Venture Capital and Overproduction

One of the 7 Wastes in the Toyota Production System (Lean) is Overproduction. Within the world of entrepreneurship and venture capital, Overproduction can take on two forms:

1. Building a Product nobody wants
2. Building Features that don’t add value to the customer

There are variations of the above, such as building more features than is needed as well as building products because they are fancy, shiny, or they are the byproducts of engineers who have fallen in love with their invention, though it doesn’t solve any real problem.

In a recent article in Entrepreneurship Magazine, they feature RingRevenue, a call tracking software company which serves affiliate networks.

For them, they knew the problem and it was this:

when digital ads were clicked by an online customer, sometimes that order was completed via phone. if that ad was from an affiliate, then the affiliate doesn’t receive that portion of the revenue share. how can this be solved?

This simple question led to the development of RingRevenue.

But they didn’t stop there, or, they didn’t just use that question to drive the creation of a product. In fact, they spent a better part speaking with prospective customers and having customers help them design what would become RingRevenue. This iterative approach eventually led them to a point where it made sense to raise a round of funding.

Here’s what we learned from RingRevenue’s approach:

1. They observed a problem
2. They spent a lot of time with customers to better understand the problem
3. They worked with prospective customers on developing a solution that would address the problem

This approach prevents building a product that nobody wants. The waste of Overproduction was avoided by spending time with customers and by clearly and deeply understanding the problem.

In their words ¹,

Jason Spievak and co-founders Robert Duva and Colin Kelley founded call-tracking software company RingRevenue in September of 2007, but it would be at least six months before any of them wrote a line of code. And it would be 18 months before the company received outside funding of any kind.

Much of that time was spent planning and talking with prospects; the founders didn’t want to build a solution before defining the problem, which they believed was big. Advertising affiliate networks were losing revenue each time a customer clicked on a digital ad but completed the transaction by phone. RingRevenue would fill the gap with technology, but only if affiliates could agree on the concept they had in mind.

“Before we were going to commit all of our time, career, dollars and resources to it, it was important to [know] enough about the customers and their needs that we could feel good that we were getting it right the first time,” Spievak says.

Each meeting brought changes to the design. But by asking prospective customers for feedback and then building to spec, RingRevenue created its own market. “We wanted to make sure that we understood the formula for growth, that we had satisfied customers and a scalable model,” Spievak says. Investors were impressed. RingRevenue closed a $3.5 million initial round of venture capital funding in June of 2009.

The hubris and excess of the internet bubble was due to companies creating solutions and then later looking for the problem. That leads to Overproduction. The Lean Thinking approach addresses and understands the problem and its root causes, then the solution or countermeasures make sense and are practical.

Venture Capitalist can help here also by being very insistent that nobody is too enamored with their technology, solution, or innovation, but instead making sure that what the entrepreneur is developing solves a real human problem and need.

What are your thoughts? Do you see any other examples of Overproduction in business?