SOPHISTICATED FINANCE

Asian VCs Now Favor Consumer and Business Services Sectors

Dow Jones VentureSource reported on 1Q 2008 venture capital investment in India and China this week. China investment is strongly up and India is down compared with the same quarter last year. More noteworthy is Dow Jones' observation that venture capitalists are scaling back investment in high tech in favor of the consumer and business services sectors. This shift makes imminent sense to some one who spent twenty years working in the consumer sector in Asia. The reasons for the shift may be:

1. High tech products sold in India and China are in large part purchased by a corrupt government/military bureaucracy, which makes sales forecasting very challenging and troubling
2. Given the inherent high level of risk in these countries, perhaps the additional technology risk queered the risk return results
3. The early high tech investment was perhaps the low hanging fruit and now the real work begins to find suitable investments
4. The LPs could not understand why more money was not going into the two largest emerging middle class markets in history

I have said several times on this blog that investing in the emerging middle class is a sound investment strategy. Nice to see that the scions of Silicon Valley may be coming around to my way of thinking

The Consequences of Technology Adoption

Two Harvard Business School professors, Diego A. Comin and Bart Hobijn, have just published an interesting paper entitled An Exploration of Technology Diffusion. The paper basically looks at the rate at which fifteen technologies have been adopted by 166 countries over the period from 1820 to 2003 and the resultant affect on economic development. The main conclusion of the paper is that the time to adopt a new technology is the leading factor to explain economic development.

Two examples illustrate the point that shortening the period between invention and adoption of a new technology accelerates economic development. The first example cited by the authors is the Meiji Restoration in Japan (circa 1860) where one of the major objectives was to industrialize Japan by using western technology (and thereby shrinking the time frame to adopt new technologies). As a result of these efforts begun in the Meiji restoration per capita income increased 33 percent. The second example is the Four Tigers (Hong Kong, Singapore, Taiwan and Korea) who in the period from 1960 to 1995 each averaged 6 percent annual economic growth. The data shows that it was the speed to adopt new technologies that explains in large part their phenomenal growth. The data also shows that Latin America is comparatively slow to adopt new technologies and consequently has had much slower economic growth than many other regions.

The paper provides the data to draw some other interesting conclusions about globalization, government policy, new business development, and business management.

Globalization The rapid diffusion of technologies in recent years is probably not due to globalization or the Internet revolution. Over the nearly two hundred year period studied, newer technologies are adopted faster than older technologies. As we consider the free trade dialog, rather than focusing on jobs going off shore the better discussion would be about how to encourage U.S. companies to adopt new technologies faster.

Government Policy The shorter the lag in the adoption of a new technology the greater the economic benefit. Government interference in the development and particularly in the time to adopt a new technology has dramatic negative consequences for economic growth. Government policy on stem cell research and global warming, to cite two examples, could severely slow adoption of these technologies in the U.S. and put economic development at a severe disadvantage.

New Business Development When the number of technologies available for a production method are small an increase in production methods, i.e. a new technology, have a very large effect on economic productivity. Given the limited number of communications methods available pre-Internet (Telephone, radio, television, newspapers) it should not be a surprise the profound effect the Internet has had. More importantly, when looking for new business ideas, look at industries or needs where there are a limited number of technologies for production; energy generation comes to mind.

Business Management A widely held view is that one does not invest in new technology when the cost of using people at low salaries is cheaper. This view is particularly prevalent in emerging markets. The key factor to explain the lack of development in emerging markets is their slowness to adopt the new technologies. Invest in new technology, even if you can not afford it.

While much is said about globalization, economic development and third world governments, it all comes down to how fast can you adopt new technologies--assuming that the goal is economic development.

If you are interested in following the thought leaders at Harvard Business School their new work is here.

New Business Idea--SEC Wikis

I have spent the last two weeks working on a prospectus for a company that is backing into a public shell as a means to get a public listing and additional capital. This is not my usual type of client assignment, but they needed some extra hands to meet a tight time line and a friend asked me to help. The amount of work involved in preparing a prospectus is gargantuan and explains why I have not been blogging much.

I have written a few prospectus over the years and one of the biggest challenges is catching up on the latest requirements from the SEC and the changes since you last wrote a prospectus. When I started thinking about what to propose for the MD&A, the Management Discussion and Analysis, which deals with explaining the financial statements and the business segments, I Googled for some guidance. Fortunately I found a great set of  disclosure guidelines. Unfortunately, the guidelines were 200 pages. Ugh!

