Meatloaf was wrong on the whole “two out of three” thing!
22 August 2014 by David Bott
There are three main components for a successful business. The first is an understanding of a specific market need. The second is a capability to answer that need. The third is the resources to move from the idea to a sustainable business – which usually involves money!
I spent the first 26 years of my career trying to build a bridge between science in universities and technology in large companies. The underlying principle was that new business options came from matching an emerging new technology – itself the manifestation of a new piece of science – to an established or growing market need. I also learned that hard work was then required to be able to deliver it at the price and reliability the customers were prepared to pay. Working in large companies, the resources needed to do all this work – both people and money – were supplied in some mysterious and effective way I didn't need to understand! One thing I have learned since entering the world of smaller companies is that what pays for these resources – the domain of finance – is different again, and that linking the worlds I have some knowledge of to this new one is very important.
Science – and by that I include not only the conventionally included areas like physics, chemistry, biology and engineering but also the realms of sociology, psychology, design and many others – gives you understanding. Some of that understanding can be used to develop and ensure a product or service that will address the needs of a market and last for the required lifetime.
Business addresses the value customers place on their needs, the ability to produce the product or service at a cost that is less than the value of the need – usually implemented as a price – the means by which the product or service is distributed to the customers and so on. Some business does not require understanding – until things go wrong!
Finance supplies the money needed to pay for all the resources to take the science and turn it into robust business, but finance is also an activity in itself, where money can be processed in (to me) odd ways to reproduce itself. The primary requirement in finance is to grow the money as fast as you can. The fraction of the finance world that interacts with the innovative part of the business world is small. A large part of the financial industry is not interested in how the money is made, but is still capable of making more!
Each form of activity has different ways of defining “value”. When a new piece of science is first discovered, aside from its novelty value as information, it has lots of application potential. As it is tested against a series of market needs, its overall potential often decreases, but its commercial value in at least one application is (hopefully) proven. People give money to resource its development because they perceive a future value that is higher than the current value – thus satisfying the requirement of the finance world.
Graphene is a good current example, although there are many others. The potential value of this form of carbon had been predicted (theoretically) for many years, and the discovery of fullerenes and carbon nanotubes gave credence to some of the predicted properties. Then it was produced, first in the laboratory and then at larger scales. Immediately, the potential applications of graphene were touted as new business opportunities, and many companies (new and old) set off to validate these ideas. Lots have proved to be commercial cul-de-sacs, but much has been learnt along the way about the different forms of graphene, the need for functionalisation and the detailed property needs of the proposed application. There are companies out there that have been financed very generously and those that have run out of money and ceased to exist. These funding decisions were largely based not on their actual commercial value (for it was unknown) but on the perceived future value.
If the 3 areas understood one another better, then many of these important decisions could have been made in a more informed, and therefore more effective, manner.
From what I have seen in my career, there is no magical sausage machine that takes science and finance as inputs and churns out business as an output, although it seems like this simplistic model drives many parts of government I have worked with over the last 7 years. The relationship is much more complex. For a robust, sustainable business, the basis has to be getting the “science” right. I have seen many businesses fail because they didn’t actually understand what they were selling (or, more correctly, what their customers were buying) and could not address problems that occurred along the development path, or when in use, in a timely and effective manner. Just as important is the understanding of the problem their customers wanted their product or service to answer, the value the customers put on that solution, the manner in which they wanted to use the product or service and the complete user path. But the fastest and most effective way to waste the potential of the science is to not get it funded in the first place! To get this right requires that the champion of the new idea understands what the science can (and cannot) do, the dynamics of the market it addresses the needs of, and can explain them in a balanced (yet optimistic) to someone from the finance world. If they underplay the potential, then there is no perceived future value and the money won't come. If they exaggerate the future value, and the time it will take to arrive, then at some point along the development path, the money will run out, or be withdrawn. Once the money is acquired, not addressing the business needs will either lose the money (see earlier) or mean that the product or service just doesn’t sell. Assuming this is all achieved but the underlying premise of the product or service is not understood, there will come a time when it will trip up the fledgling company and it will fail by yet another route! Not understanding the science, business or financial basis of a new idea will kill the company – it’s only a question of how fast.
I have seen many companies over my career and the ones that prosper thoroughly cover off all three aspects of their business. Those that leave out 1 or 2 invariably fail at some point. That really is a reason to be sad and two out of three is, very definitely, bad!!