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Breaking the Code

The authors of The Catalyst Code explain how to start a business by bringing others together.

Touted as an excellent breakdown of one of the most profitable business models in today's economy by legendary businessmen like Bill Gates, The Catalyst Code: The Strategies Behind the World's Most Dynamic Companies can be used as a starting point for intelligent business brainstorming.

Entrepreneur.com interviewed authors Richard Schmalensee, the John C. Head III Dean of MIT's Sloan School of Management, and David S. Evans, vice chairman of LECG Europe and visiting professor at the University College in London, to find out what today's entrepreneurs--big or small, tech savvy or not--can learn from their book.

Entrepreneur.com: How do you start a "catalyst business," and how does it work?

Schmalensee: You ask yourself, Are there two groups you can profit from getting together? A catalyst business serves two or more distinct groups of people who benefit from interacting with each other, but need help to do so efficiently.

These days, one of those groups will often be developers of application software, and that's what drives a lot of these businesses. There are a lot of different catalysts, though, going back as far as medieval trade fairs, marriage brokers or any other marketplace you can imagine. In the old days of department stores, when you walked into a big department store, there would be cosmetics from all the leading brands and those were basically in rented space. What the department store provided was foot traffic, and it brought people interested in buying cosmetics together with cosmetic vendors, only they had their own people behind those counters. Department stores saw that as a catalyst function.

Entrepreneur.com: What makes this business model so intriguing today?

Evans: In terms of opportunities, there are probably more opportunities to start catalyst businesses than there has ever been in past history. The reason for that is many of the elements that you need to start a catalyst business have become easier to get. Communication technology is easier and cheaper, and instead of thinking of physical places to start these businesses you have the web where it's really easy to start a business like a Facebook or MySpace.com.

If you have a business that's able to generate a lot of traffic it's relatively easy for you to go to a Google, Yahoo! or Microsoft and use that company to monetize your traffic and basically get advertisers on board. In the old days, you had trouble figuring out how to monetize your website's content. There's just a better-developed advertising business now than there used to be.

Entrepreneur.com: So catalyst businesses like Google are helping to create even more catalyst businesses today?

Evans: Absolutely.

Entrepreneur.com: Do you need to be an expert on software or a young tech-literate entrepreneur to start a successful catalyst business today?

Schmalensee: Well, as an old guy myself, the innovations here are in the business models. Yeah, Google had a very clever idea for a search engine, but that would have only been an academic curiosity if they hadn't married it with somebody else's idea for click-through advertising. I don't want to put down technology guys, because somebody has to make the idea work, but at the end of the day, the creativity comes not in writing the code, it comes in seeing the business model and thinking it through from a business point of view.

It's true in all fields that young people tend to be more creative than those looking forward to retirement, but frankly, you look at someone like Steve Jobs, who is no longer a spring chicken, and he still comes up with ideas. The key is not that you have to be an expert in the technology, but you have to not be afraid of it. You have to not say "Oh, I'll never understand that." You have to say "Well with a little help, I'll understand it." And then, what I'm good at is thinking, What is this good for? Because that's where you make the money--not in the new "gee whiz," but what the new "gee whiz" can do for people.

Entrepreneur.com: What kind of catalyst business opportunities do you anticipate in the next few years?

Schmalensee: We see, in particular, a lot of activity in the payment system space because the internet has really reduced the communications cost. Beyond that, it's sort of the sky's the limit in some respects. As you go to very, very smart phones, the opportunities for catalyst-based businesses that take into account mobility open up. BMW and other [automobile companies] are considering the notion of opening the software platform that runs the car, not to everything, but to third-party entertainment applications.

What we tried to do in the book is say, We can't anticipate the details of bright ideas people will come up with or competitive challenges that established firms will face, but here are the problems that have to be solved to make the thing go, here are the questions that need to be addressed. You have to understand the markets, you have to think through pricing, you have to understand design, you have to worry about competition, you have to be willing to experiment, and you have to be ready for change.

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