Rules 1 to 9
Starting out with a business plan, based upon a set business idea, is not a practical way to go about creating a business in a rapidly changing environment. It may be the right way to obtain finance, but, as the dotcom crash proved, getting finance has very little relevance to creating a viable business.
Learning from the many failures of the e-business pioneers, it has become evident that the Internet is mainly about enablement rather than selling. It is about communication rather than simply providing more information. While most of the ambitious e-business ventures - based upon expensively constructed Web sites and powerful backend databases - were proving to be white elephants, the simple concept of person to person communication was going from strength to strength.
Ignored by most of the main developers, e-mail became the "killer app". The inherent tendency for human systems to self-organise, put all deliberate human initiatives to shame. On-line communities, costing virtually nothing to set up and maintain, had created as much, if not more, usefulness than the millions of Web sites that had squandered billions of dollars in human resources.
Anyone who has studied organic systems, knows that they have a natural tendency to self-organise. They are driven by evolutionary mechanisms that act continuously to improve efficiencies at every level of organisation. The Internet is an organic system, not because it is based upon computer technology but because it is based upon human activity. It is as natural for the Internet to create its own order, and progress towards increased efficiency, as it is for any other biological organism or ecosystem.
Observing the progress of the e-business environment over the rise and fall of the dotcom bubble, it became increasingly more evident that rational human organisation is like a small sailing ship in a storm. Pitted against the natural tendency of a dynamic system to self-organise, it is virtually powerless. Any human activity that does not make any real improvements towards efficiency is ruthlessly broken up or destroyed.
The instances where Internet businesses seem to have had most success is where they have been allowed to self-organise: without the imposition of human control. This observation provides the first rule for deciding what kind of business situation to create:
Rule 1: A business should take advantage of a system's natural tendency to self-organise.
What makes for increased efficiency?
"Increased efficiency", is a glib term. What does it mean in a new and as yet relatively unexplored environment? How do you recognise it? How do you measure it?
In the context of any business situation, efficiency is easily recognised and measured. It is the amount of wealth that is being created or lost. In competitive environments the biggest winners are usually those who can achieve goals more efficiently.
This begs the question: "How can you tell whether or not a business venture is going to be profitable and create wealth?" Reading through the obituaries of the many e-businesses that failed during the dotcom bubble, the conclusion seems to be that predicting future profitability is impossible. Even with the survivors, the difference between expectations and actual results, make a poor case for the ability to predict future profitability in an e-business environment.
It seems reasonable then, if most companies can't predict the likelihood or extent of e-business profitability, to assume that profitability is unpredictable. This gives rise to a second rule:
Rule 2: The business should not rely upon an ability to determine future profitability.
At first, this seems ridiculous. Surely no business venture should be started without having some estimate as to future profitability. However, this is far less ridiculous than estimating future profitability when there is clear evidence that it is impossible to do so.
The resolution of this paradoxical situation is to think in terms of strategies rather than plans. If you start with a lot of capital you are compelled to estimate future profitability to make sure you don't lose the money. This automatically puts you on the slippery slope of trying to use human reasoning, planning and forecasting the future, rather than taking advantage of a system's natural tendency to move towards efficiency by itself.
Conceptually, the idea of working without calculating future probability is difficult to appreciate. The trick is to think in terms of starting with a very small amount of money, where a mistake can see you knocked out of the game. This forces you to progress only in directions where you can reasonably expect to earn enough money to continue. In other words, all activity is confined to small steps that bring immediate rewards.
Using this simple strategy, progress is dictated by inputs of revenue rather than an amount of capital. Although this may seem nonsense to those who have been brain-washed by the stories of business angels and Venture Capital largesse, the undeniable fact is that a business that is restrained by income cannot do anything other than progress in the direction of profitability.
This provides a third rule:
Rule 3: A business must be capable of starting with a small amount of capital and be able to generate enough of an immediate revenue stream to make further progress.
Creating a revenue stream
There is only one way to create a genuine revenue stream, which is to provide value in return. This places a further restraint on the type of business that can be chosen and provides a fourth rule:
Rule 4: The business must be able to provide value right from the start.
Investment capital can only be treated as revenue if adequate returns can be guaranteed. However, as profitability cannot be predicted, this condition cannot be met, so, investment capital shouldn't be used in an e-business venture where the outcome is uncertain.
Seed capital can qualify as revenue if the probability of gain heavily outweighs the risk of loss. As a rule of thumb, seed capital can only be treated as revenue if there would be a reasonable expectation that a business could advance to where the investor's share could increase in value by a multiple of between ten and twenty. To expect to obtain better terms than this for seed capital would be unrealistic.
A different approach to obtaining start up capital is to be able to offer a solution to a difficult or unsolved problem. In this case, seed capital could be regarded by the finance provider as research and development costs - on the understanding that there is a reasonable chance a problem can be solved. This provides a fifth rule for the choice of business:
Rule 5: The business must be such as to be able to solve immediate and real problems.
Personal assets and contacts
Every business entrepreneur must have personal assets of some kind. These may be tangible or intangible. Any personal finance, property or equipment would count as an asset. So also would intellectual properties, experience, special expertise or talents. Even an ability to network or sell would constitute an asset.
These assets represent the core of the business and the more of them that can be applied to a business situation the more efficient the business will be. This provides a sixth rule:
Rule 6: The business must be chosen such that it makes full and appropriate use of the founder(s)'s assets.
An individual's ability and capability is enhanced by their choice of personal contacts. The quantity and quality of these contacts determine the range of business opportunities that can be considered. Also, they determine the effectiveness with which opportunities can be realised and the ability to expand the business. This choice of contacts applies not only to immediate contacts, but also to the contacts of the contacts. These are equally as important because they will enhance the total value of the network of personal contacts.
This provides a seventh rule that will affect the choice of a business:
Rule 7: There must be enough suitable contacts, direct or indirect, available to cover all aspects of the chosen business situation.
Employees count as valuable contacts, but, they come with a penalty attached. They represent a liability unless they are directly or indirectly responsible for increasing the efficiency or income of the business: creating real value. With a young business, particularly at start up stage, it is not possible to keep employees gainfully employed all of the time. Any discontinuities, setbacks or changes in direction can dramatically change the efficiency of a business, maybe even throwing it into a loss making situation.
The penalties associated with employees are heightened by the increase in overheads they generate: floor space, services, management time, training, taxes, government regulations, working practices, etceteras. These may be accommodated in a large organisation that has a steady cash flow, but can greatly reduce the efficiency of a young business where income is uncertain and subject to unexpected changes.
This leads to an eighth rule:
Rule 8: All employees must be revenue producing and fully covered by a stable and reliable income.
Advertising and marketing
Most conventional business strategy books will emphasise the obvious: reliable product or service, competitive pricing, customer satisfaction, after sales support, clever advertising and marketing. Few make allowances for the influence of the Internet and the speed with which information and knowledge can diffuse through an on-line population.
Information, knowledge and gossip can spread from one person to another, one person can affect many others so the spread is exponential. This exponential spreading is speeded up when it involves groups of people (such as on-line newsgroups and discussion forums).
Using this phenomenon for marketing purposes has acquired the name viral marketing. It is a highly effective and costs very little, but, it only works if the product or service is highly novel, breaks new ground or is of exceptionally good value.
Many people assume that viral marketing applies only to the people who are on-line. This is not true because of another phenomenon known as small world clustering. The essence of this theory is that because people on-line tend to transfer their knowledge and information to those in their immediate locality almost everybody, whether they have a computer or not, are also influenced by the Internet spread of information and knowledge.
This provides another rule for the choice of business opportunity: