Designing a simple business part I: Working that idea

This is the first in a series of posts I plan on the topic of designing a simple business. The idea for the series started when I realized simplicity is a common feature of many of the great startups that are out there. If you can visualize a business it’s easier to evaluate it, and improve the individual parts. This first post deals with the initial idea, and the main message about your initial idea is to get you to simplify your idea - don’t bite off more than you can chew.

What is a business idea? - The three components.
A business starts off with an idea. The idea should be something that creates value for someone, said value must be deliverable to whomever it creates value for, and there should be some way of capturing this value (including protecting it). If this process seems simple for a particular idea, it’s easier to think of it as good.

A good idea exemplified
Imagine you’re the inventor of corrective eyewear (i.e. glasses). Until now there has been no product which deals with bad sight. You can probably pretty quickly see roughly how you could go about making money on this idea. Corrective eyewear creates value for people that have poor eyesight, it can be delivered through for example pharmacies, and you can capture the value through charging money on the spot. Additionally it is likely that you could protect the idea with patent, for instance the use of optical lenses for correcting eyesight should be patentable if you are the first to think of it.

The simplicity that makes this idea good comes from three aspects. Firstly, the idea deals with a specific need. Secondly, there is a clear path to market which may not cost you too much (i.e. it’s “doable”), and lastly there is a clear way to make money, as well as a clear model of how you can protect the idea (patent) while you build a strong market position.

Simplify your idea!
Too often entrepreneurs pitch ideas that are just too complex, and it comes from the typical business/engineering school instinct of wanting to cover everything. Every customer, every need that customer have/will come across in the foreseeable future. Every possible product that can cover these needs, and every application of said product. The reason we do this is that we think there’s more money in more customers, and more products. Which of course there is. However, very few companies end up where they thought they were going. Starting a business is all about adaptation. And to be successful, you need an idea that you can test systematically and improve upon.

Note that it’s not always that complex ideas are bad. They’re just hard to test objectively, because you cannot separate the issues. For this reason I propose that the first thing to do when starting a business is to simplify the business idea.

A complex idea
The other day I met a young aspiring entrepreneur. He was full of life, and eager to tell me his idea. I paraphrase:

“So what I was thinking was to automate grocery stores, so customers can just make a shopping list online, say when they want to pick their goods up, and just appear at the store. Also there would be no one working in this store, so you would check out everything yourself. Furthermore all inventories would be updated at the suppliers, so everything would always be in stock, but just enough to handle the daily demand”.

Ok, I thought, as he continued:

“Now I’m into automation, so I would make a system where deliveries would be made at the back and everything would be tagged with RFID-chips,( there’s so many cool things you can do with those), robots would then sort the goods and pick out what people order into bags. So everything’s ready when the customers appear!”

So what’s the need anyway?
This idea is so complex, and includes so many different aspects, that it's really hard to understand even what the actual need is. At first it seems the need is for a simpler shopping experience. But is it really simpler to go to a website and pick everything you need? How would you pay, do you need to enter your credit card number or would you pay on pick up? Do you need an account? How do you verify that the person that picks it up is the right person? What if someone else picks up your groceries after you paid for them? It could be a simpler shopping experience, but maybe it’s really just a faster shopping experience? Maybe removing the need for staff is a significant cost reduction for a store? Or is it just a cooler shopping experience?

In any case simpler and faster in this context are secondary needs. The consumer’s primary need is for groceries. Imagine the complexity of creating a grocery chain in and of itself. Imagine to then try to make it simpler and faster! Indeed you would have to compete on a lot of other factors as well. Would you for example be equipped to keep the salad green? And I'm not even going to attempt to comment on the capital needs to make this happen.

Let’s simplify!
Creating a new grocery store is very complex, and I think we can agree that doing so is probably not something you'd want to do. And if you are not deterred yet, let me assure you that you will not have an easy time raising funds for such a venture.

But there's a silver lining, because surely there are great ideas within this idea. From the idea, we can find many smaller ideas. The point is to start with something simple, something that you can easily test against the market. One way we can go about extracting ideas from his idea, is by looking at the needs, and finding solutions to service them. Let’s look at the need for lower costs for grocery stores, and see if we can extract something simpler. Now I’m not claiming that this is a good (or new) idea - just that it’s simpler, and therefore easier to understand and test in a structured way. Let us then ask the question, "how can we use automation to cut costs in a grocery store?"

