When a Niche Consolidates

For many months I researched and profiled various companies looking for an opportunity to build a product/service that would provide an opportunity for me to build and scale a business.  After an exhaustive search, I finally landed on an idea:  real estate.  Specifically, I saw an opportunity to service real estate agents as they struggle to establish an online presence.

The particular opportunity that I felt I saw was an innovation vacuum due to 6 years of low revenue in the industry.  In an overly saturated online World where angel funding is thrown at every college student with an idea, I was hoping to find a niche where no one was looking.  Real estate seemed perfect since it isn’t really ‘sexy’ after so many years of struggle.  Equally important however, marketing solutions for real estate agents is a massive billion dollar a year industry.  The quality of services and products is not that high and margins seemingly healthy. Once I finally stumbled upon the niche, it appeared it was all systems go!

But there was a massive under-current forming underneath me and I didn’t realize what it was until 2 weeks ago.  Apparently Zillow.com, the major online media site for real estate search and content, and decided to begin offering marketing solutions for real estate agents. More importantly, it launched a significant suite of tools and resources nearly identical to was planning, and made it available, for free. They now offer a CRM system, significant training materials, and a free WordPress-based website (which real estate agents love), complete with numerous content widgets and an IDX feed of houses the agent can display on their site.  The IDX feed is particularly notable because the vendor fees each regional MLS charges to access their IDX feed is non-trivial, adding $20-25 to each agent account on average, depending on scale.

Looking closer at the Zillow program, it is not just $25 per month they’re absorbing, there are also hosting and development costs and a free domain name they are subsidizing for new Realtors who sign up.  Its a great value for agents who sign up, but a clear loss-leader on a massive scale.  From what I have read, Zillow’s goal is to become the dominant destination for Realtors seeking online marketing solution.  Or put another way, they are establishing a Freemium platform, upon which they’ll offered paid services.  The free part of the product effectively neutralizes competition and allows them to establish a dominant mindshare; a position well worth the $5-10 million dollars in cost to them, and something that will pay off in spades later, with higher conversion rates and lower advertising costs for their services.  More importantly, the margin compression asserted by their impossible economic model will inevitably starve out a majority of the small companies currently services Realtors, creating a much less crowded table which is easier to dominate.

What I am describing is a classic case of market consolidation. Well, the part wherein a company can offer better service at a lower price is classic competition which leads to consolidation.  Subsidizing a new offering from other business units and recently acquired IPO capital in a way that renders your competition downright impotent to compete is arguably anti-competitive and monopolistic, but I won’t digress any further in that direction.

The reason for sharing this story is because it presents a learning opportunity for observant marketers and entrepreneurs.  Just because an opportunity exists today, doesn’t mean it will still exist tomorrow.  In fact, there is a natural cycle in business wherein a new innovation generates new opportunity, entrepreneurs seize on the opportunity in a vacuum of competition and do well.  Their success inspires new entrants, the market gets crowded and ROI is squeezed.  Eventually a “winner” of the competition will assert itself, another “winner” will respond, and all the small competitors are washed away in the waves of competition that overwhelm them.  By this time, the opportunity for innovation and entrepreneurship in the field is exhausted and those who competed inevitably go to work for the ‘winners’.   This is a phenomena first described by the Rogers Innovation Adoption Curve and well applied here.

If I were to apply it to entrepreneurial opportunity, I would say there are are 5 distinct phases:

1. Innovation – Shortly after an innovative disruption occurs, there is significant opportunity for an entrepreneur to introduce new ideas and products.  Because there is virtually no competition, an immature product is acceptable and very little marketing strategy is required ( brand strategy et al).

2. Proliferation – Soon after the world realizes the opportunities the early movers have discovered, more and more entrepreneurs will seize on the idea.  The market will soon get crowded.  Marketing sophistication is now required and products need to be more polished and mature to compete (more features, etc). For these reasons, the cost of entry is now a lot higher and may even require significant capital at the later stages.  The market is still healthy but increasingly difficult to enter.

3. Consolidation – During the proliferation period, 2-3 large brands likely pulled ahead through better product or marketing efforts.  These brands are now in a position to begin major advertising campaigns, major new product innovations, or reduced pricing as a result of scale.  In some more aggressive cases, they may seek to undercut competitors by offering product at impossible price points and take the loss in order to starve out competition, in an effort to accelerate the consolidation phase. Typically one brand will initiate the war but a second and possible third will respond in an effort to prevent the one brand from dominating them.