This got me thinking about why nobody had built a wiki to write selected, key sections of an S-1,10-K or 10-Q such as the MD&A. Years ago I was given a copy of Sumitomo Corporation's (very, very large Japanese international trading company) contract book. This book contained four drafting alternatives for every conceivable part of an international contract, with a rating from acceptable to "super strong" for each alternative for each section. Book was about 300 pages and one of the best guides I have seen for how to draft a contract.

Seems to me that if Sumitomo could put together a book on how to draft contracts for everything from oil trading to technology licensing, somebody should be able to build a wiki to help draft the MD&A and certain other sections of SEC filings. I would be happy to discuss with interested parties.

Note: to all the lawyers who refer work to me I can only say that perhaps you would like to join this project

Guatemala's Emerging Middle Class

In a recent post I talked about the business opportunities in serving the needs of the emerging middle class in Central America, and in particular in El Salvador. In Guatemala the lead story yesterday in a local newspaper, Siglo XXI, talks about the impending shortage of electricity in the country. (If you read Spanish, the full story is here.) The key information from the story is summarized below.

The most interesting number for me was the 43 percent increase in electricity subscribers. While part of the increase can be attributed to government efforts to expand electrification, the other important reason is the increase in the number of people with the disposable income to pay for electricity. I would suggest that this is further evidence of the emerging middle class in Central America, in this case in Guatemala.

Am I recommending that we build a power plant in Guatemala? Not exactly, unless you run a hedge fund and you are looking for less credit risk than mortgage-backed securities or want to diversify the portfolio out of the U.S. or China. I am, however, recommending that there are ample opportunities in Guatemala to serve these customers who only recently got electricity. Perhaps a concept that combined consumer credit with consumer electronics would work well. Maybe a cooperative that built wind powered electricity generation is feasible. Maybe simply a store that offered a very large selection of lamps at popular prices would work. The opportunities are there.

One note on the competitive landscape. Wal-Mart is expanding aggressively in Central America and already has six hypermarket stores just in Guatemala. The good news is that this investment is further proof of the emerging middle class. The bad news (maybe)is you do not want to take on Wal-mart head on, but fashion and trendiness are always Wal-Mart's weaknesses and trendiness extends well beyond just clothing to consumer electronics :)

Next post I will have more Excel tips.

New Business Ideas-A Different Approach

I have been working in El Salvador this week. The annual per capita income here is about US$ 2500 and the minimum wage per month is US$ 170. For a variety of reasons including political stability, historically lower borrowing rates and the CAFTA treaty, the middle class is emerging here. You see it in the development of new inexpensive town home projects and the more fashionable dress of the women, to cite two examples. I lived through the emergence of the middle class in Indonesia in the 1990s and have some experience in understanding how the customer needs of relatively poorer people change as their income increases to the level of real discretionary income.

The people I was working with were pushing me pretty hard for new business ideas. Housing development and fashion retail stores did not really match up well with their business competencies and available capital. Finally, I gave them a framework for how to find their new business idea. I told them to look for opportunities where the newly emerging customer needs can be met by technology as opposed to bricks and mortar. The technology to focus on is the cellular phone. Despite a comparatively low per capita income, cell phone penetration is approaching fifty percent. I used two examples to illustrate my point.

1. El Salvador is in some ways an inconvenient place to live because many monthly payments are made in person in cash. People without bank accounts are the majority and spend a lot of time standing in lines to pay bills.The new business I told them to consider was to establish a banking system using electronic payments via cell phone. In South Africa such a system has achieved over twenty percent of all deposits in the country.
2. Online social networks have become very popular all over the world, but in some countries the principal access to the Internet has been through the cell phone as opposed to DSL, cable or fiber. Perhaps the opportunity exists to start a cellular-based social network in El Salvador.

I had a third example which my associates in El Salvador really liked, but that idea will remain confidential.

While the examples cited above utilize the internet access/network functionality of the cell phone, there are many other functionalities in the cell phone that can be used to satisfy the emerging needs of the new members of the middle class in El Salvador...and many other countries.

