Wednesday 11 May 2011

Richard Koch's The Star Principle: the Business of Winning

I recently read “The Star Principle” by Richard Koch, (businessman and the author of “The 80/20 Principle,” one of my favourite books). In it, he describes a powerful and convincing recipe for identifying successful businesses. I can recommend reading the book but for those who don’t have the time here’s my summary of it:

A star is defined as a business which is the #1 player in its market niche, and its market is growing fast (at least 20% - 30% per year). These two simple characteristics, set apart the business success stories, which make their backers tens of millions of pounds, from the run-of-the-mill businesses that just about breakeven but never make anyone rich.

  • If you are founding a business, look for a gap in the market where you will be number one from the beginning. And look for a niche big enough that you can sustain rapid growth for many years. Once you establish a leadership position, do everything you can to retain it. More importantly, if you fail to get a leadership position, or you find your niche is not as big as you thought, it is better to cut your losses and direct your efforts elsewhere.
  • If you are an investor, look for embryonic star businesses that you can back, where you can have an active say in their management (and ensure they remain stars).
  • If you lack the resources to found or invest in a business, try your utmost to find a star business and go to work for them – the ‘first 20 people’ in on the ground floor can reap the benefits later on by getting shares or options. What’s more, working for a star business is much more fun and a much better learning experience than working for big corporates.
Koch exhorts every reader to try one of these three: found, invest in or work for a star business.
“Between 95% and 99% of businesses are not stars. For every 20 ideas you have, you can confidently junk 19 of them, because they won’t be ideas for a star venture. This saves an awful lot of money, sweat, toil and tears. Star ventures are rare...but they contribute over 95% of long-term value and probably at least 120% of the cash ever generated.”
Now every ‘recipe book for success’ needs to be read from a critical perspective (with ‘a pinch of salt’ if you will). Most importantly, if someone has found a foolproof method to ‘get rich quick’, you would reasonably expect them to spend their time executing their method, not writing about it. Well Richard Koch has already proved his entrepreneurial and investment credentials. As he describes in the book, it was his experiences with a diverse range of start-up businesses that allowed him to refine his idea of a ‘star business.’ He has been involved in five successful start-ups and made over £100m. “Koch is someone worth listening too,” wrote the Independent; this book is worth a read, as soon as you get the chance.