As a complexity scientist, I love to study markets, whether they're natural ecosystems or business ecosystems. And today we're going to talk about something really fun.

It's one of my favorite topics, which is how to build a billion dollar start-up almost overnight. And when I, when I studied natural markets, I realized that the natural ecosystems are very similar to business ecosystems, whatever they are, whatever sector, industry, and there's certain dynamics that play out over and over again and in a natural ecosystem as they do in a business ecosystem.

So what I realized is that when you want to build a billion dollar start-up overnight, well, almost overnight, is that you have to have to look at patterns within a market, whatever that market is, and what I realize is there are certain patterns that play out over and over again that I want to share with you because obviously I'm also interested in building a billion dollar start-up overnight.

So here's what I looked at. I analyzed them and looked at it from a pattern perspective, and that's what you do as a complexity scientist because you're studying nonlinear systems.

So you're always looking at simple rules that evolve and create complex patterns. So if you're looking at it as the market evolves, you might see a lot of complexity - whatever the market is - whether it's a natural ecosystem or business, but in reality, they're simple patterns that play out.

Some of the things I looked at, and we're going to do some mathematics today, obviously you don't have to know any math, we're going to be actually graphing some stuff, but five common themes or five different things that I've seen patterns play out in - first one is, if you want to build a billion-dollar start-up almost overnight, you have to build the new market on top of an existing market, and I'll go into full detail later.

The second one is, you want to serve the market expansion, and that sometimes happens—not all the time, but depending on the pattern—if you see it and you want to serve that market expansion, and I'll go into full detail.

The third is one of my favorites, which is to ride and market. If the market is going up, you want to ride it.

Then it's a matter of when you exit, and what I mean by exit is you either get acquired or go IPO. The fourth one is actually very interesting, and I will discuss a great entrepreneur who has actually intersected three of these five patterns, and we'll get to that next.

The fourth one is launching into market intersection, and of course, the fifth one is what happens a lot in Silicon Valley and Silicon Alley— attacking a market and making it more frictionless, and usually that happens when you're taking an analog service or product and converting it into a digital product.

A perfect sample is the music industry. We went from 8-track to cassettes to CDs to now everything is digital, and all these different business models are coming out with, for example, Spotify streaming service or Pandora.

And so what you're looking at is when you're creating a frictionless market, you're reducing the inefficiency in that market, which means that you're reducing the cost of whatever that is.

So in the music business, you're actually making the distribution component frictionless because it's digital—bits and bytes—and you cannot compete with that.

So what happens is the cost of distribution is reduced, and now because it's reduced, now you can actually expand the entire market, really what's happening on the digital music front.

And of course, when you create a frictionless market, then what you're doing is you're actually increasing the transparency of whatever that is, and by increasing the transparency, you're enabling people to also collaborate, for example.

So what we're going to do is we're going to do mathematics. Really fun stuff.

And we won't even use numbers because, to me, numbers are really irrelevant. What you have to look at is the acceleration and deceleration of markets and how that plays out.

So I'm going to take this off right now and I'm going to draw it for you because I think the best way to do it is—I could have just drawn it on the board, but I want to show it to you, and as I'm doing it, we can learn together.

So the first thing we're going to talk about is building a new market on top of an existing market.

And that was the first one I wrote about: building a new market.

And the best way for me always to look at it, because I look at patterns, you don't really need to know sophisticated math—I mean, algebra or calculus.

You don't really need to know anything about that. You can actually just look at it visually, so building a new market on top of an existing market is something that happens quite often, and I'm going to give you two categories.

So, for instance, if you do the simple XY coordinates and one of the things that you're going to see is that a lot of the natural ecosystems, a lot of things actually, depend on a bell-shaped curve.

And there's a great book written by Geoffrey Moore, "Inside the Tornado," that he talks about the bell-shaped curve in terms of customer adoption or product adoption or innovation.

And so what happens is a lot of the products/services, they do deal with the bell-shaped curve.

But some of the things that do play out differently when it's a new market, because an evolving market, like I said, is like a nonlinear system.

so it's quite unpredictable. So what happens is that if you have a category that's an existing category that's made a lot of money, it's a huge category, let's talk about the fast food industry.