4. Nichification – After consolidation occurs, the dominating brand(s) will have created a platform or “ecosystem” that they control.  AT&T did so with the telephone networks, NBC and CBS for television networks, Microsoft with the desktop OS, Google with online search, Apple with the IOS/iTunes ecosystem, Magento with eCommerce, and WordPress with blogging, YouTube for online video and Facebook with the social graph.  Once those dominant platforms are in place, there is very little hope of a small entrepreneur challenging the platform.  Instead, many entrepreneurs find opportunity, albeit smaller and more contrived, by developing “glue” to augment the experience of those platforms in the form of extensions, ‘apps’, themes, or content. Consulting is also still a viable opportunity at this stage of market maturity.

5. Completion – Eventually even the the entire innovation wave will be exhausted an even the niche glue opportunities on top of the dominant platforms will have been exhausted.  There is always some room for innovation but the field will again get crowded, margins squeezed, and the platform owner becomes increasingly aggressive in their efforts to control and monetize the platform, further undercutting the entrepreneur.  When all of this happens, the entrepreneurial battle for the wave is over, and many of those who participated will go to work for the dominant brands.

As frustrating as it is to observe, it is also fascinating and predictable.  In my particular experience with real estate, I observed a large opportunity that seemed to be taking a rest for the past 5 years.  I took this as a sign that the above progression was perhaps paused in that industry, providing me an opportunity to go back in time so speak, compared to a more accelerated wave otherwise online.  I believed we were in the early stages of Proliferation in only marketing solutions for real estate agents, making it a good entry point, particularly when working without significant investment capital. In fact, we were much closer to the end of the proliferation phase than I realized, and Zillow moved quickly to accelerate the consolidation phase.  So essentially we went from stage 2.5 (midway through stage 2) to 3.5 (midway through stage 3) almost over night!

As for where opportunities still exist in the niche, I believe a couple of competing platforms will exist, providing opportunities to create “glue” solutions.  The questing is of course how open those platforms will be for entrepreneurs to participate.  In Zillow’s case it is curious, though I see a clear competing platform emerging called Spark Platform, which appears will mount a meaningful battle against Zillow and seems to offer ample opportunity for entrepreneurs to become involved.  Consulting, training, and guidance also remains a clear opportunity, as there are a lot of Realtors out there who are now waking up to the reality that 90% of real estate searches begin online, but haven’t a clue how to put that fact to work for them.

Conclusion
In every market segment, there is likely to be a similar pattern at work.  It is critical for entrepreneurs to realistically assess where things are at in their market and determine their odds of success, before beginning. Raising seed money is becoming increasingly important as we get deeper into the proliferation phase, and so is the risk of being undercut by a dominant player.  If a consolidation event has already begun, be realistic abut that fact and adapt to the prevailing platforms, or don’t even bother competing.  I realize it is en vogue to be David and take on Golliath among tech entrepreneurs these days, but for every Mark Zuckerberg story, there are probably thousands of shattered dreams that litter that one path to success.  More people will not achieve the massive hit of a Facebook, but still stand a good chance of a mid-size success, but only by being realistic and adapting to their environment.

Waterfall or Iterative Methodology?

A debate has been raging for the past few years about the right way to build software products.  There are essentially two schools of thought and the two are pitted against each other with as much conviction and animosity as a presidential election.  And much like a political or religious debate, neither side seems to be much interested in influence from the other.  Despite what you’ll hear from zealots on either side however, they both have their strengths and weaknesses, and each has circumstances in which it is a better choice.  The goal of this blog is to compare the differences and guide decision for what might be best for your business.

Waterfall Methodology

Stage-gated processes such as Waterfall emphasize completion of one task before proceeding to the next.  For example, a business stakeholder must perform due diligence and complete requirements documentation before passing the project on to the technology leads to perform technical analysis and the designers to implement a graphic design.  Upon completion of the technical analysis and graphic design artifacts, the project is ready to be implemented by programmers.


