Mark Neely's Blog – 3rd Horizon

My 5th Tenet of Entrepreneurship is: Ideas are WORTHLESS. I’ve had a number of debates over the years about the value of ideas. As I wrote in my original Tenets article:

Ideas are worthless. Knowing what to do with those ideas – how to implement ideas, how to monetise them, how to drive them from an ephemeral, nebulous concept to a concrete solution/product/service is where value is created.

Reaction to this statement has been mixed. Probably the most succinct statement of the position of those that disagree was provided by Beth Carvin (an I-Entepreneur subscriber) in issue #4 of the discussion list: “This is a famous myth, IMHO. It’s what the people who steal ideas like to say.”

The way I try to explain my reasoning in support of the tenet goes something like this:

Imagine that you’re an inventor who just thought of a way to convert sand into gold. How valuable is that idea? You’re probably thinking billions! Trillions! Now imagine you never actually do anything about the idea. You don’t write it down. You don’t tell anyone. Soon, you forget all about it. How valuable is that idea now?

Alternatively, let’s say you, in fact, write down your idea. You know there’s a metallurgists conference coming to town, so you decide to make your big announcement there – that’ll generate some attention. So you pop along to the conference (uninvited). You bluster into the main hall, push aside the keynote speaker and yell “Eureka! I can turn sand into gold”. Silence. Then laughter. “Where’s your proof?’ , someone yells. “Who are you? You don’t look like a genius chemist”, yells another. “What have you been smoking?”, comes another retort.

Absolutely discredited, no scientist on Earth would touch you now – but you don’t have the skills to develop your idea without them. How valuable is your idea?

The point the above scenario tries to make is that thoughts and ideas have no value unless they are converted into some form of reality and acted upon. An idea that remains in your head is worthless. Further, unless you can harness the right resources – money, skill, people etc. – no idea, no matter how brilliant, is of much value.

Each step you take towards turning your idea from a nebulous concept to a concrete product or service – such as successfully obtaining a patent or producing a prototype or testing the market’s interest – increases the value of your idea, as you are reducing both technical risk (i.e. validating your idea’s efficacy) and market risk (i.e. documenting customer need/demand).

But taking your idea from the nebulous to the concrete is no guarantee that it will be of value – or, at least, the value that you ascribe to it.

One of the fundamental problems inventors and, to a degree, entrepreneurs encounter when seeking to sell or license an invention (in the case of an inventor) or secure funding (in the case of an entrepreneur) is differing perspectives of the “value” of their idea, invention or business. There are myriad methods of valuing inventions and ventures – some more art than science!

Contrary to popular belief, entrepreneurship is not grounded in random acts of inspiration.

Entrepreneurship is process-based. Certainly, there is often a “light bulb” moment of blinding insight that kick-starts an individual’s journey into entrepreneurship, but the path always follows the same, 6-step process:

Step 1. Identify an opportunity

As highlighted by Tenet #4, opportunities are abundant. Importantly, the ability to “spot” opportunities is a learnable skill – the more you practice it, the easier it gets.

How do you identify an opportunity? The easiest method is to look for “pain” – inconvenience, unnecessary expense, market “friction” etc. – and solve it.

How do you spot “pain”? Here are some things to look for:

* Market gaps – Gaps arise where there is an unmet need/demand for a product or service. Some entrepreneurs specialise in introducing new products/services into one country that are considered common place in another.

* Unfilled demand – A related approach is to look for demand that is not being adequately met due, say, to a supply shortage, and create or import products/services to meet the demand.

* Build a better mousetrap – Many entrepreneurs have made their fortunes perfecting imperfect products/services. Ray Kroc didn’t invent hamburgers but he, in conjunction with the McDonalds brothers, perfected – and franchised – the hamburger business. Howard Schultz by no means invented coffee, but he, through StarBucks, revolutionised how people consume it.

* Make it cheaper – You may not be able to improve a product/service, but perhaps you can deliver it cheaper, faster or more conveniently. Michael Dell didn’t invent the PC, but his direct-to-customer business model re-invented how PCs are sold. Herb Kelleher, a lawyer with no aviation background, saved SouthWest Airlines by completely revamping the way it did business.

* Cross-pollinate – Ideas or solutions long considered “old hat” in one market sector may totally revolutionise another. The pizza industry changed virtually overnight when Dominos adopted the policy of guaranteeing the delivery of its pizzas within 30 minutes after studying the techniques of other time-sensitive businesses, such as FedEx.

