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Archive for the ‘industries’ tag

Graveyards

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I hear a lot of business ideas. The uninitiated may think that there’s a great diversity in thought here, and I’m constantly being exposed to new concepts. To some extent, this is true — I meet more smart people than I’ve ever met before, for instance. But I’m also exposed to a lot of the same business concepts over and over again.

Some — like group buying or fashion e-com — are simply trendy, and winners will emerge.

But some ideas have been brought to me for years, repeatedly, as new entrepreneurs encounter the same problems and come up with similar solutions. Yet none have succeeded. Those industries are graveyards, where many have entered and none have come out alive — yet.

This doesn’t mean these businesses can’t work. How many people stumbled around the idea of building a social network before Facebook blew it out of the park? But I thought I’d share a few examples of “graveyard” businesses I’ve encountered regularly. I’m sure there are more, and I’d love to see some in the comments.

Social/Management Tools for Conference Attendees. “Idea guys” love conferences, and conferences love idea guys. In my completely unscientific experience, one thing most idea guys have in common is a huge slate of conferences they travel around attending. This is a logistical challenge, but it is fairly unique to the type of person who goes to five or more conferences per year. A fairly small market that tends to attract novice entrepreneurs.

A Portal for College Students. Like the previous concept, this one meets the need of a lot of potential “idea” entrepreneurs — in this case, socially active college students — but few others. Growing a product college-by-college is extremely problematic due to the dramatic differences between colleges and the relatively small market in each college, problems I came to know well at GoCrossCampus. CollegeOnly probably has a better model, which can’t really be described as a “portal” as much as a network or set of tools.

Cash Tournaments on Console Games. Surprisingly few people realize that chance games (such as the games played in casinos) and skill games (such as pretty much everything else) are covered by a totally different set of rules, and it is completely legal to let users bet on their performance in skill-based contests. This seems like a gold mine to many entrepreneurs. Unfortunately, this business is fraught with non-legal issues. Skill balancing is a near-impossible challenge, and it is critical for gaining new players — if a user’s first experience with your product is being badly beaten at Madden and losing $10, you’ve probably lost that user forever.

I do like what some companies here are doing, especially Playhem. Would love to see someone get this right.

Honest Hetero “Hookup” Tools: Of all the businesses on this list, I have the least hope for these. Honest heterosexual hookup apps suffer from all the problems of a double-sided marketplace — one side is a lot easier to convince to join than others. If you make the app “honest” — that is, you report an accurate assessment of the market’s characteristics — you are unlikely to succeed. Here’s a rule of thumb: If you see a man on a hookup service, he’s real. If you see a woman, she’s fake. “Hookup” apps that make money follow the (dishonest) FriendFinder model — get the men to pay, fudge the women.

Anything in the Music Industry: A bit of hyperbole here, but not much.

Written by Brad Hargreaves

October 30th, 2010 at 1:08 pm

How Entire Industries Become Unethical

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Every office building in New York City grows by a few percent per year. Each stuffy pre-war tower, art-deco complex and shiny corporate center. They’re all growing, like those Kafkaesque SimTower projects that added a few lone offices to the roof each quarter when the rent came in.

Except they’re not actually growing — just adding more space on paper. All office buildings in New York City add a few percent per year to their official square footage, often in lieu of raising rent. So if you are a startup paying $30 per square foot for 1,000 square feet of office space and need to renew your lease, it is more likely that your landlord will claim that your office has grown — perhaps to 1,050 square feet — than attempt to raise your rent.

This is simply the way the commercial real estate world works, and it’s second nature to people in the business. All buildings grow every year — it’s called “loss factor“. But to someone who isn’t familiar with commercial real estate, the concept is completely absurd and unethical.

What makes it seem particularly wrong? Well, square footage isn’t just some abstract number. It’s a real measurement of area. Burger King can claim that a new line of burgers is “50% tastier” regardless of reality, but they would step over the line if they claimed that these same burgers had 50% less fat unless that were actually true. “Tastiness” is a subjective, abstract concept. “Fat” is not.

Somehow, over the course of the development of the commercial real estate industry, square footage has converted from a concrete unit to an abstract unit in the minds of people in the industry. But to the rest of us, square footage remains a concrete measure of area. When I hear 400 square feet, I think of a room that is 20×20 or 40×10 or perhaps even 4×100. When someone in commercial real estate hears 400 square feet, he or she thinks of a space they can lease for $12,000 per year at $30 per square foot. It doesn’t matter how big the space actually is.

Now that we’re here, I don’t see things getting any better — the Nash equilibrium of the situation is for each player to continue increasing the “size” of their spaces by a few percent per year. If one landlord bucks the trend, they’ll need to correspondingly raise their rent per square foot to stay competitive with other landlords. But if everyone else is smudging the size of their buildings, why should you stop? It just means that anyone who wants office space in New York City has to figure out this bizarre system — or get screwed.

So how does this kind of thing start? First, it’s important to recognize how commercial real estate is leased. A commercial space shares a nasty problem with an airline seat: a product that is not a commodity yet is bought and sold as one. In most searches that brokers perform, they are given a price cap by their clients — say, $35 per square foot. If a space falls above that cap, it simply isn’t shown to the client. Thus, a landlord (like an airline) is heavily incentivized to keep their price as low as possible to get visibility in front of lots of potential tenants. The other shoe can drop once the tenant is in the door. This is all analogous to bag check fees, ticketing fees and the other unpleasantries of 21st century air travel.

Therefore, landlords will try to throw as much as possible into the square footage to lower the all-important “cost per square foot”. Initially, the included items were somewhat reasonable — shared bathrooms, hallways and HVAC. In fact, that’s how loss factor is still explained by most brokers. But then someone decided to include not only hallways, but the elevators. Another landlord responded by including not only the elevators, but the lobby and delivery bay. Pretty soon, it got so complicated that square footage became an utterly abstract, meaningless number in the minds of anyone involved in the industry. The square foot was no longer a concrete measure of area.

I don’t think most people in commercial real estate are unethical. Rather, the industry has adopted unethical practices due to a combination of individually innocuous factors: the characteristics of pricing, selection and demand. The airline industry is also clearly trending in this direction, as is higher education. Once an industry is at the bottom of an ethical slope, it is ripe for disruption by young companies that can sell through an honest, straightforward process.

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Written by Brad Hargreaves

August 28th, 2010 at 9:01 am