Business advice for technology investments
So you’re looking at starting a tech company or investing in one. Whether your mandate is to get involved in tech or simply your desire is to 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 industry you want to get in to?
Does the ROI look like a hockey stick?
Do you know the team behind the solution/company/technology?
Do similar businesses exist, and is there a 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 truly have a brilliant idea. Too often have I seen a client spend thousands of dollars developing a solution they believe is unique only to realise that their product doesn’t actually meet market 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 deflated bubble… Probably the most common suffering in the tech industry is disputes with software engineers who charged the world and promised more but delivered a substandard product that cannot even go to market - let’s not even talk about missed timelines and how much that can cost. Finally, the worst part of all of this can 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 he shortfalls, missed budgets, unhappy clients and ultimately poor investments.
Ok ok, enough drama, let’s get into this.
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 have a client who works in the food supply industry and he came to me oneway with a “genius” idea for a music streaming app. Now if you see the problem here then you’re doing good, if not
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 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 situation and even once he grew to learn about it, his beliefs on why the publication issue was in the state it was in was incorrect.
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. His strategy was was to bypass the major labels and sign these artists on to his own label - yes he had to start a second company to facilitate the first one.
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.
(Richard and I are still friends, and he continues to use my services - but when I tried to talk him out of his business venture 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)
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.
That’s a cash flow projection from a real business that I worked with (I blanked out the names). You can see that by year 2 they are coining it and it just goes “off-the-charts” by year 5.
Long story short, the reality of the cash flow looked nothing like that, and even if it did, after 10 years it would have looked something like this.
If you know much about graphs, you’ll know they have lovely way of doing that… That’s called a bell curve and its quite an amazing thing, but we’re not here o learn about stats. What you are looking at is essentially the result of “bubble” in the companies success. The higher the peak of the bubble the more symmetrical the curve of the graph will be - that is to say if you make super big amounts of money in your little bubble, you will lose super big amounts of money when the bubble crashes. There is no “flattening the curve” of burst tech bubble.
What this all means is that if the company looks like its about to do unrealistically well, then it probably is an unrealistic projection.
But why? “That’s not going to be case for my hockey stick.”
Maybe you’re right, but I doubt it. No offence, I’m sure your business idea is lovely.
The reason a hockey stick graph will ALWAYS fail is because a graph can only escalate like that in “extraordinary” circumstances and one the circumstances right themselves 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 they profit margin will change drastically.
Let’s take Netflix who had an insane market share at one stage in their business. At that tie 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 CashFlow 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 way, 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.
Key take away?
A company that says it is going to make loads more money than it is going to spend and that its profits will be through the roof, 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 as they expected the product to be but it would 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:
We wanted to share our experience with you after our last communication. We went forward with the proposal from *********** and they proceeded to build
This obviously not at all functional! We were hoping you could review the solution and quote us on arriving at the product we envisioned.
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 head set, 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 will never support the weight of traffic.
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…
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”.
I wrote this article about the 10 Questions you Should Ask a Developer Before Hiring Them
Do similar businesses exist and is there a gap in the market?
Often when people find out that there is already an app that does something similar to what 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 needs, your potential customers and who they really are or what they really want. This point is so important that I wrote another bog about it here The Most Important Thing Any Business Should Know: Their Market
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.
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 haver to do that is probably not being honest.
Starting a tech business can be extremely profitable. 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 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.
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.