Monday, March 6, 2017

How You Should Start a Business Before the Bubble

soap-bubble-businessIn the entrepreneur world, most of the energy I see is focused on the current opportunity bubbles, now including anything mobile, the new sharing economy (Uber, Airbnb), or yet another social media app (Snapchat, WhatsApp). Too few entrepreneurs are searching for the next bubble, so too many funding requests I see as an investor are yet another “me too” solution, with low odds.

So if you are looking to get some extra attention, and potentially capitalize on your own new bubble of opportunity, the first step is to check out where the bubbles are today. In addition, I always recommend the following strategies for critically evaluating every startup opportunity:

  1. Let Google warn you about entering a crowded space. Don’t trust your conviction that your idea has never been done before. If you do an Internet search with a couple of keywords and find ten or more existing competitors, I recommend that you look for a more unique idea. Subtle differences don’t usually attract investors or customers.

  2. Resist the urge to integrate multiple existing products. Intuitively, it may seem that combining multiple apps that you like into one would increase your opportunity, but it actually reduces it. Many customers will not want to pay for all, or will be confused by the additional options. The savings in a combined product must be dramatic to be attractive.

  3. Passion is necessary but not sufficient to start a business. Just because you love the idea, don’t assume that everyone else will feel the same. There is no substitute for market research and independent verification that a large opportunity exists. Even early positive feedback from early adopters may be misleading relative to the volume market.

  4. If it sounds like an easy deal, there is probably a catch. Bubbles of success created by others outside your domain of expertise or experience always look enticingly easy. The problem is that you don’t know what you don’t know. Every industry has a set of unwritten rules for success, so smart entrepreneurs always “stick with their knitting.”

  5. Put the reins on overconfidence and large egos. Change is always hard, so adoption rates for new solutions almost always come in below optimistic estimates. Revolutionary ideas that require customer paradigm shifts require extra time for adoption, and larger budgets for education. Don’t let your ego keep you from seeking advisor and expert input.

  6. Beware of high valuations with low revenue and profit. Existing bubbles are often characterized by high excitement and high valuations, without the requisite intrinsic value or cash flow. These usually crash before you can get there, or don’t necessarily extend to new players entering the same space. All businesses have to earn money for longevity.

  7. Isolate nice-to-have from painful-problem solutions. Everyone may love your idea on how to find the best entertainment in town, but how many are willing to pay real money for your phone app? Even good social causes need to bring in revenue and profit to continue their worthy efforts. Make sure you can quantify the value of your solution.

  8. Cheap money causes more problems than it fixes. Opportunity bubbles sometimes entice investors or your rich uncle to give you more money that you really need. As a result, entrepreneurs often spend unwisely, or chase a bad idea way too far without measuring results. Manage cash flow with an iron hand, on your first dollar or your last.

I do believe we are entering a new era of opportunity for entrepreneurs. The current rate of technology change, as well as customer cultural change, is unprecedented. There are new investment vehicles, like crowdfunding, which gives everyone a chance to own a piece of a new opportunity. So you don’t need to ride an old bubble to success. Now is the time to float your own.

Marty Zwilling

*** First published on on 02/17/2017 ***



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