Two business principles
Written after an evening of brainstorming startup ideas with a friend. Alyssa — who had recently wound down MetaMed Research, a personalized-medicine consultancy she co-founded — sketches two general lessons she’d drawn from watching her own and other peoples’ companies meet the market.
Continuing on the theme of general optimism / specific pessimism: while I’m pessimistic about most of the proposed ideas, I’m optimistic that in general, we’ll be able to create value for the world and make cool things (and hopefully get rich ourselves :) ).
A lot of my specific thoughts are based on two broad business principles, which I’ve generalized after some years of seeing both my own businesses and other peoples’ interact with the market. The first principle is that a business has to be driven by needs on the demand side, not the supply side. For example, lots of people know that many good musicians can’t make a living at music, and are in fact dirt broke. The musicians themselves want to get paid, and society as a whole believes the musicians ought to get paid, so many people start businesses to fill this “demand” — Boeing fills the demand for people who want to fly, Ford fills the demand for people who want to drive, and this new company will fill the demand for musicians who want to make a good living. Unfortunately, the market doesn’t work that way. When Bob buys a car, money goes out of Bob’s pocket, so Bob’s need is demand-side. But when Bob wants to sell his old car, which has been sitting on the lawn rusting for ten years, Bob’s need is supply-side. No matter how clever a business is, it can’t fulfill Bob’s desire to sell his rusted old car for $10,000, because there don’t exist any people who actually want to own a rusted old car. If you’re clever enough, you can convince someone to buy the rusted old car in the hope they can sell it for $12,000, but that just compounds the problem — now, no one wants to buy the rusted old car from them. You can’t cheat the laws of physics here, you can’t make an engine that puts out 200 watts with 100 watts’ worth of fuel.
We made this mistake ourselves at MetaMed. We knew a lot of smart people who had cool thoughts about things, and so we thought, hey, let’s start a business to fulfill all this demand, we can help all these people make money by selling their cool thinking abilities. But it didn’t work out that way, because that need was on the supply-side, not the demand-side. Not enough money was coming in from customers, and MetaMed eventually went under from lack of revenue (after having been kept limping along for a while on investor life support).
The second principle is that, while the number of ways to fulfill human needs is practically infinite, the number of needs themselves is fairly limited. Humans just aren’t that complicated, compared to an entire global economic infrastructure. Therefore, virtually any profitable company will be competing against some other company that is currently fulfilling the same need. Railroads competed against canals, horses, and sailing ships; light bulbs competed against candles, gas lamps, and fireplaces; computers competed against typewriters, mechanical calculators, and slide rules, and so on. If no one is already buying a worse version of the thing you’re selling, it’s almost certainly because there’s no demand for it.
Hence, with any new technology, the first thing to do from a business perspective is ask: what can this do better than any older technology, and then, who is paying lots of money for those older technologies? For example, if a new technology is really good at determining the preferences of a group, who is paying lots of money for information on group preferences? One obvious answer (although possibly not the only one) is corporate marketing departments, who put lots of work into collecting data from surveys and focus groups. If you could reliably tell marketing departments which version of a product customers would like more, that would meet a significant need for them.