Capital Gains: A 200 mph promotion and an email from Susan Sarandon

This weekend’s roundup of news speculation and tidbits from around the region includes a rare golfing opportunity, a controversy over working with President Trump and an email from an Oscar-winning actress.

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Is Your Start Up Idea Gold or Goop?

Is your business idea an undiscovered gem, or a flaming dumpster fire leading you to your doom? Here’s a quick rule to help.

A lot of entrepreneurs ask me to look at their business ideas since they know what I do for a living. Some are gold, some are meh, most are flaming dumpster fires. It stinks to tell people when their ideas are smoldering rubbish, so most VCs don’t and just politely decline or ignore bad business pitches. Although the full content of our upcoming accelerator/incubator, Sputnik ATX, is still in stealth mode, I’d like to share a quick rule you should apply to any business idea that you want to pursue. It is specific to answering the question: will anyone buy this? A question that is obviously important to everyone except the tunnel-visioned entrepreneur who doesn’t value his equity.

So, would be entrepreneurs, let’s take off our blinders and have an honest conversation about your product and service, and more specifically, the benefit it provides.

I’m hoping you already read my post about consumer surplus. If not, read this first. I’m going to use a lot of those terms here. Because if you’re going to get someone to buy your stuff, you had better generate a ton of consumer surplus first. Assuming that your idea and business plan can generate value (consumer surplus), you still may have a lot of trouble finding people who want to buy it because the switching cost still exceeds the marginal benefit. Say what?

Switching costs are what economists call any expense related to stopping the use of one product and service, and beginning to use another. Switching costs may include disposal fees for the old junk, training for new stuff, hardware upgrades, software patches, the time it takes to buy/train/learn the new item, and pretty much anything else associated with the new thing to consume or use. Sometimes these can be quite high.

For example, why do we all keep using Facebook when there are surely other social platforms out there? Because the switching cost includes getting all our friends to switch to the new platform (good luck with that) and also includes information loss when we miss out on posts from our friends still on Facebook or they miss out on ours since we now use some loser platform they’ve never heard of. That switching cost is sufficiently high enough that we don’t switch to Loserbook.

But what if switching has a lot of advantages? The advantages of switching are called the marginal benefit. This is the increase in value we get from switching to a different product or service. For example, if you stop eating at Chipotle and start eating at Qdoba, you get the marginal benefit of free guac at Qdoba (yes, you read that correctly). You also get the added option of queso at Qdoba, and hey, who doesn’t like queso! While this is a good place to add another marginal benefit, not playing the intestinal fortitude lottery at Chipotle, I’m going to restrain myself. Suffice to say that there are some serious marginal benefits of eating at Qdoba versus Chipotle.

Now, if you want to create a new company and provide a new service, you need to provide your consumers a product where the marginal benefits exceed the switching costs in a manner that is obvious and as big as possible. The larger gap between benefit and cost here will greatly influence how quickly people will make decisions to consume your new product/service.

One of the worst products to do this, of all time in my opinion, was the Apple Newton. I can pick on Apple, because they’ve made a lot of smart product launches where marginal benefit kicked the life out of the switching cost, but not on this one (thank you John Scully, I couldn’t have written this without you). Newton was a stinker. For those unfamiliar with it, Newton was a hand-held device that kept digital notes for you. That’s it. You wrote on it, it recognized the handwriting if you used its funky letter system and it converted your writing to digital text. It was also expensive. It cost $699 when launched back in 1993. That is roughly several gazillion dollars today (in Zimbabwe).

You don’t have to be a rocket scientist to know that $700 is a lot to pay for a notepad that only recognizes its own weird version of shorthand. The Newton made you pay an awful switching cost for something that you already had in a simpler, easy to use format and could buy for fifty cents at Walmart. So what happened? People kept buying notebooks that worked great, and the Newton died.

Remember how the Segway was going to revolutionize foot traffic? Yep, switching cost exceeding marginal benefit. There are more. Microsoft Bob? You betcha! Google Glass? Check! The idea graveyard is littered with expensive examples of how brilliant people created incredibly complex and expensive solutions to problems with little benefit beyond what the market currently provided.

