Too many markets...I want to go into all of them!

Someone recently asked me the following:

"If what you're developing can go in many different products, but you need a product to select a market, do the market research, diligence, and even look for partners with experience in that specific product space...what's a good way to go about that, and still keep yourself open to pivoting in the future?   For me, say you can go into the personal app space, or the healthcare transcription space, or the commercial IVR space, or license technology capabilities, or any number of others, the initial people I'd want to reach out to to bring on board or help are all different for each."

Good question.  Unfortunately, there's no easy, quick solution.  As soon as you have your core product somewhat defined, you (or someone from your team) should be doing a comprehensive market analysis, which looks at all possible markets.  For each market, one needs to assess the market size, how difficult is it to penetrate, what are the margins, how much does your solution benefit them, etc, etc.  Lots of work here!  If you're lucky, you can get a team of business students to do this, maybe even for free, but the timing has to be right w.r.t. their course series.  Or, you might be able to find a business student to do an independent study project, again, for free.  Other options exist as well.  But, before you do any of this, you must have a list of proposed product features to help you define potential markets.

Sometimes, an easy, low-hanging-fruit kind of market is obvious, and that's often a good starting point, even though it might not be a huge market or perhaps not a high-margin market, but it could potentially bring in some early revenue.

Which market to target first?

My past posts have included discussions about the importance of a market niche and the importance of a product family (not a one-trick pony).  So, you've picked a niche and are developing a product family.  But how did you decide upon that niche?  Was it the largest one?  That would be a logical answer, but what if that niche requires much more money to develop and sell into?  What if that niche has a much longer sales cycle?  Be sure to consider all aspects of the niche you plan to target first.  The best one just might be the one that will provide the quickest revenue for you.  This is sometimes called the "low-hanging fruit."  Now that you have some revenue coming in from this niche, you can fund some other niches that might require more money to develop and/or have longer sales cycles.  Oh, and beware of niches that have seasonal sales cycles.

Compensate your advisors appropriately

Good advisors can be the difference between success and failure of a start-up.  Seek out advisors who have expert knowledge of your company's business and market (or some aspect of it).  And when you find one, make sure you make it worth his/her time to give you dedicated time.  If you're just starting up your business and know you still need to raise lots of money, don't offer your advisor 0.25% of the company vested over four years...there's just not enough upside for the advisor to justify spending any time with you, especially after one considers all of the dilution that is still to occur as subsequent financing rounds occur.  Two percent vested over two years is more appropriate.  Now, if you've already raised all the money you need to for a while and little or no dilution is foreseen, and you're close to revenue, then 0.25-0.50% over two years is more appropriate.  There are other factors that play into this as well, like what is the total projected upside for the company, etc.  Bottom line:  If you find an advisor who can provide great value, work with him/her to achieve a reasonable compensation package.

But my company is worth more than that!

How do you value a high-tech start-up?  There are many ways, but very few, if any, result in a value with which both the founders and the potential investors are comfortable.  I've seen methods like discounted cash-flow and net-present value, which isn't very accurate for a start-up with no revenue yet.  I've seen outlandish methods like "$1 million per patent" or "$1 million per employee" but these can be highly inaccurate as well.  Some kind of relationship between level of product development and potential revenue in the next one or two or five years is much more accurate, but still a guessing game.

If you're going for friends and family money, or even an angel round south of, say, $1M, the best general advice I can give is to avoid pricing the deal.  In other words, attempt to do a CPN (convertible promissory note).  This allows you to offer a discount to investors, and not having to commit to a valuation.

If, however, your investors are requiring preferred stock, and therefore most likely an equity round, then you will have to price the stock.  What should your valuation be?  Whether you try to use and justify any other methods, the bottom-line answer is "what the market will bear."  In other words, you and your investors should try to find "comps"...similar deals that have recently closed, then use that valuation, possibly adjusting for any differences between your company and theirs.

Design your next product like a competitor would

In one of my previous posts, I emphasized that you need to get your product out-the-door.  It's also important to have a product roadmap, as stated in this previous post.  So after you get that first product out, what should your next product look like?  Here's one answer, or at least an exercise you should do.  Pretend you are your competitor, looking at that first product.  What features would you add or change to make a compelling competing product?  Now, consider that product to be our next one.

Determining product pricing...bottom-up or top-down?

You have your first product done, and you're going to sell it for $15.  How did you determine this price?  Bottom-up method:  Simply put, determine how much it cost you to make it, add to this how much margin you need to make on it so that your company is profitable, and you get your ASP (average selling price).  This isn't as simple as it seems, since you have to factor in not only COGS, but shrinkage, returns, sales costs, and then going beyond just gross margin, you have to fold this into your overall financials that account for operating costs, etc.

