Perspective of Trade
Value for a Price
At its core, entrepreneurship is about leading people to come together and make something so valuable that people are willing to exchange their own wealth for it.
Therefore the single most effective factor for building a successful business is to offer a truly compelling product or service. To compete against established companies, you want to offer something much better or something usefully new.
Getting Everything Right
The great challenge of entrepreneurship is that you have to get everything right.
With the wrong idea, you hold no path to success. With the wrong marketing strategy, you fail to reach the target audience quickly and cost-effectively with a compelling message. With the wrong product, you fail to attract and retain customers with competitive quality and long-term brand loyalty. With the wrong partners and employees, you encounter decision paralysis, business fragmentation, and productivity loss. With the wrong suppliers, you fail to sustain the external ingredients of the business with reliable production, clear communication, and fair terms.
Know the composition of your existing and potential customers; they have specific needs and wants balanced against their specific budgets and purchase priorities. Offer a considerably lower price than the competition. Get all the core features designed right. Group the premium features into a separate version of the product. Make the package concise and aesthetic for the casual shoppers. Show all of the technical information (ex. size, weight, replacement battery type, material specification) for the power buyers.
Prepare the idea carefully. Some ideas try to solve a problem that does not exist. Some ideas already exist now. Some ideas have already been tried before. Some problems have already been solved in a different way. Some ideas are only possible after certain requirements have matured. Dig into the complete cost and risk of a potential product.
Example: Flying cars cannot enter the mainstream market until a breakthrough in self-driving/autopilot technology combined with either low-power aerial propulsion or high-capacity batteries/fuels.
Example: In concept, solar panels can help homeowners save money on their entire energy bill every month. In practice, whether homeowners save any money at all is dependent on the lifespan of the solar panel, its performance degradation over time, its average performance in the local climate, and the cost of the entire system (purchase, installation, maintenance, insurance). Additionally, an uninsured system bears the financial and operational risk of equipment failure due to malfunctions and weather damage. With a non-grid-tied system, homeowner activity is limited by the system's average power generation over the long-term and its immediate energy capacity in the short-term.
Key Business Concepts
Total Investment Cost (Superconcept)
Total investment cost is the total amount of money and time required for you to bring a new business from zero to sustainable profits. This is the single most valuable skill that distinguishes experienced entrepreneurs, who are simply able to estimate and execute their business plan with accuracy.
Ex. Typical total investment cost is 100K to 200K USD (ex. Subway). Typical daily revenue is 2K to 5K, with some locations getting highs of ~15K.
Market saturation is the reduction of demand that occurs when a durable product fills the world. Full market saturation causes demand to fall toward the rate of expiration.
Example: Consider refrigerators that last 10 years. The fully saturated demand is an average of 0.1 per household per year. When the refrigerator market was new, everyone was buying. For a population of 100 million households that fully adopted refrigerators over 5 years, the average demand would have been 20 million units per year. But after everyone has a refrigerator, the industry is forced to shrink to an average of 10 million units per year, the rate of expiration.
Market saturation is revitalized by new products with compelling features.
Example: Consider a population of 100 million households who already have a refrigerator. Suppose a new refrigerator is launched with incredible energy efficiency and a convenient transparent door. These features might be compelling enough for 30 million households to buy a new refrigerator even though their existing one has several years left in its lifetime. That said, beware the after-effects of improved durable products that may be better and last longer but correspondingly decrease the long-term demand.
Demand validation is the process of checking whether people actually want a given product at the price it is expected to be available. For a new business, demand validation helps measure the interest in a product before extensive time and money are invested into the business. For an existing business, demand validation clarifies the value of potential changes to core business products.
Customer Acquisition Cost & Customer Lifetime Value
Customer acquisition cost is the amount of money required to get 1 new customer.
Customer lifetime value is the total revenue expected from the average customer over the long-term.
One-time purchases are the simplest and cleanest way to monetize a business because they engage the direct users of the product or service. However, one-time purchasing is most susceptible to market saturation, as seen with the automotive and software industry. For example, Microsoft has offered their Windows operating system as a product throughout their entire business lifecycle, yet now they are transitioning into a service-based business model (complementary sales) with Windows 10 being their tentatively final OS version because they are nearing global market saturation.
Typically, the base product is free with either add-ons or a complete/advanced product being available for purchase.
A popular online forum may struggle to monetize using premium features, in which case they will have to find secondary ways to make money such as by selling advertisement spots.
Fixed vs Variable Price
Fees may be a fixed value or a percentage of the transaction.
Investors and Fundraising
High-growth start-ups are popularly funded by venture capital investors (VC) and angel investors. These 2 investor types are generally reserved for early-stage businesses that have a trajectory toward an IPO on the public stockmarket or an acquisition by a wealthy company. Accordingly, the businesses that qualify must be headed toward incredible revenue and profit margins. VC firms are known to be ruthless negotiators who try to take large equity stakes in early-stage companies in need of cash. Angel investors are appreciated for their willingness to accept lower yield, sometimes even just graciously expecting to break even. So it is imperative to both avoid getting exploited and avoid meeting generosity with failure. My single key recommendation around fundraising is that you must get as much traction as possible with your own money. It's good for your negotiating position, good for reducing the risk that you'll let your investors down, and good for pushing yourself with a much-needed sense of urgency.
Overall, I see 2 major mistakes happen time and time again from the tendencies and expectations of entrepreneurs and investors. First, entrepreneurs have a hard time balancing their path of growth and their path to profit. New entrepreneurs have a tendency to lean toward making profit, while investors want growth, understandably and often wisely. When companies focus too much on growth, they commit sunk cost into new regions and markets that will not produce a return until much later. This may force the company to be more desperate for cash in the short-term while increasing their total risk. When companies focus too much on profit, they give up on their first-mover advantage, including their early timing for easy market share. This may force the company out of the market as competitors budge in spaciously. Balance is essential. Second, new entrepreneurs have a tendency to waste a lot of money, celebrating their influx of cash and rushed by their pressure to grow. Know that securing investment is indeed a milestone worthy of celebration but by no means is it an excuse to slow down; you can take it easy after you mature the company, achieve sustained profits, and help your investors exit along the way. The value of an experienced advisor can be instrumental in maintaining financial prudence and realism.
Small businesses need to be funded in a more grassroots manner. You always start by investing your own money. Once you have traction you can raise funds from family, friends, private investors, and/or pre-orders. Small business fundraising usually comes as loans because loans have a clear payment schedule and rate of return for the risk assumed by the investor. Small business equity is substantially more risky as the path to return-on-investment and annual yield is precariously dependent on the long-term future of the business. Even private investors who are interested in the long-term upside of equity will often request convertible notes that are loans with the option to convert into equity at a pre-determined ratio.
You really have to consider the perspective of the investor. Generally, they want your business to succeed so they can make money while facilitating a new enterprise that creates jobs and generates value. Specifically, the only way they will be able to make money is if there is a clear exit plan. As an entrepreneur, if you want to develop a good relationship with your investors, you have to think about how you will facilitate a strong financial exit for them while building your business healthily at the same time. Likewise, good investors will try to do the same in kind for you.