Why entrepreneurs should ignore markets.

Posted by | July 25, 2006 | business | No Comments

Old farts like myself, who were tinkering with the Internet in the early 90s will remember that there was a sudden surge in interest in the Internet a year or so before the web.

The tendency is to think that the Web was the prime reason for the increased adoption of the Internet, but in fact it is more likely that the Web was actually the result of an evolutionary niche being opened up by the spread of the Internet.

Once the Web was born, of course, it did help fuel the growth of the Internet, but like almost any other ‘ecosystem’ from the autocatalytic reactions in a single cell organism, to the money flow in an industrial economy, it was based upon a circular feedback loop, making it difficult to separate the chicken from the egg.

The are two other very important examples of cause and effect which were not what they seemed: oil and coal.

It would seem plausible to assume that the industrial revolution created engines which needed coal, which was eventually replaced by the more transportable oil.

In fact the demand for coal was stimulated by a decline in the available wood during the mini ice age in the 17th and 18th centuries. Steam engines, often running on wood fires, were developed to pump water out of coal mines. Later, a positive feedback loop would mean that more coal could mean more steam engines.

Similarly, the demand for oil was created by a demand for lamp oil to light the factories of the industrial revolution, long before it was used to transport the workers and the goods they produced, creating a bigger marketplace and demand.

The lesson from this, is perhaps that:

1. looking for cause and effect in a strictly linear fashion is nonsense.

2. business plans that are looking to change the world by attracting a significant slice of an existing market or ‘ecosystem’ would be better off focusing on how to step up between small to large marketplaces.

If you like this is similar to the vogueish marketing books of the last dotcom boom, like Crossing the Chasm or Inside the Tornado. The difference being that there is not one tornado but a series of ever increasing ones, with fractal like self similarity. The inverse pattern of turbulent air flow.

Perhaps the skill (or luck) of the entrepreneur is to find the seemingly trivial niche (like selling crude oil instead of Sperm Whale fat for lighting) that could interconnect all the way to the top.

The people that did this in the last boom were not Napster or Webvan, but people like Blogger or Ebay. And before you say, oh but Blogger never became a huge company, consider this:

The founders made more than the founders of some billion dollar companies, and they got to change the world at the same time.

Even if Webvan had succeeded, it was kind of boring and complicated and difficult to setup in your garage.