-trick-pony, this value caps out with the size of the addressable market. Assuming you know the growth of the one-trick pony, you can already estimate the future earnings.

Naturally, that’s less appealing to shareholders. They expect the business to grow so that they can then re-sell the stock at a higher price than what they purchased it for. They’re effectively betting their one-trick pony is actually an empire!

The reason that empires are so much more appealing to investors and shareholders is that there is no fundamental limit for how big an empire business can get. If they’ve built the muscle for continuously discovering new products, they can constantly expand to new markets.

This concept is even more important when it comes to raising venture capital. Because of the power law governing startup outcomes, VCs are incentivized to identify and build the empires. They are effectively betting with every investment that the company becomes an empire itself, and abandoning the rest.

Identifying an Empire

As an investor, it’s certainly valuable if you can identify the empires early on. But it’s also important as a founder or employee. You’re spending the most precious and valuable resource of all: your limited time on earth [1].

Obviously, there’s no hard-and-fast rules for identifying early stage startups as empires. Otherwise, we’d see VC firms with perfect investment records (and a lot more empires). But I do believe there are a few good heuristics.

From what I’ve observed, empire businesses seem to follow the exact opposite rules of the one-trick-pony.

Instead of immediately nailing a giant market trend, the empire’s path is more circuitous. They struggle. They work hard. They start small, and grow big. And above all, they are disciplined. They kill products that don’t work. And they constantly take bets where they can.

You see it most visibly with acquisitions, killed products, and launches. Instagram launches stories to leverage its user base to compete with Snapchat. Google retired Wave and Reader, because they weren’t contributing to the core business. Google merged Firebase’s independent platform into a core offering in their cloud platform. Sometimes there are clear missteps, but empires predominantly build products in a very disciplined fashion. And once the empire has established itself, we see this process again and again.

But more often, no one sees an empire coming because the habits and systems of the empire are internal. Like the Romans, they have to first create the network of roads before expanding their reach.

In a business, these internal pieces are the team, culture, and the leadership. And though they are hard to spot, they are the leading indicators of an Empire–it’s the product and market share that are derived from these internal systems.

[1] That is, assuming you are most focused on creating impact. Admittedly people start and join businesses for many different reasons, but overall value creation is a common proxy metric for impact.

Thanks to Peter Reinhardt, Victor Pontis, Katie Sullivan, and Tido Carriero for reviewing drafts of this post.