As I connect with and work with many entrepreneurs from my class at Haas, from Boulder, through my blog and as I read more about them, I am compelled to make a generalization about their mindset and how they approach ideas. I see the doublespeak in my claims, basing it purely on anecdotal evidence, after all my writings on the need for evidence based management and calling out those who make such generalizations. For what it is worth, treat these as hypotheses and not as claims.
H1: It is impossible for someone who rationally estimates net present value of all options, stress tests their assumptions, meticulously conduct sensitivity analysis, determines market sizes and customer demands to start a new venture. (Dan Ariely calls this Optimism Bias, Gavin Cassar attributes this to selection bias)
Corollary: To start a venture one needs to be risk seeking and at the very least be willing to suspend their rational mind to make the leap.
H2: Most ventures start with an entrepreneur seeing a localized problem and deciding that it needs a generic solution.
Here is a case study (which not should be treated as proof but rather as one of many stories that added to my conviction and pushed me to make the hypotheses).
Netflix for Hot Couture: This is a business started by two Harvard MBAs. One of they saw the problem with women buying expensive evening wear and party wear just for single use and decided that this problem is generic enough and needs a bigger solution. They came up with a web based service for renting designer dresses for $50 to $100. For an analyst this idea is a non-started. Look at all the issues:
- The idea is not unique and is easily copyable
- What is the problem is this addressing and what is the unique value add?
- What is the market size? What are the segments? What is each segment willing to pay?
- Fashion by definition is fickle and changes fast and is different across regions – how much inventory does one need and how big is the risk of carrying this inventory?
- For a $1000 dress can we rent it out enough times to not only cover the costs but also turn profit?
These alone are enough reasons to not starting this venture but not to the two people who not only started this but have successfully found funding for it. Will this venture go big? My analytical part says no, but as a fellow human I wish them well and hope they will go big and succeed.
On a side note, whoever described this idea as “Netflix for Hot Coutre” knows how to do marketing and following the advice of Salesforce.com CEO Mr. Marc Benioff. This metaphor helps with explaining the new service but one should not reduce Netflix to just a DVD rental service, you should read the vision of Netflix CEO on what Netflix is about.