A long time ago when I worked as a management consultant, I did a study for Lafarge which has a huge cement business. The study involved real sleuthing as we were trying to determine the operational capacity of cement plants owned by others and under construction all around Europe. At times I felt like a spy as I was hanging out counting trucks going in and out of facilities and sidling up to engineers who worked there as they were getting coffee before work.Previously from continuations:
Why all the sleuthing? Well, Lafarge understood well that cement was a capacity industry with boom and bust cycles. They wanted to figure out where the cycle was in order to figure out whether or not they should build more capacity themselves. The cycle in cement looks something like this: construction in a region heats up increasing the demand for cement. Since supply is inelastic the price rises. All of a sudden it becomes very profitable to build a new cement plant. Several players rush in and all build new cement plants. This upswing may continue for some time with all the new plants profitable too and even more coming online. Then construction slows down and voila: an overcapacity of cement factories results in a supply overhang which in turn causes a collapse of cement prices. The collapse is dramatic because the construction cost of the plant is sunk cost.
Venture capital shares some of the characteristics of the cement industry. It is a capacity industry also because it takes a long time to raise a fund, but once you have raised a fund, it has capacity to invest for a long time period (often 4-5 years). When there is a wave of innovation it produces good investment returns which results in many new funds being raised. Again this capacity build up will continue as long as returns are good....MORE
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Following on the post immediately below on the hyper-Pareto accretion of revs to FB and the GOOG, an idea for the so-far loser in the platform wars.
From Continuations:
At Union Square Ventures, network effects have been central to our investment thesis for a decade. From an investor perspective network effects are one of the few, possibly the only, source of sustainable competitive advantage in a world where almost everything else can be copied quickly....
