How to Profit from the Talent to Demand Ratio

I’m a big fan of business history; I really enjoy reading stories about up-and-coming entrepreneurs – everyone from Walt Disney to Steve Jobs. Lately, I’ve been thinking a lot about one question: is there a common thread – a “secret sauce” that allows these enterprising people to be so successful in different fields?

There are certainly a number of personality traits involved. For example, all of these individuals do a great job of playing to their strengths. But what else? Is there something about the opportunities they pursue that enhances their chances of success?

One day, I had a realization: the common thread was simply that these successful entrepreneurs went into a space where there was a low “Talent to Demand Ratio.”

What does this mean? Basically, it’s all about identifying opportunities which meet two requirements:

a)      There is a lack of talent (not very many high-quality business minds)

b)      There is a large amount of buyer demand (which translates into money to be earned)

Let’s take Walt Disney as an example. In the early 1900s, Disney was starting in the entertainment business and noticed a unique problem: there were no businesses which focused on entertaining the entire family. There were movies for adults and movies for kids, but nothing that would bridge the gap.

It seemed like a huge opportunity. But Disney ran into problems when he tried to raise money. Investors claimed that “this wasn’t really a solvable issue, and Disney should instead go a more mainstream route. After all, that’s where all the money was…”

But Disney was undeterred. The opportunity was real, and what was better was that no one was even willing to compete. All the industry talent was focused on making conventional movies and shows. So Disney created the Mickey Mouse character as a device to appeal to entire families, and the rest is history. Mickey became an iconic American figure, and all of a sudden, other studios were trying to get into the “family entertainment” business…but Disney already had a huge head start. This “first-mover” advantage was what helped Disney dominate the family entertainment market and grow into a multi-billion dollar enterprise.

Another great example is Google. When Google was first developed in 1997, the internet bubble was already pretty big. However, no one thought that search was the way to go, instead preferring to build online communities using e-mail and news. But founders Sergey Brin and Larry Page thought differently. They believed that search solved a real problem – namely, people finding content they were actively looking for.

For nearly two years, Sergey and Larry bootstrapped their tiny search engine from a small house in Palo Alto, California. Finally, in 1999, they managed to raise money from venture capitalists and started to scale their business. Through the dot-com crash of 2001-2002, Google continued to grow and eventually became wildly profitable. In 2004, the company filed for a $25 Billion IPO.

Their competitors were stunned. How could Google have created such a cash machine from a simple search tool? It was simple – while Microsoft and others were fighting with each other over more traditional technology businesses, Google had quietly dominated a large new category. Microsoft certainly had the talent to build a great search engine, but they hadn’t seen the opportunity. Search was an area where (at the time) there was little demand and significant demand, and Google took full advantage.

Fast forward to 2010. Numerous companies, upon seeing Google’s success, have tried to compete with a better search engine. Microsoft has sunk billions of dollars into Bing. But Google already had a huge head start. Even six years later, Google still owns the vast majority of searches done online.

So what happens with the talent-to-demand ratio is too high?

It’s pretty simple: you see a major speculative bubble. Look at the Great Depression, the dot-com bust, and the recent financial crisis. The common theme is that there were hordes of talented people flowing into an industry that couldn’t realistically support their fat paychecks. There were only so many buyers for unprofitable internet companies and credit default swaps. Talent was too high for the total demand. Once the market caught on, everything collapsed.

Ok, so we know what’s worked and failed in the past, but where are the opportunities today?

That’s a great question. To be honest, if I knew for sure, I’d be a rich man already! But here are a few thoughts…

-   Emerging Markets: Countries like China, India, Brazil, and Korea are growing rapidly. There is an inflow of capital and a surplus of opportunity. However, there are not enough talented entrepreneurs to use all of the resources effectively. I was recently speaking with a venture capitalist in India who lamented that she didn’t have enough good investment opportunities. She struggles to find fundable entrepreneurs. Contrast that to Silicon Valley where it’s difficult to even get a meeting with an investor because their schedules are so booked.

-  “Boring” Businesses: It’s easy to get caught up in the sexy industries like finance, entertainment, and technology. The media makes it seem like these are the only areas you can really make money. But there are many untold stories of people who make fortunes in more traditional, uninteresting businesses. One investor I know made tens of millions of dollars for himself by buying and fixing up a call center company. It wasn’t exactly a high-growth business, but it filled a need and just needed some operational changes to become very profitable. The investor was successful because he picked an industry where there was real demand but not too much competition.

-  The Intersections Between Different Disciplines: The world is very interconnected, and there is a shortage of people who are experts in more than one thing. Lots of talent is focused on solving problems, but there are fewer people who are tackling the space in-between. A good example of this is IronPlanet, a highly profitable company that has bridged the divide between purchasing capital equipment and online auctions. There are many people who knew about each of these topics individually, but very few people who understood the value that could be created by combining them into a single business model.

What do you think are good business opportunities with a low talent-to-demand ratio? Please share in the comments.

3 Responses to “How to Profit from the Talent to Demand Ratio”

  1. Fernando says:

    I believe we should diversify a bit, maybe we are all trying to make money over the same topics and that is what makes it even harder, what do you think?

    • Vik says:

      Agreed. Diversification is important, but so is some level of focus. I think it’s important to spend time identifying the largest opportunities for you based on your own strengths. This is definitely a good starting point.

  2. Corey says:

     
    Really good post, Vik.  Kids coming out of elite colleges all cattle-herd into the same finance and consulting fields because there's the promise of instant short-term wealth and the "prestige" for working for one of these companies.  Meanwhile, I feel that there are many many opportunities out there for the aspiring entrepreneur in niche fields.  It’s just a matter of having the proper drive and motivation to take a risk to make it happen. 

Leave a Response