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.