In closing, I would caution you to define and understand the customer need and estimate the size of the business opportunity first. Then look for the applicable technology, whether it be wireless, medical, cleantech, etc.  Remember that unless you are part of this emerging middle class you may not really understand their new needs and the timing of their emergence.

Web 3.0

When I wrote my most popular blog post ever (1100 readers), Microsoft Yahoo Makes Little Sense, I struggled with how to describe Yahoo's failing strategy. Finally it came to me. Yahoo failed to realize the change in the Internet to where people now "live on the web". No longer is the Internet about portals, static content and pushing information to readers. Today the Internet is the place where people have their social, intellectual and professional lives on display, in large part through content they produce.

As I consider the future of the Internet, a point my wife (who is much smarter than I am) always makes guides my thinking. She always says, "the computer is just a tool". Thinking about the future of the Internet, the Internet is just a tool to create and collect information. More sophisticated ways to create and collect information, not the technology, will drive the future direction of the web. As Sramana Mitra (another woman) at ReadWriteWeb said, "Web 3.0 will be about feeding you the information that you want, when you want it in the proper context".

Two recent developments support my view:

1. Reuters, the international news conglomerate, launched Calais. Basically, Calais automatically generates metadata (subject) tags from any XML document using artificial intelligence. Tags are generated automatically about event, company, organization, person, country, city and people. Producing the tags permits the document to be more easily discovered through a search. Now every Reuters story, and any document that uses Calais, will be much easier to find. Reuters obviously supported the development of Calais in order to facilitate the discovery of more of their proprietary information, but Calais can be used by anyone.
2. Google now offers the ability to translate any web page into any one of 13 major languages, but the really useful feature is that I can enter a Spanish search term, search Spanish language web pages and receive the pages translated into English, French, Russian.... Next time you need to research a foreign country or company, you are no longer limited to the English language pages (or whatever language you prefer).

A recent post on Research Recap, an excellent blog for new research on a wide range of subjects, highlights another interesting development. According to Forrester Research, 64% of consumers prefer to read user reviews of products (rather than manufacturer specs). This finding makes clear to me that we have more confidence in each others content than in content from companies, the media or the government. This is why blogging is so popular :), del.icio.us bookmarks has so many users and Ning's growth has been fueled by specialized subject social networks. There is a social component to all these examples, but I believe that it is the user generated content that is driving their popularity. A newly launched site, Docstoc.com, is another example that user generated content is the future. Docstoc allows users to upload and share a wide range of documents on subjects ranging from business and legal to creative and educational. Next time you need a sample contract try Docstoc.

What I expect to see in the near future is the following:

1. The ability to subscribe to a particular search on Google or any other search engine and receive updates via RSS as the search results are added to or change. This would be particularly useful to people interested in SEO, search engine optimization, or staying updated on a particular subject. I think it would be easier than saving a Google search or relying on a clipping service to collect pages on a particular subject.
2. While much is made of vertical market search engines, I think that a better alternative may be for several users with a common interest to be able to collectively post their bookmarks on a subject. Rather than having to view the hundreds of low quality subject tags on delicious, you could go to a specialized search engine that, for example, utilizes the bookmarks from four professors at MIT that are subject matter experts (sort of a Ning for search engines).
3. Another search option that I think will be coming is the ability to direct the search engine to certain particular databases that may not show in results frequently. For example, the Social Science Research Network is an excellent source of academic articles on a wide range of subjects, but I rarely see links there from a business topic search on Google.
4. I think there is a big opportunity to develop expert answers, similar to the questions feature on LinkedIn. Almost every question on LinkedIn has a rating of the best answer, yet these responses are only available to LinkedIn users. The other difference between LinkedIn and, for example Yahoo Answers, is the quality of the respondents (very high on LinkedIn). I think there is a business model based on a subject matter website where real experts (not hacks) answer questions and revenue comes from advertising.

Enough user generated content for today. Have to go check the Google searches that brought readers to this blog.

Public Intellectualism--A New Business Opportunity

Much is made of the proliferation of information due to Web 2.0 technology and user generated content. However, this trend may be part of  a larger trend which defines our era. Lee Siegel, a critic for the New Republic, reviewed Peter Gay's new book Modernism in The New York Times Book Review last Sunday and said in conclusion:

"We have exhausted Romantic individualism, and we have twisted the uniquely individual modernist escape from the self into "self expression". Expression is everywhere nowadays, but true art has grown indistinct and indefinable. We seem now to be living in a world where everyone has artistic temperament--emotive and touchy, cold and self-obsessed--yet few people have the artistic gift.

