The web and all that relates to it has, in just 20 years, changed the whole basis for new company/innovation creation. The principle manifestation of this change is in the type of business model which can succeed today. It is now possible to do so much “virtually”. You don’t need software or even computers; you can rent virtual desk-tops and pay as you go for cloud-based software. More importantly, many functions which had to be created internally can now be outsourced. This not only substantially reduces the financing requirements for new businesses, it reduces the risk and arguably improves the quality of such services. This has changed everything. The number of “low cost” business models which could succeed in the past was very limited. Now, other than in very exceptional circumstances, it’s the low cost or limited investment model which has the best chance of success.
The proliferation of virtual companies and the outsourcing of many disciplines not only means the innovator can focus solely on their core strength or value-creating idea, it also means real competitive advantage resides in the cost structure of a start-up which avoids the heavy capital investment necessary to create a multi-disciplined company.
Let me retreat to a few examples to illustrate what I mean. Some 15 years ago we invested in a Newfoundland-based company which had an innovative design for a musical instrument. The entrepreneur leading the charge, also the author of the design, felt he had to manufacture these things himself. The next few years of that company’s life were consumed by the manufacturing process, the significant capital it required, and the problems in learning how to become a costefficient manufacturer. Wrong, wrong, wrong. That company should never have gone into manufacturing. Its value creation was resident in the design breakthrough. All the capital and energy invested in trying to get the manufacturing right should have been invested in sales and marketing, and perhaps improving the design.
More recently we helped a young entrepreneur start a business focused on a new extreme sports device. Again, the value being created was resident in the concept and the resulting engineering. This time the entrepreneur outsourced the manufacturing function to a contract house in China.
Although this avoided the capital costs of doing this internally, trying to manage the function in a distant location, with a perhaps unsophisticated contract house, and impose quality controls over a diverse supply chain once again conspired to overshadow the real task of sales and marketing.
Compare these real-life examples to two other companies in which we have invested. Both essentially write software, one for the media/telecom industry, the other for the health care sector. You couldn’t get more diverse opportunities but in many ways the companies are exactly the same. Although their products ultimately serve the consumer, their go-to market strategy is B2B, to partner with the right strategic players who will take their products to market. Their “manufacturing” is the writing of their software. But what is so different is that they can attract superstars in their respective fields to the challenge. They haven’t had to build plants, merely rent office space; not buy expensive equipment, simply rent server capacity. The entrepreneurs have been able to pour 100 per cent of their energy into what they are good at – and the real value creation component of their business. Their circle of contacts and their network can be brought to bear on the discipline with which they are familiar and where the heart of the value creation is resident.
So whether you are an entrepreneur or a member of a circle of friends or family being asked to help an entrepreneur get started, make sure you ask the right questions. Is the company only trying to focus on the point of the exercise, the “money-maker”? Is it outsourcing everything it can so as to reduce the risk and capital required, and free the team to focus on what they’re good at? Finally, what is the nature of the competitive advantage and how is the company structured to ensure this is the area of investment? The answers to these questions lie in the architecture of the business model. Pay more attention to this area and you will dramatically increase your prospects for success.