This approach has some benefits. The business team is forced to gather all of their requirements before production begins and that can be a fantastic incentive to get the business stakeholders to prioritize the effort and complete the document.  Otherwise, business stakeholders might be inclined to do a half effort, pass along a requirements document lacking a lot of details and expect technologists to begin designing and building the product. Everyone will be frustrated in the end, when the product is late, and doesn’t look or act as was desired.  Waterfall is very good at solving this type of problem.

Waterfall can also be a significant advantage from the perspective of budgeting.  When working with external vendors or even service units within a larger enterprise which are driven by strict annual budgeting, there can be little tolerance for wasting money. By practicing a Waterfall methodology, business stakeholders get everything in place to be maximally efficient with the use of technology and design resources before engaging them, thereby reducing capital waste.   And, the vendor can also deliver on a fixed-cost or fixed-timeline, which helps overcome trust issues that can be a problem otherwise working with external vendors who bill by the hour.

Iterative Methodology (Agile & Lean)

Iterative methods such as Scrum, Extreme Programming and the Rational Unified Process (RUP) rose to prominence in the 1990s, in direct response to the perceived short-comings of Waterfall and other Stage-Gated approaches.  In 2001, the Agile Manifesto was written to unify these efforts and as a result the Agile Method was born. The key issue they collectively seek to address, is the waste of building the wrong product or features.  Whereas Waterfall in particular is great for reducing the cost of production, it is slow to produce results (since planning must be 100% complete before implementation begins) and outright terrible at discovery and responding to user feedback.  Proponents of iterative methods would argue that while stage gating methods such as Waterfall make efficient user of capital and resources to develop a product, it is only efficient in creating something that nobody wants!  This is a real problem for startups and new products, in particular.

The Agile method focuses on software development and includes several sub-processes such as Scrum, Extreme Programming, and Adaptive.  Collectively, they provide tactical guidance and frameworks for implementing iterative development process within an organization.  The Scrum sub-process for example emphasizes face-to-face communication and requires a daily meeting between team members to provide updates and social accountability, as well as align everyone around the common goals and challenges.  It also recommends that all members of the team work together in a single office without walls (called a “bull pen”) to facilitate open and organic communication.  The idea is that the team can be more reactive and ultimately agile and responsive to changing business requirements this way.

Agile also mandates that delegates from each business unit be an active part of the process, every step of the way.   Each iteration is typically 1-4 week time-boxes and while developers are implementing the design for the current iteration, designers and business stakeholders are creating the requirements for the next iteration, to be completed at the same time as implementation of the current.  When the current implementation is completed, it goes to QA to test, while development codes the next iteration, and so forth.

In this way, design and functional requirements are being created just shortly before they are implemented.  This allows for a tight feedback loop in which product designers quickly realize flaws in implementation and business stakeholders can quickly perform user testing and correct any flawed assumptions as for what is actually being built.

The Lean method is similar to the Agile method as it is iterative in nature, though the focus is product-market fit and less upon product implementation.  Whereas Agile provides a feedback loop for internal discovery among business units, Lean focuses more upon customer feedback, discovering product-market fit and optimization details such as conversion rate and landing page optimization.

Comparison

So which is a better option for your organization? It depends.  Waterfall has been beat up a lot by those who reject it in favor of iteration, but it is actually a better fit when working with external vendors, since cost-control is often a key issue. Agile can be a great choice internally within organizations that are product focused and which foster an open enough environment to allow for communication and inter-departmental cooperation.  A lot of organizations realistically do not have the culture to succeed with Agile however.  I use to work at one organization in particular which had a known policy that business stakeholders were not even allowed to enter the Engineering wing!

The nature of the project is also important.  If you are working on creative or discovery-driven projects such as analytics-driven optimization or are simply charged with increasing revenue by whatever means, iteration is the only option, since you need to make changes, test, and respond systematically.  Conversely, if you are performing a systems integration project with very specific requirements that are not going to change and require no discovery, Waterfall will likely bring more success.

Another consideration is the composition of your team.  Agile is often preferred among the more big-picture and senior members of a team, who have the competence and visibility of overall business objectives to be effective.  And in fact, it is good to engage such people and allow them the opportunity to work with Agile and Lean methods, since they will likely get bored and not be challenged by having every detail spelled out to them in a Waterfall style requirements document.  Conversely though, junior team members often need the structure and oversight of a more structured environment and might not perform well on an Agile team.  Agile has also been implicated as non-effective on larger teams.  If you have more than 20 people on your project team, the overhead of managing rapid-succession iterations might overwhelm your effort.