A simpler idea to lower costs for grocery stores
One of the main drivers of costs for grocery stores is the staff. The main bulk of people working at grocery stores are those that scan items and receive payment. So if we could automate checkout it would represent a clear cost reduction. One way to do this is by allowing customers to do this job themselves. Self-checkout would be presented in stations, each station consisting of 5 registers, each with a scanner and a system for payment. At each station one clerk would be stationed to help customers that need help, to receive cash payments (if this is important to incorporate of course), and to make sure everyone is using it correctly (e.g. so they don’t leave without paying). The solution could be delivered on a store-by-store basis, so that a chain of stores would try it out at some locations first, and then scale it up when they were comfortable using the system. Value could be captured through a leasing based plan, and the idea would be protected by moving quickly to gain a first mover advantage (for those that believe in that sort of thing).

Evaluating the idea
Regardless of whether the idea above is good or not, we certainly understand better what it’s all about now. If we decided to start a company commercializing this technology we could write down hundreds of clear and testable hypotheses about the market, which we could then proceed to test, for instance:
-    Grocery chains wish to reduce costs by replacing staff
-    Customers are willing to check out their own goods
-    Cash payments are important for customers
-    Customers will generally be honest when scanning their merchandise

Some things would be confirmed, and some things would be completely different from expected. These things would have to be sorted out. This is where the real innovation lies. For example, if customers are dis-honest, how can you make the check-out desks verify that all goods was scanned, and that the correct goods was scanned?

Of course it’s not that straight forward in real life, you still need to consider your competitors, make a strategy to avoid being copied too soon, facilitate production, consider your costs and pricing structure, and so on. However, you can now visualize how the business might look. This is a necessary first step to formulating the hypothesis that needs to be true in order for your business to flourish. The next step would then be to start testing these

The next post will look more closely on evaluating your idea, and deals with the 10 questions you should spend 15 minutes asking yourself before you move ahead to more advanced and time consuming analysis' of your idea.

Lessons learned:
-    Ideas should ideally include how your business might create, capture and deliver value.
-    When you see how an idea might work, it’s easier to formulate testable hypotheses about the product.
-    Complex ideas, that are hard to visualize can and should be simplified.

What Facebook is missing out on...

It strikes me as somewhat absurd that Facebook don’t see the opportunity they are presented with in face of the recent criticism. The criticism, as you are probably well aware off, is in my view best summed up in Leif Harmsen’s words “It is not ‘your’ Facebook profile. It is Facebook’s profile about you”, he considers it a repressive regime akin to North Korea, and he’s not alone. Yet this isn’t anything new. It’s more a case of the “commoners” starting to question what the more tech savvy ones of us have questioned for quite some time, and thus the topic has gained some momentum in the mainstream press as well.

The problem is obvious, as problems often are, but the solutions keep escaping the minds of clever people. Or does it really? A related debate I have followed since I first heard a discussion about social networking 3.0 at Stanford in 2007, is about how we can transfer ownership, and more importantly control over user information to the users. The simplest solution is of course just to pressure sites like Facebook to change their terms of use, but a more lasting solution would include the possibility for users to bring their friends, pictures and other information with them between social networking sites. Undoubtedly there are many design issues for such a system, for example I certainly have multiple online identities; my Facebook content isn’t really suitable for my LinkedIn page and so on. And where would my information be hosted? Would I have to buy server space in case someone wanted to view my profile while I was online? Would the standard allow new networking sites to add slots for specific information that were only suitable for that site (like favorite recipes for a cooking site, or where I’ve been for a scuba diving site), and how would I controll what and how much  information is sent to each site I visit?

This however isn’t the biggest problem; the reason why such systems haven’t been implemented is that no one with the leverage to create this system has done it yet. This system has to be made by the right people, people that can reach critical mass. At present, only geeks and idealists would bother to learn how to use a totally new system, especially because something like that sounds very complicated. The average user doesn’t want complicated stuff, they want simplicity, and they just want to use the product. So to reach critical mass for such a system you would have to have some way of gaining a lot of users for it fast. Like a big already existing user base, like Facebook has, but wait - why should Facebook make this system? Facebook like it the way it is, they own your content (or their content about you to be accurate), and can use it for pretty much whatever they want. In addition to this Facebook enjoys users that have extremely high switching costs, something which might be their biggest competitive advantage. It seems that Facebook is in a perfect place.

