Business advice for technology investments (2023 update)
Updated: Apr 3
So, you're looking at starting a tech company or maybe investing in one that already exists or paying someone to do it for you (why is the latter so common these days?). Who can blame you? The world of tech is seemingly an endless sea of possibility and rich with a never ending supply of different niches for you take advantage of.
Because there are so many people out there looking to start up a tech company I put together this article to try and list the advice that no one wants to give you. When things feel too good to be true they usually are, yet it's not often that people will call you out on your fantasies while you're deep into fantasizing. Luckily for you, I am not like that; I call a spade a spade and I am not afraid to slap you out of your dream to face reality. Don't get me wrong, I want you to dream. I want you to think up the impossible and achieve it. But more than anything, I want you to be successful and not waste your money.
So, whether your mandate is to get involved in tech or your desire is to simply make some of that silicon-money there are 5 questions you should consider before jumping into the world of the internet, apps, websites and tech.
Do you know the team behind the solution/company/technology?
Do similar businesses exist, and is there a decent gap in the market?
Do you have any experience with developers, software engineers or “tech guys”
Like so many fundamental questions, these are easy ones to overlook when you think you have a truly brilliant idea. Too often have I seen clients spend thousands of dollars developing a solution they believe is unique, only to realise that their product doesn’t actually meet their market's needs and that there have been competitors all along…
The horror stories of investors losing money because a cash flow projection that once looked like a hockey stick now looks like a ski-slope are endless…
Probably the most common suffering in the tech industry is the disputes with software engineers who charged an arm and a leg in return for the world but delivered a substandard product that cannot even go to market. Let’s not even talk about missed timelines or how much that can cost an investor who wants to be "first-to-market". Finally, the worst part of all of this can be that you will be dealing with a bunch of people who literally sound like they’re speaking a different language talking about “Jason Scripts?” Tea Ess files” and other alien concepts.
You don’t have to be particularly business savvy to imagine how the above problems can lead to shortfalls, missed budgets, unhappy clients and ultimately poor investments.
Ok ok, enough drama, let’s get into this.
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Do you know the industry you want to get in to?
If you think this is dumb question, then this one is actually for you - so don’t skip to point 2.
I'll use an example to illustrate the point: I have a client who works in the food supply industry and he came to me oneday with a “genius” idea for a music streaming app.
Now if you see the problem here then you’re doing good, if not KEEP READING.
My client thought that his idea was truly revolutionary - a music streaming service for his “local” ethnic group in Africa. His argument was that iTunes and Spotify to do not cater to the tastes of his demographic and that his demographic loves music! He had the market research to prove that his target audience was spending millions of dollars every month on their “local tunes” and that they were still willing to buy CD’s if it meant getting the music they wanted. His idea was to provide an app that would cater to these people and give them the music they want.
My client has several great ideas on how to monetise the app, deal with the bandwidth and connectivity issues his users experience, as well as a decent strategy to get the artists to put their music on his platform.
So I thought, “this guy’s got something here!”, but he didn’t…
He may have thought about the problem from a number of novel ways but the main thing he did not consider was the music publication rights... And even once he learned about this issue, his understanding of it was minimal.
At this point Richard, who was no longer my client, believed that the reason there was an issue with publications and rights was because of race and inequality and that the major labels simply overlooked his demographic. I told Richard that overcoming this issue was key to his success with this business and that unless he could overcome it, he should not move forward with building the app and developing the website and marketing material. He disagreed.
His strategy was was to bypass the major labels and sign these artists on to his own label - he was going to start a second company in order to facilitate the creation of the first one (maybe he was inspired by the Uber guy...)
And that’s where the wheels fell off. The music publication business is cut throat and well established and profit margins and artist rights are not straight forward. Long story short, this fantastic business idea crumbled to the ground over the period of a very expensive six months.
When I tried to talk him out of his business venture, six months prior he quickly found a “tech guy” that was happy to take his money and build him his app… The exercise cost a lot of money and it brought me no satisfaction when Richard told me his story and that I was right all those months ago. Richard and i still do business with his B2B food supplies website and in this industry he makes a ton of money. The moral of the story here: know the industry you want to invest in.
Does the return on investment look like a hockey stick
So for those of you reading this who are business people you probably know that a graph in the shape of a hockey stick is an ugly thing… If you don’t know what I mean when I say that, looks at the picture below.
In 2018 I consulted for a business who had a cash flow projection that looked just like this. The financial documents were drawn up by an independent accounting firm who was hired by the CEO of this business. At first, when we saw the graph we got excited. After all we gave the accountants all the relevant information and this is what they came back with. The business was going to a bonafide success story! But it wasn't.
