Read our Key excerpts and most important highlights (Emphasis Ours) of an excellent blog published on how to forecast growth rates of business that are growing aggressively with positive feedback loops. Bigger gets Bigger ideology
Category killers are companies that benefit from positive feedback loops in rapidly growing markets.
Three of the main reasons that growth tends to slow over time is because:
Most markets have robust competitors who compete for current growth opportunities.
High growth markets draw in new competition, reducing future growth opportunities.
The available market becomes saturated
But category killers are insulated (although not immune) from these pressures. Instead, these companies:
Dominate their current market and face only limited competitive pressures.
Operate in markets with high barriers to entry and/or scale (i.e. Industries that are hard for competitors to enter at all or feature significant barriers to generating material initial growth).
Participate in industries in which the longer-term addressable market is almost certainly much larger than the current market.
Feature a set of positive feedback loops that cause the company’s products or services to improve more rapidly than their current or future competitors are likely to be able to achieve.
Most activities in business (and life for that matter) exhibit negative feedback loops, at least over the long-term. These negative feedback loops are a chain of reactions that leads a particular activity to stabilize at some sort of equilibrium.
One example of a negative feedback loop is the way in which the increased profits that a company earns when they raise prices leads to more interest in entering the market from potential competitors.
Positive feedback loops, on the other hand, lead to exponential outcomes, rather than equilibrium. The fact they are called “positive” does not mean they are always good.
As more greenhouse gases are released, the atmosphere warms. Warmer air holds more water vapor and water vapor traps heats. This causes the atmosphere to warm further, which causes air to hold more water vapor.
Now lots of CEOs get excited about their business. But it is the rare CEO who guides a rapidly growing category creating company as they leverage their massive lead to improve their product in a way that will attract more users whose use makes the product and their fellow users even better.
But positive feedback loops alone are not enough. If an industry is made up of many competitors, all of whom benefit from positive feedback loops, cultivating these loops may only be enough to keep a company competitive, not vault them far ahead of their competition.
If an investor is any good at all at identifying superior companies with superior growth potential, then the base rate of growth they should expect from their portfolio should naturally be higher than average.