So why should Facebook do it?
The first reason why Facebook should create a system for sharing information is that it would buy them credit. It would buy them credit with the tech community for being open and with the media for listening to them. It would buy them credit with normal users because they would feel safer and because they have the option to leave. Remember why some people escaped the Matrix? It turned out that given an unconscious choice nearly 99 % of test subjects would accept the program anyway. I see no reason why this shouldn’t hold true for Facebook as well, as the primary reason people leave is because they are malcontent by Facebook’s closed systems and strict privacy policy (at least if we believe random Internet chatter - which we do).

Secondly, and maybe more importantly, I believe that if Facebook don’t do this, others will. Services such as Google Accounts and Open ID don’t have a long way to go to allow users to store information that at their request can used by third party sites. Right now Facebook can deny Open ID and other such services to provide login to their site, but can they still do that in 3 years? Right now they can delay the inevitable move to such services, but as I wrote in a blog post some time ago, change happens when change is due. Change isn’t always created willingly, it’s just there and those that catch the wave gain momentum, furthermore no surfer ever caught the back of a wave. If people gets used to logging in to their favorite sites through a third party provider, I’m not sure Facebook can withhold the pressure.

The third reason Facebook should use their user base to create an open, user owned system that can transfer information easily from site to site is that whatever disadvantage Facebook sees in having users logging in to their site via a third party provider will be Facebook’s advantage against new social sites. If users are used to using their Facebook login when they log into pages on the net, they will expect new sites to follow this convention, thus granting Facebook some limited power to monitor and control new services.

The fourth reason Facebook should do this is because there’s bound to be a business model in it. What this model is, I’m not sure, but it could for example be that commercial sites would have to pay a small fee to use the service, or that when you log in you get redirected through Facebook’s ad page.

The fifth and final reason is that this would be a good first step towards extending into new forms of web services. When users already have a login, it should be easier to gain momentum for new and exciting products. Google has already realized this when they launched both Wave and Buzz (though this seems to be bad examples, as both services are virtual ghost towns). Having a customer base like Facebook’s is an incredible asset, in the case of Facebook an asset that remains close to unexploited. Surely marketing new web services through Facebook would ensure enough users to create critical mass for many services?

Maybe Facebook as we know it today is just a stepping stone? I certainly think that they should consider expanding their services, and specifically they should start making a product that they could easily gain market leadership with almost immediately, namely an open profile service that provides an API for other services to let users log in with their Facebook profiles. With the share number of users Facebook has it shouldn’t be a problem becoming the market leader in this "sort of related" market.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

Stepping out of the box (part 2): Techniques for stepping out of the box

This post continues from this post, and explains some steps that can be taken to step out of the afore-mentioned box.

Start anywhere but at the start
If you were to write a book, a criminal novel, where would you start? Most people I guess, would figure out a plot, and then start fiddling with the details. What if you just started to write? Don’t have a plot; don’t know how it ends or who the killer is. Just write something crazy, introduce us to the situation where the protagonist comes across the murder. Put in as many weird details as you can, then start working them out. The result will be very different than if you start by deciding how the murder took place, how the murderer covered it up and then write the book. In inventing it’s the same, most people start either with a technology or an unmet need. Don’t do that, find somewhere else to start. Find a crazy theory of where to start.

How about this? Most people start companies that they either know something about or that interest them. Find out what you know the least about and start with that. Find something that interests no one and start there. Think about roads, extremely boring, and I know nothing about making them. Maybe that’s a good place to start, exactly because I don’t know anything I can’t have any preconceived notions, I don’t know that I have to make the roads using asphalt and stone, maybe because I don’t know that I had to go to a university to ask someone, maybe I went in to the wrong building and met the wrong guy, but maybe it turned out that he had just invented a cheap material that would be perfect for roads, only that he hadn’t realized what the material was for? Maybe he had invented something completely different and you could go with that instead?

