Principle number one is learning to spot ghost towns before you build in them. Years ago, my CEO asked me if I could build a premium consulting service that could help our customers implement our tech platform. Now, we were selling into large enterprise companies and it was a complicated platform. So we hired Wharton MBAs and MIT grads, XBCG consultants, solution architects, and we spend months crafting the perfect pitch deck, figuring out the implementation processes and pricing model for the service. But we had a little bit of problem while we were building a perfect deck. Google had quietly released a cheaper version of that software and literally nuked the market. We looked up and realized the town was empty. We spent months building a Michelin star restaurant in a ghost town.

That failure taught me one very expensive lesson. Intelligence is knowing how to solve a problem. But wisdom is knowing if that problem is worth solving in the first place. And the problem is for decades our education system helps us live in these ghost towns because universities train us for what? For convergence. They give you a multiplechoice test where the answer is already on the page. Follow the rules. Ace the test. Get a paper degree. The system does not teach us to question the question, to question the professor. But life is about divergence. Life gives you a blank sheet of paper.

A Harvard Business School professor studied thousands of venturebacked startups. 75% of those never returned a dollar to investors. But here's the harsh part. 48% or nearly half fail for just one reason. There was no market need for their solution. And it's not just about business. We spend our careers living in these ghost towns, too. So how do you avoid the ghost town in your career or in your business? Ask three questions. First, why am I doing this? Not how, what is your why? Second, whose life actually changes if you do well? This is a forcing function. And third, what breaks if you don't do this? Be honest. Does anything break? If you're a founder or an operator, you'll always feel the pressure. How do I build this particular feature faster? Or how do I optimize this particular process? But the top 1% always start with a different question. Should this exist at all? Don't optimize what you can eliminate.

Here's the inconvenient truth. Look at any passion industry, and you'll see a graveyard of dreams. In Los Angeles and in New York City, thousands of talented dreamers wait tables at midnight. In music, in film, in hospitality, in fashion, on Broadway. Some call it the glamour industry. I call it the glamour tax. It's the price you pay to be discovered. The supply of passionate talent is infinite and the demand is so very limited. So your value collapses to zero. And I've seen often that when you turn your talent into transaction, you lose the joy of both.

But what about all these inspiring stories we hear about passionate leaders who followed their dreams? You know, Bill Gates falling in love with coding and dropping out of school and starting Microsoft. What gets left out of those legends is the hidden advantage they had. Bill Gate's father was a powerful lawyer with deep pockets and even deeper network. Bill had no existential risk when he dropped out of school and Bill's mother served on a charity board with the CEO of IBM and she was the one who introduced Bill to the CEO. That's how Microsoft got the deal of the century. None of that had anything to do with passion. Of course, Bill had passion for coding, but so did thousands of other kids. Only one of them had a hidden advantage. So passion is great so long as there is a market for it.

I like what Mark Cuban says, "Don't follow your passion, follow your efforts." Effort reveals what you're willing to suffer for. Thousands of hours of painstaking effort builds mastery. And the truth is, we love what we're good at. So what's the action item here? Before you build or chase anything, qualify it. Don't just ask if you have passion for it. Run a test with three questions. I call that framework lit. Leverage, insight, timing. It's a way to qualify good ideas, sustainable ideas very quickly. L is for leverage. What unfair advantage can you start with that others can't copy? Example is Bill Gates. We talked about him already, but there are people like Sam Altman, for example, or Adam Neumann. They had deep networks and they were able to raise billions of dollars even when their businesses showed no hope of being profitable for years to come. But that was their unfair advantage. They could outspend rivals before the race even began. I stands for insight. What is that one secret thing about the market that you know that everybody else is missing? The example is Larry Page. He realized that the inbound links to any page were in fact votes. Ranking the page on search results by counting those votes mattered more than counting the keywords. That one insight built Google. Now Larry Page had no passion for scaling Google. In fact, he wanted to sell it to Yahoo so he could go back to his PhD program. And T is for timing. Why right now is the only time your idea works. Jeff Bezos didn't have a deep passion for books either. He saw a statistic that the internet was growing at 2300% a year. He didn't follow his heart. He followed the math. If you don't have one of the three advantages, leverage, insight, or timing, you don't have a business. You may have a romantic delusion disguised as a dream.

