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Friday, January 15, 2010

Learn small, profit big

I majored in Chemical Engineering. My dad is a well-known hop chemist in the beer industry (yes, he gets free beer). To most people, chemists and chemical engineers are pretty much the same (it's only one word different!). But there's one thing that separates a Chemical Engineer from a chemist... and that's scale-up.

My dad works in a lab, working with beakers and flasks. A chemical engineer works in a pilot plant and in a plant. We take what the chemist learned in the lab and figure out what fundamentally needs to happen (transformations) to make the product we need. We do this on the lab scale, then pilot plant scale, and finally at the plant.

These transformations are the same no matter what scale you're on... for instance, "remove water" is a fundamental transformation. Notice that "drying" is NOT a fundamental transformation... Why? Because removing water is what needs to happen. Drying is only one way to do it. Can you think of other ways to remove water? Freeze drying? Sucking it out? Zapping it with microwaves?

Once we've figured out what the transformations we need are, we try to quantify it and determine what measures are the same on every scale. For our "remove water" example, the quantity may be "remove water until product has 5% water." This is true in the lab, pilot plant, or manufacturing plant the size of the moon.  In the plant, this could be a 10 million watt Yankee direct contact dryer. In the lab, it could be a stack of Bounty towels.

What's the advantage of doing all this work? Why not just run it at the plant? The reason is a run in the lab probably costs $<100. A run in the plant could cost $10K, $20K, maybe even $100K or more. There's a saying: "Make mistakes in the lab, profits in the plant."

Entrepreneurs should take that to heart. Too many "entrepreneurs" make their mistakes in the plant... Think of all the dot bombs who got $50 million in funding and failed. That's why entrepreneurship is so "risky." On the other hand there are people who start small and when they scale up just multiply everything by 2 or 3 or whatever. They don't figure out what the fundamental measures are.

For NOTtheBookStore venture, I'm trying to apply these principles. I could try to get $1 million in funding, spread it to 100 schools, and go straight to the plant. But instead I'm testing it with 2 schools, one that's 6,000 students and one that's 30,000 students. The fundamental measure I'm testing is conversion rate... i.e. how much I make per visitor to my site. I want to see if that's constant with a bigger school. This is very important so I know how much I can spend on advertising. I also learned that the marketing is the most important part right now; Facebook ads by themselves don't cut it. So I'm also testing ROI for various marketing avenues.

If I show that the bigger school has the same or better conversion, and it makes a profit, I know I have a scalable venture and can start expanding. I also know how to expand it and what marketing avenues to use. If it doesn't make a profit, I can find out by blowing only $1000 or so. I'm making my mistakes in the lab, and hopefully someday my profits in the plant.


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