How to make millions with the Star Principle

Winds of change

When I worked in London about two decades ago, I used to audit a couple of chains of turf accountants, more commonly known as bookies.

Bookmaking operators were often exceptionally smart businessmen who had successfully generated profits for years through their chains of high street betting shops.

But the winds of change were blowing through the industry, and although I was young and didn’t fully understand what the bookies were indicating to me, they cautioned their profits were set to fall away due to the sudden appearance of ‘betting exchanges’ during the tech boom years.

BCG Matrix

If you’re thinking of ideas of how to build a great business and achieve great success from doing so, Boston Consulting Group’s famous old matrix is an extremely handy place to start.

To build a ‘star’ business you should aim to find a market which is growing at double digit rates, and must then aim to become the leader in that market.

Investors seeking steady and reliable income can look towards mature ‘cash cow’ businesses, often found in sectors such as energy, utilities, or consumer staples.

‘Dog’ businesses with low market growth and share, on the other hand, should clearly be avoided, and there will always be some ‘problem child’ businesses which fall between two stools and either need to grow their market share more quickly or shift into a more dynamic market.

Business & investing 80/20 style

Richard Koch, BCG alumnus and author of The 80/20 Principle sought to follow his Star Principle when investing, looking solely for star businesses which could lead the way profitably in a growing market.

Despite being relatively innumerate and a self-confessed technophobe, Koch once invested his entire liquid net worth of £1.5 million in the revolutionary betting exchange operator Betfair, despite being unable to operate the website himself.

Venture capitalists had steered clear of the business due to the founders lacking management experience, being sport and gambling enthusiasts rather than demonstrating start-up expertise.

But Koch quickly recognised a brilliant star business positioned in the right place at the right time, and placed his own bets accordingly, later selling his stock for £100 million.

Shooting for the stars

Koch rarely spent time poring over financial statements when looking for business or investing ideas.

Instead, using his renowned 80/20 style of thinking, he simply wanted to know two things: is this a rapidly growing market, and if so, who will be the market leader?

A market leader needs a niche – a different product or service, a different way of doing business, or a means of attracting a new breed of customers profitably.

Koch used this simple technique to make millions in businesses such as Betfair, the restaurant chain Belgo’s, Plymouth Gin, The Great Little Trading Company, Filofax, and more.

His mission was clear and was executed with a laser-like focus: to shoot for the stars using the Star Principle, and to find the 5% of businesses with outstanding upside.