Understanding "Markets" in Economics

What's a Market?

The writer's of Wikipedia state in the first line of their discussion on Markets: "A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. "

Markets are necessary for my line of business (software development).  If I was a thief, I wouldn't need a market.  If I was a government I wouldn't need a market.  But I'm a capitalist, so I need a market.  And my hypothesis is I need a FAIR market for sustained business activities.

I will re-define market for my own purposes here, but I think it's a useful definition (if more specific).

A market is a system of procedures where a buyer transfers stored value to a seller who concurrently (or as concurrently as possible) transfers goods or services to the buyer.  For the market to function well, and all parties to be recurring members, a mutually agreed upon, fair and sustainable exchange rate needs to exist at transaction time.

So what?

When you start a company; known in the lingua franca as a "start-up" (go figure!), you need to find a market.  From my definition, as the seller you need to:

• find a buyer
• find a service or good
• find a fair price
• find the system of procedures for exchange

These four things make up your Go-To-Market strategy.

There doesn't have to be a lot of buyers.  For example last year Boeing had a handful of buyers, but their price of service and product was fair enough to keep Boeing going and bring more buyers to the table later.  Sometimes the system of procedures for exchange is not well defined.  For example how do you sell home-grown pot to people on the street?

Having this system is a very important go-to-market strategy component.  Can you name some places for desktop/laptop software sales?  How about - Best Buy, Download.com, Amazon.  What about Mobile applications? iTunes, Android, Ovi.

Knowing where the market is the responsibility of the seller and the buyer - but most work to get the word out  is being done these days by sellers.

Applications

Let's now apply this to business plans that come across my desk.

• How many buyers do they have?  How do they define a buyer?
• How do they offer their service or product?  What benefits are there to the buyer and seller?
• What's the price of the product?  Is it a market sustaining price?
• What existing market or procedures are they using?  Are they giving their buyers directions of getting to their market?

I find this the weakest in most of the plans I see.  I can only suggest making friends with a good marketing person here.  This part of the plan becomes the "gray-area", where there is no black or white, plus you need to use the "gray-matter" between your ears to see if this is reasonable. 

Maybe it's weak because engineers can't think in fuzzy grays.

The OpenText Guy and being a good Drummer Boy

Who should decide my freedom? me.
Who is responsible for my choices? me.
Who should control the federal Innovation Grants? elected officials.
Where should they get policy advice from? experts in the field.
How should I qualify for these grants? only by fulfilling the criteria.
Background: I didn't vote for Stevie Wonder's government in the last election.

Now begins the rant.  Parents, please remove your children from the room.

I haven't been given access to every SR&ED and IRAP claim or the way the money was used in the history of Canada.  However I am going to make a bold statement here: I bet there was abuse.  But, I believe there is (and will be) abuse in every place where money changes hands: in filing taxes, in paying taxes, in collecting refunds, in applying for grants.  And in every department: Agriculture, Natural Resources, Defense, Human Resources, you name it.  If you use the Prone-To-Abuse Trump Card in your argument against innovation credits, you are a POLITICAL ASS, a puppet for the white-bread-eating bogey-man-fearing bean-counting mandarins that provide government services to us (us, BTW, the people that actually build the wealth in Canada - not the bank of Canada, not the department of Finance).  When there is abuse in a department (let's say 5% of employees).  Do you shut down the department or do you change the employee's behaviour?  Do you enact rules so this doesn't happen?  Do you shut down the company for 5%?  When you eat people's bagels in the cafeteria and don't drop in a dollar in the donation box to cover the cost?  Do you commit suicide because of the gross abuse you have committed?

WARNING: Analogy shift here.

Say I'm a farmer, and I know that the expectant lifespan of my fruit trees is 30 years and the economic value years of those trees is the years from 5-20.  So basically every 20 years I need to have a whole new orchard of trees to keep my business afloat.  That means that every year I need to nurture young trees so that they can reach their 5th year so I can gauge if they have any economic value.  It would be pretty stupid not to support trees at this stage and give them a chance to grow.  Because bringing young trees into the orchard is the main way I keep my farming business going.

Shift back here.

What do the following companies have in common: Odesta, NIRV, OnTime, Dimensions, Lava Systems, Bluebird, LeadingSide, Centricity, Gauss, Eloquent, Corechange, IXOS, Vista Plus Suite, Hummingbird Ltd., eMotion LLC, or Spicer Corporation?  These are all smaller companies or products acquired by OpenText.  Awesome strategy huh?  Our trees are getting old, and let's keep the orchard fresh with young trees with a future.

Now if small businesses are the key for big business success, why would someone take-away the SR&ED credit from small companies?  Only an ECONOMIC ASS, would jeopardize the future of small business in Canada.  One employee grows to two, two grow to three.  That's the reality of day-to-day business growth in Canada.  As you get bigger your corporate growth only begins to match the birth-rate, unless you buy smaller companies.   So why, oh why, would anyone propose dropping this credit for small companies?  I know, because there are lots of small companies and they make up the majority of claims.  That's my guess, anyway.  Ok, so it's about saving money.  So let's not drop the funds evenly across the board, let's just cut the small company's portion.  Could it be because they don't have a voice? a political voice?

When I look at companies to invest my time and money in, I look at broad indicators of what they are doing and what the political and legal frameworks are for these companies.  Most WTO and OECD nations have some sort of research refunds/grants/credits/incentives for small business.  Some are directed in only certain areas, some are broad.  I'm going to be less interested in riskier ventures if I know that these innovation credits will be harder to come by in Canada.  I am.  It's because the government is saying "F**K YOU, small business doesn't deserve our help, we all have big companies now and we have no clue.  There's the door, please leave."

So here's the next proposal.  Let's give it to Universities.  Ya.  There's no abuse in those institutions, and they're right on the ball on the economic-feasibility stuff.  (If you have more than a grade 12 education in Canada, you don't need me to explain that last sentence.)

[cut to Andrew, sitting behind the desk, looking somber into the camera, dim lights behind him, put a warm light on his face.]

Starting companies (one of my greatest joys) entails lots of risk. [pause] Life ends in death so these risks are not so bad.  Starting companies requires a good mix of Courage and Stupidity.  I have excelled in both.  Once there were no tax credits. (There was a time of no personal taxes too!) Life will go on. Governments will pay for Canadian flags to be sold in Quebec, for memorials of the war of 1812.  Innovation will be stifled in Canada.  Dollar stores will be the most influential store chains.  These chains will claim to have more and broader clientele than any other stores in Canada.  We will continue to dig up things and trade them for Chinese goods.  And then one day [very dramatic pause] the Chinese will take our land, all because the OpenText Guy didn't have the balls to stand up for the innovative courageous and stupid visionaries that start small businesses but chose to be a good Conservative Drummer Boy.

Financing a Start-Up on a Personal Credit Card

(1) DON'T EVER USE A PERSONAL CREDIT CARD TO FINANCE A START-UP

(2) But, if you have a cheque in the bank that has cleared but it is on hold, and you need cash flow for one or two days until the bank releases the funds, you may use a credit card, but only if you pay back the money drawn on the card in the two or three days following the transaction.

(3) If you have reason to believe that the value of your share of the start-up will grow at faster than the 20-ish % (that the credit card is offering) you may want to infuse your start-up with this type of borrowed money.  Even if you have a card that offers you 0% for a few months, or with some transaction fee of 1% or even for a smaller %-age like 12%.  You really have to believe that your company will be growing at an astounding rate.  But remember, even if your company will grow at such an astonishing rate ... are are giving that 20 points to the credit card company.  You take all the risk and they make all the money.

So where do you find money with assets at your disposal?

• Operating Loan
• Line of Credit

Where do you find money without assets?

• Government Grant
• Low-Interest Loans
• Partner Programs
• Angels
• Friends
• Family

A lot of people even put their own money in!  I know that seems like a novel idea, but I certainly appreciate the people that do this.  I think people that follow on with investment also like to see some equity put into the prototype/product by the founders before they show up.

Rating the Angels

How do you know when to listen to an Angel that tells you a bad thing about your product, or to an Angel that tells you a good thing?

How do you know the guy causing you stress by telling you that your business model sucks is right and the guy telling you to keep working on those buggy whips is wrong?  What we really need is a way of rating the Angels.  (Of course, any Angel that give you money is Right On!  But they're few and far between.)

So what's a decent rating system for Angels?  Going back to my MBA training: we need to itemize a scorecard.

Obviously, if the Angel has no record, it's hard to evaluate their abilities, so the first scorecard metric is a public track record of investing in ideas/concepts/prototypes/start-ups.  Sorry Mr. First-Time-Angel, you don't make the cut, but I'll take your money if you have some!  Happily take it!  The second metric is accessibility.  If there is no way of contacting the Angel, then it's the same as if they didn't exist.  Does the Angel have an email, website, blog, linked-in profile?  The third metric is also pretty easy to figure out, does the Angel work in your chosen field?  There's a good chance that you could convince someone that your product is a decent idea, but getting them to risk their money with you usually means they need to know the market you are in or they need to trust you intimately.

