This is the best info that we have found on startup traction and communicating it properly to investors. (Hint: It’s all about the messaging!)

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At Tech-Rx, we see many executive summaries from startups and companies looking for funding. Most of them are okay, but few are truly great. The great ones seem to all have similar key points and these key points are……

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BUSINESS PLANNING SERIES

Last time, we wrote about the importance of True Competitive Advantages and how the lack of at least one will likely condemn your business plan to the Reject Pile. Today, we will look at another common Fatal Error – Lack of Market Validation, or —

No One Ever Said They’d Buy It!

One of the saddest mistakes we see in business plans, especially from first-time entrepreneurs and, regrettably, from some second- and third-time entrepreneurs as well, is the failure to actually validate the market for their new product.  They propose to go ahead and build their product without asking anyone if they will actually pay for it.  The “If we build it, they will come” model is fine if you are building a simple iPhone app that you plan (hope) to sell for $0.99 and will only take 100 hours for you to build it.  It’s something else again when you are betting the kid’s college money and taking out a second mortgage to fund your efforts.

Here’s some typical answers received (and our unspoken responses) when investors ask about market validation:

“I’m my own target customer. I’m ‘scratching my own itch.’  I know what to build.” What we hear you saying: “OK, so I guess there might be a market for at least one of these.”  More to the point, “scratching your own itch” is just the beginning.  It’s your inspiration, NOT the strategy for a real business.  “I’m the target customer” is NOT market validation.

“We didn’t bother with research.  It doesn’t matter what 10 people think, there are millions of potential customers.” Our unspoken questions: “If there are millions, you mean to say that you can’t find at least 10 that will commit to buying your product?  If you can’t find 10, what makes you think there are millions, or thousands, or even hundreds of potential customers?”

“My customers won’t understand mockups. I have to build it to show them first.” We hear you saying, “This product is too complex to sell, or even understand.”  If you can’t describe your concept in 30 seconds or less, it’s either too complex, or you don’t understand it yourself.  Let’s pretend that your customers don’t get it from mockups.  By definition, your first customers will be early adopters who will probably be OK with, and anxious to get, an alpha version.  If you can’t find a few who are excited about your product, perhaps your product isn’t exciting.

“I’m no good at sales and marketing.  I have to build a product so good that it sells itself.” Our immediate thought:  “This guy does not understand business.”  We don’t doubt that you can build what you say you can build.  (If you can’t, that’s an entirely different problem.)  The high risk is not that you can’t build it; it’s that you be able to find actual customers who will cough up cash for what you have built.  The earlier you can reduce this uncertainty, the more likely we are to invest.  No sense in putting this off.

“My friend / co-worker /  brother / teacher thinks it’s a GREAT idea.”  We hear: “His mommy thinks he is smart and handsome too!”  It does not matter what non-entrepreneurs think of your product. Actually, it doesn’t matter what real entrepreneurs think either. They are not experts on your problem, probably have outdated ideas and might not like certain technologies or methodologies (e.g. Mac vs. Windows, Linux vs. Windows, Open Source vs. Proprietary, etc.), probably due to bad experiences. Of course, none of these “expert opinions” matter, because you have done your homework and actually have real-world people who are saying that they want your product and are willing to pay for it, right?

Conclusion:  The only thing that matters is that people are willing to give you money. It doesn’t matter what “experts” say. When 10 people say that they will give you money if you build this thing, that’s the only validation that matters!

The next time, we’ll look at Fatal Error #3 – Incorrect Positioning vs. Competition.  I hope this is helpful.  We want every entrepreneur to be successful!

-Steve Hogan

BUSINESS PLANNING SERIES   Last week, we wrote about a common-but-fatal error to avoid when writing your business plan – Invalid Competitive Advantages – stuff that makes you look less-than-competent and turns investors. This week, we will focus on the True Competitive Advantages your plan should show. If you have one of these, investors will probably read your plan. If you have three or four, you may actually get an audience – that would be good.

A True Competitive Advantage can’t be copied and can’t be bought.

