New Business Challenge Part 1: Markets

This is my first post in 3 years. Between job and family my writing has decreased to an unacceptable level. LinkedIn has invited me to contribute to their site. The post below is my first on LinkedIn. It is intellectual, but for someone who wants to start their own business, necessary information. Enjoy!

Running a new business can be exciting and life changing. Taking an innovative idea and bringing it to life. Potential rewards are towards the upside when a business succeeds. Start ups have generated an entire mythology around the topic. What often is ignored surrounds the unspoken negative side with business failure rates during the initial 5 years. I have read that around 80 % outright fail, 10 % organizations live on in a lesser form while 10 % grow to become big, successful entities.  Working in a well connected startup; I have dealt with many new businesses and bringing their products into reality. This post is part one of two in a series addressing the two main pitfalls I believe cause this large failure rate, marketability and corporate mismanagement. We will address the former and most important factor in this article. 

Business sales come down to one question, “Why should I buy this product or service?” Breaking the question down into smaller components yields even more simple items. Do I need this product? Is this the best version on the market? Will I get good support and service? Many more questions arise that define a customer’s desire in purchasing any product. Other less obvious, but very important factors that come into play are product functionality, accessibility, culture and even the zeitgeist. The best example of a product missing in the secondary categories is Chevrolet trying to sell the Nova (no go in Spanish) in Latin America during the 1970s.

Larger more established companies also face the market challenge, but have more leeway since they are often diversified allowing a greater margin of error. With a startup, a few errors are fatal. Being a small, young company forces the business into creating a viable product with its main and often only product. For it to survive within such a short time frame, the product is required to fit into one of three main categories:

1 Revolutionary – nothing like this has ever been seen before

2 Disruptive – this product is the better mousetrap

3 Niche – this product fills a previously empty void within an industry.

If the business is a market failure from the beginning, these are (in my humble opinion) the root causes and should raise a flag within anyone who is dealing with a nascent business:

Delusions of Grandeur –

The inventor has the best product in the world that is going to conquer all markets. Founder(s) can be good salespeople and make it sound like their technology is just unstoppable. Another related delusion is the founders’ obsession since it is their lifework while overlooking the obvious flaws. Big egos are at play here. Yelling at the sky to make it green just will not make it happen. Reality will one day step in and make an ugly scene with all involved.

Lack of Due Diligence –

Modern technology is complex and is built upon decades even centuries of prior discoveries and inventions. One can easily point out the con artist who comes and tries to sell you a bridge. New products or services do not tower as the Golden Gate Bridge since they inhabit only the thought process of the company’s founder. Does a variation of this product exist? Has this idea been tried before without luck? Those who cut corners will downplay these quintessential questions.  

Insufficient Product –

The product is put onto the drawing board, prototypes work and production begins. Once the initial sales are complete the technology works. It just does not work well enough to displace an alternative or does not make the product worth purchasing in comparison to the price. In other words, the benefits do not match the high cost.

Application Missing –

Key to any new successful endeavor is the “killer” application. The customer will buy this product to complete a necessary task or resulting entertainment. Failure to fulfill an application is a recipe for disaster resulting in no orders. Starting a business before a previous demonstration will most likely lead to this endless, financial drain leading to a slow death. Focus is demanded to avoid this trap.

This post is not as a condemnation of start ups, but is educational for those who wish to engage in such enterprises. Start ups and small businesses are the backbone of the US economy and encourage job growth. This in turn makes our economic engine purr along while many in the world stammer. We should encourage those who are willing to take the risk and start their own enterprises for it benefits them and society as a whole. Part two of this series will address the broader issue mismanagement found in all corporation sizes.

Sun blows against reality

I am a proponent of most alternative energies on the grounds of replacing limited fossil fuel sources and alternative energy's lower environmental impact. My global opinion on the subject can be read here. One issue that restricts alternative energy's growth is cost. These technologies are not cheap to implement. In an effort to offset the high cost, government subsidies are often given to wind and solar companies. This may seem fine, but when the political winds change, these mostly startup operations run into serious cash flow issues from the simple fact that they can not turn a profit on their high investments into equipment and talent.

This CNNMoney.com article warns of the expiring subsidies the US federal government has been giving to both wind and solar companies.

After years of rapid growth and darling status among many in Washington, the future of the American renewable energy industry is uncertain. That's because the government cash it has come to rely on may dry up on Dec. 31.

Before the Great Recession, renewable energy developments were helped by a tax credit, worth generally 30% of the cost of the project. When the recession hit, the stimulus package replaced those tax credits with direct cash grants of similar value.

Cash is considered more beneficial than credit to the industry.

So far, the government has handed out about $5.4 billion, according to the Energy Department.

Congress could vote to extend the grants, but that's highly unlikely.

$5.4 billion is a lot of money to be spending on technologies that may be abandoned from lack of interest. Those companies most likely will not survive without the stimulus money. Money thrown down a hole. What saddens me further is this is a repeat of the solar boom/bust that occurred in the 1970's. This is a demonstration of why socialism does not work on a large scale, the government's central planning is not efficient and is often driven by politics, not market reality. Do we ever learn?

What to do? The stark reality is these alternative energy technologies are not yet ready for prime time in the capitalist market place. Reality trumps a naive, orthodox environmental ideology. This should not be an excuse to fully abandon them though. As a supporter of these alternative energies, I believe we need to spend more money (government and private) on research and development (R&D) of these technologies. Develop them to the point where they can compete with the more traditional fossil fuel and companies will be able to turn a profit. The secondary benefit would be a revitalization of US R&D and industry.

This lesson should not be forgotten when the true energy crisis strikes, the exhaustion of crude oil.