Saturday, December 31, 2011

"Vapor" Opportunities

I often tell my students to be very careful when considering a new business opportunity if you are on the outside looking in with a solution to a problem you perceive to exist.  An example would be for someone with software development experience in, say, customer service software who decides to develop software to automate some aspect of medical records in doctor's offices.  He or she talks to a few office managers for doctor's offices and develops a set of features for this software based on this very limited information.

Our entrepreneur then induces a doctor's office to be a beta site for the software and, with a great deal of hand holding, decides that the beta site was a success.  This is a disaster about to happen.  Usually, the doctor's office in the beta test has not paid money to use the software and, therefore, didn't have to consider the value versus the cost of the software product.

Inevitably, the software needs many bells and whistles to handle all the variations "required" by different doctor's offices making it impossible to charge a price that the doctor's offices are willing to pay that will cover the actual cost of delivering the product.  The entrepreneur deceives him or herself into believing the "value-added" by using the product exceeds the price the entrepreneur must charge and the entrepreneur runs out of cash chasing a "vapor" opportunity.

Compare this to a person with some knowledge of software who works as an administrator  in a large doctors' office who sees the need for a similar product, but with a simplified set of features that will meet the need.  He or she sees that the product can be developed, from the beginning, to have flexibility to handle additional features, if a doctors' office is willing to pay for them.  This person decides to team with a software developer and designs the software to meet the real needs of a doctor's office that have subtle, but very important, differences from the needs perceived by our first entrepreneur.  The bells and whistles (that often cost more to develop than the basic product and often cause more problems for the customer) are offered only as add-ons.  This entrepreneur has a real chance of succeeding.

What I've described above happens very often.  The first entrepreneur conducted a superficial analysis of the problem he or she perceived to exist and developed a product without knowing the subtle aspects of the customer's problem that will be the difference between success and failure of the product.  This often happens because of an arrogance on the part of the first type of entrepreneur who thinks he or she can understand the customer's need and thinks he or she knows the decision making process the potential customer will use in deciding whether or not to pay money for the product.

In reviewing a business plan, I always look for a section that walks the reader through the thinking process of a potential customer in deciding to purchase the product.  I very seldom find this analysis and, when I ask the entrepreneur to verbally tell me, the entrepreneur can only give me generalities that are useless.  Yet, when I ask someone like the second entrepreneur described above who has had personal experience in dealing with the problem, he or she can usually give a very good explanation of the customer's decision making process.  Which of these entrepreneurs is likely to raise capital from investors? 

The lesson - team up with a person with real experience at dealing with the problem you think you can solve with your product; not by simply interviewing the person, but  by making the person a part of your team!