Best of Times or Worst of Times for Starting a Business?
Example Conventional Wisdom
- Businesses started in tough times do better than those in a boom. (An observation made by many people)
- Semiconductor businesses are too expensive and have low success rates. (Many Silicon Valley venture capital firms have closed down their semiconductor investment groups)
- Internet based businesses are attractive because they have low startup costs. (Frequent venture capital observation)
- Putting businesses on the Internet that automate previously more labor intensive businesses is a low risk strategy. (Typical venture capital observation)
- Avoid businesses that large players such as Google, Apple, Microsoft, etc. can integrate easily into. (Often phrased as a complaint that large companies are killing innovation because of their patent portfolio or pattern of vertical integration)
- Venture capitalists are a pain in the neck and actually add little value, so avoid raising money if you can. (A invariable complaint of many entrepreneurs)
- Manufacturing is impossible in the US. (A widely held assumption)
- If I don’t have a business model, advertising will support my web site. (Frequently heard idea from startups)
- My idea for a business is unlikely to be simultaneously invented by other entrepreneurs. (Competitive analysis is typically weak with most startups and even worse, parallel startups may have low or no visibility)
- Starting a business is lower cost than it used to be because of all the open source and free software that is available. (An observation made most commonly by technically oriented founders who downplay the need for marketing, sales and partner development)
- Bright and inexperienced managers are the only managers worth considering. (Consider Google.)
- Content is king and all content has value. (The idea of “long tail” content is that the Internet provides a method for monetizing less popular or low demand content)
Some Useful Observations For Innovators Starting a Business
Supply and Demand
Content Availability and Distribution
- First, it is hard to maintain a traditional business model where service is incorporated into the price for free. In some cases, the profitability is so low that sales costs are no longer affordable – which explains the trend towards freemium models, where initial use is free. Make the trial free to reduce the sales cost. You only pay when you reach some threshold of use or activity. Historically when you bought expensive mainframes from IBM, you received lots of service. The amount of free service declined as the cost of computers dropped. The same phenomenon exists with software. Expensive software is more likely to have paid or free support. In contrast, getting support out of Google on their free offerings is a little like looking for hen’s teeth.
- Second, companies need to increase the performance and scope if their offering in order to maintain their profitability. An MP3 player such an iPod may be profitable, but a smart phone which generates several thousand dollars of service revenues is a lot more attractive. Investment in these sustaining innovations represents the past road to success for many product categories.
- Third, companies will tend to over-service customers leaving room for disruptive less capable products and services. Using a netbook, tablet or smart phone for interacting with the Internet provide clear examples of usage where the less capable technology is more convenient, more affordable or merely sufficient. The lower cost of these disruptive technologies will often open up a new group of users that previously would not have been able to afford the offering.
- Fourth, when margins get compressed, vertical integration occurs. Amazon’s launch of its Fire tablet demonstrates this principle. Estimates of Amazon’s manufacturing cost vary between $150 and slightly over $200, but it hardly matters any more to Amazon that the cost of the razor does to Gillette. Both companies look at multi-period profitability and the revenues generated by the initial sale.
So What’s the Good News? Why is it the Best of Times?
1. Do I want the option of 3G so I connect when outside my home or office?
2. How much memory do I wish to pay for? 16, 32 or 64 gig?
- The strongest predictor of new product success is offering a differentiated high value product.
- Value is not homogenous and varies by segment of the market and also by the objectives of the user.
- The most common cause of new product failure is inadequate market research and understanding of customer needs.