Invisible Companies

Steve Ross was a legend. Starting with nothing but a job at his father-in-law’s funeral parlor, he built Time Warner into one of the world’s largest companies, making a mark on every part of the media landscape. MTV and Nickelodeon were born under his roof. He bought and ran Atari. He helped found the New York Cosmos and, with it, professional soccer in America. When Ross died in 1992, Clint Eastwood dedicated his Best Picture Oscar for Unforgiven to him; two years later, Steven Spielberg did the same with Schindler’s List.

Everyone glosses over the boring part. To build the stake he needed to get into the media business, Ross bought and built a string of strikingly mundane companies in the 1950s and ’60s. He started by convincing his father-in-law to let him rent his funeral parlor’s limousines out at night, when they weren’t being used. Then he founded a rental car company, merged it with a parking lot business, bought a cleaning business, and took the whole thing—including the funeral parlor—public as Kinney Services. Ross used Kinney to buy a flooring company, a painting company, a carpentry company, and a plumbing company. He then parlayed this hodgepodge of everyday businesses into acquiring the legendary Warner Bros. movie studio.

There’s a puzzle here worth thinking about. Ross essentially picked up a bunch of stones off the ground and traded them in for a diamond. Usually, to make big money in business, you have to do something no one else can do or have something no one else can have. But any competent businessperson could have bought or started the businesses Ross did. In 1990 he took home $78 million, the largest pay package of any executive in America at the time. How did he get there?

If you took economics, your introductory textbook said something like this: “Business dynamics cause firms to enter and exit markets so that, in the long run, prices are driven down to minimum average total costs, resulting in all firms earning zero economic profit.” What this means is that no company should be able to make outsized profits for very long.

Of course, plenty of companies do make money for a long time, and business strategists have laid out the reasons: Michael Porter’s barriers to entry (you do something no one else can do), and Jay Barney’s costly-to-imitate resources and capabilities (you have something no one else can have). These “moats” protect a company from profit-destroying competition.

The businesses Ross bought and started did not have moats. Funeral parlors, parking lots, rental cars, and the rest are easy industries to compete in. You can tell because they are crowded with competitors. Yet in 1969, Ross bought Warner for roughly $400 million—about $3.5 billion today. Without any sort of moat, Ross should not have been able to accrue the wealth needed to buy one of the storied movie studios of the ages. But he did.

Steve Ross wasn’t the only one. Constellation Software, Waste Management, HEICO, and many other rollups searched for just these sorts of businesses, and built extraordinary profits by looking where no one else was looking. This entire class of mundane businesses sits right in front of our noses, but both management strategists and most businesspeople just couldn’t see it. These businesses are invisible.^[1]

How to disappear completely

You can’t, of course, make a definitive list of today’s invisible companies; that’s the point. But the building blocks of Steve Ross’ early empire are perfect examples, for their time. Others, like HVAC, trailer parks, and candle retailing, were much more fragmented businesses until someone realized they were invisible sources of profit and rolled them up. Hindsight suggests we are currently surrounded by highly profitable companies that we never even think about, while common sense suggests this is impossible.

Your basic econ 101 “economic-profits-go-to-zero” explanation has a couple of assumptions: frictionless entry and exit of companies into an industry, and perfect knowledge of the relevant drivers of success. Economists aren’t naive, so they don’t really believe these things entirely. But they assume they are mostly correct over the medium to long term.

Management strategists, on the other hand, saw that the first assumption was grossly wrong: there are plenty of industries in which it’s hard for a competitor to enter the market. In response, they came up with the concept of “sustainable competitive advantages,” which is 90% of the reason business strategy is a different discipline than economics.

But both approaches assume the market works like this: (1) an opportunity exists; (2) potential competitors notice it; (3) they evaluate how to enter the market; (4) if they can, they enter; (5) profits are eroded. This all hinges on whether anyone has noticed the opportunity. If they don’t, potential competitors never get to step one. Competitive neglect is upstream of the entire economic and strategy machinery.

This is not an asymmetric-information problem, where both parties know the gap exists and have every incentive to close it. Nor is it tacit knowledge or a trade secret—things rivals can’t observe from the outside but know are there and actively try to crack.