* Follow the trends – Few societal changes happen without warning. Futurists, trend forecasters/analysts and social researchers (such as  anthropologists) produce a wealth of research/opinion that can be used as a “map” to potential future scenarios.

Step 2. Evaluate the opportunity

This is probably the key step in the process. Failing to correctly evaluate an opportunity could see you discard potentially lucrative opportunities or (in some ways, worse) invest time/money/effort in dead-end “opportunities”.

Opportunity evaluation requires the consideration of a range of issues/criteria, such as:

- How well does the opportunity “fit” with your specific skills and experience?
- What potential does the opportunity represent?
- How risky would the venture be?
- What sort of resources (money, time, manpower, office space, equipment etc.) would be required?
- Is the risk v. reward ratio agreeable?
- Are there any competitors?
- If so, how would they react to your venture?

The foremost consideration is, of course, whether there is a market demand (or need – not the same thing) for the product and, if so, how large the demand/market is and how you will reach that market.

Determining answers to these issues can require considerable time and research, but it doesn’t pay to cut corners.

The initial research can be done sitting in front of your PC. Data such as market size, annual revenues, primary competitors, market trends, regulatory requirements etc. are readily available from public and private sources. Use Search Engines to locate Web sites offering competing products to determine their pricing, quality and other features.

However, you do need to do some ‘field’ work. You need to literally ‘touch’ your market: identify your target market (i.e. customers) and talk to it. If you plan to sell your product to, say, truck drivers, be sure to interview a number of truck drivers to ascertain the level of interest in the product. Listen very carefully to any feedback you’re given on what features/benefits the consumer is looking for in such a product. Speak to other market participants – competitor or otherwise – to get the ‘big picture’ of the issues at play within the market.

Step 3.    Innovate to fulfil the opportunity

Once you’ve identified the opportunity and researched/documented its potential, the next step is to develop the product/service required to take advantage of the opportunity.

You don’t have to do all the work yourself – or any, for that matter.

You can retain contract designers/manufacturers, hire or partner with one or more individuals with the skills/knowledge the venture requires, outsource product design/manufacture etc.

Step 4.    Marshall suitable resources – time, money, people, plant, equipment.

This probably constitutes an entrepreneur’s core “skill” – being able to marshall resources additional to those within the entrepreneur’s immediate control. It is also arguably the most testing and arduous part of the entire process.

Only a lucky few entrepreneurs have the necessary money, time or skills to fulfil identified opportunities. The rest need to develop plans for obtaining required resources.

This could range from borrowing a modest sum of money from friends and family etc. to structuring a joint-venture arrangement with several parties willing to contribute resources, and managing the often conflicting demands/interests of the various parties involved.

Step 5.    Assume necessary risks – financial, psychological, social.

Entrepreneurship is not without risks. As we will see in the next segment on Tenet #3, entrepreneurs are not – despite popular belief – risk takers. Entrepreneurs are risk managers.

Skillful entrepreneurs analyse every facet of their planned venture and carefully develop risk-minimisation strategies.

Step 6.    Reap rewards – independence, personal satisfaction and wealth.

Central to entrepreneurship is wealth creation, and through wealth comes independence (financial and otherwise). Importantly, in pursuing entrepreneurial opportunities, individuals also generate “external” wealth, through the economic stimulation the venture creates.

The first Tenet of Entrepreneurship posits that ANYONE can become an entrepreneur; that is, entrepreneurial skills, traits and tendencies are not innate, but rather are learned.

Entrepreneurial tendencies etc. are influenced by a number of factors, including:

Personal values/characteristics

It is impossible to provide a universal characterisation of the “entrepreneurial type”. Entrepreneurial tendencies recognise no cultural, social, political nor temporal boundaries. Indeed, history is replete with examples of entrepreneurs springing from all walks of life, in all industries, with varying motivations and degrees of success.

Some generalisations can, however, be drawn. Entrepreneurs tend to be achievement-oriented, revel in taking responsibility for projects and decisions and have a distinct dislike for work involving repetitive tasks. Entrepreneurs embrace change, as they realise that with change (even chaos) comes opportunity. They revere flexibility, individualism and opportunism.

Childhood environment / role models

Numerous studies have explored the implications of ‘birth order’ (i.e. first born, second born etc.) on entrepreneurial abilities. It is commonly believed that, as first born children receive special attention (enjoying, as they do, a ‘monopoly’, if only short-lived, on their parent’s time), they therefore build greater self-confidence. However more recent studies offer contradictory conclusions.

The employment history of a child’s parents is a confirmed influence – a disproportionate percentage of entrepreneurs have self-employed or entrepreneurial parents (especially fathers).