Ok, so let's put this to a test with an Angel from the virtual world.  (DISCLAIMER: Jeff has never loaned me money nor invested in my companies, but I will fax him the Bank transit number as soon as he calls!)

Angel: Jeff Clavier
Track Record: Bit.ly, Blekko, Buzznet, Eventbrite, Foodzie, Kaboodle, Kongregate, Milo, Outright, Seesmic, Tapulous, Truveo, Userplane, Mint, Get Satisfaction, Topguest, Gigwalk
Accessibility: linkedin, facebook, twitter, corporate phone number, email
Area of Interest: Information Technology, Web, Games

Now we have to compare Jeff to someone else. So ...

Angel: Andrea Zurek (I really like the Rye Zurek with a boiled egg and a some kielbasa chunks.)
Track Record: Chai Labs, Eatlime, Facecake Marketing, Global Fresh Foods, Lotus, Metropark Usa, Pathwork Diagnostics, Plusmo, Poddaddies, Posterous, Rallypoint Tv, Scoopler, Tapulou,s Tsumobi, TwitVid, Vaxart, Hug Energy, BackType, Crocodoc, MightyMeeting, MyLikes, Nowmov
Accessibility:  linkedin, facebook, twitter, corporate phone number, email
Area of Interest: Information Technology, Mobile, E-Commerce

Angel	Track Record	Accessibility	Area of Interest	Score
Jeff Clavier	17	5	IT, Internet	22
Andrea Zurek	22	5	IT, Internet	27

The winner: Andrea Zurek.  Why? Because I really like the Rye Zurek with a boiled egg and a some kielbasa chunks (and Rene Descartes was a drunken old fart).

Although, funny (ok, slightly funny), this could really help you weigh the comments your Angel gives you.  I would suggest going a little deeper though.  Look at the companies they invested, look at their payroll, the business and technical knowledge of their teams, the type of exit or current revenue of the company, and compare those to your company's model.  You'll obviously be able to get better advice from a Angel that is already working with a concept or team like yours than someone from a different part of the spectrum.

How do you time the introduction of disruptive technology?

How often does a farmer plow their field?

I know very little about agriculture, but my guess would be either once at the end of the harvest or once at the end of harvest and once at planting time. Why? - because plowing is DISRUPTIVE. If you plow during the growing cycle you gain no benefit from the growth of the stuff you plowed under – unless it was meant as fertilizer!

The same applies for new disruptive innovations in a company. You don’t want to plow under a crop that is going to earn you money. Because of fear, the big argument is that in the end you may never disrupt the growing because a short growing cycle remains and your disruptive innovation won’t have time to mature enough. This is the real meaning of disruptive. You need to have to guts to see your field producing way more value with your new crop than with your old one. And it may take more than one growing cycle. (That’s why corporate strategy is hard and making the tough decisions is why the CEOs get paid so much!)

Probably the intelligent thing would be to follow a portfolio strategy, to do is divide your field in two and plant one with your core money making crop and the other with your disruptive crop. A definite amount of stable cash flow is always necessary to incubate a disruptive crop. Then as your disruptive crop gains in value over the years, you convert more of your field to produce it and you eventually stop growing the other stuff.

This idea is entirely similar to the Boston Consulting Groups Growth-Share Matrix. The idea that the cows aren't growing but they bring in the cash, the dogs are just a waste of time, and the stars grow their market share and bring in the cash.

To summarize: timing is important in introducing disruptive technology, but it takes guts on the part of the CEO to introduce it when it appears to be the wrong immediate choice.

Good Luck CEO!

3 Business Ideas that May be Big Soon

The following three ideas have been around for some time. They have been incubating until the right amounts of fertile customers are available for them to spread past the prototype stage into the adoption stage. Two are convenience and one is just the application of reducing information for accurate business intelligence.


1. Paying by Mobile Phone

In the North American Market, a typical mobile phone bill is between 30 to 100 dollars. While that is not a big portion of someone with a car and home, for teenagers and people in their 20s, this might just be the biggest outflow of money if they are living at home. This also is usually their first entry into the credit market: starting a credit rating and a long-term payment agreement with a mobile phone company.