Invisible companies persist for a different reason: the missing information is itself invisible. Would-be competitors do not know that they do not know, so they don’t think to search. And the invisible companies have no reason to tell them. No one searches, so no one competes; no one competes, so the profits persist. The reward for being overlooked is, paradoxically, the opportunity for supranormal profits.

Companies are invisible primarily because no one is paying attention to them. There are four main reasons this happens: No. 1, they are unknown; No. 2, data about their existence or profitability is private, missing, or obscure; No. 3, they are misunderstood because their markets are assumed to be mature, shrinking, or too small to matter; or No. 4, they are disdained, because the work is low-status, unpleasant, parochial, or socially stigmatized. It’s obvious that this happens, but it also seems impossible that the absence of information could last for long: dead-end markets eventually dead-end, and stigma could be overcome for a price. Invisibility seems like it should be a brief anomaly; a weird blip in an otherwise efficient market. Over the medium to long term, the market should make these invisible companies visible.

How does invisibility work?

This is not what happens. Take Constellation Software. The best-performing software investor of the last 20 years, Constellation has compounded shareholder returns at roughly 34% a year since its 2006 IPO. (Berkshire Hathaway, by contrast, managed about 11% over the same stretch.) It did this by buying tech businesses. Not exciting ones, but small ones—deal sizes often under $5 million—in niche markets: marina management and ski-lift ticketing software, funeral home record-keeping, library cataloging, oil-and-gas pipeline scheduling. It bought them after the companies’ management or their venture capital backers had thrown in the towel because they were too small and growing too slowly. Constellation is good at picking companies and helping them succeed, but some of its outsized returns come from a different source. The industries it buys into were profitable but boring to everyone else, leaving Constellation to buy cheap and build something big by putting them all under one roof.

Constellation recently estimated that there are still 38,000-plus vertical-market software businesses it could potentially buy. These aren’t a handful of backwater anomalies. They are companies across nearly every industry that are ignored by other acquirers, even though they are presumably profitable, since value can be created by buying them.

One mechanism that causes invisibility is simple unawareness. Businesspeople hunt for opportunities using data other people have already gathered—and no one bothers to gather data on obscure, small, non-strategic markets. It costs more to collect and almost no one wants it. Worse, the data that does exist is often aggregated at a level that buries the anomaly: for instance, figures on the packaging sector can hide a specialty-packaging niche that earns several times the industry average.

Businesspeople also gather information from those they know through work or socially. But some companies sit entirely outside the social networks where investors and executives trade ideas. Even if you have cultivated a diverse network, it is unlikely an acquaintance you have coffee with in New York or Silicon Valley has any knowledge of specialized manufacturing in the Upper Peninsula.

Another source of invisibility is less the absence of information than the habits people bring to interpreting it. Investors, entrepreneurs, and corporate development teams are trained to look for large markets, rapid growth, novel technology, and strategic urgency. These filters are useful, which is why they become standard. But they also make smaller, mature, operationally mundane businesses look boring even as they quietly mint profits. The opportunities aren’t hidden because the facts are unavailable; they’re hidden because the algorithm that works most of the time screens them out.

The last mechanism is status: Some businesses simply seem less important, interesting, or socially acceptable. Wayne Huizenga could build Waste Management into a behemoth by buying up smaller haulers—in his first two years they rolled up 133 of them—precisely because almost no one else wanted to be in the trash hauling business. The same stigma turns people away from other structurally crucial industries: janitorial services, plumbing, cleaning, and countless others. These industries are stable and, as with all these mechanisms, competitive neglect keeps them consistently profitable.

We have always known about invisible companies, but previous explanations for them have led to self-defeating tactics. In Germany, for instance, they have “hidden champions”: smaller companies in niche markets that are mostly unknown to the general public but drive much of Germany’s exports. The success of these companies has been explained by some of the usual sources of sustained competitive advantage: customer ties and closely held knowledge. And the reaction has been to publicize these underappreciated drivers of the economy. But the evidence—the companies are closely held, remotely located, and tend to control, rather than outsource, all production—points to invisibility as the likely mechanism for their success. By not understanding this, these companies endanger their position by drawing attention to themselves.