Even where parents are not self-employed or entrepreneurs themselves, parents that encourage independence, achievement and responsibility tend to instill the desirability of entrepreneurial pursuits in their children.

Other role models – siblings, relatives and other entrepreneurs – are also important influences, especially where they play a mentoring role during and after the launch of the business.

Education

There is plenty of anecdotal evidence that entrepreneurs tend to be less educated than the general population. Almost everyone has a story to tell of a self-made businessperson that dropped out of school early and went on to earn his or her fortune.

However, this is by no means the “norm”. Education is important for successful entrepreneurship, as it helps entrepreneurs deal with the challenges and obstacles they are likely to encounter along the way.

A formal education is by no means necessary, but it certainly helps, especially where it is related to the entrepreneur’s future endeavour.

Age

Most entrepreneurs embark on their entrepreneurial careers between the ages of 22 and 45. Certainly, individuals have launched their first entrepreneurial endeavour outside this age bracket. They are an exception to the rule, as entrepreneurs require a degree of experience, financial backing and sheer energy not often found outside this group.

Some research has shown that there are “milestone” ages – 25, 30, 35, 40 and 45 – at which entrepreneurs are most likely to start their first endeavour (a case, perhaps, of “it’s now or never”).

Experience

Prior entrepreneurial experience(s) clearly plays a role.

Many entrepreneurs become “serial entrepreneurs”, launching or buying a number of businesses, which they may own one at a time or sequentially. In doing so, they apply learnings and insights from previous ventures to new ones, gradually perfecting their techniques and approaches to creating successful ventures.

The earlier in life you gain entrepreneurial experience, the easier it seems to be to pursue entrepreneurial opportunities. For instance, many an autobiography shows successful businesspeople emerging from humble backgrounds and applying fundamental business lessons learned from their adolescent newspaper rounds or lemonade stands.

Market knowledge

Many entrepreneurs get their start after spotting a potential opportunity in the context of their former field of employment (such as an opportunity or niche not currently exploited or adequately serviced by their employer). Having “inside knowledge” of the market, its dynamics, consumer requirements, competitors etc. allows them to “hit the ground running”.

In other cases, training/experience within a specific field can be a hindrance, blinding all but the most creative and open-minded to non-traditional methods of solving problems. Many entrepreneurs spot opportunities in fields unrelated to their training/background because they are able to examine problems free of industry “dogma” and/or because they are able to bring a different approach/skillset to the problem-solving process.

Work history

Dissatisfaction with paid employment is certainly a prime motivator for would-be entrepreneurs. However, work history plays a more important role, as the technical and other skills gained while employed play a key role in the success or failure of an entrepreneurial endeavour. Experience in areas such as finance, marketing, distribution and product/service development gained while employed will stand an entrepreneur in good stead.

Government policy

Governments can play an important role in stimulating entrepreneurial activities.

At a micro-level, they can provide entrepreneurial support programs (such as free business skills courses, advisory/mentoring services etc.) and funding agencies.

At a macro level, many governments around the world are introducing legislation to ensure that government-funded R&D labs and universities pursue the commercialisation of their research, either through startups or by licensing/selling intellectual property to entrepreneurs.

Years ago I read an anecdote in a Jay Abraham book that had a formative effect on how I view innovation and opportunism. I managed to track it down:

Two men were mugged. Neither one was harmed.

Mugger No.1 took the man’s wallet and all his cash – $85. Mugger No.2 took the other man’s wallet and cash, $70, plus his watch and his Princeton class ring. The watch and ring were not expensive and had no real street value.

Ordinarily, that would be the end of the story.

But, two days later, man number two walks out of his New York City apartment on his way to the office. He hears someone calling his name. He turns, and there is the man who mugged him, smiling and not at all threatening.

Mugger No.2 asks the man if he would like to get his watch and Princeton ring back. As both items held great sentimental value to him, he said yes. The mugger offered to sell them back for $500. The man only had $90 with him. The mugger accepted the $90, but instead of returning the watch and ring, he gave the man a receipt from a pawnshop. Later that day the man went to the pawnshop and paid $80 to reclaim his watch and ring.

Mugger No.1 made $85 cash. Mugger No.2…made $70 on the mugging, $80 by pawning the watch and ring, and $90 by selling the pawn ticket. Total income: $220.

Now, rest assured I’m not advocating mugging people (literally or otherwise). This story exemplifies how the same “transaction”, when viewed through entrepreneurial eyes, can be leveraged to reap greater rewards.