Top-down method:  How much are competing products selling for?  Do a market survey of how much customers are willing to pay for the product.  Do a sensitivity analysis of how much product you'll sell at $X versus how much you expect to sell at $Y.

Which method is correct?  You need to do both to see if you have any overlap or not.  If the price you need to sell it at to make your financials come out is above what the market will bear, then you have a problem and you'll have to go back to see what can be adjusted.  But if it's the other way around, then you have some freedom to make extra margin, or to keep your price low and go for increasing market share to make that extra profit.

Above all, be brutally honest with yourself.  Be ultra-conservative in your numbers, and don't talk yourself into unreachable numbers just to make the financials look good.

Focus on your core competencies

There are many "layers" of product development, from core IP to a complete system.  To get a new, disruptive product out the door, sometimes you need to develop layers that are beyond your core competencies.  But be sure to do this for the right reason:  because it's necessary to gain market acceptance.  Then, once the market has accepted your disruptive product, shed the layers that aren't part of your core competencies and don't have high gross margins.  After all, it's your core competencies that help give you that unfair advantage over the competition.  Here's an example:  Qualcomm developed CDMA back in the late 80's and early 90's.  But to get this new, disruptive technology accepted in the market, it had to make handsets and infrastructure equipment (not part of its core competencies, and becoming commoditized).  Once CDMA became a popular standard, it shed its handset and infrastructure divisions, and focused on its core competencies:  IP licensing and ICs.

Get the product out the door and optimize later

This is a follow-on to my previous post on validating your market.  Entrepreneurs, especially engineer entrepreneurs, like to make that first product perfect.  It's nice to be a perfectionist and strive to make the best product, the most reliable product, with the right colors, or the right bells and whistles, etc.  But this will most likely come at the expense of time and money, and you might guess wrong on some of the features.  Build your first product (or service) and get it out the door.  Early feedback from customers is very critical, as it will tell you what you need to focus on for the next version.

No more boring presentations, please!

If I see another PowerPoint presentation that is "bullet, sub-bullet, bullet, sub-bullet, sub-bullet, bullet...." I'm going to puke.  Get creative.  Make some sizzle.  Stand out from the crowd by making a presentation that engages the audience, not puts them to sleep.  I don't mean throwing a bunch of animation up there either...that has become a bit cheezy.  Keep the message on each slide simple and powerful.  This might mean lots more slides, but that's okay...you'll roll through each one faster and keep your audience engaged.  And for heaven's sake, don't read your slides to your audience.  Your audience is capable of reading as well as you are.  Supplement each slide with expanded comment and not dictation.  And if you keep the message on each slide simple, your audience won't have to compete by either reading it or listening to you.

I realize there are different kinds of presentations, but in general the above advice should fit most types.  However, if you are giving a copy of your presentation (hard copy, or through email, etc.), then you might have to format it differently, since the slide deck for a powerful live presentation might not come across the right way in a non-live setting.  I'll probably expand upon this in a future blog.

Have you validated your market?

This post is a follow-on to this post where I asked "Are you solving a real pain?"  Entrepreneurs sometimes get caught up in believing in their own product so much that they really fail to validate the market before fully developing the product.  This also is sometimes referred to as "drinking your own kool-aid."  There are numerous ways to validate a market, depending on the type of product or service you are offering.  Let's say you want to offer a new widget for sale on the web.  Before you even spend a penny on developing it, how about spending a few bucks on a website that describes this widget, perhaps a little money to SEO it, and a button on your website that says "Click here for more info" and another button that says "Order Now" (which can return a polite message referring to order-backfill).  Even before you can fulfill any orders, you are collecting very valuable market data...all before you've spent a penny on developing possibly the wrong product.

Are you bankable?

Simple fact:  If you've never started a company before, or weren't part of the core group of a start-up company that became successful, it will be much harder for you to raise money, especially these days.  In other words, investors will not consider you "bankable."  This doesn't mean you don't have a great idea or the promise of a great company, it just means that investors put you in a much higher risk profile.  However, if they really like your company's product and market, they might fund you with a plan in place to bring in someone who has "been there / done that" before.  If you want to avoid this, perhaps because you don't want to lose control to an unknown, then the best remedy for you is for you to find someone yourself, who you are comfortable with, and who is "bankable" to join your team.  This person will be the rainmaker for your company and ensure that your company gets funded and becomes successful.