Find a starting place that is outside the normal, then you force yourself to think in a new way.

Challenge yourself beyond your capability
The previous example also advocates this point. A friend of mine considers himself a pickup artist, which means he goes out twice a week to pick up girls, and are fairly successful. However, he never uses the same approach twice, so each time he picks up a girl the difficulty goes up, and so does his success rate. My theory is that the more approaches he use, the further he comes from what is normal to do when picking up girls, and the less he is categorized as “the guy who just want to get laid”. It also shows that he is having fun, he’s a cool guy, that loves what he is doing. He says random things, and because of that he get’s random results. My point is that for us that accompany him we always think “that is never going to work”, but sometimes it does, and we are as surprised each time. The thing is that you never discover new grounds if you keep doing the same stuff. A business example would be the notion that start-ups cannot sell to fortune 500 companies. So people will generally tell you to not try. Why not? You have nothing to lose, call Microsoft, tell them about your product, request a meeting. Don’t think your product is good enough? Well, then your that guy sitting on the sideline saying that’s never going to work while your friend steps out of his comfort zone and get the girls. Embarrass yourself, fail, but try; you will be surprised at what you can achieve!

Give yourself over to chance
We make our decisions based on our assumptions, that means that there’s systematic errors in your decision making. If you want something new to happen you can throw a dice. Should I go to that interview or that interview? Throw a dice, let chance decide, not because there’s faith and everything is supposed to happen and so forth, no, because then you end up in situations that you normally wouldn’t be in, and then you get to think about problems that you normally wouldn’t.

Ask someone different
Take the Play-Doh example above, the solution to the problem wasn’t anything that was in the toolbox of the director or the MBA’s, it was a preschool teacher that came up with a solution. Again, if you keep doing the same you get the same results, if you ask the same people you get same answer. MBA’s are all in the same box, so ask someone that’s outside the box, maybe that can shed light from an angle you haven’t seen. If you however are a preschool teacher try asking an MBA. If you are a CEO, try asking someone on the floor, of you are an entrepreneur try asking an athlete.  Find people that are different than you, that think different, that knows less, ask them and listen to them. It's not always those that should have the answers that have them, we often just assume they do. Did you know that monkeys can pick stocks just as well as professionals? Often better? Consider this excerpt:

“In the four years since [Chicago Sun’s Monkey] has chaired and inspired this contest, his stocks have posted annual returns of 37 percent, 36 percent, 3 percent and, in 2006, 36 percent, beating the major indexes every time. It's proof that you don't have to be an insider CEO, an insider hedge-fund manager or a loudmouth on CNBC to make money in the market.”

(read the entire article)
How about that? So maybe amateur investors should stop listening to professionals and go ask the monkeys, or even start making their own theories - that shouldn't be based on the ideas of the financial advisors. (I would go get a sociologist to explain the nature of socially constructed reality if I wanted to make money on stocks, stock brokers don't even know what it is and yet the sociologist will claim thatit controls their every move).

It’s ok to be wrong
Seriously. It is. Whenever in an argument over what’s right and what’s not, try to think “what if I’m wrong”. A good way to do this is to whenever you have a discussion about something, take a break, go to someone that agrees with you and argue the other point. Often we are so sure that we are right that we cannot for the life of us even consider the alternative, but remember that the other person is just as likely to be right if that person believe in her ideas as strongly as you do!

Question all assumptions!
It’s well known that kids have an easier time learning languages than adults. Is it true? I don’t know. It takes a kid two years to learn their first language in a way that they can make themselves understood, and still it’s a couple of years before they speak it any good. I’m pretty sure I could learn French in four years if that’s all I had to do. That kids can learn to speak languages easier than adults is a cultural assumption. It’s something we all (or most of us) believe to be true. The thing is that it doesn’t have to be true, it can of course be true, but if you start questioning these assumptions when you come across them you will surprisingly often find that maybe they aren’t always true. The man running the factory in the example above assumed that his product could only be used for cleaning wall paper. His assumption was wrong, now we assume that making Play-Doh was his best course of action, maybe we are wrong? When you talk to someone, try figure out what yours and theirs basic assumptions are. Challenge them.

