Great businesses keep finding success

Spencer and I were talking about a book he read recently called “The Star Principle” by Richard Koch. The basic premise is there are only a few exceptional businesses that are market leaders in a market that is growing quickly (think Nvidia & AI). These are the companies you want to work for and invest in. 

While we were talking, it occurred to me that for many of the largest companies in the world, their most successful product or service was not their first. They used the profits from the first business to create a new, second business that became the larger and more profitable part of the company.

You might call this The Second Star.

The iPhone was not the first Apple product. AWS was not the first Amazon service, and the datacenter GPU wasn’t part of Nvidia’s business for its first few decades. What many of these Second Star businesses have in common is that they are much larger market opportunities and often entail higher profit margins than the first business.

How did they do this? By reinvesting the profits of their first business into new and innovative products and services. 

Not all companies have the right DNA to do this. We’ve found that the companies that have a track record of success—and make reinvesting a priority—have the right ingredients to create a Second Star (and even a Third Star) business. 

These great companies ride the wave of success in their first venture, but they don’t rest on their laurels. They make the difficult decisions that may decrease short term profits (like Nvidia investing in CUDA in the early 2000s) in order to position themselves to benefit from the next major area of growth. 

Can you think of another example of a Second Star business?

 

Best regards,

Evan McGoff

 

 

Disclosure: Dock Street Asset Management, Inc. and/or our clients may own Nvidia (NVDA), Apple (AAPL) and Amazon (AMZN). This article is not intended to be used as investment advice.