Surround yourself with smart people

Starting a company can be scary.  If you haven't done it before, there are many things you simply won't know how to do.  That's okay.  You're probably only a few phone calls or mouse clicks away from the answer.  That's why it is so important to surround yourself with smart people, and build that network.  This doesn't mean that as soon as you have over 500 LinkedIn contacts, or 500 friends on Facebook, that you've succeeded.  Go for quality contacts...people who have been there and done that, then leverage your professional and social networks.

Bootstrapping versus Venture Capital

This is very much a function of the type of product or service you're building, the market you're targeting, how quickly you expect (or want) the company to grow, and its total upside potential.  It's also a function of the type of company *you* want to build.  Since there are so many variables here, it's very hard to generalize.  If you're starting a company that is more of a "lifestyle" company, e.g., one that probably won't see a "hockey-stick" growth curve into millions in the first few years, then you're pretty-much stuck with bootstrapping, simply because you will have a difficult time finding an investor who will invest in a company with minimal upside for him/her, plus investors like to see clear exits.  But, sometimes there's nothing wrong with bootstrapping...you get to keep most of the company (instead of giving much of it away to investors) and you get to run it the way you want to (instead of being run by the investors via the Board).  On the other hand, if your product/service is one that must get out on the market fast to "catch that wave," or its a land-grab, then going the slow-growth route will most likely kill the company.

Time doesn't stand still while you're developing your product!

When making a development plan for your product/service, it's easy to think that for everyone else, time stands still.  I see a present need for a product.  It will take me 3 years to fully develop the product and be ready to sell it.  Gosh, what will life be like in 3 years?  Will there still be a need for my product?  Will it be solved another way by then?  Or will the problem simply go away, lose favor, no longer be in vogue?  Will a competitor have solved the problem by then?  If only we knew.  So, try to keep your development cycle short by perhaps coming up with a simpler version of the product, or outsourcing some of the work, etc.  Being paranoid will save you here...being ignorant or dismissive might kill your company.

My standard is better than your standard

Here I'm referring to a communication standard, or a set of rules that define how a signal is composed and communicated.  Many exist, such as Blue-ray, IEEE 802.11n, USB 3.0, Bluetooth, etc.  These standards have been defined by a committee of persons, usually from several organizations, or sometimes by a large organization pushing its particular approach or IP.  Since every company has an opinion on the make-up of such standard, it will most likely not be optimal for any one case or for everyone.  The saying goes something like "A camel is a horse designed by committee."  And it can be a huge turf war between large companies, too, like VHS versus Betamax, CDMA versus GSM, and Blue-Ray versus HD-DVD.  So, why am I bringing this all up?  Well, this opens the door for a new company to define a "race horse"...a better, more streamlined standard that does the job better.  However, many have tried, and few have succeeded.  But the failure didn't come when defining the better standard...that's the easy part.  The tough part is getting it accepted in the industry.  Whether you try to get your better standard endorsed by a standards body such as IEEE, or by a potential customer/partner, the resounding questions from them will be "And who are you?  How big are you?  How do I know you'll be around next year?"  A true David-and-Goliath problem if you're a start-up.

So if you're considering defining the next wireless isochronous multimedia communication protocol, or the next DVD format, or the next Body-Area Net standard, and your company is made up of two guys and a dog, think twice about how you're going to market this standard to get it widely accepted and embraced by your partners and customers.  Like I said in a previous post, knowing the right people is a huge component of a successful start-up, and it is absolutely essential in this situation.

The requirements of a successful start-up

After watching many start-up companies succeed or fail, I've come to the realization that the requirements of a successful start-up company these days are: 1) solid management having a great network of relationships and contacts, 2) luck/timing, and 3) a darn good product.  Expanding these a bit:  1) People solve problems.  People buy products/services.  People tell others about your product/service.  The broader your reach into your industry, and your market, the better you will be able to solve your problems and sell your products.  2)  You have to admit, timing is critical.  Hitting that market window is critical.  And in this is some degree of luck, which none of us can control.  And finally, 3) you have to have a product that has sizzle...that compels users/customers.