Crisis
When everything goes as planned it’s easy to keep routinely doing the tasks you have always done. When crisis appear, that’s when you have to think about new ways to do something. In a way crisis force you to consider option you otherwise wouldn’t, a teenager might not get into the educational program she wanted, so she has to look for new options, a company might discover that their product is no longer in demand, so they have to find new products, or new uses for their products. A new father might discover that his life is turned upside down, so he has to change his routines and his survival strategies.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

Stepping out of the box (part 1): Taking the red pill / Drinking the Kool-Aid

What is the box?
Coming up with radical inventions requires you to step out of the box, but what does this mean? Well, the box is a metaphor for your preconceived notions. The box is the Matrix. It is the world that has been pulled over your eyes and blinds you from the truth. It is said that Edison once fired a man for salting his soup before he tasted it; the reason is that this implied that the man was so blinded by the box that he forgot to check its validity. The man couldn’t know that soup needed salt if he hadn’t tasted it, but of course he assumed that he had to salt it because he had eaten so much soup that the salting was on autopilot. The box are all those things we take for granted. From the small things, such as “hamburgers are eaten with a side of french fries, not rice” to the big things, like, “the earth orbits the sun”, some of these assumptions may be true, but this isn’t really the point, the point is that the assumptions block us from thinking differently.

Why should we step out of the box?
First let’s look at why we are in the box. Our minds are designed to maintain the reality we believe exists, and generally this is very useful. What if you had to rethink how to open a door each time you walked through it? What if you had to decide if you liked your girlfriend each time you met her? What if the doctor had to convince you that the drugs you are taking actually will help each morning? It would make life extremely tedious, and the strain on our cognitive ability would be very high, so that our brains would require a lot more energy, i.e. we would need bigger brains and more to eat, which isn't good from an evolutionary perspective. Another reason we are in the box is because it is useful to maintain a sense of stability and reality. Research even shows that after people make a decision on any topic the brain will start to justify the decision so that you won’t change your mind so easily. This also goes for belief. Think about politics, when you decide that a certain party or politician is the one that should be elected it is really hard to change. This is called cognitive dissonance, and is just one of many mechanisms that help us maintain a healthy sense of continuity and reality, it makes us feel consistent. Historically this was useful because it freed up the brain to solve more important issues with its limited resources, in modern day society it's useful for that very same reason.

The problem with our sense of continuity is that it blocks our ability to think about what the world would be if it wasn’t the way it is. This is why US presidents are reelected more times than not. We strive for continuity, because we don’t understand how the world could be different. Stepping out of the box allows us to think about the world in new ways. It allows us to see things that others cannot see. First when you free your mind from the idea that transportation is either by foot or by horse can you start thinking about cars. Did you know that the wheel was never invented on the American continent before the Europeans arrived? They had circles, but no wheels, how weird is that? And no one can blame them, this is how our minds work. We see everything that exist as obvious and natural (the wheel for you and me), and everything that don’t exist, well it generally doesn’t occur to us.

Let me give you an example. I heard an anecdote that goes something like this: Once upon a time, in the olden days a man was running a factory, this factory produced a type of malleable sticky clay that was used to remove sot from the walls. You see, back in those days people warmed their houses by burning coal, and this left residue on the walls. A person would then buy some of this clay-like substance and roll it on the wall, the sot from the coal would then stick to the blob. Since the blob was white the coal would color it so you could even see when it was so dirty that you had to get a new one. One day however the sales started declining, a thorough market analysis revealed that people were using less coal to heat their houses, thus the demand for white clay-blobs fell as well. The manager of this factory started to worry, so he hired the best MBA’s in the kingdom to figure out what to do. The MBA’s effectivised the routines, lay off people, streamlined shipping and so on until they had reduced the cost of the factory to the point where it was impossible to reduce them further. The factory was however still in a crisis, because the problem of course wasn’t the cost, it was that no one needed their product. So what was he to do? In total despair he went to dinner to his sister, she was a preschool teacher, and as casual dinner conversation he explained everything and that he was probably going to lose his job and would have to shut down the entire business. His sister asked if she could look at the product and the manager fished out a piece of white clay from his pocket, his sister started molding it into shapes, and decided to bring it to her daycare the next day to show the kids. When she came back, she suggested making the clay in different colors, calling it Play-Doh and marketing it to kids. Today this business is much bigger than the wallpaper cleaning business of decades past ever was.