Barriers to entry and resource-based advantage are well known. Invisibility points to a different source of protection. Competition is not only limited by what rivals cannot do or cannot copy; it is also limited by what they fail to notice or turn their nose up at. It shifts the focus of strategy from tangible barriers and resources to the intangible concerns about how a market space is cognitively and institutionally structured. Thinking about invisible companies means thinking about strategy in a new way.

Staying invisible

Many industries have no easy moats to erect. There’s nothing novel to patent, no shortage of workers with the requisite skills, no scale effects, no secret sauce. And when there are moats available, they might be costly or time-consuming to build: a well-known and trusted brand, a corner on some crucial input, or long-term deals with customers, for instance. Staying invisible saves you from all that—you can be viable without a moat, since competitors won’t enter anyway. Or you can use invisibility as a temporary moat until you build a conventional one.

There is a strategic trade-off here. You might need to raise money, but financiers talk. An IPO tells everyone how profitable you are (though, if you’re a conglomerate like Kinney was, it might be hard to pinpoint exactly why). Employees whose skills you need might prefer to work somewhere with more cachet, or at a company whose future looks more secure. You might have to make yourself invisible not just to potential competitors but to some kinds of customers, especially if you’re in the type of business where you need to build a brand or do PR to attract them. You can’t have fancy offices in the city to impress clients, or, in general, show off your financial success. Any large public investment might signal that you have money to spend. And while resource-based advantages can be built even while invisible because they are hard to observe from the outside, building barriers to entry is the kind of visible activity that signals you have something to protect.

Some companies need the attention. They need word-of-mouth to grow, or they need to impress clients with their acumen—either directly, by telling people how successful they are, or indirectly, with wood paneling, Persian rugs, and recognizable modern art in the reception area. Invisibility does not make strategic sense for these companies. Similarly, you need to find a different moat if you sell goods to consumers, where price and volume are readily visible. And you won’t stay hidden if you are strategically important to your customers (who then might need to find a second-source supplier) or to other companies’ customers.

But other markets are especially conducive to invisibility. Firms in these markets serve narrow customer segments with mature technology in unglamorous industries: providers of essential but overlooked support functions; suppliers whose products are too small a line item for customers to study closely; businesses addressing needs so specific they look irrelevant to generalist investors. HEICO, for instance, managed to stay under the radar while building a multibillion-dollar business in aftermarket aircraft replacement parts. This opportunity never surfaced for others because it involved obscure components, mature use cases, and line items too small to notice (relative to a whole airplane). But the parts were critical to keep old aircraft flying. Most businesspeople looked at the airplane business, but HEICO looked one layer deeper and found an opportunity sitting in plain sight.

Some markets start out invisible, and others fade from view. These might be companies that were strategically, financially, or institutionally important, and then weren’t: laundromats went from important to ignored before popping back into view for investors as recession-resistant, cash-flow generators. Or they may be companies whose technology was displaced, became obsolete, or addressed too narrow a niche, like the ones Constellation acquires. Other industries—like, say, business magazines—lose their narrative appeal, leaving potential profit for those willing to buck the tide.

There are also firms that are not so much invisible as disregarded because they are not currently “high status.” This includes many firms in the trades, like landscaping, janitorial services, septic tank maintenance, garbage removal, and parking lot management. Of course, these are exactly the kinds of companies Steve Ross used to build the wealth needed to buy Warner Bros.

Losing invisibility

Invisibility has to be treated as a strategic asset to be managed. Firms must weigh the benefits of discretion against the demands of sales, hiring, financing, and reputation. If they need public attention to grow sales, hire employees, or raise money, for example, they may decide invisibility isn’t worth the cost. Or, if they think they are about to lose their cloak of invisibility for some other reason, they might decide to shed it pre-emptively. They might decide to launch a brand-building campaign, for instance. Or they might decide to go public and use the money raised by an IPO to build an enduring competitive advantage—with the strategic fillip of exposing their competitors to scrutiny, who then lose their invisibility without any offsetting benefit.

Some companies can stay invisible forever. But even companies that choose to remain invisible can lose their invisibility through no fault of their own. These unmanaged unveilings can do lasting damage to industry margins.