First, service DNA. Here, what you sell is time and talent. The trap, well, the time wall. Scale is all about how much of your time you can sell. If you're a lawyer or an IT consultant, you stop working, the revenue stops coming. Scaling requires hiring more humans which eats into your margin. So that's the basic trap. And how do you win when you have this DNA? You productize. Turn your service into a repeatable playbook that runs without you that others can run. Second physical product DNA. What you sell here is physical goods. The world of atoms. The trap here is all about cash. Your money is always locked in inventory. You know, because you have to pay for the goods before you can sell them. So, how do you win when you have this DNA? You have to invest in supply chain and lean flow. You have to find ways to let your market fund your working capital. Third is the digital product DNA. You sell digital goods. You know, the world of bits and bytes, the software industry. The usual trap here is called the J curve. Is the cash burn because the software business typically requires massive upfront cash in R&D to build a platform with zero revenue for months and that's why there's an entire venture capital industry that funds these companies during that phase. Now AI is changing some of those dynamics but we'll talk about that in the coming episodes. How do you win in software industry? Build the absolute minimum product that you can to validate the market first. If it's not fitting, evolve it, change it, keep testing, keep trying. But before you take on massive upfront cost, convince yourself that you have customers and they're willing to pay for it. Fourth DNA signature is the marketplace DNA. Here you are the matchmaker, matching supply with demand. The trap of this business is perhaps the trickiest one. It's the two-sided hustle, right? No buyers without sellers, no sellers without buyers. And when you have this DNA signature, one way to win is to stay hyperfocused. Focus on dominating one tiny niche to create liquidity first. Fifth, media DNA. What you're selling here is human attention. The trap here is the danger of the treadmill. Audience attention is a flimsy artifact. It's radioactive. It starts decaying the moment you stop demanding it or deserving it. So you have to keep running just to stay in one place. So how do you win here? One way is to build direct relationship with your audience. So move your audience from a rented platform like social media to a direct community like newsletters. Sixth, capital DNA. And this is the business of money, right? You're transacting on risk and on yield. Banks, hedge funds, insurance companies. The trap usually is the concentration. One bad investment can wipe out the entire fund. And then the way to win here is diversification and syndication of risk. That's why all these capital businesses know a lot about spreading their risk across a network of partners instead of betting the whole house on a single card. And finally, the seventh signature assets DNA. This is where you sell access to a location or an asset. Real estate, data centers, those fit into this DNA. The trap here is that you have to take on massive debt just to get started. But the good thing is in these type of businesses your difficulty is your best defense because it costs $100 million to build a data center. But then very few people can do it anyway, right? So once you build it, you can extract monopoly rent for years to come.

So those are the seven DNA signatures. Now most burnout comes from the DNA mismatch. So for instance, if you want a business that gives you passive income while you sleep, then you shouldn't start a services business, you should explore something like the capital DNA where your money is making money. Another example, if you wanted to build an asset light business with near zero marginal cost, then don't start a physical product DNA business, right? Look at the digital DNA. So, make sure your goals are matching the DNA signature of the business you want to start. So, what's the action item? It's a simple two-step process. First, examine the DNA of the business you're in as an employer or as an entrepreneur. Which signature does your business have? And more importantly, is it capable of taking you where you want to go? And second, if you are in the right place, then apply the winning strategies. Choose the DNA signature that rewards the life you actually want.

Easier said than done, right? How do you protect your fortress so your rivals can't breach it? Build strong, high walls. There are three specific ideas that once built make it mathematically impossible for others to breach your castle. Wall number one, economies of scale. This is the cost wall. Most businesses get more expensive to run as they get bigger. But a business that has economies of scale gets cheaper to run as it grows. Why? Because the bigger you get, the lower your cost of input and operations. Let's say Walmart sells 10,000 bottles of Tide detergent every day. When they negotiate with Procter and Gamble, they're going to say, "Hey, we want this for $4, not six." And PNG has to say yes. Why? Because losing Walmart would mean losing 3.6 million bottles a year. If PNG says no, they lose the biggest shelf on Earth. This is the cost wall. Wall number two, network effects. The most successful products are those where every new user adds value to every existing user. And the party goes on. Think about Visa, the credit card company. They have 4 billion card holders and 100 million merchants who accept it worldwide. So more card holders make merchants want to accept Visa more. And the more merchants accept Visa, the more card holders want to use it. Each side reinforces the other. Now imagine I launch a rival credit card called Lisa. Tomorrow with superior technology, lower fees. I'll still have zero merchants and zero card holders. Nobody wants a Lisa card from me because nobody accepts it. And nobody accepts it because nobody wants to use it. I'm locked out. That's the power of network effects. Wall number three, switching cost. This reminds me of that epic rock song, Hotel California from Eagles. You probably remember the final line from this song. You can check out anytime you like, but you can never leave. They probably didn't know, but they were talking about switching costs. Now, some switching costs are emotional. Apple's branding, for example. It makes you feel attached to it. Even if someone will tell you 10 things that Android phones can do better, in that case better doesn't matter and some switching costs are the exact opposite. Take Salesforce. It's a CRM platform for businesses. Nobody loves Salesforce. However, ripping that software out and replacing it with a rival would be a massive headache. It would require migrating 10 years of data, retraining 500 salespeople. The pain of leaving is way higher than the pain of staying. That's the final wall that your rivals can't jump.

So now the real question is, well, how do you build those walls? And the answer is surprisingly counterintuitive. Start very small. You cannot have economies of scale or network effects on day one. If you try to capture 1% of a hundred billion dollar market, you'll have competitors attacking you from every side and direction. Instead, you should try and capture 70% of an extremely small market that no one cares about. The examples are everywhere. For instance, Amazon didn't start as the everything store. They monopolized very small market books. Facebook didn't start as the world social network. They monopolized just one university first, Harvard. Walmart didn't start as America's retailer. They monopolized Rogers Arkansas. A town so small Sears and Kmart would never bother to compete there. And those two companies are gone. Walmart is now a behemoth. So don't try to build a wall around the entire world. Find a tiny corner and build an impenetrable wall around it.

So, those are the four pillars of our foundation. Avoid ghost towns, avoid graveyards, learn to read the DNA signatures, and build strong walls. But now comes the hard part. The messy, unglamorous work of constructing your masterpiece on top of this foundation. How do you get your first customer when nobody knows you and no one trusts you? How do you hire a players when you can't afford them? How do you avoid burnout? This is where you have to remind yourself that you are the builder, not the building. Your business or your career may rise, it may fall, but your foundation remains so you can keep building. And that's where the rubber meets the road. But that is our episode two. And that comes next month. Our usual weekly videos will continue in the meantime. If you enjoyed this video, you like this one, too. I'll see you next week. Thank you and I love [music]