The moral of the story is of course that when you look outside the box of your usual surrounding you find solutions that you wouldn't otherwise find. This manager hired MBA’s, and no offence to MBA’s, they’re great, but they all think alike. If you need someone to think different, then don’t use people that think like you and each other. If you do the same, then how come you expect different results? MBA’s have a set of tools, and when you have a hammer, a surprising amount of problems looks like nails. Only when the manager (by chance in this case) got someone that thought differently to think about the problem could a radically new idea come about. To continue reading click here.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

Crowdfunding: An Idea for a Business

I recently came across a guy named Gijsbert Koren from Netherlands, which introduced this idea of “crowdfunding” to me. He explains:

“Crowdfunding, inspired by crowdsourcing, describes the collective cooperation, attention and trust by people who network and pool their money together (via internet) in order to support efforts initiated by other people or organizations.”

Though his question was more in the direction of what could go wrong, I started thinking about it, and realized this could be made in to a lucrative business.

Mission: To bring together people that want to invest small amounts of money in entrepreneurial firms and entrepreneurs that need early stage funding.

Concept: A webpage with an auction-like system that allows entrepreneurs to post their business together with funding needs, and let small time investors “bid” on pieces of a company. For example an entrepreneur would say what his company was doing, at what stage it was, how much funds it needed, how much of the company it would be willing to give away for that amount and other relevant information. Let’s say he needed $50k and would be willing to give away 30 % of the company, an investor willing to invest $100 would then be able to post a bid for 0,06 % of the company. When and if the entrepreneur reached $50k, the bid (along with the other bids) would get accepted.

Business model
There are many ways to make money on this, some alternatives are:
- 1 % of the money invested or the of ownership of the start-up could be retained by the site
- 1 % of the returns could be retained by the site
- The site could provide services, like board members, to help develop the firms that are invested in
- Books and other relevant material could be sold in a related webshop (it is likely that not only those that use actual the services of the site would visit the site)
- Posting a firm could cost a small amount
- Placing bids could cost let’s say 0,1 % (so $10 out of $10 000 should be bearable)
- If you receive funding it cost 0,1 % of the funds received ($ 50 in the case above)
- Public support?

Marketing
Would you need investors or entrepreneurs first? And how would you reach and recruit them? This is of course a difficult issue, maybe you need some funds? (Can it be crowdfunded?) I’m sure that getting in touch with entrepreneurs should be easy enough, you can use personal contacts with incubators and such, most entrepreneurial districts have emerging technology funds, technology transfer offices and incubators that can point you in the right direction. Investors would maybe have to be reached through some sort of viral marketing? Or would ads in newspapers do for this kind of service?


Problems:
Some issues deserve some attention here, even if I don’t like to consider the problems the first day of a new idea.

How would you avoid scams?
In a small country like Norway it would be possible to only allow entrepreneurs to post after meeting them, and talking to them, a sort of due diligence light. In larger countries, like the US, this would of course be difficult, but maybe you would have to send in some paperwork or letters of recommendation?

How would investors get their returns?
A bid could be posted in a number of ways, the entrepreneur could say that he accepted that people would bid for the company, and get a share of it. That way, the investors would get dividends and profit from a potential exit. The entrepreneur could also chose to look for loans, that way the investors would get their money back at a certain date with the interest that was agreed upon. If there are 500 investors that has invested $100 each and they all have different terms, this could obviously offer some difficulties, this could be solved by the site acting as a proxy. Meaning, the site creates a fund for each entrepreneurial venture that gets funded and the site technically owns the small-investors part of the start-up. The dividends and money from the exit is then paid to the site, which forwards each parties money back to them.

How would the investors get a voice in the company?
If, as suggested in the previous part, the investors are represented by the company, board decisions could be done through a proxy that is the site. By investing through the site you agree that the site, as the technical owner, has a representative on board whose job is to represent the small investors.

But what about taxes?
These laws probably are different between countries, and I’m not an expert. I would however imagine that this would be double taxed, first a tax when the site collects dividends, and then a tax when each investor receives their money.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.