Finding Opportunities in the Modern Business World, Pt.1: What Businesses to Build?
A few days ago I had the chance to watch a phenomenal presentation by Matt Barrie, CEO of Freelancer.com.
Freelancer is a global crowdsourcing marketplace website, which allows potential employers to post jobs that freelancers can then bid to complete. Founded in 2009, its headquarters is located in Sydney, Australia.
Matt Barrie has been running Freelancer.com the past few years, he is one of the most prominent Australian entrepreneurs and he is also a LinkedIn influencer.
In that presentation, aptly titled “Opportunity”, Barrie discusses how the modern entrepreneur should think about assessing opportunities, building businesses and creating wealth.
His presentation not only hits home with the profound lessons it provides, it is also cleverly structured in a way that allows viewers to get the most of it.
Since all the lessons resonated with me and all the things I have been talking about all this time on this blog, I wanted to present those to you, analyze them, comment on them and build on top of them.
For this reason, I am publishing a series of posts where I will elaborate on Matt’s presentation.
First of all, make sure to watch the presentation, either all at once or in bits and pieces as you read along my posts. Here it is on Youtube:
In this post, we are going to discuss three key points that we should take into account when building a new business. Let’s dive into it!
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The business of the future
The first major point is that the business world is being shaken up.
Several industries across the board are being disrupted by the use of software, and new players, who are more technical savvy, are rising up, displacing the old incumbents.
The main culprit is, of course, the proliferation of the Internet, and of technology in general.
In this context, it becomes clear that opportunity is everywhere. That being the case, we need to properly assess which opportunities we should pursue.
The underlying question that we should be asking then is:
What sort of businesses do we want to build?
Well, if you are a regular visitor of this blog, you already know the answer: Scalable and saleable businesses!
Matt comes to the same conclusion by declaring that we should go after scalable businesses. He defines scalable businesses as those where profit grows faster than costs.
Let me repeat that, because it is critical:
In a scalable business, profits grow faster than costs.
Essentially, that means that each incremental customer (or revenue), leads to faster profit generation.
In the same spirit, revenue can grow unboundedly without a corresponding increase in costs or overall complexity.
Digging deeper, that happens only in the case where incremental costs (of revenue) are actually decreasing.
“How is that possible?”, you may ask. Well, it is possible because, with software, the incremental cost of servicing another customer is virtually zero.
Think of it like this. If I am selling a digital copy of a book, the cost of selling it to 100 people or 100,000 people is virtually the same.
In this case, as the number of customer grows, the initial cost of producing the ebook is distributed among more people, and thus, decreasing.
This is HUGE. This is what has enabled companies like Google and Facebook to rise to prominence and displace older companies (mainly the oil ones) from the list of the most powerful companies in the world.
The same thing applies to the complexity of the business.
Consider the example of a website and the infrastructure it needs. After it is set up, there is virtually no difference into serving 10 visitors or 10,000 visitors per month.
Sure, if you go from 10 visitors to 10,000,000 visitors, you are certainly going to need some infrastructure upgrade, but in general, you will need orders of magnitude in traffic increase, before those are needed.
The quintessential example of a non-scalable business is that of a yoga studio where instructors provide lessons to customers. There are several flaws in this business model. Let’s examine them.
The most fundamental problem with this concept is that revenue is bound by the amount of hours that instructors can teach, which are inherently non-scalable.
A second issue is that demand might not be enough to generate significant revenues. Since a yoga studio is a brick and mortar business, it usually can attract customers from a close vicinity. This is terribly limiting.
Even if demand is strong and a continuous stream of new customers exists, scaling the business might be tricky since more studios will have to be opened, bringing along major capital expenses (CapEx).
On the flip side, if demand is not strong and the studios remain idle, you still need to pay for several fixed costs (rent, electricity etc.) as a business owner.
Finally, another major issue that you should keep in mind is that this business model is based on humans delivering the service. The problem with that is that humans are incredibly expensive (typically payroll is the largest expense of a business) and can, in times, be unreliable too.
In short, just opt for online ventures, they have many advantages over traditional businesses.
Now, let’s examine how this “yoga training” business could be modified so that it becomes scalable. The answer is of course to deliver the training courses over the internet. The model becomes scalable as software comes in and changes everything.
Since the service (training material) is delivered via software (Software as a Service, or Saas), there is only one piece of code to maintain. Thus, the incremental cost to serve another customer (and add a unit of revenue) decreases.
At the same time, there are no heavy costs involved since there is no physical infrastructure. You just need commodity servers to run your application and perhaps some customer support agents as you get more customers.
Seeking large addressable markets
The next major point that we need to take under consideration is the size of the market that we want to attack. This is commonly known as Total Addressable Market (TAM).
In general, we seek markets that are large and where people are collectively spending lots of money in.
In fact, these markets should be big enough so that they can accommodate businesses that generate revenues in the hundreds of millions of dollars (or even billion of dollars) per year.
Matt even makes a joke about “finding markets the size of Texas”, since everything is bigger in Texas!
Now, here is an important part. Competing directly in a large market is usually a losing proposition. Most probably there are going to be some serious players that have a stronghold over it.
A better approach is to start within a smaller niche, dominate that niche, and after you accumulate some resources, launch your expansion towards the rest of the market.
An awesome example of this strategy is Facebook. Facebook started within the Harvard campus, expanded to the rest of the colleges, quickly dominated that market, and only then attacked the broader market.
Solving the right problem
Moving on, the next important issue to tackle is choosing what problem to solve.
First of all, let’s highlight the fact that, an existing problem means that there is a market for the solution of said problem, and it is probably possible to build a company around that solution.
The opposite is also true. If there is no problem, there is also no market, and thus it is impossible to build a company based on that.
An indication that a market indeed exists is the fact that there are already competitors out there. Lack of competition is a huge red flag which indicates that there might be no market for the specific product or solution.
After validating the existence of a market, then next thing to ponder about is whether you are building a “painkiller or a vitamin.” This is a metaphor that highlights the importance of building a product that people “must” have.
Vitamins are “nice to have” products that people do “not need to have.” If you skip your vitamin one day, you will be alright.
On the other hand, painkillers are typically products that people “need to have”. If you are in pain, you can’t afford not taking a painkiller.
Taking it up a notch, it is even better to have a “narcotic”, as Matt calls it, where people get “hooked” on it and return on a consistent basis for it.
Again, Facebook is an amazing example of a “narcotic” product that people can’t get enough of and spend large portions of their lives into.
In this introductory post, based on the exquisite presentation by Matt Barrie, I discussed three major points that every aspiring entrepreneur needs to consider when contemplating a new business venture.
The first one is that we need to think of businesses that are based on scalable models that allow profits to grow faster than costs.
The second one is that we must seek out vast markets that can sustain company revenues to the tune of hundreds of millions per year.
The third one is that our product should be a must-have “painkiller” in the lives of our customers, and not a nice-to-have “vitamin”, or ideally, something they get “addicted” to.
Stay tuned for the next part where we will be discussing secrets, trends and more!