What Siegel is saying, in part, is that Web 2.0 is another manifestation of Modernism, that period in intellectual history (art, literature, music, architecture, etc.) which began in the late 19th century. However, Modernism has lost sight of true art and the quality associated with it. (There is a business point here, but you will have to be patient.) I would go a step further and say we have also lost sight of the value of public intellectualism.

Public intellectualism, which I would define as the public interest and support for new ideas and contributions in the arts and sciences, has been lost in part due to our addiction for fast, easy to understand cable news snippets and our willingness to accept unqualified  pundits as satisfactory commentators regardless of the gravity of the matter. Part of this abandonment of public intellectualism is attributable to the declining market share of newspapers. Rather than attributing this decline to the growth of the Internet, I believe that the newspapers erroneous decision to compete with cable news has been their undoing. Newspapers historically succeeded because they provided information not easily found elsewhere, albeit somewhat esoteric, such as coverage of chess tournaments, architecture or new scientific discoveries. With an increasing part of their budget devoted to generating instant news, newspaper coverage was reduced for the specialized information that actually attracted readers.

Another example of the decline of public intellectualism is the low respect we give intellectuals today compared with previous periods in history. For example, Charles Dickens and H.L. Mencken were icons in their period, but we have opted to idolize movie stars, professional athletes and the likes of Pat Buchanan and Larry King.

Perhaps the third example of the decline of public intellectualism is the lack of a robust, public debate as Washington rolled back our civil liberties in the last few years. Perhaps it happened because of what Siegel calls our self-obsession, and the 2008 elections may in part be a referendum on the acts of the current administration, but the depth of debate on civil liberties has been shockingly thin.

Two news items may suggest a subtle reversal in the abandonment of public intellectualism, and therein lies the new business opportunity:

1. Insidehighered.com ran a recent story on the American-Statesman, an Austin, TX newspaper, which is launching a column to review university-press titles by academics. Few publications review academic texts and Austin is the home of several universities including the University of Texas
2. The New York Times reviewed Lapham's Quarterly, a new publication edited by Lewis H. Lapham, the former Editor of Harper's Magazine. This publication devotes each issue to a single subject, but in an interesting approach they provide both historical writings and current thoughts on the subject (think Plato, David Hume and Thurgood Marshall on democracy).

What these two examples may portend is a subtle strengthening in public intellectualism and a move back toward the quality and art that Siegel finds currently missing. Public intellectualism and its inherent art and quality can not be abandoned, for if so, we forego critical thinking which is the foundation of democracy, capitalism and the arts.

Providing a quality, intellectual experience may now be an under served need and the basis for a new business. While information is proliferating, little has been done to organize it where quality is the selection criterion or where analysis puts it in a larger intellectual context. Imagine an RSS feed reader that provided posts of your favorite writers but only on subjects where you think the writer is qualified and relevant. Another example is perhaps a search engine that includes historical references on the searched subject (search for democracy and find an easy to use link to David Hume's writings).

A third example comes from the New York Times on Monday. The NYT reviewed a beta site called Big Think, which targets "thinking people" and looks to generate debate between its users and experts in the fields of academia, business, politics, science and art. Your participation in the debate can take the form of video, audio, slide shows or text.

Marc Andreessen's recent post on the number of Ning networks dedicated to education and the arts is possibly another example or at least supporting evidence. Public intellectualism will rebound and quality in the arts will return and this will provide new opportunities to start businesses.

If this post prompts you to do a little more research on this topic or any other, you may want to check out Zotero. Zotero is del.icio.us on steroids and designed for serious online researchers. (It only works with Firefox).