Finally, consider stepping back from all of the details of what Stage Gate and Iterative methodologies are, and simply ask this question:  does your business benefit more from a large-batch or small-batch approach? Stage Gating is much like an assembly line and assumes you have all of the answers and are not making any strategy mistakes.  If the answers are known already or discovery of the answers within your organization is not going to be tolerated,  then large-batch is the way to go.  If you are an early-stage company or are intro ducting new products or trying to optimize user engagement or monetization of those products however, small batch is the right choice, since you need to build a little bit, test, get feedback, and take the next steps based upon feedback.  If retaining top intellectual talent is core to your business, Agile provides more latitude and will allow you to keep your best minds engaged.

 

The following lists provide a quick comparison of waterfall and iterative pros and cons.

Agile Considerations

» Creative and Discovery-driven projects
» Seeking Product-Market Fit
» Team typically on-site together
» Responsive to Changing Requirements
» Responsive user feedback loop
» Requires a senior team
» Quick initial product release
» Intensity of iterations can lead to burnout

Waterfall Considerations

» Transactional Projects (black & white requirements)
» Precise control of time and cost
» Mission Critical system development
» Clients with external vendors
» Remote teams work well
» Large teams (20+)
» Teams with junior engineers
» Better documentation

Are We In Another Startup Bubble?

Have you noticed how many online startups there are again recently? While it’s great for overall innovation, it can create a challenging ecosystem for budding entrepreneurs. I’ve spent more time than I care to remember, evaluating various businesses, looking at models, and seeking opportunities where I could compete. Invariably no matter what idea I find and no matter how niche or arcane it is, it’s likely there are already more than a handful of competitors already in the space.

Just a few years ago, may of the simplest online opportunities were still viable for new entrants with relatively little capital. Today, I see excessive competition everywhere I look, and nearly every niche seems to have at least 1 or 2 well-funded competitors. The other day I was joking with my wife about the issue, and we came up with a business idea (as a joke) that we thought would be a good litmus test — a dating CRM. Afterall, a busy dating pro needs to keep track of all their dates right?. So we looked online, and to our horror, there were several, one of which appeared to be a serious product.

This kind of crowding isn’t what you want to see if you’re about to take a major career gamble.

So why has the market become so congested? Consider what has happened with venture capital investments in Internet startups. Only a decade ago, the expense of getting a startup off the ground was very high. With the cost of servers, and having to write all the low-level code from scratch, it was entirely likely to require millions of dollars to get a company off the ground. As hardware commoditized and foundational software became open source, the cost and time to get off the ground has reduced substantially. Investor Mark Suster wrote an interesting piece on this topic, suggesting that the capital cost of launching a new startup has gone from a million dollars to only $50,000.

I’ve heard it said anecdotally that only 1 in 1,000 Silicon Valley startups would be considered a “success” five years later. A little more promising, I also heard Founder Institute CEO Adeo Ressi indicate that startup success was closer to 3%. I don’t know what the actual number is, but this serves to illustrate just how high the risk is and why the lower cost of investment for VCs is such a good thing. Rather than spending a million dollars on a single business, you can spread that same million dollars across many young startups and significantly increase your odds of reaching positive ROI. That’s why we saw Y-Combinator launch a few years ago to provide early-stage mentorship and $20,000 of investment for college students who want to take a chance on a startup.

The Y­‐Combinator model has proven so successful that it has attracted much more money into the ecosystem and there has been an absolute explosion of startup accelerators across the country, all proliferating the same mentorship + seed capital model. The net result is that you have often multiple tech entrepreneurship factories churning 20-50 out cohorts of new startups every quarter.

With geek now being chic and success stories such as Facebook and Google inspiring movies and careers around the world, the allure of becoming a startup millionaire is today’s equivalent of becoming a rock star. And the Internet has torn down many physical barriers that once precluded other nations from competing. Now you see merchants selling directly from China on eBay, and SaaS companies providing compelling online software solutions directly from India and Eastern Europe. No wonder it feels so crowded!

