Advising any business is hard. I’m hesitant to do it. It’s all too easy to give bad advice, which steers companies in the wrong direction, all based on my whimsical throwaway idea shared over coffee.
New software companies are volatile and unpredictable. They don’t need to make a profit to sell for tens of millions of dollars. Sometimes the more money they’re losing, the more desirable they seem to be. So as a rule I rarely advise people on what they should do. I don’t know what they should do. Instead I try to ask good questions in the hope of creating new ideas for them to consider, and new places for answers to fit.
This article is based on a talk I used to give called Business Experience Technology, or BXT for short.
The first question I ask (though sometimes I just ask myself) is an easy one: is this viable, feasible, and desirable? The answer has to be yes on all three counts—no two are enough. In fact, pick any two, and you’ll think of a start up that failed because they missed the third. That said, a few will have become successfully unsustainable companies, or had lucrative acqui-hires. This is why advising companies is hard.
Can you execute on this idea?
If the idea is viable, feasible, and desirable then the next question is “Do you have everything you need to execute this?”. Borrowing from Bill Buxton, I use a three-legged stool of business, experience, and technology. A company needs talent and creativity in all three areas.
The Business of Business
Milton Friedman is famous for saying that “the business of business is business”. The key questions I ask start-ups here are simple things like: Where will you make a profit? How can you increase it? How will you reach your customers? If their answers mention things like two-sided markets, or viral distribution, I’ll ask more specific questions to help them be sure they actually understand how those concepts work. I look for unconventional ways they can make money, as there are so many overlooked opportunities here. Innovative business models are fascinating. Here’s an example from Amazon:
This above slide (from Jared Spool’s Design Treasures from the Amazon) shows how Amazon use a negative operating cycle to sell you a product they’ve yet to even pay for themselves. Dell subsidise their hardware costs by selling advertising space on the desktop. The more ads they sell, the more they can subsidise, which in turn lets them sell more adverts, which in turn lets them, well, you get the idea. Products like Dollar Shave Club, and Manpacks highlight the benefits of looking for less conventional business models and how they can succeed.
Price is about more than revenue. Price controls behaviour. Gerald Weinberg’s “The Secrets of Consulting” lists out many rules of pricing, the first two of which are relevant here:
- Pricing has many functions, only one of which is the exchange of money.
- The more they pay you, the more they love you. The less they pay you, the less they respect you.
The behaviour that your charge for are the ones that customers pay full attention to. Charge $250 for a job posting and you won’t get speculative bullshit postings. Offer unlimited free edits and you get lots of edits to use one posting for multiple roles. Charge candidates $5 to apply for a job and you get a really small number of applicants for jobs, but all of them are very serious about their application. Price controls behaviour.
An idea I like to play with is how would charging work in social networks. What would a Facebook that people paid for look like? If people paid for Facebook, would they still bother with it? Would it change how many friends they had? Would all of the remaining connections be meaningful?
It’s worth obsessing about what you will ultimately charge for, and how you meter it, as it will define what your product is known for.
Design is critical to start-ups. Andy Budd gave a fantastic presentation recently on design as a competitive advantage. The questions I ask start-ups about design are things like: Where, when, and how are you going to delight your users? How are you going to engage them? Do you plan to make them advocates? How? How will you keep them loyal? Why will customers leave? How will you proactively make sure this is working?
At this point it’s important to make sure a start-up knows the distinction between interface design and overall user experience.
The experience of buying a flight online is about much more than dropdowns and date pickers. It contains every touch point your customer has during their transaction. This includes your unsubscribe page, your 404, the emails you send out, the telephone system, order tracking page, and beyond. For example if this is how Aer Lingus thanks me for over $1000 worth of business, then I don’t care how clever their date picker was.
Compare that experience with the thank you I receive from Panic software for a mere $29 purchase. These two screens live on in my memory.
This is why many uninvited redesigns fall on deaf ears. A website reflects the company behind it. Things are the way they are because they were allowed get that way. You can’t jump twenty-foot chasms with incremental steps.
Finally I ask questions around the technology used. Simple questions like: Is your technology unique? What parts can simply not be copied? For how long will this solution be relevant? Could Apple wipe you out with an iOS update? Why won’t they? Could a competitor start at the finish line, while you’re busy waiting for the gun?
For many companies, technology serves as what Warren Buffett calls a moat. The piece that can’t be copied. As DHH pointed out, this is where products like Groupon struggle, their technology isn’t a moat. If the technology isn’t a moat, then the community must be. Communities are very hard to copy. By definition, Groupon’s community will go anywhere the cheap deals are, and aren’t many positive network effects at play.
For services like Heroku, YouTube, Google, and Amazon, their moat has evolved to the point where they’re close to untouchable. It’s not easy to build what they’ve already built. And while you’re busy trying to get there, they’re busy adding crocodiles and piranhas.
Going head to head with these businesses is a very risky idea for a start-up. It sounds stupid to say it, but YouTube didn’t have to compete with a YouTube. There was no Heroku before Heroku. Similarly, you should find an area where you can attack either through low-end or new-market disruption, rather than stepping into the ring with a giant who made up the rules.
The last question I ask is simply: What’s in the moat?