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Before starting a business, learn the relevant mental model

  • By Alan Knott-Craig
  • November 24, 2017

Charlie Munger says the secret to success is to learn as many mental models as you can, whereafter you have a latticework from which to hang facts.

In the absence of a latticework, facts are meaningless.

Here’s an example:

Do you want to launch an Uber-like app? Or an online classified ads empire? Or another social network to challenge Facebook? Or an instant messaging platform to challenge WhatsApp.

These are platform businesses. Platform businesses are premised on “network effects”.

Before embarking on your entrepreneurial adventure, you need to understand network effects.

The network effects mental model comprises three major factors:

  • You can’t launch a platform in the absence of a vacuum.
  • Platforms benefit from winner-takes-all effects. In some cases, there is space for a 2nd place player, ie: Lyft vs Uber. But there is definitely no (profitable) space for anyone from 3rd place downwards.
  • The player with the most growth capital, wins. In other words, Silicon Valley-backed or China-backed companies always win. The only possible exceptions to this rule are companies tackling problems that do not exist in Silicon Valley or China.

Don’t start a platform business until you understand the network effects mental model, or latticework. Then, make sure you’re tackling a problem specific to your geography.

A mental model that applies specifically to Africa is that virtually every Internet user uses prepaid mobile data, which is capped and very expensive.

That makes African web users very sensitive to data costs, which makes Netflix a completely unattainable content category for most Africans.

If you didn’t understand this mental model you would cheerily launch a mobile-only Netflix-for-Africa and promptly fail.

No matter the merits of your startup idea, if you don’t hang them from the relevant latticework, you won’t make an informed decision.

If you don’t make informed decisions, don’t be surprised if you lose a lot of money.

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