Asymmetrical Knowledge aka “Insider Information” – Not the kind we hear about on Wall Street, which is illegal, but rather intelligence about the market need that you know that is unknown to others. For example, you may have worked for a very large company that has made the conscious decision to ignore a market that they feel its too small for them to devote resources to, but that you believe, with solid justification, can be built into a $100 million a year company. (I am sure that I do not need to caution you to behave ethically and legally in the use of this information.) In business, having knowledge that is uniquely-available to you is a True Competitive Advantage. An Obsessive-Compulsive Attitude about The One Thing – I’m not talking about washing your hands every 3 minutes or straightening the chairs around the conference table whenever you enter the room. I mean figuring out what you can do better than everyone else, something that matters, and obsessing on ALWAYS doing that One Thing better than ANYONE, including your closest competitor, YOURSELF. For example, Google became the behemoth it is today by focusing on Search – being faster, better, more accurate and relevant than anyone else, and then making it faster and better and more accurate and more relevant again and again and again. By the time their competitors came close to copying their stuff, they were already on to the next iteration. Most of their competitors – who started out before them – are long gone (can you say Alta Vista? Lycos? Excite? Do you even recall who they were?). Google’s search page was NEVER the prettiest. It still looks about the same as in 1998. In fact, it was years before Google returned anything beyond a text-based response.  They waited until they could return a page with graphics just as fast as their text-based earlier versions. Faster, better, more accurate, more relevant, rinse, repeat. An OCA is a True Competitive Advantage. Personal Authority – Become known as the Industry Expert – the Go-To Person for anyone interested in your area of expertise which, of course, is the basis for your company (see above, Asymmetrical Knowledge). Attend meetings and conferences related to your intended business area. Make noise i.e. ask questions and start discussions. Take controversial positions. One “trick” I have used effectively works like this: Attend a relatively large conference with a panel discussion covering something relevant to you business; during the Q&A, pick one of the panelists and ask a question that contradicts his position – if he says “it’s white,” you say “my experience shows that many times it is black.” (Does not matter if you are right – just matters that your position is conceivable.); A little active banter back-and-forth (courteous, of course); thank them for their answer and ask them (in front of the audience) for some time “after this session.” Two things will happen: 1) Your target will commit to giving you a few moments of his time during which you will have the opportunity to learn and, with any luck, form a lasting relationship; and 2) Others in the audience who were afraid to ask a question or to take the same position as you will seek you out for your expertise i.e seek to bask in your Personal Authority. Your reputation as an expert will flourish. A Dream Team – Has your team done something like this before? Have they served the target market and hence understand the pitfalls in addition to the needs? If they haven’t, then are their other credentials strong? The team is a prime focus for investors – find a way to present each team member in the best possible (but factual) light. You want your investors to understand that your team is up to the task and understands exactly what needs to happen and when. One caveat – avoid being seen as over-confident “know-it-alls.” Existing Customers – An absolutely True Competitive Advantage. Having paying customers, even if it is for a pre-beta version, is priceless! Especially if these are significant customers in your target market. This validates your business plan and relieves investor anxiety. The less-nervous the investor, the more-likely they are to invest. I hope this is helpful. In our next entry in this series, we will talk about Fatal Error #2 “No one ever said they’d buy it.” Please feel free to add your $0.02 to this discussion. (See “Personal Authority,” above.) – Steve Hogan        

BUSINESS PLANNING SERIES   We see a lot of business plans, both here at Tech-Rx and in our alternate lives as angel investors, entrepreneurs and executives.  Over the next few weeks, we will touch on some fatal errors that we frequently see and that will almost certainly cause a potential investor to deep-six you plan, and the actions you can take to avoid these errors. Avoid what we call “Invalid Competitive Advantages.”  The bottom line – it’s not an advantage if anyone claims the same advantage.  Here are some of the more-popular red – or should I say black-flag “advantages” — 1: We have Feature “XYZ” — Sure you do, but only until someone copies it. If it is really cool or useful, the competition WILL copy it.  Even worse, if it doesn’t work, your competitors will make fun of you. 2: We have the Most Features — No one wants more features, they just want the right ones.  Look no further than Microsoft Word.  The 2003 had lots of features that are never or very-rarely used by very few writers.  I suspect that many features have NEVER been used by anyone!  Yet, Microsoft, in its infinite wisdom, added more useless features in its 2010 and 2013 releases.  Just to compound the error, they completely revamped the menu structure (i.e. Added Feature “XYZ” – See above) in a way that is to this day almost universally-hated – hated so much that a cottage industry of plug-ins that restores (most of) the old menu structure has sprung up.  Critical mass is probably reached when everyone has 80% of the desired features. 3:  We are better at SEO and Social Media — Would it surprise you that well over 80% of early-stage company founders believe that they are “better” than everyone else at SEO and social media?  Just like in Lake Wobegon where “all of the children are above average.”  The truth is that SEO rules evolve as Google and others strive to deliver relevant results to their users.  It’s a losing game.  Just do the basics to make sure that they can find your website and understand what you are about. 4:  We work hard! We’re lean! — You better work hard and be lean.  After all, you are a three-person team working 80-hour weeks for probably zero pay.   What are you going to do when Google decides to take 10 people, give them a $10 million budget, have them work 40-hour weeks, paying them above-market rates? 5: We’re passionate!!! — I sure hope so.  Otherwise, why are you doing this? 6: We’re cheaper. — Sure you are – until Google builds the same thing and gives it away for free. (See #4 above.) What can be learned from all of this?  — 1: Simplify your product scope. — You will never have enough features and your product will never be perfect.  Feature-rich products take too much time and money to build, and they usually turn out to be slugs! 2: Anything worth being copied will be copied. — Plan on being copied and make it a part of your plan.  Answer these questions:  What if some big company copies your idea and builds the same product after you go live? What are you doing now knowing that some big company will copy your idea? What are you going to do when some smart hot-shot startup copies your idea, gets $10M from XYZ-VC and is featured a half-dozen times on TechCrunch? What are you going to do when there are four totally-free open source competitors? What are you going to do when employee #2 takes your code, marketing plan and customer list and starts selling your stuff worldwide for 1/10 the price?

 The Moral – – The only True Competitive Advantage is that which cannot be copied and cannot be bought.

Next time we will talk about True Competitve Advantages that you may not realize you have.

– Steve Hogan