As a follow-up to his recent presentation on what makes a great startup idea, Cornell entrepreneurship expert Bradley Treat has returned to eCornell to discuss some of the common pitfalls that often keep great business ideas from succeeding. Below is an abridged version of his discussion.
People often go down the entrepreneurial path only to discover that their idea actually won’t work before they’ve made it very far. What I want to discuss today is how to spot potential pitfalls in your business idea and address them early on.
Most of this presentation comes from a class I teach at the Johnson School called “The Business Idea Factory”, which helps students work through a business plan or business pitch.
YOU DON’T ALWAYS HAVE TO GO BIG
Most times, when we are looking for great business ideas, we look for really big markets. We’re thinking of being as big as Walmart, which basically sells everything to everybody.
But there’s always a counterpoint. The counterpoint to Walmart is a company called Fox 40, which makes whistles. The founder of Fox 40 was a hockey referee. As he was refereeing a hockey game, he went to blow his whistle – it was one of those metal ones with a little bounce-around cork thingy – and it didn’t blow. Maybe it was cold, covered with sweat or whatever, but it didn’t work. Some of the players saw him raise his hand to indicate a penalty but some did not and, as a result, a player got hurt.
He said, “Okay, I need a whistle that always works in all situations.” And so he developed a whistle that is loud and works whether it’s wet, cold, high-altitude, you name it.
When he said, “I’m going to make a whistle that always works,” was that a huge market? Of course not. But is it a great company? Yes. The whistles have become very popular with the military, the police and lifeguards.
My point here is that you can go big, or you can play small, and still find success.
HIGH MARGIN ISN’T THE ONLY MODEL
Another thing we tend to think about when starting a new business is high margins. We like businesses with high margins, but there is again a counterpoint to be made.
For example, Harley Davidson has extremely high margins on their motorcycles. And people who buy Harleys are not buying them just to get from point A to point B. It’s a state of mind, it’s who you are. You can go to a tattoo shop and choose multiple options for Harley Davidson tattoos. Harley is a brand for life and they tend to keep people. The motorcycle aficionados out there would probably say that if they made a list of bikes with the highest-performing, cutting-edge technology, Harley Davidson might not be at the top. But it’s that brand identity that gives the company such an extremely high margin.
Now look at Costco. I guarantee you will not find a Costco tattoo on anybody. But they do extremely high volume with extremely low margins. They just move a lot of product. Their number one product is toilet paper. So they’re a great counterpoint example of how a low margin/high volume model can work.
EXECUTION TRUMPS ALL
Let’s take Planet Hollywood. This company was started by A-list celebrities – Arnold Schwarzenegger, Bruce Willis, Demi Moore – but it went bankrupt twice. With that kind of marquee value, you might ask, how that is even possible? Or you could look at Dive!, a restaurant that was opened by Steven Spielberg, arguably the greatest movie director of our generation. But the thing bombed. He lost like $20 million on it.
What these examples have in common is that they prove that the success or failure of restaurants and bars is not the concept. It’s the execution.
Great restaurateurs make it look easy. They’re like professional basketball players draining three pointers. But if you want to be successful, particularly in the hospitality or service industry, it’s not about having a great idea. It’s about having the right experience. The truth of the matter is that there are very thin margins in the industry.
I mean, one of the most successful restaurants in the world is McDonalds. Their concept is not that special. It’s hamburgers and french fries. But just think about the volume of food they move. It’s almost unbelievable they can sell their food for as cheap as they do on the margin, but they’re very successful operators.
DON’T MISS THE REST OF THE ECOSYSTEM
Another thing to consider is the ecosystem. Most college students would agree that their textbooks are really expensive. But the textbook ecosystem isn’t just buyer and seller. There is the teacher, there is the institution, the publisher. It’s a very complex ecosystem.
So is the taxi business. It’s much more than just the driver and the rider. There’s a whole ecosystem of dispatchers and cab owners. There are also all the government regulations, and different rules for different places, such as airports.
At first glance, it might look like just two players, but in fact there are often many more. Understanding that ecosystem is very important. And it’s not only about understanding the rules and the players, but also the individual people involved that could impact your business.
NOT ALL ADVICE IS CREATED EQUAL
When you’re starting a business, you should be out talking to a lot of people. What you’ll quickly find is that you’re going to get a lot of conflicting advice. Some people will tell you that your best idea is A, others will say it’s B. What are you going to do about it? Whose advice should you care about?
Try the mosaic method. A mosaic, when you look at it up close, is just a bunch of broken ceramics. But when you step back, you start to see a picture. So you need to have a lot of conversations in order to see that big picture emerge.
The other thing is to make sure you understand the context in which people are giving you advice. A mistake many people make is to put too much stock in the advice they get from investors at the detriment of advice from potential customers. When an angel investor comes in and says, “Here’s what you should do with your business,” people tend to go, “Oh, well, they can write a big check so I should listen to them.”
I would actually discourage you from doing that unless you’re selling to venture capitalists. You should heavily weigh the advice of the people who are most relevant to your business, and if you’re already up and running, those who are actually using it.
ONLINE AD REVENUE – IT’S A TOUGH GAME
When people tell me their plans to do this and that in their app and I ask them how they are going to make money, they almost always say “ads.”
Well, the challenge with ads is the numbers just aren’t there anymore. The way that a lot of online businesses make money through advertising is described in terms of cost per thousand, cost per click, cost per action and so on.
The problem is, these prices have gone into freefall. The cost of ads has dropped precipitously. To make $3, you have to show a video a thousand times. To make $3 million, you’ve got to have a video that is seen 100 million times. Just do the math. You need just insane volume to make money off this.
When somebody tells you their big plans for an app and they say they are going to make money through ads, it means they haven’t thought about the business very well.
YOUR MOM ISN’T YOUR BEST CUSTOMER
The last pitfall I want to touch on quickly is confirmation bias. I see this a lot. Basically, when people are convinced that they have a great idea, they pay attention to all the data that confirms that their idea is great and ignore all of the data that says it’s a bad idea.
I guarantee if you talk to your mom about your business idea she’ll think it’s the best idea ever.
Instead of only listening to those whose inclination is to support you, you really need to go out there and talk to people who don’t know you. The best ones to talk to are your potential customers.
Want to hear more? This article is based on Bradley Treat’s live eCornell WebSeries event, What Makes a Great Startup Business Idea? Subscribe now to gain access to a recording of this event and other Entrepreneurship topics.