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70. Per Bylund: How Entrepreneurs Build Businesses That Are Beautiful Islands Of Specialization

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Per Bylund discusses the distinctive Austrian theory of the firm on this week’s Economics for Entrepreneurs podcast. He captures his unique business strategy construct in the metaphor of Islands of Specialization.

Key Takeaways and Actionable Insights

How do creative entrepreneurs design and build new businesses, new products and new services that grow and succeed? You’ll make a big difference for your own venture if you follow Per Bylund’s advice to Think Better, and Think Austrian. One step in the right direction is to clear your head of thoughts about competitors to fight, markets to invade, beachheads to take, or moats to construct around your business and your brand.

The alternative way of thinking is to envision your business enterprise, your brand or your offering as an island of specialization. What you create, launch, build, grow and sustain is something that is so special that your customers experience a deep and rich feeling of value that they can’t possibly get anywhere else. For your customers, it provides the business equivalent of a visit to (and eventually permanent residence in) a comfortable, amenity-laden resort on a beautiful tropical island, where the staff recognizes and caters to their every wish. There’s nothing else like it.

How can you create one? There are four principles that successful entrepreneurs follow to build their island.

Tropical Landscape Cartoon

Click on the image to download the PDF

Aim To Please. That’s not the kind of advice you’ll find in business school or textbooks. Yet it captures the core of our Austrian approach to business. The customer is the reason for you to be in business. Aiming to please them is the right way to think about strategy. Aiming to please is a process of observing, listening, studying and empathically sensing what will please customers the most. You aim to understand their ecosystem and their logic, their hopes and their dreams. Your offering is the way you indicate to them that you can fit in to their ecosystem and contribute to their goals. Your business model is the way you arrange your activities to please customers once you’ve fully understood their preferences and desires. Competition, cost, resources and other considerations are secondary.

Don’t copy — move beyond. Military business metaphors depict competition as conducting wars over business territory, or fighting for customer attention. In Per’s Austrian way of thinking, there is no new value for customers when a firm merely copies what is already offered by others. There’s no point — no value — in fighting over market spaces. Value emerges from what’s new and better and different. Smart entrepreneurial island builders assess the current landscape, predict where the customer will be in the future, and navigate to that place to build a new island.

Build from strength. Entrepreneurs distinguish what is unique about themselves, their partners and employees, their processes, their brand and their resources that can be of benefit to customers. Much of the uniqueness is subjective — the owners’ or the business’s identity, their unique knowledge and expertise, their relationships and interconnections that can co-ordinate the assembly of specific solutions. It’s not about arraying more destroyers on the battle lines than the opponent; it’s arraying a set of uniquely desirable and attractive brand features and attributes that are attractive to the customer.

Maximize value not output. The island builder keeps on building. Not for scale or market share or maximizing output. The direction of growth is to maximize value. Value is a feeling of satisfaction in the customer’s mind. Maximization, in this view, refers to higher levels of satisfaction, over a wider range of experiences, for more customers on more occasions. Maximization is not a quantitative or mathematical concept, to be compared with rivals to ascertain who is “winning”. It’s a qualitative concept — what quality of value has been experienced, and how can it be improved.

The four guiding principles — aim to please, in unique ways, based on your own identity and strengths, always thinking about the value that’s experienced by customers — lead to beautiful businesses. If you are developing visual island imagery in your mind’s eye as you read this, think of a balmy climate, vibrant flowers and trees, bubbling streams and distinctive animals and birds. Let your imagination run free in conjuring up beauty — that’s what entrepreneurs do as the start, grow and sustain their businesses.

Free Downloads & Extras

The Two Kinds of Knowledge Entrepreneurs Must Have: Our Free E4E Knowledge Graphic

For a full-length essay by Per Bylund (“Make Your Startup an Island”), download our latest free e-book, Austrian Economics in Contemporary Business Applications: (PDF): Our Free E-Book

For a shorter essay, see Per’s Entrepreneur.com article, “Forget the Moat and Make Your Startup a Tropical Island”: Click Here

For a full exposition of the Austrian theory of the firm and the concept of islands of specialization, see The Problem of Production: A New Theory of The Firm: Click Here

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

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63. Dusty Wunderlich on FinTech Financing: Entrepreneurs Helping Entrepreneurs

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Key Takeaways and Actionable Insights

FinTech sounds like the latest over-hyped tech bubble. But it has a much more fundamental importance in entrepreneurial economics. It brings entrepreneurs the best-priced capital in the marketplace. Dusty Wunderlich explains on the Economics For Entrepreneurs podcast #63.

Consider these findings from a 2017 report from the G20 Global Partnership For Financial Inclusion, titled Alternative Data: Transforming SME Finance.

Access to financing remains one of the most significant constraints for the survival, growth, and productivity of micro, small and medium enterprises (SME’s).