But let’s focus back on the maturing of capital markets and their contribution to this phenomenon. In the traditional investing cycle, initially, a few investors would reluctantly invest a little money in a company that already had a proven model and track record. With a nearly guaranteed return on investment, they saw healthy returns and confidence built. In the next cycle, more investors observed this success and tried to step ahead of the conservative late-stage investors to get in on the easy money. They accepted more risk and lower returns. This process continued until we had a very mature market in which too much money was chasing too few ideas, all trying to step ahead of one another. And eventually we got to where we are today — money being thrown at every college kid with an idea and no track record. Now imagine what happens with the newly passed JOBS Act, that will make it easier for small businesses to attract angel funding from non-accredited investors, particularly through crowd-funding.

But everything goes in cycles, and I can’t help but wonder if this wave is already cresting. While there’s been opportunity for venture capital firms to spread their risk across numerous startups and increase their odds, doesn’t the proliferation of incubated startups actually challenge the success potential of each one of them? And how long does it take for the aggregate return-on-investment to once again find its historic equilibrium?

It was less than a decade ago that Wall Street was touting financial innovation and Congress was touting easy lending that would make it possible for more Americans to become homebuyers. This, of course, opened up capital to home buyers and investors that created the housing boom and eventual bust. But all it really did was bring more people into the market place and temporarily distort opportunities; a distortion resolved a few years later.

So how long will it take for this bubble to correct? As aggregate returns begin to marginalize and the over-supply of startups begin to cannibalize one another, other investment opportunities such as real estate may become more attractive again and provide healthier alternatives for the early ‘smart money’. The ultimate consequence is going to be a downward leg for a number of years for startups. It won’t be the end of the world, but it will mark the end of an easy-money cycle and a period of exaggerated perceived opportunity.

For would-be entrepreneurs looking to invest in a startup today, it may be worth taking a hard look at whether this is the best time to take the plunge. Isn’t it after all the height of a market cycle when the opportunity looks the best and when everyone is convinced that ‘things are different this time’?

Originally published at  VentureBeat.com:

Are We In a Startup Bubble?

Entrepreneurship Advice From Bill Gross

Tonight I attended an event for Startups at CalTech.  The event began with presentations given by several founders and wrapped up with a key note speech by Bill Gross. For anyone who does not know, Bill Gross is a legend in the startup community.  He founded IdeaLab in Pasadena, which has incubated over 100 companies, including just about every major Internet success story in the LA area – brands such as eToys, CarsDirect, eHarmony, Overture.com and UberMedia.

His speech chronicled his life as a serial entrepreneur and provided a 12 pieces of advice that he learned along the way.  I thought it might be an interesting blog post to capture his advice.

1. Up Markets – try to align yourself with a market that is rising.  If you are running with the trend, it is like running a marathon with the wind at your back.  Yes there may be a lot of competition, but your opportunities to succeed are also greater. This is the most important piece of strategic advice.

2. Selling – Learning how to sell, pitch, and explain your product, is the single most important skill as an entrepreneur.

3. Passion – You have to pursue your passion!  A young company will go through many tough times and often the fate of the business will not be known.  Apple and many others experienced these dark times and persevered, only because their founder(s) had so much passion for what they were doing that they did not give up, when things looked bad.

4. Focus – Even if you think you are going to starve yourself of opportunity by limiting yourself to just one thing, in fact the opposite is usually true.  He told the example of how he was building educational software products for kids and decided to build one specifically for Kindergarteners. That became, by far, their biggest seller!

5. Strengths – It is important to recognize your own strengths (and weaknesses).  Build your infrastructure around your strengths, and find others  to compliment and fill in around you.

6. Grow Slow – Do not get ahead of yourself; it is better to grow slowly.  He told the story of how eToys was growing as quickly as possibly, trying to grab marketshare before Amazon did.  When the .com crash happened however, they were over-extended and it killed the business.  In retrospect, growing slower and not causing such vulnerabilities would have been a better strategy.

7. Survive – If you have a great idea but are early to the market, you need to stay lean so that you can stay alive until the market is ready for you.  Mr Gross told the story of how Z.com could have been a leading entertainment business online but they spent their capital and folded that business before the market was there.  In retrospect, they should have grown slower and maintained so they could stay alive until the opportunity manifested.

8. Testing – Test your core value proposition early and often – test, test, test!  He told the example of how CarsDirect initially was just intended to be a simple test.  They put up the site to see if they could attract buyers for a single night and received 4 purchases.  Based upon this response, they went forward with the business.  Testing as process is an idea I’ve written about before and also a major tenant now of the Lean method.

