Research and Entrepreneurship

As a former science teacher and student of the history of science I am fascinated at how often scientific truth is counter intuitive.  For centuries we failed to understand much about how the world works because we Aristotle's model of trusting our brains to figure things out without testing those assumptions through experimentation and data analysis.   Today, we drill those principles into our science students: hypotheses must be tested, reviewed, and verified.  They must constantly be re-tested and re-verified as new knowledge becomes available. 

After several decades of working in the entrepreneurial world I can say that what makes a good business idea can be just as counter-intuitive.  In my current roles I get to see a large number of business ideas go through the evaluation process.  Very often ideas that seemed the most likely to succeed ended up being marginally profitable, and ideas that seemed only marginally interesting turned out to be money printing machines.  That is why it is so important to do the work needed to research a new opportunity in a structured manner before proceeding.  While my years of experience have given me valuable intuition that I certainly take advantage of, I know how important it is to validate my ideas using a structured approach, and to be open to ideas that don't immediately resonate.  

Microsoft vs Samsung Ads

I just watched a commercial for the Microsoft Surface comparing it to the Ipad.  You know the one, where Siri jealously pouts about features that the Surface has like a USB port and keyboard.  Seriously Microsoft, who is running marketing for the Surface?

Contrast that with the commercial that Samsung ran comparing the S4 to the Iphone.  They didn't quote the differences in size of the screens.  They showed two people playing a game on the two devices, with the Iphone owner complaining about how much easier it was to play games on the Samsung.  

The difference is that Samsung doesn't just tell us how they are different, they tell us why it matters. They show an understanding of how features relate to the uses of their product that are important to their customers.  They answer the question that Microsoft fails to answer:  "so what?"  What important things can I USE the surface for that I can't use an IPAD for?   Are these things that are important to me as a consumer, not a business, since that is who the commercial is targeted at?

The real question is:  is this just bad advertising, or does Microsoft really not have a clue what an average consumer wants to do with their tablets?  

Why you buy

In my entrepreneurship class at Duke we always start out the semester talking about recognizing problems,  specifically problems that at they see every day around them, with the idea that problems often lead to opportunities. One of my students brought up the subject of the incredibly small dorm rooms at Duke,  and all the students agreed that they were small as compared to other schools that their friends attend and a drawback to going to school at Duke.  I asked them: what possible benefit would it be to the school to increase the room size.  One noted that larger rooms would make the school more attractive and could result in better students.

I then asked them how many of them even considered dorm room size when looking at schools.  Zero. Not even considered.  It probably ranked even lower than zero in the eyes of their parents, who are heavy decision influencers. The point?  Entrepreneurs and marketeers often make assumptions regarding how benefits that their products and services provide will translate into sales.  What they fail to understand is that many of these benefits,  no matter how valuable,  may not get their customers to pull the trigger on a buying decision. There is no substitute to digging into the customers buying and decision making process.

Friends and Family

Some of the worst personal disasters I have witnessed involved entrepreneurs raising money from friends and family.  It can be done properly, but seldom is.  Professional venture investors and sophisticated angels understand what risk capital really means.  Friends and family usually do not.  There are many risks, but here are a few.

The first is that when things don't go perfectly they panic and want to pull money out even when success might be in the future.  The second is that they most often don't understand dilution that inevitably occurs when a company is successful and needs more capital for growth, even if it is explained to them beforehand.  Finally, when money is lost, relationships can be severely damaged.  Look for a paper with some suggestions on how to avoid the pitfalls coming soon on my web site.

Consulting Malpractice.....
Business schools and marketing consultants are great at helping their students/clients develop a strategy to turn that great idea into a huge success with a huge exit strategy.  Sometimes that ends up being terrible advice.  I watched student at Fuqua a few years ago who had started a high end custom jewelry design business and had seen demand grow so fast she hardly had time to breathe. She was getting a lot of advice on how to scale her business to get to that desirable run rate in the tens of millions a year that all B-school students wanted.

The problem was that this would require that she compromise the artistic element of her personal design work and take her brand into the mass market.   A key part of her value was a custom design.  Every time someone talked about the idea she looked like she was going to be sick.  They never considered the  possibility that perhaps for her a better path would be to stay at the high end / low volume world and keep doing the design work that made her happy. That concept seemed foreign to most of the B-school world around here.

I encouraged her to pursue a different path.   One way to expand revenue was to generate more repeat business from each high end customer leveraging common design across multiple products.  She did not really need my expertise as she was already on that path.  She did need me to point out to her that any time you cannot keep up with demand you are almost certainly not charging enough.  She mostly needed a voice to balance the others screaming at her not to choose a path that would lead to failure.  By failure they meant having to "settle" for a business where she did what she loved, generated a few million a year in revenue,  and had to learn to survive on a half million to a million a year in net personal income.

Don't get me wrong.  I more often encounter the struggling business owner who hangs on to his or her dream as the company goes down in flames. I'm not talking about refusing to adjust to market reality.  I'm talking about the ability to make conscious choices between profitable paths where the trade-off is between success at different scales and other personal and life objectives.    

Most of my life I have dealt with venture funded companies where it was understood from day one that the objective was high growth and a very large exit.  I am very comfortable in that environment;  it seems normal to me.  However, those of us in the business of teaching and giving advice need to be careful when dealing with small business owners, especially sole proprietors.   Try to discover not only where they want their business to go, but also what they want their lives to look like 5 to 10 years in the future.  

First day of class at Duke today.  It doesn't seem like it but this is the start of my third year of part time teaching here. 18 seniors ready to learn about entrepreneurship.  Many of them are excited to be moving beyond the "well rounded liberal arts education" that Duke has provided and learn something "practical."  What they don't realize is just how important the problem solving and critical thinking skills that they have acquired are to the entrepreneurial process.  In fact, I would say that the skills they have are preferable to those of the business school grads I have worked with.  It also doesn't hurt that they had to be super smart to get into Duke in the first place. :)

Watching a new show on TV called The Profit in which a billionaire entrepreneur invests in distressed businesses if they will allow him to help turn them around.  After the first few shows several themes have emerged which resonate with my experience.  First, people often mistakenly associate revenue growth with a well managed company, even when their business is losing money and about to go under.  Second, many entrepreneurs are so set on their original "dream" that they would rather their dream go down in flames than modify it slightly and make millions of dollars. Finally, many first time entrepreneurs would rather own 100% of a business that is worth nothing than 50% of a business that is worth millions.