Digital SME finance, using alternative data, offers an extraordinary opportunity for addressing…this problem.

The world’s stock of digital data will double every two years through 2020. Every time SME’s and their customers use cloud-based services, conduct banking transactions, make or accept digital payments, browse the internet, use their mobile phones, engage in social media, buy or sell electronically, ship packages, or manage their receivables, payables and record-keeping online, they create digital footprints. This real-time and verified data can be mined to determine both capacity and willingness to pay loans.

A rapidly growing crop of technology-focused SME lenders are putting the use of SME digital data, customer needs and advanced analytics at the center of their business models, setting forth new blueprints for disrupting the SME lending status quo.

The report refers to 800+ innovative digital SME lenders. Colloquially, we can refer to them as FinTech.

Dusty Wunderlich, a subject matter expert and seasoned investor in the FinTech field, discusses this lending landscape.

FinTech Ecosystem Map

Entrepreneurs need capital in the present to deliver goods and services to consumers and customers in the future.

Entrepreneurs take scarce resources and apply them to what they believe the consumer will want at a future date. In order to do that entrepreneurs need capital in the present so they can deliver on those goods and services to the consumer in the future in the hope that their forecasting is correct.

That’s why entrepreneurs need to understand capital financing and modern day capital markets.

Access to capital has historically been difficult and expensive. Today, it’s becoming easier and less expensive, aided by the digital data revolution referred to in the report quoted above. It’s important for entrepreneurs to be familiar with the new field of FinTech and how to navigate it.

Dusty Wunderlich suggests that entrepreneurs map out the financing alternatives on the axes of their own business stage versus the cost of capital.

Cost of capital refers not just to interest rates and fees, but to the requirements that lenders can impose on entrepreneurial borrowers. At the very earliest stages, “friends and family” lenders, angel investors and seed stage venture funds will all require equity stakes, and ratchet up those stakes via deferred interest and debt-to-equity conversion requirements. These early investors perceive themselves as taking a high amount of risk, and the start-up entrepreneur typically has little or no collateral or leverage in negotiation. The best negotiation stance is to generate competition among investors with the quality of the customer value proposition and the business plan and revenue model.

Fintech financing is now available at the earliest of entrepreneurial growth stages.

Today, from the very outset of the business journey, start-ups and small businesses can access a range of financing types – debt, convertible notes, equity and SAFE’s (Simple Agreement For Future Equity) – via crowdfunding platforms like nextseed and others like it. Marketing your business to investors on platforms like these taps into your existing skills in marketing and social media, and doesn’t require you develop capabilities in pitching your business that you might not have mastered.

As you advance along the growth curve, FinTech options expand and may offer you the best-priced capital on the market.

As a result of the expansion of FinTech based on alternative digital data sources, the potential for connecting your particular business to a well-matched and well-priced source of capital is greater and more precise than ever. Dusty cited a couple of examples like Kabbage (where, incidentally, entrepreneurs can currently get help with PPP loans). There are several more. Because of the competition in the FinTech market and the quality of the information they utilize, capital from these lenders is well-priced – probably approaching Mises’ originary rate of interest, Dusty observes, in a testimony to Austrian free market principles.

It is when your business represents the least risk to lenders that big banks offer their high-requirements business loans.

At a later stage of your business journey, banks will lend money against collateral and will impose additional onerous requirements and loan covenants. The entrepreneurial embrace of uncertainty is not for them! Bank financing is at the top when it comes to cost of capital and is to be approached cautiously. It is with bank financing that entrepreneurs become entangled with the negative effects of Federal Reserve repression of interest rates, that can mislead them into making incorrect investment decisions.

The cost of bank financing for mature companies revolves more around terms and covenants than interest rate percentage points. Banks are transactional, whereas entrepreneurs are operationally minded. This can cause a lot of friction if covenants, terms and triggers are not properly set. Entrepreneurs must pay attention to every detail in the loan contract. Great businesses can be ruined because of draconian covenants and triggers banks put into their loan contracts.

Indicated action: Entrepreneurs will be well-rewarded for fully investigating and understanding the emerging world of FinTech and digital SME finance. Be sure to calculate the full cost of capital – not just interest rates – and weigh all options.

Free Downloads & Extras

“Financial Capital Options for Businesses At All Stages”: Our Free E4E Knowledge Graphic
Understanding The Mind of The Customer: Our Free E-Book

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

Apple Podcasts, Google Play, Stitcher, Spotify

Per Bylund’s Tweet Stream Explains The Concept Of Economic Cost And How It Directs Investment To The Highest Return Projects.

