I was reading a post on a friend’s blog (http://iterativepath.wordpress.com/) about the mind set of an entrepreneur and realized that what he was pointing at as arguments not to start a business was partially flawed. I agree with the fact that if we could get all the data the analyze a venture’s success in advance, most of the time we wouldn’t start those businesses but the flaw in the argument resides in the fact that most of the time, those analysis are close to impossible to make. Sensitivity on Pricing based on what evidence? your product is not even sold yet. Of course you could survey a few potential customers and get an idea, but until you start getting money in your bank account, you have no real proof that your ricing is the right one. Your market sizing is similar in that a lot of entrepreneur will rely on a Gartner research, or on Forrester research to get those big billions of dollars market, but knowing in advance who your perfect customer is, and predict how well you are going to be able to sell them is clearly an illusion. What I’m saying here is that the art of forecasting and sizing stays an art, and their is very rarely hard proof that you forecasts are right or wrong. As a consequence, entrepreneurs won’t decide to start a business based on evidence that it cannot work, but more relying on the fact that the picture “looks good” when gathering as much data as possible.
So what is a picture that “looks good”?
A big market: clearly the bigger the market the easiest it will be to find some place for your venture. just a matter of sheer size.. The Travel industry for example is over $300B dollars annually. It could be considered easier to make $50M to $100M in a market of that size than in a $200M market.
A fast growing market: It’s easier to grow with a market than inside a market. Their is less competition for market share and the demand is growing which helps keeping prices high and preserve margins.
A real problem: That would be the key to a successful business.. Solving a problem that is painful, costly, visible, well known.. It’s even better if it’s a direct problem for you customer. Costly server and datacenter maintenance have pushed companies to use SaaS (Software as a Service) solutions. It was a direct cost (high cost I should say) reduction. On the other end, global warming has an indirect effect on people, and the immediate value of solving that problem is harder to defend in the short term. Who is the most impacted today by global warming? That’s who should be targeted by company that have solutions (if any) to solve the problem. A consequence of the real problem is that customers would be willing to pay for it. to many product (especially on the web) think they cannot charge and that it will bring more traffic if they don’t. This might be true but I would rather have 1 customers that pay me $1, than 10 customers that don’t pay me at all.. both could be used in a pricing strategy though!
A cheaper, faster, better solution: It’s often the case that the problem you are solving already has a solution, albeit a bad one. Switching costs are often a big forgotten component of many wannabe entrepreneurs and status quo has a very powerful force. The venture should have a cheaper product (to compensate the switching cost), it should be faster if a matter of performance is implied (although it could be faster to deploy… ie SaaS), and better. Better does not necessarily mean more features, more integration, etc.. but could be better suited for need. Why is it that Barracuda antiSpam solutions when they came out were so successful with a product that was clearly not as efficient as a Sophos PMX and Open Source alternatives? it was easy to install, easy to upgrade, was cheap and replaceable, and was doing an “OK” job. It’s was better for many companies where spam was an issue but not a tremendous one.
Some other points could be added to the picture:
A good business model: The choice of business model is extremely important and can make or break a venture. As an example, your product could be a technology that you license or a full blown product. One of the other is completely different in cost structure and financial forecast. “Implicit Interfaces” (winner of the UC Berkeley Bplan competition 2008) has a good technology for shopping visually based of commonality between products. they started deploying the technology with Zappos.com which was a perfect fit and suddenly changed their business model to a standalone site that they would control. I’m hoping they are successful but I strongly doubt that the shift in business model was the right move..
Connections / industry experience. Having the right network in the industry you are dealing with can greatly speed up development of your business. When Marc Benioff started Salesforce.com, he had a tremendous experience at Oracle, as a VP of sales (TO VERIFY). What a great position to start a company like salesforce. This is why the team is very important when the venture starts.
A Patent: I was hesitant to put that in the picture because of the cynical point of view I have about patents for entrepreneurs. The problem with patents is that you need to defend them against infringement. Imagine you come up with a great technology, you file a patent and try to start a business. Now Microsoft, Google or what ever big corporation infringes the patent.. What money are you going to use to fight the multimillion dollars law fees they have available against you for many years? Those companies can drain you out quicker than you can think. The movie (MOVIE ABOUT WIPERS) was a great story but I wouldn’t make it an evidence that it works every time.
A good understanding of the competition: The more you can know on the competition the better. How much revenue do they make, how fast did they grow, how many customers, what segments of the market are they targeting, what’s their roadmap, who’s in the team, who funded them, could they copy/modify their product to look like you etc.. Your competition can bring a lot of data point for your own forecast. Competition can also force your pricing in a direction or another and your sensitivity analysis could potentially be more accurate. I often hear entrepreneurs pitching their idea and saying that their is no competition on their market. If that is really the case, they should wonder why, and think about switching costs and status quo as their competition. Those two are tough..
I’ll conclude by saying that evidences of a good opportunity are hard to gather in a precise way. Writing a Business Plan is a way to ensure that you have dug as much as you can into what you can know and see if the picture “looks good” or not. Experience helps a lot, so getting feedbacks from other entrepreneurs is critical in the process. they will raise some good questions and allow you to refine your search for the right opportunity.
So why are entrepreneurs still starting all those ventures? is it because of a leap of faith or something else? I think that is going to be the subject of my next post..