I retired from personal blogging in July 2008.
But you can find me over at http://blog.xero.com.
I’m doing a 6 article series in the NZ Herald on various aspects of starting a business. Rather than the normal text book stuff I’ve tried to get through a few street smart things I’ve picked up over the years.
The first one was out today and was originally called I have an idea, but how do I know it’s a business.
Rod Drury: How to start a business
Almost all ideas I get pitched fall into the categories mentioned and almost all of them are fundementally flawed for one of the reasons mentioned below. I’m sure there are lots of exceptions but comment away.
Here is the full text …
People pitch business ideas at me all the time.
Unfortunately, almost all are fundamentally flawed, and almost all in obvious ways.
With a few exceptions, there are natural laws of technology businesses that you should take note of, so you don’t find yourself repeating the mistakes made in previous start up businesses. There are a number of business ideas that are just too hard and not worth putting your energy into.
- Anything that involves text messaging or mobile data is unlikely to be a success. That’s because mobile carriers just don’t leave enough on the table to make a buck from. It’s hard to think of anyone who has built a successful business based on text messaging.
- Taking on Trade Me will not work. They already have the customers and therefore they own the market, and only one player wins.
- Anything aimed at taking bricks and mortar retailers online will not work. History tells us that.
- Anything to do with document or content management will not work because that has been done 10,000 times before.
- A start up involving retail point of sale will not work because the cost of sales and support will be too high.
- An export-focused business where the founders are not willing to travel abroad will not work because you need to be in the market to understand it.
- Any business where the founder is not happy to step aside and letanother person be the CEO will not work.
- Any business that only wants to give up 10 per cent for $1 million in its first investment round will not get funded and will not work.
- Any business depending on low-cost Google AdWords will not work, because the price of those AdWords becomes valuable, and then it blows your business model.
- Any software business where the software development is outsourced to a consulting company will not work because you need to be nimble to close the feedback loop between your customers and your product strategy.
- Any business without a business plan will not work.
This might sound like a grim reality, but almost all of the hundred or so businesses I’ve looked at over the past couple of years are flawed because of one or more of the reasons above.
You only need to look at the very few angel or venture capital deals done in New Zealand during 2007 to see that very few ideas are actually valid business ideas.
As a first step before presenting your idea, you need to be able to write a high-level summary of what the business is and why it will be successful, in not more than three pages.
Then you need to test that idea. Try out your idea on friends first.
Make sure you check with someone who will tell you honestly, and not just what you want to hear. Make sure you check with someone with industry expertise. A “fast fail”, where you quickly discover that your idea is flawed, will save you time and money.
My ideas usually come from problems that I have experienced personally. In areas where I have significant base knowledge, I can intuitively know where there is an opportunity. Once you’ve tested your big idea, you need to back yourself and go. One of the first activities is building a team.
Next up, we’ll look at setting up a business with multiple shareholders.
blog
Great read, looking forward to the other parts
Interesting, Rod.
A few seem rather specific to niches, calling them natural laws is perhaps not the turn of phrase I would have used.
I had to smile at the point of sale item, having worked at the successor to the company you were CTO of. No-one thinks of support when dreaming up the next big thing, yet it is an important part of your brand, and the marketplace rightly demands higher levels of service.
It’s true that taking on someone who already has a large part of the market cornered is risky. But market share breeds complacency, and nothing like an aggressive young upstart to shake things up. Your timing and execution has to be impeccable though.
Good post Rod. Like some of my friends say, it is easy to register and start a business in NZ, but not easy to success.
Beside what you point up in your article, NZ’s small market also reduce the chance to success. Everyone in NZ buy a pencil in $1 from you, you get say around $4.5M. How about in AU? not to mention in China or India.
What about http://www.silverstripe.com? They do content management. A lucky (smart?) exception?
Hi Rod,
Great stuff.
In 2003 I was looking for funding for a business idea and what you
have said in just this one article is what took me literally 2 years to find out getting bounced all over the country fronting up to VC’s. Good on you mate for this insight it certainly was “hit you between the eyeballs stuff” and a great read.
Like the previous comment cant wait for the next shot.
BTW that 2003 company was LemonCheck http://www.aalemoncheck.co.nz.
Now Im on to my next big thing http://www.oziwi.com (equity share avail)and it was with huge relief to read that http://www.oziwi.com does not have any of the aforementioned voodoo points. phew!!
Kind Regards
Gregg Nelson.
looking forward to this.
another one…
any idea that you won’t share and improve with your friends and colleagues will (probably) not work.
In my role as a “connector” within the technology community I’ve had a lot of business ideas across my desk too. One of the chief problems I’ve noticed is that many ideas attempt to solve a non-existent problem. When you ask about what market research or consumer testing has been done, some proprietors squirm nervously or refer you to a three year old Gartner report as evidence.