9. Perservence – If you believe strongly enough in an idea, stick with it. When Bill Gross founded GoTo, no one saw his vision for the Pay per Click advertising model.  GoTo later became Overture.com, which of course eventually became Yahoo, and is the model that Google Adwords now uses. Had he not stuck with it at the time, none of that may have happened.

10. Funding – If you have a big idea, you will need big money to pull it off. Its that simple.  No when you are going to need partners and seek them out if necessary.  For smaller ideas, its often better to build the initial iterations yourself and seek funding later, but for big ideas, funding is a critical element of the venture.

11. Automation – Find automated ways for customers to bring new customers to you.   Virality in other words.  Its the single most efficient way to scale a business, though it can be difficult to crack. He is currently working on social media tools (UberMedia) and social networking (Chime.in) and exploring how to make this happen.

12. Opposites – Work with people opposite from you.  This has previously been described as the hacker and the hustler team.  Mr Gross talked about how early on, he made the mistake of always working with people like himself but soon realized he wasn’t getting the objectivity or rounding out his own skills this way.  He recommended that entrepreneurs seek out their opposites instead.

Test Your Ideas Early & Often!

One of the core principles of the Lean methodology is to validate “product/market fit” as early in the process as possible.  Historically, a business would define a budget, create a product, and put it on the market and hope for the best.  Typically this worked fine since we were living in a supply-driven economy wherein there were more consumers (demand) than providers (supply).  Today however, the cost of competing to supply a product has fallen dramatically, and suppliers are increasing by the day.  And so too, the risk of failure has risen.  So it is more important than ever to make sure you are building a product people truly want, with better product/market fit than your competitors.

If you are a startup, you likely have limited time and money, and thus a limited runway with which to work, to make sure your product “hits”. If it doesn’t, it is often game over.  So what can you do to make sure you don’t waste your entire budget or timeline creating something that no one wants?  Here are a few ideas:

1. Smoke Test – Create a website that promotes your product, market it as if the product exists, and then track your results.  Another term for this might be “vaporware”.  You can see hypothetically how sales conversions would be, if you were to build the product, before you invest a dime!  I’ve used PPC ads for limited amounts of time, and when a user submits their data, I simply display a thank you page and say someone will contact you shortly. This works best for consumer products and software products.

2. Affiliate Marketing – With affiliate marketing hubs such as CJ.com and Linkshare, its extremely easy to become an independent marketer for thousands of brands. By doing so, you can make a little money to cover your marketing costs but more importantly, you’ll have visibility deeper into the sales funnel than you would with simple smoke testing.  Many times your affiliate program will share details such as how long the customers stick around (lifetime customer value) and what has worked well for them in the past.  A word of caution however, if you’re entreating a market with plenty of affiliate programs, (a) the market is probably already a bit too saturated and (b) those affiliate marketers have already probably driven up and artificially inflated marketing costs in that vertical.

3. eBay – If you have a physical product you’d like to build an commerce store around, consider first trying to sell it on eBay. By a few test pieces, and run a campaign on CraigsList.  If you’re able to generate demand volume and reasonable profit margins, then you could justifiably move forward and build the store.

4. Prospect Interview – If you’re considering the development of a B2B product, the best thing would be to talk with the people for whom you might develop your solution.  Let’s say you’ve decided you will build a software solution for accountants. You need to speak with a few accountants to understand their “pain points”, and figure out how you could solve them.  Once you’ve found something, ask other accountants if they would realistically buy the product and how high of a value it is to them (1-10).

If you find a niche that seems compelling and you have validated a reasonable probability that you can hit product-market fit if you proceed, congratulations!  The next step is to build enlogica, meaning build in small installments, beginning with the smallest, most minimally viable version of the product you think someone would actually use.  Then, socialize it!   Begin to share it with a small group of prospects who can give you feedback and help you refine your vision.   Because they are your end-consumer, they should be your partner in the design process.  The will be able to tell you better than anyone, if this is exactly what they need and want, and help you to avoid making some pretty fundamentally bone-headed mistakes!

Which Advice To Follow?

