Musings on starting a business
These are my thoughts on building a framework to understand the potential of a business idea.
5 min read
Limited human bandwidth
A lot of us want to start a business, we have many ideas too. The real struggle starts with the idea itself, we do not know if it is worth pursuing or not. Since our human bandwidth is limited, we always have to decide on rejecting many ideas and choosing the right one. At times, most of us come up with the solution of just getting started with an idea and learning on the way. While this is true for starting up a business, it helps greatly to have a framework in place to understand the potential of the idea and the challenges that may come.
Most ideas start with a solution without delving deep into what is the exact problem that it solves. Here comes the role of the hypothesis. The hypothesis can be understood as our assumptions about the world in the future. What we think will the world look like in the future. Take an analogy from the stock market. To invest in a stock, we have a view that a certain stock will go up for so and so reasons. This is a hypothesis that a certain stock will go up. Our hypothesis can very well go wrong and we may end up losing money. Starting a business is similar to stock investing. You have certain assumptions about how the world will be in future and you build a product assuming that assumption comes true. This assumption is your hypothesis. So whenever you are starting a business, think what is your hypothesis of the future worldview. This will ensure that you are not working on some random idea. It will also help you understand if you can commit to the hypothesis for the long term.
Barriers to entry
What defines the potential of a business idea? The answer is barriers to entry in the domain that the idea works on. The higher the number of barriers, the more potential the business has, assuming it can cross those barriers.
There are the following barriers to entry:
- Does building your business requires a large amount of money? If yes, then anyone who does not have money will not be able to compete with you. That itself will root out most of the competition.
- Does building your business require access to a particular type of network? For example: Building an international payments business may require a network of a wide range of banking partners to obtain relevant licences. Without those licences, the business could not oeprate. Anyone without access to this network would not be able to compete with you.
Intellectual property (IP)
- Doe your business as an IP which others do not possess? This would be a differentiating factor from your competitors and you can continue delivering better products or services to your end users using your IP, which your competitors can't match.
Types of business
Most small businesses like micro SAAS and indie hacking do not have any barriers to entry. They can be started with a small upfront investment, do not require access to any special network, and do not have any IP. That is why these businesses have a lot of competition. Everyone finds their small niche of sat 100 to a few thousand users and can earn a decent living out of it. As soon as the business starts growing, other competitors see the opportunity, and they enter the space with similar offerings to take a share of your market. These businesses are good for earning a decent living but the growth may stagnate after a certain point.
Then there are businesses which have only money as the barrier to entry. These are the business which requires a high upfront investment for many operational reasons or buying machinery or hiring manpower and so on. For example, Food delivery aggregator businesses like Uber eats, Doordash, Swiggy, and Zomato. These apps do not need any tough to procure licences. They do not have any unique IP. But the competition is limited by the money needed for marketing and operational expenses. So a limited number of players exist and they share the entire market. Any new player can enter with enough money at hand.
Then there are businesses which have multiple barriers to entry. Like Google has money and IP as barriers to entry. Take the example of Google, they had their Pagerank algorithm as IP which set their search engine apart from others. Stripe has money and network as barriers to entry because it needs international compliance to handle payments and taxes in multiple countries. These businesses share a large pie of the market and are very hard to compete with.
How to bootstrap
A lot of us do not possess large sums of money or has any IP, or access to the network. What do we do then? The answer is to build trust with a large audience. This is hard and takes time, but it eventually pays off. Once you have an audience, you can sell to them. For example: Having 1M+ subscribers on youtube for an educational channel can be utilised to sell an educational platform to the audience. You can have a hypothesis about how the world will look in the future, and identify the product you would want to sell to that world. At present, you can start building an audience along with that product, so that when the hypothesis eventually comes true, you have a large audience ready to buy from you. The audience itself becomes your IP, and your network and gives you access to the money.