To cut a long story short, the reason the graph looked so good was that it did not account for a number of "hidden costs" that we would later learn were essential to getting the business to market and establishing market dominance. When this business went for a run at venture capital investment, they were quickly shot down by the investors who knew that this graph was fundamentally fishy.
Moral of the story: if the company looks like it is going to do unrealistically well, then it probably is an unrealistic projection.
The reason a hockey stick graph will ALWAYS fail is because a graph can only escalate like that in “extraordinary” circumstances and once those circumstances become ordinary the graph will escalate (or descend) at a “normal” rate.
An example of extraordinary circumstances is being the first to market, or having monopoly over the market etc. If those situations exist then your profits can be amazing, but as soon as you are in a competitive market the profit margin will change drastically.
Let’s take Netflix who had an insane market share at one stage in their business. At that time they were onboarding millions of subscribers every year and they were retaining those subscriptions month after month. I’m sure the graphs of the Netflix Cash Flow Projections in 2016 were insane. But very quickly the market changed and so did their market share. Let’s just pretend there was no way of knowing Amazon would jump into the streaming site race, or YouTube Premium, Disney+, Hulu, Showmax and a whole bunch more… Even if we had no way of knowing those companies would join the race in competitive and meaningful ways, it is a sure bet that no one can hold 100% market captivation on the internet.
Even Facebook has competitors and while it may take some time, Facebook is not destined to remain the king of social media - in fact even now in 2020 it’s pretty to easy to see that the days of Facebook being the most popular social media site are numbered.
This article was originally published in 2020 and now in 2023 we have absolute proof of the above statements. Facebook is no longer the king of social media and netflix is looking at all kinds of new ways to keep up with declining subscribers and heavy competition.
Key takeaway?
A company that says it is going to make loads more money than it is going to spend with through the roof profits, is probably wrong.
Do you know the team behind the solution/ company/ technology
This one is a problem… I’m sure most of us don’t know exactly how our car works, so when we take it to the mechanic we are at their mercy. I’m sure most us have a story or have heard a story about someone who got ripped off by mechanic something like this:
“We’ll need to completely replace the carburettor and the exhaust pipe or you’re gonna break down and damage the entire engine any day now!” So you replace the parts and pay the mark up on the new parts only to find out that they didn’t need to be replaced at all… I even know someone who paid to have parts replaced, but a year later found out that the mechanic didn’t even replace her parts! He just left the old parts in the car and still charged her.
A relationship with a software developer or web developer is similar to a relationship with a mechanic. If the web developer says you have to “build” a new component in order to achieve a new “function” on your site - you probably don’t know what that means… So if the developer says it costs “$X” you have to believe them…
I’m sure it’s easy to imagine how that can lead to getting seriously ripped off…
The other thing is that no two solutions are equal.
A good example here is a person who approached me that wanted to build a crazy 3D virtual reality platform. I rightly quoted the person on a solution to achieve the product they wanted to build, and even did a concept design mockup. My proposal would have been 100% functional and would have cost about $500 000 to build. Obviously they were not convinced and soon found someone who was willing to build “the same thing” for only $10 000 - they even wrote back to me angrily telling me that I had tried to rip them off… A few months later I got this email:
“Dear Michael
We wanted to share our experience with you after our last communication. We went forward with the proposal from *********** and they proceeded to build
(Video Deleted)
This obviously not at all functional! We were hoping you could review the solution and quote us on arriving at the product we envisioned.
Kind regards
***************
“
Alright, so that’s obviously shit for them, 10K down and no product. I did actually review the platform that was built and it was in no way a 3D virtual reality platform. The platform could be experienced through a VR headset, and at first the video that you played seemed like it was a 3D space, but it wasn’t. It was a flat video and nothing more.
Unfortunately I could not salvage what they had built. What they had built was like a life size model of a bridge made out of noodles - you cannot take your noodle bridge to an engineering firm and tell them to salvage it (sorry). A noodle bridge may look like a bridge but it will never function as one.
I’m sure this point must be the scariest - at least it was for me when I developed my first app… You see, I too wanted Silicon Valley money and at that time I built solutions for the web, but not native apps or solutions that could achieve what I needed… I found a team that talked the talk and I let them build me my platform while I continues with my work. I funded their development out of my pocket and after 6 months they had nothing to show me other than a platform I knew was wrong. Of course they had excuses for days and eventually I had to cut my losses and walk away with nothing.
I am friends with a dentist who wanted to build a dentistry app and had the same experience… Another friend who hired app developers in India to build her fitness app... same thing happened.
