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.

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.

  • Great post, Rob! All of us should keep a copy and re-read it on a weekly basis as a reminder of what to focus on.

  • Rob – don’t forget the importance of timing in any entrepreneurial launch. Give me a mediocre idea and management with great timing than a brilliant concept and team, with piss poor timing any day of the week.


  • Great post. You’ve hit on some critical points. As I was reading it I couldn’t help but think: Web 2.0.

    I know Web 2.0 isn’t all vapor-ware and nonsense, but there seems to be a lot of huffing and puffing, betas, free launches and not enough in the way of monetization…

  • So you think the acid test of entrepreneurship is knowing, “How you make money?” How can anyone ever know such a thing except by trying?

    The best consultants once were sure there was only a market for about 900,000 cell phones a year. How wrong was that estimate? Who anticipated fax machines? Or $4 lattes back in 1975.

    Entrepreneurship is complex. The simplest test of it’s validity is your ability to find, keep, and grow customers. Profit comes from doing that well. And you’ll only find out by trying.

    But re: your past attempts. Don’t take more from the experiences than is actually there or you’ll be like the cat that sat on a hot stove. He’ll never sit on a hot one again but he’ll also never enjoy a warm one on a cold night. (adapted from Mark Twain)

  • Rob

    That’s true, but I put it as a secondary factor because in the long-term economics still drives the success of the business. Although one could argue that if you enter the market at a bad time, you will fail in the short-term and not get a chance at the long-term.

    I think I wasn’t clear enough in my post. The question isn’t really how you make money but “are the economics favorable?” I didn’t really think about market size etc. as much as I was thinking about individual transactions.

    You are right that you can’t know how to make money until you try, but what I was trying to get across was one step before that. For instance, launching a fax machine is fine, but you have to believe you can sell the machine (or services on the machine) for more than it costs you to make.

    To give you a counterexample of what I was getting at, there are 85 online video sites now. They all have customers, but most of them will fail because of bad economics.

    Or maybe the better thing to say that is closer to what you are getting at is “if we can find customers, do the economics work out that we make money?” Some economics are better than others.

  • It appears your line of thinking supports the idea that business success is less a function of the products & services provided and more a function of the machine you have built and the environment you’ve chosen to deliver those products & services. I have to admit that is reflective of my experience. It seems to me that my greatest business successes have come when I took steps away from the technical aspects of the products & services and moved toward the nuts-and-bolts aspects of actually running the business.

  • Rob – as always, an insightful article and one that makes me feel renewed when I see the momentum we’re realizing at Six Disciplines Leadership Centers.

    “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.”

    Continual business improvement – lasting excellence – is something that many business leaders want/need – they just haven’t had the method, tools or proper guide before. And, yes, they’re willing to pay for it to get there.

  • N

    You have cited Microsoft and Google- but how about Netflix- weren’t they the first online DVD rental service? and they’re market leaders too….

    How about First online bookseller think. Just a couple of examples that tell me that you sometimes have to be the first to execute an idea well.

  • Shalmanese

    I disagree. Googles big idea wasn’t search, it was PageRank. Microsoft’s turning point wasn’t with an idea, it was IBM licensing their OS rather than buying it outright. But what about ebay? Amazon? hotmail? True, they only eventually succeeded because their ideas were backed by solid execution. But it was the original spark of an idea in the first place that gave them that first push.

    I would say a great idea is generally a neccesary but not sufficient condition.

  • Rob

    I don’t think amazon was first to sell books online, but I can’t confirm it either. A google search turns up conflicting information. Netflix probably was the first, but no one is sure they are going to make it. My point is not that a first mover advantage is useless, my point is that I thought a first mover advantage was the key to success, and it isn’t. In other words, I’ve been more worried about being first than being good, and that was stupid of me.

    All the companies you list are tech companies, but entrepreneurs still start up in old industries like steel, agriculture, etc. If you have money and better execution skills, you can copy someone’s idea and beat them at their own game. Virgin does this – they go into established markets, not new ones. By ‘ideas’ I was really talking about new concepts, not tweaks of old ideas.

    That said, I think you are misreading the post. I’m not saying ideas don’t matter at all. I’m saying that isn’t what you should focus on. I hear too many people say “when I have my great idea…” but their great idea turns out to be something that only they would use and that doesn’t have an economic model behind it.

    What I am saying, and perhaps I should update the post to say this more clearly, is that to be a successful entrepreneur you need to understand what makes good economics for a business/industry and you need to look for opportunities that have those economics.

  • The real key for me is creating VALUE. Create value and the money will follow.

    The mistake is equating great ideas to creating values. If the idea works out but the money ain’t following, then the value of the idea is in the wrong place.

    On the other hand, I can also give a great example of an coulda-been industry that has thousands of superb life-changing ideas, but ultimately suppressed and killed by economics: mobile content.

    Countless things can be done and beautifully executed and even possibly monetize. But just when everybody get psyched up about any great idea, the impossibility of payment simply destroy all hope.

    So yes, economics rules the bigger picture, and as one chinese saying goes: “circumstances makes the hero.”

  • Studies show that a first-to-market company which survives competition reaps much greater rewards than any follower (seems obvious, doesn’t it?).

  • Very good ideas. So I study economics since one year and i think it’s the best thing to understand what happens all over the world and what chances you have to create your own business. My Blog is new and my friends and I think about new ways in economy, so I would be very pleased if you can answer the first question on my page. Thanks

  • haig

    In my specific case, I can attest to another reason why people place more weight on new ideas rather than business economics…creativity. I always felt that entrepreneurship was in its own way a form of creative expression, seeing gaps in the market or new business models, or creating new products/services. By simply improving on an existing business you may actually have more chance to make money and be successful, but it doesn’t feel as good as when you come up with an original idea. That being said, entrepreneurs (or potential entrepreneurs) need to understand from the beginning which is more important to them, running a successful business or creating a novel idea.