Many entrepreneurs attempt to start businesses by coming into an industry as an outsider. As an angel investor, I generally don’t like these kinds of entrepreneur situations – and I especially do not like independent inventors who write patents in this manner.
My preference is that an entrepreneur knows the deep, dark bowels of an industry and has experienced the pains that their new business or invention is trying to solve. This person, in my mind, has the best chance of success, and I like to invest in them.
Ideas from Outsiders Who Do Not Understand Industry Dynamics
I see lots of inventions and business ideas from people outside an industry who think they know how to solve a problem they perceive.
For example, I see a lot of medical technology companies who look at the world from the patient’s perspective. Wouldn’t it be great if the patient was treated better in the waiting room, exam room, or during rehab? Wouldn’t it be great if the patient had a better overall experience?
Nobody Cares About the Patient.
These entrepreneurs dream up some technology or business that solves the patient’s pain points. However, patients are not the customer of your product. The doctor (or clinic) is.
In healthcare, just like customers in other industries, patients have very little ability to switch providers, or the switchover costs might be dreadfully high.
For all but the ultra wealthy, there are a limited number of options for doctors in your local area where the doctor is taking new patients, in your insurance network, and within a reasonable distance away. Even worse, the switchover costs (from the patient’s perspective) can be brutal. It can take several visits for the patient and doctor to get to know each other and develop a history for treating the patient.
The point here is that patients almost never switch doctors, so there is no real reason why the doctor should improve their service over what other doctors currently do. There is no reason why they should invest money, time, or effort to make their patient experience any better than they need to.
The Myth of the Industry Outsider.
There is a mythological industry outsider that can see through the thick, stubborn mess of an entrenched business and bring ‘new ideas’ that ‘revolutionize’ some part of the business. In a typical scenario, our innovator can apply the proven technology from one industry to solve a similar problem in another industry.
Of course, I am a sucker for the Hero’s Journey where our intrepid and insightful entrepreneur lifts the scales from everyone’s eyes and paints a bright, new future with less pain and suffering – and plenty of profits – for everyone involved.
But there are always reasons why things are done the way they are done.
Over time, procedures and processes, technology and devices are refined and improved, but not always for the better. For example, design choices for a particular medical device may have been made years ago when materials and manufacturing processes were different. The status quo procedures have been done for years because that is how people have been trained and nobody ever thought to do it differently.
However, most of what we see in every industry is the result of years of slow refinement and improvement. Things that do not work are slowly discarded and replaced with things that work just a bit better. This is the powerful nature of the status quo. It is the result of a long investment in improvement, which is why it is the most powerful competitor a company can have.
I Want the Industry Insider, not the Outsider.
The industry outsider does not have the benefit of understanding why the status quo exists, consequently, they always downplay the strength of the status quo. Maybe the outsider can point to something that does not make sense to them and suggest an alternative, but that proves that the outside does not have all the information at hand.
My preference is to invest in an entrepreneur who has deep industry experience and has lived with the problem they intend to solve. Because they felt the pain point, they are in a better position to communicate that pain to others in the industry. Because they felt the pain point, they are also in a better position to identify every potential customer who also feels that pain.
The industry insider can speak the language of the industry. The also have established connections throughout the industry, with colleagues, with suppliers, with competitors. They know how information is communicated within the industry and who the best spokespersons/influencers might be.
One key factor for me is when an industry insider breaks from the pack, goes out on their own, and starts a business to solve a problem they experienced in their industry. This person is so convinced that their solution has merit that they have left the comfort of their previous position to venture out on their own. That is someone who has skin in the game.
The Outsider Often Looks Down on People in the Industry.
The industry outsider often comes across as arrogant and haughty to people in the industry. Remember that people in the industry are going to be the customer, so getting them on board is critical.
Because the industry outsider does not fully appreciate how and why the status quo exists, they can be dismissive towards the status quo and gloss over the importance of the status quo solutions. Most people take satisfaction and pride in their work, and having someone come from the outside to tell them that they are doing it wrong can be a very uphill battle.
The biggest issue I have regarding industry outsiders is that they do not have all the data at hand. They often have their perceptions about what ‘should’ be done, but because they do not know why it is done that way today, they are missing a huge amount of the picture. Consequently, I rarely invest in this person.