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What Founders Should Think About Before They Jump In

23/04/2014 09:59 BST | Updated 22/06/2014 10:59 BST

Possibly the worst piece of advice that keeps going round is that 'ideas are cheap, it's all about execution'. It's not.

This is not to say that execution isn't important. But great execution of a mediocre or bad idea will get you nowhere. A great idea that's radically different will give you room for error and even if you don't execute perfectly - which you won't - the business will succeed.

Quite a few entrepreneurs come to me to tell me their idea and get feedback. I always end up saying the same thing - which is - to be brutally honest with themselves - 99% are not. They are too wrapped up in their own idea.

Entrepreneurs in general have a knack of making their idea sound great. They can sugarcoat your own dream and sell it back to you without you realizing. They exude passion and get trapped in their own reality distortion field. Suddenly a mediocre product that adds no value to the customer looks like ecstasy. Thats the problem. Most entrepreneurs when starting are not sober (metaphorically speaking), they're on ecstasy.

So what makes a great idea?

Two things I think.

1) what real problem are you solving for the customer? and 2) how much better are you doing it than the incumbent?

If you're not solving a real problem then go home. True some businesses started off as a hobby or a hack and evolved to solve a real problem eventually, but that's not a strategic way to build a business. That's not a plan that's something that either happens or it doesn't. If you're killing time waiting for puberty to happen its not a bad strategy but otherwise you may as well go to the casino!

From the rest you can pigeon-hole most in two categories

1) Those that solve a problem marginally better than the incumbents, say 10-20% . Be it in price, quality, delivery time, or a combination. Whatever it may be they add more marginal value to the customer than the incumbents

2) Those that solve a problem in a radically different way that creates step change and disrupts whole industries. For this to hold true the value add must be orders of magnitude higher than the incumbents, not marginally better. 10-20% won't track it. It needs to be at least 5x better.

Both can lead to a successful business. But if your idea falls in category 1) then either you have to accept that it will take a very long time to reach scale organically (if it does) or you need to invest aggressively in marketing to take that 10% gain to a big audience fast. And the reason is that the customer WOW factor is just not strong enough to get them raving about your product to all their friends. You're marginally better - who cares?!

Remember : we live in a world of extremes. People either want to talk about things that are dreadful or things that are awesome. Something thats OK doesn't particularly make great dinner table conversation.

So if that's the case the second question is: will your unit economics stack up and how much money will you need to get to a sizable customer base? If you're customer cost per acquisition (CPA) is $10 and you get $15 in 3 months then you need $30m working capital to get 1m customers (simplistically). And thats assuming you don't have a rising CPA and deteriorating cohorts of users as you scale - which you will - to both examples.

Thirdly, in a world where the inventory and content online (and on mobile devices) is growing exponentially whilst marketing channels are not keeping up, naturally more people are competing for shrinking shelf-space and so advertising costs keep rising and that delta in your unit economics will narrow. So your operating leverage will be squeezed at both ends as you scale.

But even if you can successfully buy that 1M customer base, say you cracked something others didn't with "great execution ". Is 10-20% value add enough to keep bringing them back as repeating customers? And for how long before someone comes up with a radical innovation that blows that out of the water? Marginally better isn't sticky not longer term at least.

So this is my answer to 'great execution is what its all about'. You may execute with surgical precision on that marginal 10-20% gain, acquire users efficiently etc but you won't change the world doing so and at best you will get out fast enough before a disruptor comes along. This is an arbitrage play. And like any arbitrage its treading on thin ice.

Yet most entrepreneurs think that this holds true of everyone else EXCEPT their business. They're on ecstasy so they see that 10% with a few too many zeros!

So the first piece of advice is : quit fooling yourself. Be brutally honest in measuring your true value first.

If you have genuine, true, SOBER conviction that you do fall in category 2, that you do change the playing field and generate north of 5x value-add to the incumbents then go all in and don't look back. But only once you have full conviction.

At PeoplePerHour we made every mistake in the book on execution. But the one thing we did get right is that conviction. Right from the start, from the first 5 customers even the experience wasn't just OK (even though we didn't even have a product to begin with - it was all done manually with me as the micro-broker matching freelancers with project work on the phone). But the value the customer got was a whopping 10x saving of the the price of the traditional way of hiring. That's where the WOW factor came from, not from the things that half of silicon valley obsesses about today like having a slick interface and a cool logo. Those things do matter too, but they are secondary. First comes the underlying value you generate as a business for the customer. If its north of 5x you will have plenty of space to screw up as we did. People will still talk about you.

Over 5 years we barely spent any money on marketing and we still don't, and we've doubled year on year from the start. I think 5 years in, we now execute quite efficiently but we didn't at the start so that growth came despite (not because of) great execution. It came because we picked the right idea at the right time. We had the right vision and we stuck with it. We persisted, so in the end we came through and I think we still would have come through if we'd had even more screw ups in execution.

The entrepreneur I admire the most who is the epitome of this, is Jeff Bezos. Unlike most of the other great success stories many of which happened serendipitously, Bezos is one of the very few who took a very top down strategic view , he imagined the future and went all out and built it, with customer value creation at the core of his mission. He didn't just jump in or create an app in his spare time that just happened to take off. He did it consciously and with clarity of thought. His thinking process was: what will be the dream experience for the customer purchasing online? And he came up with the 3 pillar stones of Amazon that have defined his strategy till this day. To to have the biggest choice, the cheapest price and the best customer service. Turns out he needed a billion dollars to make that a reality but thats irrelevant. He identified what would be step change and went for it.

So, you want to be an entrepreneur ? It's not for wimps or the delusional . It's a long term play and you need to have the stamina for it. My advice : add real value for the customer, by picking a hard problem that can change the status quo, dream up a solution for them forgetting the obstacles you'll face along the way.

If you have true conviction that you cracked it then go all in - and don't look back!