Our companies offer new solutions to old problems
Wisdom in investing, as in life, comes from many sources. One passage from a biblical philosopher is something we reflect on when we make investments and as the competitive environment evolves for our portfolio companies. It is this rather definitive statement from Ecclesiastes:
What has been is what will be, and what has been done is what will be done; and there is nothing new under the sun.
Is there a thing of which it is said, “See, this is new”?
At first glance this seems obviously not true. There are new businesses doing new things appearing all the time and some of these thrive. But in an important sense the philosopher is correct, most new businesses are solving old problems. People have always needed to find things and firms have always needed to advertise to potential customers, which are the problems Google addresses. There is nothing new in households needing to find tradesmen, designers or other one-off workers, which is what Freelancer does. There is nothing new in people wanting to sell their car which is what Carsales.com.au does. It is the solution that is new, not the problem.
For a new solution to an old problem to turn into a great business, the new solution has to be significantly better than the old solution. A slightly better solution will not be enough to persuade customers to go through the inevitable hassle of changing providers.
When we say a new solution is better we usually mean some combination of faster, cheaper and a ‘better return on investment’. For a consumer the ‘investment’ is often time and the opportunity cost of doing something else, but it also includes cost. For a business the calculation is financial. What is my return on the cost of advertising with Google compared to advertising on television?
Providing a new solution to an existing problem is what the vast majority of new digital models and businesses, and Bailador businesses, do. The new business grows by displacing incumbents and taking market share.
The BTI Portfolio: New Solutions to Old Problems
There are rare new businesses that reveal new opportunities consumers had never before considered. Discussion of these businesses will have to wait for another time.
First published in the BTI Shareholder Update for July 2018.