 

Building Great Companies--Six Principles

I rarely read books on leadership because I find them confusingly similar to good books on management and strategy. Whether you wish to consider it a matter of leadership, strategy or management, the six principles below are what I believe are necessary to build a great company (such as Coca Cola, Sony or Intel):

1. Vision  A large, panoramic view of how to serve a customer need or how to realize value from an unappreciated asset. This view is almost always based on an asymmetry of information wherein the founder develops an incredibly in-depth knowledge of his subject matter and an intense passion to pursue the goal.. Case example: Amazon
2. Focus   Dedication to a simply defined business concept which stands the test of time (and markets) without the need for diversification, acquisitions or "financial engineering" to generate above average growth. Investment in growth drivers alone is typically sufficient to achieve growth and market share objectives. Case example: Wal-Mart
3. Values  Large groups of people can only succeed where a clear value system is articulated and practiced by the senior management. The key values are honesty, fairness and respect for all people (whether they be employees, customers, shareholders or the community). Case example: JP Morgan
   
4. Customer Focus   Great companies have a unilateral focus on serving their customers and do not place a higher priority on investor expectations or competitor moves. Case example: Johnson & Johnson
5. Low Cost   Capital is invested in the growth drivers of the business and not frittered away on overhead and there is a constant effort to provide the customer with a cheaper, higher value product(s). Case example: Wal-Mart
6. Exceptional People   Great people are hired and retained in the key disciplines for the particular business, such as programming, merchandising or research. Today, almost everything else can be outsourced. Case example: Goldman Sachs
   

The most common mistake I see in entrepreneurs is a lack of focus, usually brought on by a lack of self-discipline. When growth or earnings expectations are not met, too many business owners resort to diversification into new businesses or use acquisitions as a means to improve expected results. Great companies grow organically because they constantly find ways to generate growth in their core business. Successful companies assume there is organic growth and then find the way to achieve it. Such an approach allows them to leverage their strengths and expertise and consequently typically results in lower risk, less capital intensive strategies.

The second common mistake is that the founder is not a good recruiter and ends up with mediocre people in key positions. Founders tend to recruit the wrong people because they fail to give recruiting sufficient priority (usually because they are wasting time micro-managing) or they lack the confidence to recruit people that may challenge them. A founder's vision is improved by the input of other exceptional people.

The most difficult deficiency to overcome is a lack of values, which comes about due to a lack of respect for other people. Without the proper value system a founder can not retain good people and no great company was ever built by just one exceptional founder.

In my experience a lack of customer focus can be overcome by a clearly articulated vision and a relentless pursuit of lower cost, higher value product. However, this approach may only work temporarily if your target customer develops new requirements and demands better quality products or a different type of product value (in which case you better become customer focused).

Many pundits typically list 8-10 qualities of great leaders and then say that no leader has all the qualities.  This type of conclusion suggests to me that the pundits gave up on the analysis half way through. I worked for over ten years with the founders of two great companies--one in Indonesia and one in Japan and have met several other founders who built great companies with revenues in the billions. There is a simple set of key principles to follow to build a great company.

Web 2.0 Changes the Context

One of my more thoughtful (as in thinks deeply) readers sent me an email after my post on creativity. Kendall Kunz, who blogs here, is an inveterate entrepreneur with 3 or 4 successful startups to his credit. He is now working on a new startup, but I can't talk about it yet because I am a sworn to secrecy, official alpha tester. I will not publish Kendall's email but his point was that basically Web 2.0 is changing context and promoting creativity. That idea got me thinking about why Web 2.0 is changing context. 

As a refresher, context is our background and preconceived ideas. In a previous post I talked about Israel Kirzner's theory of entrepreneurship. Kirzner defined the entrepreneur as having a unique, in depth understanding of the opportunity, an asymetry of information. Web 2.0 is a powerful set of tools that provides information in greater quantities than most of us have ever seen. Given that most of the information is user generated, the variety of information is unparalleled. The user generated variety is what is leading in part to a finer and finer market segmentation. With finer and finer segmentation the opportunity for an asymetry of information increases. As the likelihood of asymetry increases, the opportunity for a change in context also increases, thereby generating the creativity.

Much of what we have seen so far is the powerful new tools made possible by Web 2.0. The next big wave in creativity  will be the uses of the information generated by the tools, wherein lies another huge opportunity for entrepreneurs. For example, all of the web pages tagged in delicious represents the opportunity to develop a search engine based on user tagged pages rather than an algorithm such as Google uses. (This example came from the Parallax blog.)

There is a conference--Defrag-- coming up on how Web 2.0 tools create layers of knowledge.

New Business Ideas--III

Periodically I write about ideas for new businesses. The last post is here.