Dramatic changes in market conditions, demography, or consumer preference can make a market interesting enough that it starts to surface. COVID brought attention to makers of N95 masks. Aging baby boomers made it obvious the hearing aid market was going to be big. Digital music pushed audiophile equipment upscale, and made makers of vacuum tubes (JJ Electronic) and high-end amps (McIntosh) more visible. This resulted in mainstream media coverage and new entrants after decades of neglect. In these cases, it was an improving market that drew scrutiny, so the impact was mixed.

Other events pierce the cloak of invisibility without any offsetting gains. A succession fight inside a family company can drag private valuations, ownership stakes, and margins into court filings. Political activity can reveal wealth no one had thought to ask about; Mike Lindell probably did more to teach the public that there was serious money in pillows than any industry report ever could. And scandal can illuminate an entire profit pool. When Martin Shkreli raised the price of Daraprim from $13.50 to $750 a pill, an obscure corner of specialty pharmaceuticals became a national story overnight. This was a grievous own-goal.^[2] For a company trying to remain invisible, publicity is not free advertising. It is discovery.

Finding invisible opportunities

Companies work to stay invisible because they want to maintain the profitability that comes with having few competitors. This is exactly the kind of industry that entrepreneurs and investors might want to find. There’s a paradox here: if they are invisible, then by definition you can’t find them. To do so, you have to reverse the rules that keep them invisible and look where there is, suspiciously, nothing to see.

Since the databases and screens that everyone uses gloss over these business opportunities, you have to look deeper, for outliers in the data, or look outside the consensus data sources entirely. Looking deeper means finding the niche opportunities that disappear in the broader data, for industries that don’t seem to be in the data at all, or for companies geographically isolated from the investor class. This requires broadening who you talk to and being alert to chance comments. People pay attention to large companies but never see the cloud of small suppliers around them. If you look a layer or two deeper, you can find invisible companies providing indispensable products and services.

Or: loosen some of the criteria you use to filter companies in your search process. What happens if you ignore growth rates and look instead for industries that are shrinking? What happens if you ignore apparent market sizes? What happens if you look for large market sizes where no one advertises or goes public? Find things no one else has found by breaking from the consensus and staring directly into the institutional blind spots.

And last, look for industries where new entrants almost exclusively come from existing companies, where there are businesses being started, but not by outsiders. If there is outsized profit, existing employees will know about it. Some of them will decide to compete, even when no one outside the industry can see the opportunity.

The return of the age of invisibility

Steve Ross came of age when organization men ran the big companies and society looked to engineers and scientists for progress. He was none of those things, so he used his entrepreneurial drive to make money in invisible businesses. We have, arguably, come to that time again. Our big companies try to grow through rent-seeking rather than innovation, and venture capital is increasingly concentrated in businesses started by PhD-level experts. It’s a hard time to start a tech business, but Ross’ path is always there.

Meanwhile, companies that have relied on technological change to generate the dynamism they need to stay ahead of the competition are seeing technological advances increasingly controlled by a smaller and smaller group of well-resourced incumbents. For these companies, knowing how to be invisible becomes an ever more appealing strategy.

On the flip side, some of the mechanisms of invisibility are becoming weaker. The data that could pinpoint a company making excess profits is increasingly available and AI can be used to sort through vast amounts of it in shorter periods of time. Social media might overcome geographic obscurity to broadcast success. Or, given the tendency for like to follow like, it might reinforce partitioned social networks: do NYC kings of the universe follow industrial workers on Instagram? Maybe they should. The shield of invisibility becomes harder to maintain.

Or does it? If AIs are all trained on the same datasets, case studies, and value frameworks, invisibility gets quietly hardcoded into the models. Of course, the harder it is to find the invisible opportunity, the more competitive neglect there will be. If some of the best opportunities are those few people think to look for, seeing the invisible may be the most valuable competitive advantage of all.

The authors would like to thank Rob Wuebker for his contributions and advice.

Jay Barney is a Presidential Professor of Strategic Management and the Pierre Lassonde Chair of Social Entrepreneurship at the University of Utah David Eccles School of Business.

Haiyang Zhang is a doctoral candidate in the Strategy Unit at Harvard Business School.

Jerry Neumann is a Colossus contributing editor. He is a retired venture investor and former adjunct professor of entrepreneurship at Columbia University’s School of Engineering.