Now, Steve Jobs returned to Apple (hurrah) and we got the iPad. It could still be used to jot stuff down, but it also pretty much ran the whole universe. The increased benefit of zillions of apps, made the switching cost paltry compared to the massive benefit provided and, viola! People buy them up the wazoo.

So, if you want to avoid betting your life savings, and that of your investors (me) on something that will never catch on, please do some product soul-searching to see if the benefit your start-up provides is sufficient to cover the cost to customers when they switch. Remember, marginal benefit must massively exceed the switching cost -iPad, not Newton. Of course, you still have to do a lot of other things right to succeed, but this is a biggie so get it right.


Is Your Start Up Idea Gold or Goop? was originally published in Austin Startups on Medium, where people are continuing the conversation by highlighting and responding to this story.

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More signs of relief in Austin-area housing market: Inventory ticks up in July

Summer is a hot selling season for Realtors, but the gap between sales and new housing starts is actually increasing in the Austin area: "During a month when housing inventory should reach its lowest point of the year, housing inventory across the Central Texas region is at its highest point since fall 2012."

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How a new development is shaking things up in Austin’s most affluent ZIP code

The 78746 ZIP code, which includes Austin’s famed Westlake neighborhood, is the city’s wealthiest area. But as this bastion of wealth runs out of land on which to build, a new 16-acre mixed-use project aims to meet a growing demand and reshape the development landscape. What challenges did the developers face to bring together such a vision?

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Beer brewing returns to downtown: Austin entrepreneurs emphasize location, community with their suds

Julie Ballato and Angela Duley plan to open the first beer brewery in the city center since 2012. They plan to serve alcohol in a comfy pub setting, a stone’s throw from dozens of hotels. In this article they talk about their long-range plans to work with other businesses in the area, and what inspired them to open the brewery.

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Q&A: New Central Texas president of Associated Builders and Contractors dishes on safety and more

The new Austin president of the Associated Builders and Contractors answered a wide array of questions from ABJ about her goals for the association, its mission and her personal background — and reacts to the accident that recently killed an Austin construction worker.

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Cash-rich Amazon borrows $16 billion for Whole Foods acquisition

That leaves the e-commerce giant with billions in cash on hand to continue its 2017 acquisition spree.

#URLinkedUp Austin Business News – Local Austin News | Austin Business Journal https://www.bizjournals.com/austin/news/2017/08/17/cash-rich-amazon-borrows-16-billion-for-whole.html?ana=RSS%26s=article_search

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Paul Qui opens new Houston restaurant

Paul Qui has opened his first Houston restaurant as a wave of new eateries crests in the Bayou City.
Qui, a past James Beard Award winner, saw his Southwest Asian-inspired Aqui come to life Aug. 14 in the Montrose neighborhood.
The chef and restaurant announced via social media channels that Aqui would begin taking reservations at the 520 Westheimer Road location. It had a soft opening over the weekend, which was also released over social media.
The Houston Business Journal reported in February…

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Coming soon to Austin’s F1 race track: Arcade-style golf, chance to drive an Audi

Executives at Circuit of The Americas want to make sure non-racing fans make the trek to their facility southeast of downtown Austin.
COTA announced Thursday morning a partnership with Topgolf that will turn a section of the race track into a driving range ahead of and during the next Formula 1 United States Grand Prix event this fall.
The Topgolf Crush experience will be held Oct. 18-22 at turn 1 of the course: food, drinks and music via a live DJ as well as the chance to smash a golf ball into…

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Austin on the Inc. 5000: Tech consulting, events planners lead the way

The national spotlight is shining on MKS2 LLC and other Austin businesses in the annual Inc. 5000 list of the country’s fastest-growing privately held companies.
MKS2, an advisory and consulting firm for government agencies like the U.S. Army and Department of Veteran Affairs as well as some corporate clients such as Accenture and Zynga, was the top-ranked local business on the 2017 edition of the list, which was published Wednesday. It came in at No. 92 with 2016 revenue of $4.7 million — up…

#URLinkedUp Austin Business News – Local Austin News | Austin Business Journal https://www.bizjournals.com/austin/news/2017/08/17/austin-on-the-inc-5000-tech-consulting-events.html?ana=RSS%26s=article_search

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