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The concept of economic cost seems to confuse people. It is not the price you pay for a good, but the reason you pay it. The cost of one action is the value you could otherwise have gained, from taking another action. In other words, if you have $100 and you have the choice to buy two goods, each at a price of $100, you’ll naturally choose whichever is more important (valuable) to you. The cost of it is not the $100, which you give up to purchase it, but the value of the other good, which you can no longer purchase.
That other good is the opportunity foregone by your action, the ‘true’ cost of your action–the economic cost. Why does this matter? Because our actions are intended to create value, and we always aim to maximize that (subjectively understood) value. The economic cost concept brings to our attention what we *actually* give up to get a value, and thus why we choose a certain course of action.
An economy, which is a system of economizing on scarce resources, is the systematic allocation of resources to maximize value. It is not about minimizing price paid, which is something different. It is about value. While this may seem like an academic point, the implications are enormous. Those who are ignorant of this concept focus on the outcome of action only–the “net gain”–rather than the cost. Doing so means we end up wasting enormous resources while not getting the value that was well within reach.
Examples of this include arguing that there were massive gains from, for example, World War II or the US space program in the 1960s. Both were enormously wasteful, but also generated tangible benefits. WW2 led to the discovery of artificial rubber, freeing us from costly and time-consuming rubber production. Yes, that’s a benefit. And there were plenty of technologies developed as part of the space program. Those were also benefits. But at what economic cost? That’s the real issue: what *other* benefits did we never see because we instead pumped in enormous resources into war and the space race? What other discoveries and innovations were within reach had those resources been used differently?
The WW2 example should be obvious, since the war itself was hardly productive. But the space program is exactly the same issue: what opportunities did we, as a society, forego because the government preferred to invest billions of dollars into the prestige program of beating the Russians to the moon? We don’t know what we didn’t get, of course. But this doesn’t mean we cannot say whether it was the right thing to do. The fact is that in a market system entrepreneurs compete with each other not to minimize cost, but to produce value. Naturally, this means *net* value: what actual benefit is provided in the eyes of the consumer. The entrepreneurs don’t know what consumers will value, but they bet their livelihoods on what they think will benefit consumers most. The result is a variety of goods and services from which consumers can choose, and they will choose what is the best option from their point of view.
What is not produced cannot be chosen. But what is not produced also does not seem to be worth it to the numerous entrepreneurs engaging in value facilitation for consumers. Note that this is not a matter of whether entrepreneurs can “afford” the capital investment needed. It is about the rate of return: whether the value is high enough above the outlays necessary to produce the good/service (the production cost). With a sufficiently high ROI, relative to other possible and attempted projects, entrepreneurs can always find the funds needed: investors are looking for a return on their funds, after all. So the argument that “only the government can” invest in something because it requires capital is bogus. It asserts problems that don’t exist, and often fails to properly apply the concept of economic cost (as in the examples above).
Economic cost tells us what is expectedly most important to people, regardless of the capital investment magnitude. Higher ROI means greater value, which means a higher price can be charged–and more profit earned. This is where economic cost is essential to understand the workings of the economy. Because if a project envisioned by an entrepreneur appears to be highly profitable, regardless of initial investment needed, s/he will pursue it. This means, at the same time, that other entrepreneurial projects, which are expected to provide a lesser return on investment, will *not* be pursued.
What matters for society and the economy is that the greater value is pursued, because it makes all of us better off. This is why, through competition, the swift weeding out of entrepreneurs with projects that do not actually produce much value is important: they literally waste our resources because the value foregone–the projects that were not undertaken because the resources were bound up in these lesser projects–is higher than the value produced. It is an economic loss regardless of what benefits came out of it.
Consequently, we can conclude that the space program, just like war, was a wasteful act. The government stepped in because no entrepreneur was willing to undertake it, which is because its expected ROI (if any) was much lower than other projects entrepreneurs could pursue. We don’t know what we lost, but it could have been cures for nasty diseases, doing away with poverty, or whatever. The fact that consumers were not expected to spend their own money on the space program, and the fact that no entrepreneurs expected that they would, at
least not to the extent necessary, means it was not considered valuable enough. Its economic cost was expected to be higher than the economic value!
Now, does this mean that nothing good came out of the space program? Of course not. There were innovations and technologies discovered that have served us well. But they were, at the time of investment, either not expected (at all) or not expected to sufficiently serve people. There are certainly examples of flukes that ended up creating beautiful things (like Arpanet becoming the Internet), but who in their right mind would argue that we should waste resources on grand government projects because there might be unintended consequences that we’d benefit from? Considering the economic cost, what we could have gained from that investment was expected (by everyone!) to be higher than the project pursued by the government.
That’s the reason the government did it: Government is in the business of wasting scarce resources at high economic cost, i.e. without sufficient expected value. No matter how one looks at it, this is wasteful.
Unless, of course, one ignores the concept of economic cost: the higher-value opportunities that are foregone–lost–because we’re instead pursuing the lower-valued ones.
To simplify, it is a matter of picking the low-hanging fruits first, because there is much higher return–greater “bang” for the buck–from doing so. It makes no sense climbing to the top branches “in case” there is some other and unexpected benefit from putting in the extra effort.