So now, Mr. Mobile Phone operator, why don’t you let these guys buy a pack of gum at the store and put it on their next phone bill? They do have a debit card for sure, but you want to keep them for life. If you offer this service – people will stay forever! (Anyway that’s the way I’d sell this to the phone company.)

I think that micro-payments, using the phone company as a mini-bank will happen sooner than later. But the issues are several:
• What interface will the store owner use?
• Existing debit/credit one?
• A new software interface over phone lines?
• How will the transaction work?
• Will phones have chips in them or will it be done by sending an SMS or making a phone call?
• What charges will the seller/buyer incur?


2. Mining Social Networks

This goes back to yesterday’s post about finding trends, but it also goes deep into finding key ideas, business influencers, and product information. We are already mining social networks today, but there is a lack of unification between the Psychological understanding of groups and the higher level of what this data means.

The business model must answer:
• If this solution can this be used by a third party on an open business network or does it need to be used by the host of the business network?
• Who is the user, an individual looking for information about another individual or about an organization?
• Will the product be used for spying on the competition?
• How can the accuracy of the conclusions being made about the mined data be tested against the facts existing in the brick and mortar world?
• What benefit does this give a company in pursuing its strategy?


3. Connected Home Healthcare

People are aging; their access to healthcare is not only limited by their ability to pay, but also by their ability to get someone to help them to the hospital. What if a heart rate monitor, blood pressure cuff, thermometer and stethoscope could be connected to an Internet-connected laptop or phone-line. The information would be sent to a virtual clinic (could be anywhere, India, China, or Cincinnati) and the doctor could prescribe medicine, monitor a treatment plan, or call emergency services for the patient.

Wouldn’t the hospitals be happy that the emergency rooms would be filled with less “Emergencies” because they were prevented? Plus this would offer some people actual health services that may never choose to go to a doctor at all. Plus it would benefit the medical provider because they would not need to maintain a clinic.

Questions that arrive with this business idea:
• How would the devices be tested by the doctor if they never left the patient’s house?
• How would payment be made?

• What laws surround malpractice and remote diagnosis and treatment?

• How would insurance know that a treatment occurred?
• Could these digital records (video conference even) be stored and accepted under national and international health records laws?
• How would you distribute the devices to the patients?
• Who would manufacture them?
• Would this solution work more developing countries or rural communities than for the United States?

Finding the Next Big Thing! (Part I)

If you are like me, expending energy on finding the Next Big Thing is much more fun than working at creating the Next Big Thing. Why work hard when you can march in front of a popular revolution and then install yourself as its leader?

I’m being a little facetious here but, it is true that The Next Big Thing is never just one person’s idea. The history books say Calculus was invented by two men simultaneously; that the phone and light bulb were invented by many independent teams as well.

Some people think it up, some people adopt it early, others improve it, others promote it, others commercialize it, etc. People outside the organization touch it and use it. The idea though is for you as a leader in innovation for your company to know in what industry, product, price-point and value proposition to be in based on what the trends say. So the Next Big Thing has everything to do with trends.

I use the Internet to find big trends. I would not use the Internet to discover if a local vacant parking lot was used more on weekends than weekdays. But then, a local vacant parking lot may not be part of the Next Big Thing - just part of the Next Small Thing. I might be able to see if vacant lots around the city or North America where used more, but then I would have to go to a distributed data gathering tool, like the Internet, for more information anyway. Have I mentioned I like using the Internet to find big trends?

So what (free) tools and data sources are out there to find trends?

• The first tool is Google Trends (it is simple and gives you some basic statistical answers to some basic questions: when do people search for “flu”? are there more searches for “snow blowers” from Los Angeles or New York over a similar period?)
• Another neat tool is Alexa. It’s a company that uses really big browser search numbers to project activity across the whole Internet. They can tell you what topics are hot, what websites are active and becoming more active, and even what products are hot. But these are basic and the ability to ask a more complicated question is not possible in this free tool
• Yahoo Buzz! Is another trend monitor. It’s divided into news, business, entertainment, etc. It’s basically a way to find the top “information” pages being read on the Internet found through Yahoo sources.
• Other, but poorly organized storehouses of information would be: Twitter, Facebook, Wikipedia, Slashdot, YouTube, Blogger and Baidu.

There are even some meta-sites like trendsbuzz.com that put a few of these free tools side-by-side on the same web page. The problem with these tools is that they really talk about what is hot now, and not what is a large underlying trend. For this you need to be a little more clever in how you analyze the data you read and how you monitor the hot trends over time.