Nowadays the startup and entrepreneurship worlds as a whole are interested in practical knowledge as opposed to academic theory, and with a good reason. Being a management or economics graduate, as a whole, isn’t something that brings you a lot of extra credit as a founder.
Nonetheless, this doesn’t mean that intellectual concepts are useless – on the contrary, they could save you a great deal of trial and error by helping you make better decisions. This is why we think that while you don’t need an economics degree to be a good entrepreneur, it’s a good idea to understand basic economic principles that undoubtedly have (or will have) an effect on your own project.
When it comes to concepts from economics useful to startup founders, which is a topic we’ve covered before, you can’t go wrong by going to the source by exploring Adam Smith’s The Wealth of Nations (1776) – the foundational texts of modern economics. While it primarily addresses national economies, many of its core ideas apply directly to entrepreneurship. So, here are ten principles from The Wealth of Nations that startup founders can apply to their ventures:
1. Don’t Do Everything Yourself, Or Division Of Labor Increases Efficiency
Adam Smith emphasized that dividing labor into specialized tasks leads to greater efficiency and productivity. He illustrated this with the example of a pin factory, where workers who specialized in individual tasks could collectively produce far more pins than if each worker attempted to make an entire pin alone.
For startups, division of labor means structuring teams effectively. Early-stage companies often require founders to wear multiple hats, but even though to a degree this is inevitable it should be minimized as much as possible. The easiest way to do that is to attract cofounders with different domains of expertise. Having at least one technical and one business-focused founder gives you a significant advantage.
As the business grows, specialization becomes even more crucial. Delegating tasks to experts leads to better results and equally importantly – a more scalable business model, as your own time as founder is not scalable.
2. Market Beasts Product And Team, Or The Invisible Hand
Smith’s concept of the “invisible hand” describes how free-market forces guide resources toward their most efficient use, often without direct intervention. He argued that individual pursuit of profit leads to the overall economic benefit of society by aligning business incentives with consumer needs.
For startups, this principle reinforces the importance of responding to market signals. A successful startup adapts its offerings based on customer demand and competition rather than forcing a product onto the market.
Consider the famous example of the pivot of Slack: originally a gaming company, the founders recognized a stronger market need for workplace communication tools and shifted their focus. By aligning with market dynamics, they built a billion-dollar business.
3. The Importance Of Acquiring Capital And Reinvesting Profits
Smith highlighted the importance of accumulating capital to fund expansion and innovation. He argued that businesses that reinvest profits into growth can create more value over time, leading to economic progress.
Startups need to manage capital wisely, whether through venture funding, bootstrapping, or reinvesting early profits. Capital accumulation allows startups to scale, hire top talent, and invest in research and development.
Tesla, for example, reinvested much of its early revenue into battery technology and manufacturing improvements, leading to breakthroughs that positioned it as a leader in electric vehicles. Amazon has also famously never paid dividends since it’s founding in 1994 and has always reinvested its profits into growth.
Startups are highly scalable and capital-intensive, which means that capital acquisition and management are crucial skills for finding success.
4. The Role of Specialization In Value Creation, Or Choose Your Minimum Viable Market Segment
Smith argued that specialization allows workers and businesses to create more value by focusing on what they do best. Nations, businesses, and individuals should specialize in areas where they have a competitive advantage, trading for goods and services they cannot produce efficiently.
For startups, specialization can mean focusing on a niche rather than trying to serve a broad market. Companies like Zoom succeeded because they specialized in high-quality video conferencing rather than attempting to build an all-encompassing communication platform. This focused approach enabled them to outcompete broader platforms like Skype in a key market segment.
In a way, the concept of an MVS – a minimum viable segment, is equally important to the concept of MVP – a minimum viable product. You don’t have the resources to serve everyone, so choose very carefully whom you serve.
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