The World is full of advice.  And in entrepreneurship, we can choose from hundreds if not thousands of books that either advise us on how to become successful, or tell us the history of the successful. And it seems that many of these are just re-organization or re-hashing of a few core ideas:

 

 

1. Do what you love.  (proactive)
2. Pivot and react to market demand.  (reactive)
3. Build Product, not services companies.
4. Focus on  helping others, not yourself.
5. Work on the business, not *in* the business.

But it strikes me each time I hear one of these, that they’re not always true!  And I guess it makes sense – to condense a lifetime of learning into a small sound byte means that you must dispose of a lot of detail.  But too often I think these are taken literally.  Let me take a few as examples:

Do what you love – I personally struggle with this one.  The premise is that if you follow your own bliss, then it won’t feel like work and you’ll have the energy to go the extra mile and overcome your competition.  The passion will come through and your customers/clients will see the authenticity.  That’s great and makes a lot of sense … when its true and when you have an opportunity for that feedback loop.  But what if your love is music?  The odds of success in those cases are astoundingly low, particularly amidst the disintegration of the music industry! But what if your odds of success are less than 10%, compared to the next best option which is 70% odds of success.  Is this really still good advice?

Product Scale, Services Don’t – The current zeitgeist wisdom of Silicon Valley is that you should only do products businesses, because services (consulting) businesses do not scale well.  With products, you can create it once, iterate a few times, and then sell it a million times.  But with consulting, you have to hire expensive and difficult to find consultants with egos to be managed etc.  Sounds simple.  But the overlooked half-truth here is that with product development, you’re taking all the risks of a services business, and compacting them all up-front with expensive development and no income yet.  Whereas there are small potholes all along the way for services businesses such as empoyee retention and cashflow, there’s one MAJOR hole at the very beginning with products, which  is very dangerous for a young entrepreneur.  On one hand I guess you can fail quickly this way and move on, but if you’re using your own money, wouldn’t you rather spread it out a bit to lesson the risk of failure altogehter?  If you’re in Silicon Valley, have raised $500k of other people’s money and have a great idea, then sure – build a product!  But if you don’t have those things, why would you?  The risk is too high and your odds of success are quite low, given how much competition out there *does* have the money that you do not for marketing etc.  In that case, you really *should* start a consulting business.

On another front, I recently watched a video of the speech that Steve Jobs famously delivered at a Stanford graduation.  He talked about how he was a little lost while attending Reed College, dropped out and took calligraphy and fontography classes.  Despite being a little aimless, it was okay because it turns out this life enrichment was what he drew upon to make the Mac special. His point was again, follow your bliss because you don’t always know where these things will end up; you can only connect the dots looking backward.

His point sounds brilliant, when said in this context.  It is after all the key to the success of one of America’s most brilliant modern-day “invent-aprenuers”.  And I can see how it makes sense if you are going to be creating things for society.  But what if your vision is to become a professional in a much more structured world (law, medicine, etc).  In those cases, was such sojourning a value or a waste?

I’ve heard so many stories of successful entrepreneurs that become successful.  After which, we’re all told to follow their lead.  Just create a social network like Mark Zuckerberg did. But every one success story that we can point to, there are a thousand dead entrepreneurial dreams littering the path to success.

My point is not to be cast doubt on entrepreneurship; quite the contrary.  I am instead saying, know these success rules for what they are – half truths.  And know your own situation and gauge whether this particular rule really applies to you.  If you’re a student in a dorm room with free time to kill like Mark Zuckerberg, then absolutely – go create your dream and see what happens.  Apply to YCombinator and every other accelerator program while you’re at it. Its not only your best chance to success, it reinforces your skills and is a great resume builder at worst.  So what did you loose?  If however you have a family, a mortgage, and are otherwise giving up a six-figure income while you sit back and build your dream, the risks and opportunity costs are much higher, and the secondary benefits are much lower.

To sum up, know your own reality and balance it against your dreams. Going to one extreme or the other is probably not going to maximize your odds for maximum success.  And if I may create my own soundbyte it would be this:  Look for secondary benefits for anything you do.  If you create your business and fail, can you at least get a career bump from the experience or will it help get accepted to that graduate school you were considering?  These things also help to lesson the risk.  Keep in mind that entrepreneurship isn’t just about taking risk, its also about managing and a mitigating risk so that you can live another day if you turn out to be wrong!