Build, not burn those bridges

The entrepreneurial world can be quite small sometimes, and it's very important to build relationships in it.  These relationships become the foundation and resource for solving problems that your company eventually encounters, whether it's raising money, finding a strategic partner, or finding a key employee.  A large component of a company's ultimate success stems from its relationships.  And in this ever-increasing world of social networking, it's essential that these relationships are maintained and never burned.  If you don't like the fact that a VC kicked you out after just 10 minutes, or will only offer you ugly terms, or whatever, just walk.  Don't retaliate.  Keep that relationship, because you might need him in the next company you start.  Or, he might be contacted by another VC you're pitching, and you need that positive reference.  Same goes for relationships with employees, employers, business partners, etc.  Do you have a particular experience you'd like to share here?

Are you solving a real pain? Old-school versus New-school

My last two posts talked about product differentiation and the importance of having a product family.  Now, I want to briefly discuss whether your product has merit.  Old school says:  "Is your product a painkiller or a vitamin?"  It certainly is nice if your product truly solves a pain in the market you're pursuing, but with all of the social networking websites out there these days, I have to ask if these really are solving a pain, or are they just darn fun.  Facebook, Twitter, Foursquare, SCVNGR, Zynga, etc.  Are they solving a pain?  I don't think so.  Even Betty White said Facebook is a complete waste of time (lol).  My point here is that if you are told (or you admit to yourself) that your product isn't a painkiller, perhaps there's still some merit if you have a unique twist, or a particular approach, or something that the market will embrace.  So, perhaps the other old-school saying is still the best question to ask:  "Will the dogs eat the dog food?"

A "one-trick pony" isn't enough

If you are like most entrepreneurs, you want to build a big company.  To do this, you not only need to have an initial product that you can develop without a ton of money, but also a product roadmap.  It might be sufficient for some to develop and market their widget (or service) and launch it on a website, etc., for everyone to see and buy, with no real vision of follow-on products.  This is often called a "one-trick pony."  Perhaps this is just fine for them.  This is a "lifestyle" business, in other words, one that is just fine for the entrepreneur, bringing in a nice paycheck on his profits, but not a good investment for an outside investor.  An investor needs to see an ROI on his investment, and a lifestyle business will most likely not qualify.  So, before you approach an investor, be sure to have a vision of how your company will evolve beyond your first product and clearly communicate this vision on a chart with a timeline.  Include costs of developing these future products and resulting market penetration.

Product Differentiation with a Sustainable, Defensible Barrier

You tell me you have a new widget.  There are similar widgets out on the market already, but you say yours is better.  It has more bells and whistles, or it has different bells and whistles.  No one else is offering this product/service today.  Should I invest?  Well, you have to do lots more convincing first.  Do you have any defensible IP?  How broad is your defensible position, or could a competitor design around it and not infringe?  You say you don't have any real IP, but you're first to market, and you can run faster than the competition?  The rule-of-thumb is a competitor can design it twice as fast as you took, so if it took you two years, your competitor will be able to offer it in a year or less.  I'm not saying these cases are non-starters, but be sure to look very critically at how your product is differentiated, and try to quantify why it's better.  Better performance?  By how much...10%?  10x?  Create a competitive matrix with features on one axis and all of your competitors (and you) on the other axis.  Then, fill in the "bingo card" to see if you're really head-and-shoulders above the competition.  Especially in cases where there is a questionable defensible barrier, it is absolutely critical that the founders have vast domain knowledge and a Rolodex filled with contacts that will enable them to build critical relationships in their target industry.

Taking on the big boys is a tough row to hoe

"Wow, I just thought of this great new kind of TV.  It's a great idea.  All I need to do is raise a few million, design it, manufacture it, and they will come to buy it."  Ouch.  An investor will look at you and see "risk" written all over this deal.  Unless you're a person (oops, I mean a complete team) who has a proven track record in the consumer electronics industry and is well-connected in that industry, it's a non-starter.  And even if you are such a team, you're taking on the likes of huge multi-national players who don't take kindly to competition.  "But, what do I do then?"  Firstly, if you have some great IP around your new kind of TV (or fuel-efficient engine, or new semiconductor process, or...), get it protected.  Start with a provisional patent if you're still validating the technology and/or the market, then move on to a PCT filing within a year.  Don't disclose it to anyone without an NDA.  Once you have protection, then, talk to those who know how to make your 800-lb gorillas your friends.  That is, turn your competition into partners.  These players have the ability to turn your new kind of TV into a market success.

Chemistry is important

I'm not talking about chemical bonds, but human bonds.  If you're thinking about starting a company with a friend, colleague, acquaintance, spouse(!), or otherwise, make sure you all are on the same page with respect to your vision for the company.  This includes initial product features, product roadmap, market niche, market strategy, company structure, company ownership, who's in charge of what, and a method to resolve conflicts, which inevitably will arise.  I could go on, but you get the idea.  Equally, investors look for this same chemistry, not only between the founders, but also between the investor and the founders.  If an investor gets a funny feeling about his/her interaction with the team, the potential for investment may be in jeopardy.  So be sure to start out right by building a team of entrepreneurs who are all in sync with you and are team players.

