Growth Market Traps

Obvious large markets attract capital and competition that destroy economics before the growth materialises.

The graveyard of obvious bets

Between 1895 and 1955, roughly 1,400 American automobile manufacturers launched. Three survived — and two of those required government bailouts. Over 5,200 radio manufacturers entered that market; 90% were defunct by 1931.

These weren’t bad entrepreneurs chasing bad ideas. They were smart people who correctly identified where the world was going. Cars were the future. Radio was the future. They were right about the direction and still lost everything.

The problem wasn’t the prediction. It was the economics.

How growth markets destroy value

Mark Leonard, founder of Constellation Software, identifies the mechanism. Roy Thomson — who later became one of the world’s wealthiest media owners — went bust three times chasing obvious growth markets: farming, auto parts, radio distribution. Each time, the market was clearly growing. Each time, he lost.

The pattern has four components:

Early adopters give false positives. The first customers aren’t price-sensitive. They’re enthusiasts, experimenters, people who’ll pay almost anything to be first. This creates the illusion of healthy unit economics that evaporate when you need mass adoption.

Underlying technology may not be ready. The vision is clear but the infrastructure lags. Early movers absorb the cost of immature supply chains, unreliable components, and customer education. Later entrants inherit a solved ecosystem.

High initial costs delay mass adoption. The growth curve is real but the timing is off by years or decades. Capital runs out waiting for the market to catch up with the vision.

Obvious large markets attract capital. This is the killer. Every investor, every entrepreneur, every analyst can see the opportunity. Capital floods in. Competition intensifies. Margins compress. The economics get destroyed precisely because the opportunity was so visible.

Growth vs good business

Leonard draws a sharp distinction using Thomson’s own experience.

Auto parts distribution during explosive automobile adoption? Bad business. High cost of goods, inventory requirements, consumer financing needs, low barriers to entry. Being right about cars didn’t help.

Radio broadcasting in the same period? Good business. Government-limited licenses created local monopolies. Competition was against non-commercial CBC, not other private stations. Lower marginal costs than newspaper advertising. Structural protection existed.

Both were “growth markets.” One had economics that worked. The other didn’t.

The insight cuts deep: you can be right about where the world is going and still lose everything if the business model lacks structural protection. Direction isn’t enough. You need defensible economics.

What Thomson learned

After three failures in obvious growth markets, Thomson spent nine years running a single small-town newspaper. He surveyed 100 competitors. He developed what Leonard calls “earned secrets” — proprietary understanding of small-town advertising economics that came from doing the work.

Then he bought 200 newspapers. Most of them during the industry’s circulation decline.

While others chased growth, Thomson bought monopolies. Local newspapers in towns of 15,000+ had structural protection — barriers to entry, captive advertisers, no meaningful competition. The market wasn’t growing. The economics were excellent.

He entered TV late in the adoption cycle, when others had already absorbed the early losses. His Canadian radio experience told him something others didn’t know: competing with government broadcasters wasn’t actually the problem everyone assumed. The Scottish ITV license became the cash cow that funded international expansion.

The inversion

Conventional strategy says find large growing markets and capture share. Leonard and Thomson suggest the opposite.

Visible growth attracts capital. Capital attracts competition. Competition destroys economics. By the time the market matures, the survivors have fought through a war of attrition that consumed most of the value that was supposed to be created.

The alternative: find markets others overlook, where structural protection exists, and develop earned secrets through operational depth. Buy during decline if the underlying economics are sound. Enter late if your proprietary knowledge reveals what others missed.

This isn’t contrarianism for its own sake. It’s recognising that the crowd’s capital allocation changes the payoff structure. Obvious opportunities become less attractive precisely because they’re obvious.

The question to ask

Before entering any market, the question isn’t “is this market growing?” It’s three questions:

What do I know that others don’t? If the answer is nothing, you’re competing without an edge against everyone who spotted the same opportunity.

What structural protection exists? If anyone can enter, capital will flow until returns compress to the cost of capital. The growth benefits latecomers, not you.

What happens when competition intensifies? If margins depend on limited competition, the growth that attracts you will also attract the capital that destroys your economics.

The graveyard of obvious bets is full of people who were right about the future and wrong about the business model.

Connects to Library: Earned Secrets · Counter-Positioning · Process Power · Effectuation

See also: The Halma Discipline — A 27-year case study in patient, counter-consensus capital allocation.