It’s The Economics, Stupid – Why A New Idea Isn’t The Key To Entrepreneurship


For some strange reason I keep thinking I have figured it all out. I feel this way despite the fact that every few years I look back on my life and realize how stupid I was in the past. I may come to say that about this post someday. But I'll keep going anyway because for now, this is what is running through my head.

I used to think the key to entrepreneurship was a novel idea. Isn't that what most of us believe? I wanted to invite a new high tech widget or offer a cool new service that no one else had thought of. That was the way I would make my millions.

The first blow came when I realized that ideas are mostly worthless. Somebody else has thought of your invention, they just haven't built it. If no one had thought of your idea, then it is probably beyond current technology to build anyway. That is why you don't see business plans for time machines.

When that was stripped away, I realized it was all about being first to market. Right?

The second blow came when I realized that too was wrong. Google wasn't first to market. Neither was Microsoft. Few companies successful over the long term were first to market. First to market means you get to learn from your own mistakes… and so does your competition. But it costs you more than it does them. So I put that aside and started to think it was about the execution.

I was getting warmer now, and at least I hit on something that really makes a difference, but the third blow came when I realized execution wasn't enough. Peter Drucker wrote that "nothing is worse than doing something very efficiently that shouldn't be done at all." He's right. I could execute the hell out of a dumb business plan and I might have enough for a bus ride at the end of it, if I borrowed $0.50 from you.

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So after beating my head against a wall for so long I think I must have cracked my skull and let some wisdom creep in from somewhere. (Let some 'obvious' creep in might be a better way to put it). I finally realized that entrepreneurship starts with the economics. How do you make money? I have been so quick to do cool things that I forgot to care about doing profitable things. I was so taken by the "provide a service and sooner or later you can figure out how to monetize it" school of thought that I forgot to think about whether or not I could ever monetize it. In other words, I have wasted too much time chasing ideas with no economic potential.

I won't deny that money can be made that way. You can start something and hope that it can be monetized, but I think that is like playing the entrepreneurship lottery. You have a 1 in 1000 chance of winning something, and a 1 in 1,000,000 chance of hitting the jackpot. Good ideas for startups basically come from recognizing an opportunity that could perhaps be described as "productivity and/or value arbitrage." You see a chance to do something better in a way that encourages people to pay for it. You see a way to let people trade time for money, simplicity for money, productivity for money, or some other combination.

If you want to start a company, study the economics of various industries. Look at how you create value for customers. Not assumed value. Not vapor-value that you think exists until you try to move from free to fee and realize no one will pay your fee.

Don't be me. It has taken 30 years for me to realize this basic lesson. At that rate, I should be ready to start a successful company by the time I am 350. Too bad that by then all the entrepreneurship will be done by some kind of A.I.