Monthly Archives: February 2010

What great questions have you got?

My son, like many children, had his birthday around the cutoff date for entry into Primary school. So my wife and I had a choice “do we send him a little earlier, or a little late.  My position on the matter was “Give me one good reason we should hold him back”. And we couldn’t come up with one.

I then read Malcolm Gladwell’s Outliers which discussed, amongst other things, the correlation between careers as a professional sportsman and birthdates. When I changed the question to “Why would I deliberately make him the smallest, youngest boy in the class?” the answer was obvious.

I realised the truth in the old adage – its not the answer that matters but the question.

Recently I cam across a quote by Henry Ford, which I will come to later, which reminded me how important the question is. So I thought I’d share with you some of the great questions I have come across in start-up and innovative  environments.

1. What would an extraordinary life look like to you?
I find that this question really focuses people on what’s important to them. Nobody chooses a mundane life, it just kind of happens whilst you are busy. For my wife and I its a continuing conversation as its the question that shapes both long term and short term goals.  I also find that it helps founders dream large and set the course for their business.

2. What exactly are you getting out of this?
I love this question.  My friend Fiona Boyd of Collectzing asks this question all the time as not only does it give her insight into other people’s motivations – it also uncovers a whole heap of attributes around the situation that you haven’t considered.   For instance I never would have picked that a slightly complex programme for an international business development visit I have just worked out with a client, was actually all about them making time to catch up with a sibling  that they haven’t seen for years.  It was actually the most important part of the trip for them.

3. Has money actually been spent to solve this problem?
What most aspiring entrepreneurs don’t seem to get is that just because you have a great idea, its not a great business idea unless it has potential customers. The quickest way to figure out whether people will buy your solution is to ask whether they are currently paying money to try and solve this problem in another way. And its not just aspiring entrepreneurs who don’t get it either.  A vast number of Research Agencies (funded by you and me) have IP portfolio’s of solutions nobody actually wants to pay money for. I pretty much see solutions falling into one of 3 categories, of which only the last category makes me happy.

  • Solutions without problems :(
  • Solutions solving a problem :(
  • Solutions solving problems that people will pay real money to fix :)

4. How well does this solve your problem?

This is the Henry Ford question and the basis of being balancing customer focus with innovation based advantage.  If Henry Ford has asked his customers what they wanted – the answer was going to be “faster horses”.  His competitors could also get exactly the same answers and they would all fight it out in the arena of diminishing margins.  But by coming up with innovative solutions, then asking “how well does this solve your problem”, he got to satisfy his customers plus reap the profits of innovation based competitive advantage , or, “he got rich selling factory produced cars, when no one else was doing it”.

So spending time thinking about and refining the questions you need to ask , is time well invested.   The questions determine the answers and choose the direction you take without even being aware of it.

What great questions have you got?

Selecting your start-up funding source

One of the things that drives me up the wall is hearing the local start-up community complain that the Venture Capital market in Australia isn’t like the US.  Of course its not, we are in Australia, a much smaller market,  with a completely different culture.

The general complaint is that “Venture Capital is so risk averse here” because they wouldn’t invest in a business.  The truth is, most American VC’s wouldn’t invest in these businesses either because they are just not good enough; suffering from simply okay ideas, average people and a small market.

Having worked and observed the space for a decade or so, I have come to the conclusion that the type of funding you should chase depends on two things; The type of competitive advantage your venture will have and the market risk.

Your competitive advantage is a continuum that  has at one end a pure Intellectual property play (eg ResMed)  to a Execution based business (eg McDonalds) at the other end, with lots of stops in between.  A new drug is normally a pure IP play, because it simply has to work, and be patentable to attract investors interest. However a website that targets a hithero unknown market segment, no matter how clever it is, is simply an execution based model.  You need to do it well to win.

Your market risk can be extremely high or extremely low.  To have low market risk you can either have a product that will solve a clearly articulated and expensive problem (eg a new anti-cancer drug) or it can have a proven market (eg shoes).  High market risk is the area for disruptive innovation (such as nanotech) , or unproven demand for a consumer product.

I see see the two areas intersecting as per the drawing below.

The Venture Risk Quadrant
Now once you start looking at the world this way, you can start to see that the traditional sources of funding gravitate towards the different quadrants.

  1. Venture Capital likes protectable IP and a low market risk.
  2. If there is no market risk and your competitive advantage depends on how good a job you do, become friends with some high net worth individuals as potential private investors will  probably support you. But if you’re really confident, why wouldn’t you just see the banks and use a bit of debt to grow.
  3. If your like the hundreds of aspiring entrepreneurs I meet over the course of an average year, and you have a solution to problem but can’t keep competitors away your options are really limited to finding an experienced hand to put some cash &  guidance in (Angels), put the hard word on people you know for investment (family, friends & fools) or reduce your ambitions, tighten your belt, and get on with the job (sweat equity).
  4. And if you’ve developed some really clever intellectual property, but have no idea whether it solves a problem that people would pay money for, the government grants are probably the only source of funding, as no one else is likely to put money in.

Populating it with sources of funding, the model now looks like this:

Sources of New Venture Funding

Seeing the world this way, its pretty obvious that chasing Venture Capital for your “kick arse” idea is more than likely to be a waste of everyone’s time.