Building a Monster Business

Damian Olive
Sep 13, 2024
3 min read

In 2004, I bought shares of United Rentals at $15 a share. In less than two years it doubled and I sold at $30. Shortly after that the stock went to $3. At that moment, I was convinced that I was the next Warren Buffett.

The stock is now at $695.

So the next Warren Buffett missed a 46x return.

I managed to repeat this “strategy” a few times before realizing it.

What was my mistake?

Some businesses are special in ways that are not obvious. At a surface level they might look too simple to be interesting. United Rentals buys and rents out construction equipment. It’s a capital intensive, cyclical business with low barriers to entry. So it’s both mundane and, in theory, highly unattractive.

Yet the company’s management found ways to grow consistently while achieving acceptable returns on invested capital.

The end-result was the generation of monster returns for its (loyal) shareholders.

What I failed to see is that simplicity and patience can lead to extraordinary outcomes.

The biggest monster of all

United Rentals is one of many examples in this group of what we can call Monster Businesses. In my view the biggest monster of all is -sorry- Monster Beverages Corp, the seller of energy drinks.

The stock market returns for this company in the last 30 years rank 3rd among all US companies, only behind Nvidia and Amazon. An investment of $10,000 in Monster Beverages thirty years ago would be worth $17 million today.

What a Monster Business is not

To understand what makes this business special, I will invert the question and make a list of the things that Monster Beverages is not.

The company:

Doesn’t sell a complicated product. It sells water with sugar and caffeine.
Was not first to market. It launched its first energy drink 12 years after Red Bull.
Did not participate in a “blue ocean” of low competition. Coca Cola and Pepsi competed in the space.
Did not have a visionary leader. Its CEO was working as a lawyer in South Africa a few months before taking the top job in California.
Has not achieved extraordinary growth rates. Revenues grew 23% annually in the past 20 years.
Is not number one in its niche (energy drinks) or in the broader category (carbonated soft drinks).
Never had an advantage of size or access to capital.
Didn’t issue an excessive amount of shares in stock based compensation.
Never used debt.
Didn’t make any large acquisitions or diversify into businesses other than drinks.

After reading this list one has to wonder, how could they ever produce one of the best stock market performances in history?

One foot in front of the other

What Monster Beverage did very well was consistency.

Selling a product that people really want, with global potential, and managing its operations and capital efficiently.

That is the whole list of what they did well.

Unicorn vs. Monster

The appeal of building the next unicorn is high. In a few short years you can become the next big thing.

Here’s the problem: the probability of building a unicorn is below 1%.

Let’s assume for a minute that you’re one of the lucky ones and your company will in fact become a unicorn. Let’s also assume that it takes 10 years to get there, and that the ownership of each founder at that point is 10%.

Here’s the bet founders are making:

$1 billion of final value times 1% probability equals $10 million of expected value.
10% of $10 million is $1 million.
$1 million divided by 10 years of work equals $100,000 per year.

You can judge for yourself if that is an attractive bet.

Wake up

The startup ecosystem has a few revealed truths that go unchallenged. One of them is that outcomes are binary. You either make it as a unicorn or you fail.

That is false.

The origin of that belief is the venture capital business model, which requires a couple of huge winners in every fund. That setup has nothing to do with your own business.

However, founders accept the binary outcome creed and use it to judge their performance.

Regardless of your fundraising history you can start building a Monster Business right now.

Offering products that people value and focusing on the long term gives you control. Recognize this and you’ll be well positioned to avoid the mistakes I made early on as an investor.