There once was a highly motivated developer who worked at a bank. One day, he figured out a way to automatically round up decimals in banking transactions to the nearest whole number in bank accounts. He reasoned that the difference could be either taken as additional revenue to the bank or paid back to the customer as a savings award. This simple solution awakened the inner entrepreneur in the developer.
He promptly resigned from his well-paid position and set out to become a founder. He gathered a motley crew of fellow developers, built a website, and raised a few million dollars in funding. But as soon as the ping pong table and espresso machine were installed, an unfortunate thing happened – he soon realized that his idea was not new enough.
Many well-known financial institutions were already well engaged in developing similar solutions and had spent millions of dollars doing so. Additionally, they did not consider the young founder experienced enough to take on the solution.
Soon the founder ran out of capital, laid off his staff, sold their ping-pong table and found himself back at the bank.
What happened here? It was a simple case of developing a solution and then looking for a problem.
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Unpacking the above case (not a real case, although there are many cautionary tales out there) can almost certainly fill a whole MBA case study but let’s focus on not knowing your market. Angel investment groups and venture capital firms constantly receive pitch proposals from founders who had the light bulb moment sitting in the cubicle or home office. They come up with a new and interesting way to solve a particular problem. They obsess about it. They dream of someday founding the next “unicorn” (a term for a fast-growing, highly invested-in startup).
Investors struggle to explain to founders that their idea or new way, although interesting, may not be enough to build a business. They also struggle to explain to founders that what may appear as a good idea to you may not necessarily be what the market wants or is ready to accept. It could be because it is too innovative. It could be brilliant, but the market is too married to the status quo, or the economics of change (incentive) does not currently exist.
Consider the case of the CRM (customer relationship management) software. CRM started to hit the market in the early 2000s as the new way to electronically capture relationships between sales teams and their customers. Sales teams were the biggest group to resist CRMs. They did not want to spend time entering their data or their Rolodex of relationships into a piece of software.
Many sales teams considered their customer relationships their secret sauce and did not want to give up the control of their relationships with their customers. Companies did not want to be held hostage by senior sales teams who could easily walk to a competitor with their relationships.
The economics of CRMs was not sorted out, and the true value of CRMs was not fully vetted. Ultimately, what both groups came to understand was that CRMs enhanced customer relationships. The data collected became known as “customer intelligence,” and sales teams learned that the more information they had on the customer, the better they could align products and/or services to the benefit of both groups. But during the process, many early CRM startups failed because the market was not ready for them yet.
The founder who left his banking job can be considered a cautionary tale of not spending enough time developing an idea. He did not spend time listening to the market, researching the economics of his solution, or testing his solution in beta groups. Sometimes that process takes months, if not years. Call it going into stealth mode – the founder developed a solution and looked for a problem to solve but perhaps did not take the time to understand the market well enough.
The market did not need his solution yet. If he had continued researching the industry he may have discovered a real need that the market was ready for.
Steve Jobs reinvented and disrupted home computing. His folkloric rise often misses his keen read of the market. He knew what the market needed, and the market agreed. History was made.
Teruel Carrasco is vice president of entrepreneur engagement at Valhalla Private Capital.
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