You've got McDonald's, you've got Wendy's, Taco Bell and all those different chains that make a lot of money, but one of the cool things you can do is, you can actually create a new category.

And it's really not a subcategory of the curve. So it's really not creating something within it and this new category as an example, is called fast-casual dining, okay.

You know what's phenomenal about fast-casual dining is the leader in that was Chipotle.

I remember when I lived in Silicon Valley and my kids maybe go and eat at Chipotle. The first time out I was like "Wow!

This is good," but to me it seemed like it was expensive considering the layout and and all - and I'm actually a huge Chipotle fan and the reason is because they've kind of recombined fast-food with with casual dining.

And they created a simple solution. Of course they added the organic components to it and all that.

But one of the key things that's really interesting about Chipotle is that their menu hasn't changed much over the last ten or fifteen years.

And so what they did was they created a fast-casual dining category. So you could say that within this bell-shaped curve you had a fast-food industry and they'd been stagnant to some extent.

Obviously the expansion McDonalds and Pizza Hut and all these places...

that has happened because of international markets but if you look at the sector within America, as an example, it had majorly a bell-shaped curve. And of course it's really a matter of where each one of these players sits on the bell-shaped curve.

So a new player. So one of the things that, if you're a startup, okay...

which Chipotle was, you can ride, okay... You build on top of the existing market and you create a new category.

And that's really cool. Another really cool company which I'm a huge fan of is Whole Foods. What they've done... I mean the grocery business has been around forever.

It's always going to be forever - we all have to eat. But what they've done is something really cool: they created an organic-based...

And most of their products, and they're pretty good at this, they're actually excellent at it, is it's organic-based and they try to keep it that way and healthy, grocery store.

So, you know, in Texas you have Randall's, you have Kroger...

and of course Walmart came in with their grocery format and Target and so on, but the bottom line is that organic-base grocery was created by Whole Foods.

And if you notice something about both of these companies - they're both public, they're billion-dollar enterprises. So what they did was they rode on top of an existing market, they created a new category.

And so what I wanted to write down on this is that this is market X, okay?

It could be anything. And I'm telling you because of the complexity science principles of non-linear systems, you can tell that one of the ways to create a billion-dollar start-up almost overnight is to create a new category within an existing category and that's what they've done.

a first way of looking at an idea, whatever your idea is, and looking at it from a perspective of how do I create a new category on top of an existing category because what happens is that if you do it on top of an existing category, it's easier to explain to the consumer why they should buy it.

And that's very critical because, if you're a startup, it doesn't matter how much money you have, okay...

You're going to have to spend money, time, and effort and all that educating the consumer why they should buy the alternative, whatever that alternative is.

So this is the first market pattern that I've seen. It plays out all the time.

People create a new category. The category, whatever the reason, whatever the structural dynamics of the subsector, they just take off.

And of course fast-casual dining was... right now in hindsight it's like, "Gee, Chipotle was the first to invent that?" Yeah, their food is high quality, okay?

And they make it easy and they make it quick for you to go through the line, pick what you want, sit down, and eat.

So it's a beautiful formula. And of course they're having copycats come out now in different types of food sectors, copying Chipotle, as an example.

And one of the things that I can say in regards to Whole Foods is that you got other players right now attacking the organic market.

So you've got Sprouts. Sprouts is a very cool change because they try to focus on giving you less SCUs, less offerings, but the price is really good and they do try to keep within that organic feel.

The other one that I think is doing a really good job, and they're in my opinion, may be a little less organic, is Central Market.

Very good stuff. Very good products. Great pricing...

probably a little bit better pricing than Whole Foods, but still they're riding that healthy, conscious wave of the consumer, so they don't have to educate the market.

The irony is that Whole Foods was the company, from my perspective, that educated consumers, the average consumer on the benefit of buying healthy food, local food.

And on that note, we'll go to the next pattern that I've seen in regards to how to build a billion-dollar company overnight.

And so the next pattern is Surf the Market Expansion (continued in part 2).

Startup Unicorns | 1: Building a New Market | Build a Billion Dollar Startup Almost Overnight

Startup Unicorns | 1: Building a New Market | Build a Billion Dollar Startup Almost Overnight