Revisiting The Power Of Spawners
There are few new mental models I wanted to expand on, which I think make the spawner framework even more powerful. If you don't know what a spawner is, please check out the framework here. If you can't be bothered with reading the whole thing, the TLDR is a Spawner is a company with "DNA, which reflects a deep conviction in the importance of relentlessly adding and incubating new businesses that have the potential to be massive growth engines."
There are three mental models I want to focus on which add credence to the power of Spawners:
The role of specialist vs generalist in an ecosystem.
How spawners have a leg up on the competition when you view the evolution of business life as an algorithm.
Why spawners can fill the niche of building a great business that no one is building, as outlined by Peter Thiel.
In any ecosystem, there will be organisms that survive, and those that go extinct. It doesn't matter if you're a gazelle in the desert or the executive of an S&P 500 company. These rules apply. In both of these ecosystems, there are organisms that can be classified as generalists or specialists.
The Great Mental Models Vol. 2 defines generalists as "organisms that have a broad niche." Whereas specialists "have a very distinct role in the ecosystem." A generalist is widely adaptable, they can live in multiple environments, eat a variety of food sources, protect themselves from a variety of predators. A specialist will do very well in a very specific area and niche, such as very distinct or non-changing hazardous environments (such as heat resistant bacteria), but will have a hard time scaling due to their inability to adapt to a changing environment.
I think the natural growth in some (not all) businesses, is to start specialized, become very good in that area, then begin branching out (acquiring more generalist characteristics) once you cannot scale. So in some ways, businesses move from one end of the spectrum to another. Many businesses don't need to, and that's fine, but in the sense of the spawner framework, these businesses are finding themselves in more and more competitive niches and further diversification is needed in order to survive.
The concept of apex spawners helps companies become more generalist. It allows them to survive in a more dynamic business environment. It allows for certain parts of the company to level out, but not die, because other areas of the company can more than take up the slack. The other great thing about spawners is that they often retain supremacy in their area of specialization that they can leverage their expertise in when acquiring spawner businesses. For instance, Amazon already laid the groundwork for selling things to people by starting with books. Their knowledge and know-how in a specialized area were able to be applied to all sorts of goods, and they were able to successfully spawn great new ideas.
On top of this, a generalist can fail at certain things and still survive or even thrive. A specialist is good at very few things, if they crap out on one small vital area, they're gone. So being a generalist helps with business durability, and helps protect the downside verse being a pure specialist.
Next, we look at Daniel Dennet's view of evolution as an algorithmic process. Dennet views an algorithm as having the following characteristics:
I don't think there is an algorithm for business success, otherwise, everyone would find the recipe for success and get to cooking! However, I think there are certain parts of this algorithmic model that fit into the business.
Substrate neutrality in business means a successful business can be successful in any currency, in any area of the world, in any climate, demography, etc. Good companies make money in multiple currencies. Period.
As for underlying mindlessness, this is where the model is in the grey zone in business. Underlying mindlessness means a recipe or blueprint should be followed in order for a specific result to happen. I think 1000 businesses can do pretty similar things, but they aren't all going to end up as the next Google. However, most businesses have specific outputs which end up giving some success. If you grow free cash flow without accounting gimmicks over a long period of time, it will be hard not to succeed.
Guaranteed results mean that if the steps are executed flawlessly the result is always a success. There doesn't seem to be a specific attribute or series of attributes that guarantee business success. Again, there are definitely some similarities in successful businesses. If you look at The Outsider's they all had attributes such as intelligent share buybacks, the use of debt for acquisitions, decentralization. But if we follow the recipe above, increasing cash flow for long periods of time due to the underlying economics of the business and not accounting magic, you're pretty much guaranteed to succeed as long as that free cash flow is going up.
If you look at successful Spawners, they're essentially a free cash flow building machine. There are multiple routes to building this free cash flow, and over time, the successful ones will compound their cash flow, allowing them to acquire more spawners which will add even more free cash flow.
That brings us to Thiel's spiel about building businesses that no one else is building. The ability for a spawner business to generate free cash flow that can then be re-invested into the business is a huge advantage. Not only can companies invest in improving their own business, but can branch out in different areas to diversify revenue channels.
Where a lot of power comes in, is being able to fund private companies. This gives the spawners not only the ability to make cheap moon shot bets, but also gives them valuable insights into the future of competition in their own or similar industries. If you have a good idea of what new elements of competition are going to be thrown at you, I think you have a higher probability of staying alive for a longer period of time.
If you already have a great business but want to make it even better or scale it, you may need to focus on building something that nobody else is building. A great current example that I think about a lot is Shinoken's REaaS segment. I've often looked at what new technology is being built in the space. There definitely is a lot of innovation, but I haven't seen anything exactly like what Shinoken is doing. The REaaS spawner is a very interesting long-term proposition on removing some of the pain points of purchasing a property. Time will tell how well this works out, but the investment into the segment was cheap, and even if it fails, it won't negatively affect Shinoken.
If it succeeds, you have a potentially massive TAM, a first-mover advantage, and a long runway for growth. Companies that have high ROIC and high retained earnings will do well in this area. Companies that acquire spawners with debt and have a historically low level of ROIC will have problems making these spawners work due to the underlying economics of their business.
You don't need to exclusively use the spawner framework to succeed in investing. But understanding it as well as possible will help with your decision-making when choosing your next investment. I think utilizing the Spawner framework will definitely eliminate a lot of possible businesses while highlighting the ones that will be long-term compounders!
Good luck out there and keep thinking!