Michael Porter, the HBS professor and leading authority on business strategy, believes that a competitive advantage can be achieved through cost advantage, differentiation (providing greater benefits) and competitive scope. Competitive scope addresses what industry segment the business targets and the choices are a broad or narrow segment focus.

With the proliferation of the web and in particular user generated content, more and more information is being created and the pace is increasing. This has lead many analysts to realize that markets can now be segmented more and more finely. The result of this segmentation will be a tendency toward more narrowly defined vertical markets and a proliferation of strategies based on scope (Hint: you will still need cost advantage or differentiation but it will be in more narrowly defined segments.) As markets become more finely segmented, competition will increase as competitors intentionally or inadvertently test the boundaries of their competitors' segments.

This analysis is of course only true in the developed world of internet access, computers and ample disposable income. To avoid this increasingly competitive marketplace in the developed world, I think the best market opportunity in the 21st century may be the "poor" in the markets of Africa, Latin America and South Asia. If you already think I am crazy, consider the success of Wal-Mart in Latin America and GE Credit in motorcycle finance in Southeast Asia. Another data point may be the US$1 billion retail company I built in Indonesia where annual per capita income never exceeded US$1000. Lastly, look at the high penetration rates for cellular phone service in Latin America and Asia. Carlos Slim, now reportedly the richest man in the world, built his fortune by providing telephone services first in Mexico and later throughout Latin America. Yes--he had a near monopoly in Mexico but over 35 million comparatively poor customers still had to buy the cellular service.

These successes in poor, emerging markets all have certain common characteristics:

1. Large markets (possible to achieve economies of scale and cost advantage)
2. Provide basic consumer needs (consumer products, telephone service, consumer finance)
3. Generally the markets were neglected by local providers

Why did the local businesses neglect the market and create the opportunity for new (foreign) entrepreneurs? Local businessmen were already rich and satisfied. Basically the locals were focused on their existing customers and a lack of competition in these markets had not prepared them to identify new, emerging consumers with sufficient disposable income. The scope of the market was changing and the local providers did not recognize it early enough to prevent new competitors. (There is also a tendency to under estimate the income of the poor because so many are part of the "informal" economy.)

Emerging markets are not for the timid, but the "poor" are still under served in most of the world. The "poor" is a viable segment and therein lies the opportunity.

(This post is based in part on discussions with Dr. Gilbert Morris.)

New Business Ideas-II

I recently received a business plan for a new networking site for business people. It offered no compelling reasons to abandon LinkedIn, Xing or Facebook, all of which I use. Managing three networking sites is about my limit and two more than I would like to manage. Consequently, as social network sites sort themselves out competitively, I need a very good reason to add a new networking site.

Last week a little noticed news item mentioned that Wachovia is developing an internal social networking site using Microsoft technology. (Hint: When the Web 2.0 technology is Microsoft there is definitely a business opportunity.) This morning Read/Write Web posted on two Forrester Research reports on Web 2.0 in the enterprise. My interpretation of the graphic below from Forrester suggests that Web 2.0 as a corporate application(s) has barely penetrated companies with more than 500 employees and significant opportunity still exists.

 

(Click on graphic to see full image)

Marc Andreessen, the developer of Netscape, posted today about the three types of web platforms. Not surprisingly he advocates the type of platform he is currently developing at Ning. (Ning provides a platform so that anybody can create a social networking site and hosts a reported almost 100,000 networks.) Andreessen's recommended platform is a runtime environment.  In such a platform third party applications code actually runs inside the platform, as opposed to third party Facebook apps which run outside on their own infrastructure. (As a big fan of salesforce.com, another runtime platform, I think Andreessen is correct about the best type of platform.It is not for the technologically challenged as he points out.)

At this point it may not yet be apparent where I am going......patience.

I think a big opportunity exists to provide corporate social networking sites, a combination of the functionality of Facebook and LinkedIn, to large enterprises. The product would be offered on a software as a services model but would offer a runtime environment so third party developers could develop apps and be compensated. Effectively, one would have salesforce.com for corporate social networks. Security concerns could be met by the apps the corporation selected to offer employees.