On the Importance of a Market Niche

So you've just invented the greatest thing since sliced bread.  Who is your customer?  You say "everyone, of course."  "So how is your brand new start-up going to reach everyone?"  "Well, I'll advertise, I'll put it on my website, pretty soon everyone will know about it."  Well, this is a market strategy, but good luck.  You are going after such a huge market, it's tough to address, and it's tough to convince "everyone" that you have something special for "them."  Find who could benefit most from your invention.  Then customize the product specifically to address this particular demographic.  Then market specifically to them.  You'll have a better product for them, and they'll feel you have something special for them.  And then, it opens the door for a roadmap of future products for other target markets.  Now, you've turned your one-size-fits-all product into a roadmap of products, with something special for everyone and a market that is easier to reach.

Start-up companies / entrepreneurs: You say you don't have any competition??

That's pretty-much the worst thing you can say to a potential investor.  If you really don't have any competition, then you probably don't have a market either.  So, either you haven't really looked at your competition, or you are coming up with a product or service that no one cares about.  There must be an incumbent way that people are solving the problem, or at least trying to solve the problem.  That's your competition.  Be sure to study it intensely, and acknowledge it's existence (and potential threats) in your investor presentation.  This will give you much needed knowledge and credibility.

Entrepreneurs: Turning the screws down on investors will just lead to a very long round.

It's tough to raise money these days, especially if you don't want to mortgage your house or run a big credit card debt.  So, you need to provide terms that are in the norm.  When you're raising your first (or second) angel round, typically you (and your attorney) will provide/present a term sheet for the round.  It's tempting for first-time entrepreneurs to "turn the screws down" on the terms.  By this, I mean making the terms favorable to the founders to the point that they just aren't attractive to the investor anymore.  If the going rate for interest on a convertible debt is 8%, then make it 8%, not 5%.  If the going rate for a bridge discount is 30% make it 30%, not 10%, etc.  If your company is successful, the difference in these terms won't matter.  Giving up a bit here will close your round faster, get you the money you need, and everyone will win.  You don't know what the terms should be?  Your attorney will know.  If he doesn't, then get a different attorney.  Ask him what terms you need to get your round closed by a certain date.  Then get the term sheet out, get the round closed, and get on with running your company.

Investors invest in people, not products or services

You've probably heard this before:  Bet on the jockey, not the horse.  Another one:  I'd rather invest in an "A" team with a "B" product than the other way around.  It's the A team that can make a questionable product/service successful, and if that's not possible, it's the A team that will know it can't be and kill it (or morph it).  Why is this?  The A team knows how to assess it.  And, more importantly, the A team has the contacts database to assist him/her in assessing the market potential, and getting it into the market.

These days, you need to be capital-efficient

Back in the 90's, VCs would put millions of dollars in a high-tech start-up, and patiently wait several years for the start-up to build its hardware product (software is a different story).  If the product was successful, everyone won, and many did.  It's not that way anymore for most investments.  Unless you truly have a blockbuster hardware product, these days your start-up needs to be capital-efficient:  less money has to go farther, and the point in time when your start-up either gets springboarded to the next level or gets its plug pulled is shorter.  Keep that in mind when developing your funding strategy and product roll-out strategy.

New blog to help entrepreneurs looking for investment in their start-up company

Welcome to my new blog.  I'm a private (angel) investor in the southern California area.  I've been investing in high-tech start-up companies for over 10 years and started my own company in 2004.  I've also screened hundreds of company applications for funding (by me) and provided my recommendations to various organizations such at the Tech Coast Angels, EvoNexus, etc.  I also advise and consult early-stage companies on strategies around funding, business, go-to-market, product development, and in some cases, even technology (yes, I have an MS in Electrical Engineering and still enjoy dabbling in all things technical).  Many of the entrepreneurs I meet have not even incorporated yet, or have just incorporated and now need some gray-haired advice on how to go about their business or how to attract funding.

Experience is critical.  Knowledge is critical.  In this blog, I plan to pontificate my views of how to successfully get your start-up company off the ground, funded, and moving up that hockey-stick on-ramp.  It's a wild ride.  Enjoy it!  If you want to talk directly to me, email me at timr411 -at- gmail.com.  Thanks for visiting my blog.