by Demetrios Sapounas
Part 1: The Idea
In the past decade and a half, I have had the opportunity to work on several new ventures and advise and mentor numerous entrepreneurs on their journey to building a successful company from an idea. Recently, I also began working as a business coach with the Small Business Development Center (SBDC).
A common theme with all these interactions is the emphasis on building a product. This includes: raising capital, developing detailed revenue models, recruiting a team and getting customers – not necessarily in this order. This is the “classical” approach of going about launching a new venture where the belief of “build it and they will come” still seems to influence early- stage activities.
The Idea
Any business concept starts with an idea. Most ideas are not unique, and fall into one of these three categories:
- Improve on current processes/products/services.
- Solve a problem many have and there is no good solution solving the problem in its entirety.
- Create a new product/service, currently not in the market.
The majority of new ideas and businesses are built around 1 and 2. While 3 is the most innovative, it is also the most difficult to be successful. Let’s look at these three categories in detail:
Improve on Current Processes/ Products/ Services
Ideas in this group offer incremental improvements to existing products or solutions. This means there is market validation and an existing market with sellers who compete for buyers. Some of the existing sellers may be dominant in the market and/or have a controlling market share (examples include Amazon in ecommerce, Epic and Cerner in electronic medical records (EMR)). Smaller sellers compete for market share among themselves and with any dominant sellers. Their success is usually defined by their differentiation and the value they deliver to their buyers.
While this is the easiest market in which to enter, it is also one in which it is very difficult to be successful. Entrepreneur in this market need to do substantial homework to validate the value proposition and the target market segment and identify the customers who will possibly buy the product or service. Any success will not be immediate and will require a sound strategy, perseverance, patience and resources to support operations until customers start buying and revenue is generated.
Market penetration and capturing a market share is usually accomplished by taking market share away from existing sellers. This will not be seen favorably by the incumbents and will lead to increased competition. Success, though difficult, could present early exit opportunities in the form of acquisition offers by incumbents or even private equity (PE) firms looking to consolidate the market or third parties looking to expand into this market.
Leveraging third party vendors, instead of going it alone, would offer another avenue to customers, where the sales force of the vendors would be used to promote and sell the offering to buyers. This approach reduces the need to build a sales force to sell the solution, thus keeping costs lower. It should be understood, though, that vendors will promote the solution as one of their offerings, instead of their primary or only solution and sales would not be guaranteed. If the idea and business are strictly digital (online) the approach would be similar, where influencers could be used to build a following and share the target market’s perception of the solution, along with online marketing, where converting eyeballs to customers would be the end goal.
Solve a Problem
This is a variation of the type of idea discussed in the previous section. The idea may combine disparate solutions into a comprehensive offering that makes it easier to do business, increases efficiencies, reduces costs. One example is an enterprise resource planning (ERP) system that integrates business functions, instead of separate systems for accounting, supplier and customer management, invoicing and order processing, etc.
It may seem straightforward that this type of idea will take the market by storm, but things are never that easy. While the idea and subsequent offering will make sense from a value proposition and measurable value to buyers and there is excellent alignment between value proposition and market segment, buyers may be hesitant at buying.
As an entrepreneur you will need to consider the buyer’s perspective. They have established processes and systems in place, people who are operating well within the existing structure and what is being offered will change all that. Change and the uncertainty it introduces are the resistance factors which will need to be overcome to get a potential customer to become a buyer.
For any organization, large or small, change is hard. The same holds for consumers, where established habits and familiarity make changes or new products harder to sell. It is not that change may not make sense, but that it requires people to change how they work, get out of their comfort zone, learn something new and change how they do things. Effectively it becomes a “people problem” that requires prodding, executive sponsorship an active engagement and support, to adopt and institute.
In addition, incumbents will not sit idle and see their market share diminish. They usually have the resources and the ability to develop and deliver similar solutions to yours, plus their existing relationships with buyers could convince their customers to stay with them and not switch, promising to deliver similar capabilities in the very near future. Such tactics can be costly to a new entrant and may be the difference between longer term success or failure. You should be ready to counter these tactics by providing incentives to switch or identify buyers where there is no incumbent or the relationship with the incumbent is not healthy.
Establishing partnerships with third party vendors, or even competitors when there are defined synergies or a clear value proposition, may offer ways to leverage existing relationships leading to customers. This will definitely create dependencies on these partners, and may also be a faster path to earning revenues. Both you and the competitor will learn from each other and may decide to enter each other’s business (legal and contractual restrictions aside). It may also be a path into being acquired by the competitor or even establishing a joint venture or a separate entity to address specific market needs.
Create a New Market
Novel ideas where there is no established market are the most ambitious, innovative and potentially rewarding, but also the hardest path to success and require the most effort. Since there is no established market, there are no defined customers or even demand. As an entrepreneur, you will have to create the need and build the demand from the ground up. An example is the fax machine, which created a new mode of communication, though to deliver value there had to be at least two fax machines transmitting information of value to the receivers.
Even the best ideas fail if there is no market and no demand. An idea can be the solution to a problem, but if the potential buyers do not recognize they have the problem they will have no need for the solution. As the entrepreneur, you will have to do your homework, talk with the people you assume have the problem, validate your hypothesis and determine whether there is a desire for a solution and more importantly there is the willingness to pay for the solution. The quest may become an expedition to educate the market of the problem and the value a solution can deliver and be able to do all that before investing into building the solution. This discovery phase is critical. This is also an excellent time to determine whether the idea requires tuning or a completely pivot is needed.
Identifying those who realize they have the problem and would like a solution is the fastest way to start building the market and creating demand. From them, the most valuable potential customers are the ones who would be interested in getting the solution early, who may be willing to be involved in the development or evolution of the solution and who would be happy to act as references and even promote the solution to others who have similar problems. They can become your initial users and paying customers and can help you to build your company. These are the people who could become your strongest advocates and supporters and most likely would be willing to work with you to perfect the solution. You will need to keep in mind that their focus will be on their specific needs, which may not be sufficiently generic for the market, so it will be important to strike a balance between keeping them happy and building a solution for the whole market.
To be successful progressing from the idea to a viable company requires time, planning, a lot of work and an entrepreneurial mindset. It is not easy work and that is why not everybody does it. Most importantly you need to be prepared veer off the straight path, because building a successful company hardly ever is achieved following a straight line. There are plenty of resources to help along the way and numerous entrepreneurial programs to guide budding entrepreneurs through the process.
In the next segment we will go over the value proposition and market segment alignment and how structured and comprehensive up-front research can reduce the risk of a new venture.
Resources
Lean LaunchPad: https://steveblank.com/2021/07/13/this-class-changed-the-way-entrepreneurship-is-taught/
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