Some pundits have pointed out that corporations are restricting access to Facebook during business hours. Ten years ago companies were concerned about the employee productivity loss from Internet "surfing". Social networks within corporations should be a big business and there is always room for a number 2... after Microsoft :)

New Business Ideas

One of the things that intrigues me is theory that has practical application, especially as it applies to economics and business. My students, I truly believe, dislike this feature about the way I teach. They much prefer to struggle on with no theoretical foundation. One of the questions they struggle with in my entrepreneurship course is how to find the idea upon which to start a new business.

Israel Kirzner, a distinguished, retired professor of microeconomics at NYU, wrote an outstanding book, Competition & Entrepreneurship, in which he criticized traditional supply-demand theory (a corner stone of microeconomics) for its failure to explain entrepreneurs and their effects on markets. Kirzner also postulated several interesting conclusions on market opportunity and basically defined entrepreneurs as having an "asymetry of information". Entrepreneurs have a unique, in depth understanding of an opportunity--an insight. (Hint: Kirzner thinks of entrepreneurs on a large scale (think Google), not the neighborhood dry cleaner.)

Marc Andreessen has an interesting post about the work of James Austin, a philosopher and neurologist, which puts forth a theory very similar to Kirzner's but coming at it from a completely different discipline. Austin writes about "chance" or "luck" in the vernacular. Austin defines four types of chance and at least two relate directly to entrepreneurship. Type II luck arises when when one dedicates themselves to a problem steadfastly and eventually comes across a solution (Eureka!). Type III luck involves spotting an opportunity because you are the one person uniquely qualified to realize its significance. Type III luck looks amazingly similar to Kirzner's "asymetry of information".

[As a side note, Austin is a serious student of Zen Buddhism and Kirzner is a Talmudic scholar of some distinction. With no wish to start a debate on religion, it is interesting to me that both men were life long students of rigorous philosophical systems and came to very similar conclusions about "insight". Did I mention my undergraduate degree in Philosophy? :)] Now, back to new business ideas.

So far we have learned that by working on a problem steadfastly we will eventually have the "luck" to find the solution or become so knowledgeable about a subject matter that we will be the unique person to have the insight. Hard work and luck! Not sure how helpful that is, but it sounds about right.

Now to improve your chances let's direct all that effort. Few of us are going to discover calculus, prove the earth revolves around the sun or discover the transistor. We probably need a simpler approach than a breakthrough scientific discovery to launch our new business. Many of the greatest entrepreneurial fortunes have been based on two simple approaches:

1. Do something better
2. Do something in a new way

Do something better is exemplified by Google. Google did not invent Internet search and was not the market leader in the early days of the Internet. Yet Google managed to create the largest market cap Internet company to date by simply doing search better. I am not trying to take anything away from Google and their incredible success but merely trying to illustrate how the simple notion of doing something better can build a successful new business.

An example of doing something in a new way (with no scientific breakthroughs) involves a private company called Digicel. Digicel, based in Kingston, Jamaica, is the largest cellular carrier in the Caribbean. When Digicel commenced operations in 2001, Cable & Wireless (an international telecom conglomerate) was the market leader throughout the Caribbean for both fixed and wireless telecom. Digicel overcame Cable & Wireless' dominant position by providing islandwide network coverage in every new market and by providing world class customer service to prepaid customers. Not earth shattering ideas, but very new approaches for the Caribbean market. With over 4 million subscribers, Digicel's market cap today would probably be in excess of $1 billion if it listed.

Google and Digicel both built large, very successful companies very quickly. One of the great advantages of these the two approaches outlined above is that the market already exists. New entrants, if successful, can succeed quickly because they are not investing to create a market. Of course, many Japanese companies dramatically proved this point in the 1970s and 1980s when they improved upon market leading products and took huge market share away from American manufacturers.

So, if you are looking to start a new business and need an idea....work hard, wait for the insight and study ways to do something better or in a new way. Practical theory--a wonderful thing!

Tags

If you use the Web to improve your productivity, blog or for social networking you are frequently usings tags. Sites such as delicious, Technorati, Clipmarks, Facebook and many others work best with tags. For example, if you found a good image or graphic that you wanted to post to your blog, save in delicious and publish in Clipmarks, you would need to enter the same tags three times (hint:Technorati tags for the blog post).

I hope somebody is coding away to produce the first "tag generator" that let's you tag multiple sites and then update all those sites. This free, new business idea is brought to you by the "Hacker Wants an Easier Life" Foundation" :)