Tech founders sometimes become so emotionally invested in their baby that they forget they need to demonstrate a market for it. Just because you, your Mum and a guy down the pub think it’s a great idea - doesn’t make it so.
I think its good to get a wide range of advice and feedback on business ideas. But, because guys like Rod are thin on the ground, it’s really important to get involved in networks to bounce projects around and filter ideas. Take all the advice you can get and listen hard.
Last year I had to pull the pin on one of my projects. Apart from a bruised ego there was no harm done and nobody lost any cash. The reason I got off lightly was because I got advice from a wide range of people within my personal network and eventually made the decision not to keep flogging a dead horse. Taking a few lumps is part of being an entrepreneur and it’s also how we learn to do better next time.
Regarding startup CMSes like Silverstripe or Alfresco or Plone or OpenCMS or … Am I at 10,000 yet? And have these guys made a buck anyway?
It is not easy to build a team to develop a good CMS product and it is not easy to build up a opensource community like Dot Net Duke or Joolma, Check silverstripe.com’s community page, just “1395 members total”.
Like Linux OS, everyone can get it for free but you need services,like installation or customization, you gotta pay. Dot Net Duke has already built up a mature framework and 520828 members on board. Many developers are making different modules which you can buy it from DNN’s market place.
If a successful business is one that makes money, then a failed business is one that doesn’t…so looking at the finance side of things, businesses that expand too soon in an effort to be first to market, or keep investors happy, or satisfy their egos can overextend financially and…oops. Back to the plan - set realistic (but still aspirational) goals and keep a close eye on revenue rather than projections to guide hiring choices.
Often its people with little or no hard commercial experience that propose ideas, which after some serious examination (some of the outcome is not too far away from your 11 bullets) are found to have no idea at all. Usually its not easy telling them either as they seem to have convinced themselves and their “yes” men its a goer.
Everything you say makes sense to me apart from the one about Document Management
Current Document Management software sucks because the fundamental technology advances needed have not been made. Everyone is just putting a different experience on a fundamentally flawed technology foundation. Changing the foundation will change the rules…
Now I know this sounds a lot like yet another technologist with his head in the clouds, but hell, I really think that this time perhaps the marketing/business people have their feet stuck in mud.
So I can’t/won’t believe that smart marketing combined with smart technology in this area won’t work. I agree however, that any attempt to put a new UX on current technology is doomed.
Alex
Not sure if I agree with the view that you can’t take bricks and mortar businesses online.
While there hasn’t been a great history of doing so, this is generally due to the lack of uniqueness for the online property, and also because the companies compromise their online channels so as not to hurt existing retailers or franchises.
There is evidence that you can get this right (Argos, Curry’s, Tesco in the UK and Target in the US) - it just requires bold leadership and vision. (I’ve just read in IT Week that Tesco’s did 1.3 million online orders in the 4 weeks up to Xmas).
“Anything aimed at taking bricks and mortar retailers online will not work. History tells us that. ”
History records both failure and success – it’s up to you to make the judgement… Online retail is experiencing huge growth right now and it is the large High St retailers who are making online inroads into the consumer spending habits.
It is really a question of optimising a few things and doing it well – integration of the online channel with other back-office applications, having great site design and making sure the costs are driven out of fulfilment.
This isn’t for everyone, but the investment many large retailers (yes, even in NZ) are making in true multi-channel selling is evidence that you ignore the online channel at your peril…
Great read Rod. I don’t totally agree with all your comments but what I like is that you are getting people to look at their business idea more closely. I am a big advocate of testing the market as early as possible with as little expense. Sometimes a couple of phone calls to potential customers will save you heaps of time and heaps of money.
@Chris McKay - add another “modXcms”, innovative technology, open source, ‘the original’ tableless/xhtml/css/ajax/php/mysql application framework, enormous international community, been around for years… still crawling along on hand outs and donations.
Open source CMS is fine for the enthusiasts and as a part-time hobby. Anyone making retirement plans on the back of an OSCMS will have a hard time succeeding, why? because OS is a magnet for penniless ‘web newbies’ looking for a free fast-track into web design and development. And if there’s something they can’t get for free, they’ll waste a lot of time trying, especially other people’s.
@Greg Nelson - since its obvious your here drawing attention to “your next big thing”. First impressions: it’s difficult to believe Oziwi has anything in common with lemon, except that it almost resembles one. Apart from the invalid tables used on both sites, conceptually they are worlds apart. Oziwi is hard on the eye and difficult to read. To a layman, it just doesn’t make any sense, everything mentioned is being done already. I checked (goldcoast dot com dot au) for the testimonials, and found no reference to Oziwi. As a prospective investor, I don’t get it. Lemon on the other hand, very handy indeed, endorsed and promoted by AA, good stuff!
