The information-heavy third week of Startup NOW boot-camp, just passed, has stimulated my mind with notions about markets. I’ve written before about how if you make it through this very thought provoking week, you will gain some deep understanding of markets and how they ultimately dictate your success or lack of it.
Left to their own devices, most generally always, markets work. They take care of allocating scarce resources where they are most needed, creating the greatest value. There are some instances where markets get challenged, and we go through some discussion of these. Solutions to these challenges may include regulation or oversight, for instance, when the product is human organs, or emergency services. In other cases, when information asymmetry impedes trade, the market itself brings about solutions. This may take time to sort itself out, but is truly evidence of the market at work. It may take time for this “working out” to happen, and there will be temptation to intervene and control, in the face of some extraordinary profits by some players, but that is exactly what will drive more players into markets and stabilize supply and demand, bidding down prices and arriving at optimal solutions of resource allocation. It has always been the case and will always continue to be.
Markets have developed solutions for the adverse selection challenges that the used car market poses. Adverse selection occurs when negative information about what is being offered is conveyed in the offer. For example, the fact that a high mileage used car was for sale, when I was a kid, had connotations of a bad deal at first sight. In the 70’s and 80’s, the moral hazard associated with the temptation of the seller party – who had better information about the condition of the car – to exploit the buyer, was perceived as high, hence all the jokes about “used car salesmen”. You don’t hear these as much anymore. It has never been easier and safer to buy a used car than today, with all the solutions the market itself worked out over the years – third party reviews, user ratings and car history records come to mind. The potential for a rip-off is greatly reduced, and in many cases the agency issues related to the middle man have been greatly reduced.
We tell our entrepreneurs going through Startup NOW, and about to finish the boot-camp, that things are about to get even better for them. In just a week, they will be able to start working directly on their own idea, singularly focused on validating whether there is truly a market for it in its current form. If there isn’t one, they will learn how to change the form of the current idea, or pivot completely away from the idea itself. The application of concepts discussed during boot-camp, like the fact that value is subjective, and that the communication of this value is subject to information asymmetry, and to vigorous competition among other messages and signals out there, is the challenge they will face for the next three months.
The odometer on my car just passed the 175,000 mark last week. It has filled me with a sense of pride and accomplishment, because I’ve taken the necessary care and steps to reach that milestone, without any major repairs. At the same time, I could be filled with fear of the future, as people that know this little fact from my car’s history me tell me that nothing lasts forever, and that I need to get rid of it now. The problem is, the first person to tell me that did it 100,000 miles ago. I own something that has provided me great value over many years, and I understand well the asymmetry of information as perceived by the naysayers and the used car market in general, which do not know the repair and maintenance record I know this car has. But that does not concern me. I am not willing to part from it for the $1,215 Kelly’s Blue Book is telling me I could get out there for it.
Our entrepreneurs about to exit boot-camp should feel the pride of the milestone, and move on without fear to validate their ideas, and listen to what the market tells them. At the end of 3 months, if they do all we ask of them successfully, they will have a ton of recorded information to validate the value of their business idea. The market will have spoken to them enough to launch and hopefully embark on a journey that will take them even farther than my car has taken me.