This happens a lot. It’s not easy to avoid and to be honest it is a risk you have to take. At the end of the day you cannot build the website yourself (even if wix tells you that you can), so you have to hire a “professional”.
Articles I've written about working with developers and hiring them:
How to find a freelance web developer for your app or website (2022 update)
Choosing the right web professional to help with your online business
Do similar businesses exist and is there a gap in the market?
Often when people find out that there is already an app like the one they want to build they get really freaked and call the whole thing off. This is not always the right idea. For example you may have an idea to build an app and then find out that a similar app exists but when you use that app it frustrates you and doesn’t do what you want it to. If that happens, then there is definitely a gap in the market and room for improvement.
Understanding if there is a gap in the market is not easy, but it comes with understanding your market's needs, your potential customers and who they really are or what they really want.
The fact is, sometimes when there is a lot of competition over a certain topic it actually leaves room for a truly valuable product to rise to the surface and you could have that product.
The Netflix example is another example of how even though a market may look captivated, competitors can still sink their teeth into a profitable market share. I have a client who has a fitness app and although there are literally thousands of fitness apps out there, my client's service does well. This is because it focuses in on a niche. Their app, theoptimal.me delivers fitness workouts for people over the age of 65. This unique niche in the fitness industry has allowed them to captivate a healthy market share and run a successful business.
That said, if you are thinking of developing an app and then realise that there are actually quite a few other apps out there already do what yours will do, think twice. I consulted for a client once who wanted to create an advertising app that was going to revolutionise advertising by only showing items that were on sale (being offered at a discount) . Before long, I had found a few similar apps that had popped up and died down over the years. To me this was a huge red flag. Why had those apps failed? I investigated the reasons behind their failures and presented them to my client, but they were not convinced. They believed their app was going to be different. It is 4 years since that last consultation with that client and their app is still not profitable. Were it not for family money, the business would have closed its doors a long time ago.
Do you have any experience with Software Developers or “Tech Guys”
Cause if you do, you’ll know what I mean… They rabbit on about things that don’t seem to matter and constantly get caught up in the details of how a project functions in stead why a project should function at all. Tech Guys typically don’t have an eye for design and they typically don’t mind much about the profitability of your idea.
A normal software developer cares about providing solutions that work, a great software developer cares about providing solutions that produce amazing experiences for the end user. A great software developer will be honest if they are not great at design or if they struggle with meeting deadlines or if they have not got experience in one field or another. A normal software developer will lie about any of those things if they think it will get them the job.
One of the most important things to remember about working with a developer is that they will be using google to figure out how to build everything. There is no senior developer out there who writes code from the top of their head. Most developers need to figure out how to build your project by asking questions each step of the way, a developer who claims they don’t have to do that is probably not being honest.
But I digress, when you hire a software developer for your project you are going to be inundated with technical jargon that you do not understand. Making calls in a business can be the difference between operating a lean business and one that hemorrhages money on unnecessary features. Knowing how to manage your development team is essential.
The only real advice I can give to you here is that you must be honest with yourself about your limitations. No one knows everything and there is no shame in that. Being able to honestly reflect on where your knowledge ends will help you to make the right choices in the hiring processes. A developer needs a manager. Some developers can manage themselves and do it well, but you need to be able to identify those developers. Finding the right team of people to work with means finding a team that will spend as little of your money as possible, while generating the largest possible return on that investment. If you do not have the technical knowledge to reign in the developers and make calls that keep your operation lean, then you need to hire a project manager who can do that for you.
Conclusion
Starting a tech business can be extremely profitable, but it can also be incredibly risky. I recently read an article in a business magazine that said starting an app company was “low risk & high return”. I don’t believe that is true… If I were to start another app company it may be true, because I can slowly develop the software in my free time. Over a long period I can, without pressure, create my solution and then take it to market. I can leave it there and hope that one day it gets thousands of subscribers. So long as I can produce all the content for the app with my own two hands it doesn’t cost me much cash - only time. If you have to hire a developer, you pay for their time and developer time is usually expensive ($60p/h +) and the average project can take 200 hours and even after 200 hours of work you might not have an app ready for market, or a competitor might have gone to market before you in that time. That sounds like an expensive and risky exercise to me.
Before you jump into the world of tech, do your research, reach out to developers and companies like my own and ask the questions you want to ask. Make sure you have these five fundamental questions answered before you spend any money on your venture.
If you enjoyed the way I broke this down and you are thinking of getting started on your dream startup, then I encourage you to get in touch with me and we can hash out the details.