@Rod - this should be compulsory reading for all entrepreneurs and anyone considering buying or selling a business. I like the fact that its relevant to local business and markets. I’m simply amazed though, with all the hard and enlightening facts spelled out in easy to read plain English, that some people still don’t get it. Which only goes to prove there will always be those that won’t take good advice, no matter how free or impartial. Looking forward to the remaining chapters.
Rod said…
Make sure you check with someone who will tell you honestly, and not just what you want to hear. Make sure you check with someone with industry expertise.
Dang! I have been trying, to find people in the financial market industry to talk to so that I get some feedback about what I am doing, financial market analytic web-based tool. All of the answers came back to me (after sending them the model names and offering to do free market modeling & simulation for them in exchange for knowledge of how the financial market works), saying that the stuff I do, is too theoretical, where as what they do is they try to avoid anything theoretical. WHAT? These are the people who are responsible for millions of dollars of investors in their hands and they avoid using the so called theoretical modeling as in analysis. It’s probably good that I know that they don’t use high-end financial analytics app, so that I can knock on their doors again as potential customers. I talked to a financial analyst at the BNZ Auckland (a friend of a friend), an investor analyst from Macquarie Auckland, Herald finance commentaries such Bryan Gaynor & Mary Holmes, fund managers as Carmel Fisher (of Fisher Funds) & Mark Ford (of Mint Asset Management), Andrew Boyce (ASB Securities Head of Research) and others. I have explained to the analysts mentioned above, that the models are not theoretical, in fact they (models) are being used today in commercial environments overseas by merchant bankers & vendors such as Credit Suisse, Merrill Lynch, Goldman Sachs and others. I know this for a fact, since authors (mostly academics) who published articles in Journal of Computational Finance, Journal of Mathematical Finance, Journal of Computational Economics, JOURNAL OF ECONOMIC DYNAMICS AND CONTROL and others, had informed me in the past of which merchant banker that they implemented the algorithms in their papers for commercial use. Authors who had done commercial work based on their publicly available papers, are less collaborative (in terms of asking questions about the implementation issues relating to their published algorithm) than those that published for reasons of pure research. Commercial authors will say, that they don’t want to give too much info, since their work was done for such and such merchant banker, but they’re keen to only give minimal assistance, insisting that the algorithm is already made publicly available, so one has a choice to just implement it or don’t.
I am surprised that those local finance industry experts don’t even use (or know about) the modern Harry Markowitz (Economic Nobel laureate) optimization portfolio theory & efficient frontier, that is taught at undergrad level economics & finance courses. In my opinion, all financial analysts should use Markowitz portfolio optimization to quantify risk (instead of quantifying risk by intuition). Some analysts do use it and most of them don’t (I suspect that it is for the reason of lack of knowledge or if they do, they don’t know of how to implement them - software-wise). This algorithm has improved over recent years (ie, more accurate) and getting more sophisticated.
So, at this stage, I have to just stop pursuing expert advise from local financial analysts, since all of those who I have tried to solicit info regarding the financial markets don’t understand what I am doing, unless you know some analysts out there Rod, that you recommend that I should approach, since you know the industry better than most of us readers here.
Any tips with some names would be appreciated.
Great read Rod and I hope your points around being very clear of one’s business concept and plan resonate with any of your readers who are considering pitching on Dragon’s Den.
Re “Taking on Trade Me will not work. They already have the customers and therefore they own the market, and only one player wins.” I agree, but have been wondering for a while whether Facebook Marketplace (or an improved version of it) could take off in 2008, especially if they adopt some Trade Me / eBay like features (or even better features suited to a social networking platform). At the moment it is little more than classified ads, but this could change. There may be opportunities for some interesting innovations either released by Facebook or API application developers/marketers (maybe even Trade Me). The NZ Facebook community is growing and people are getting familiar with the whole social networking thing - it is quite a captive audience for marketers - the challenge is to work out how to create a business in there. I think emerging technology will provide opportunities to take on the established and sometimes complacent players - not by copying their model and features but by offering maybe something similar but in a way that is pereceived as totally unique and resonates with the target audience. I think customers these days are less loyal to one provider, particularly if something better / of more perceived value (and maybe cheaper) comes along. I have seen that with the exodus from Bebo to Facebook since mid 2007. Food for thought.
To Ryans Way.. Your the sort of negative person I come across all the time. Can I suggest you surround your self with lots of positive affirmations .. you need them. Also I will look you up in a few years and hopefully you will eat those words mate. In the mean time I am still working hard.. not that you would know what that was. Dont hide either mate show the world your claim to business fame or are you still working for work and income
[...] the market it’s trying to enter and has totally mis-read its value proposition. Rod listed a whole raft of points to consider for a new business idea. Maybe this should have been in there [...]