A true economist, the joke goes, would never bother to pick up a $10 bill on the sidewalk because in an efficient market, instant, riskless profit is impossible. Of course, markets are far from efficient, and an entrepreneur would not only scoop up the sawbuck but also scheme about where to find more. Startup companies are ventures whose entire existence is based on exploiting a gap in the market-an inefficiency that existing companies have failed to identify and pursue for profit. Potential investors attempt to assess the size (or even existence) of a startup’s designated gap and whether the company is truly poised to take advantage of it.
I recently ran across a fascinating case of attacking such a gap in London, England-based SwapitShop, an enterprise dedicated to creating a universal currency for children. As Jonathan Attwood, SwapitShop’s CEO, explains, children have tremendous economic influence via their parents, who purchase endless quantities of toys, food, and entertainment on their behalf. Yet kids themselves generally have very little ready cash. Guiding their economic influence is big business, and marketeers constantly strive to “incent” (i.e., bribe) kids to demand the games, TV programs, and sugary snacks that they sell.
Attwood finds huge inefficiencies-and hence opportunities-in the ways that these incentives are currently meted out. Inserting a Spider-Man figure in every box of Frosted Flakes costs millions, he explains, and of course many children may not like Spider-Man, or action figures at all. His solution: give kids Swapits, a virtual currency redeemable for merchandise on the SwapitShop Web site. Swapits are distributed as coded numbers printed on coupons or product packages. Printing 100 Swapits on the inside flap of a cereal box costs next to nothing, says Attwood, and kids can get things they actually want.
SwapitShop profits from these transactions by selling its currency to, say, a cereal company, typically for a few tenths of a penny per Swapit. SwapitShop then spends about one-third of its take on new merchandise, ensuring a broad range of gettable goodies and preventing Swapit currency devaluation. The remaining two-thirds is gross profit-not a bad ratio at all!