What Investors Look for in a Startup

I have been on more than two sides of startup investments. Two of my companies have raised money and I have invested small amounts. Plus, I have been an advisor to investors. So, I feel adequately qualified to give some advice…

Less than 1% of startups get funding at the seed or startup phase. Of those that do, less than 1% get future rounds of funding. In other words, companies that raise multiple rounds of funding are literally one in a million. So, ideally you shouldn’t look for funding – read more here (http://blog.gupte.net/dont-look-for-funding-generate-revenue-instead/). However, should you decide you are going to pursue investors, read on.

A Passionate and driven management team – Notice that this one is first. A great management team will not only come up with winning strategies but also execute them efficiently and effectively to get the desired result. An important point to note here is that investors rarely invest in one-person companies. Not only is the risk too high (of the person quitting or worse) but it raises a red flag that the person is unlikely to be good at convincing people to support the idea (customers, partners, employees etc…)

At a talk that I attended, an investor gave the following reasoning. He said “that they rarely look at financials or look at them in great detail before a deal”. In fact they even give the business plan only a cursory look. He made a very important point, and here it is. He said essentially, that “An A team will fix a B plan or a B business. But a B team might screw up even an A plan”. Makes sense. In fact, I’ll take it further. An A team that is passionate about the business they are pitching will likely have thought about it carefully and chosen that business because it is an extraordinary proposition. A teams are made of A players and A players don’t choose ordinary opportunities. The rest of this article is about how you as an entrepreneur should identify a “great proposition”.

Return on investment – Your opportunity has to be a better option for investors than say, the stock market, gold, real estate or a dozen other opportunities that return anything from five to thirty percent annualized returns. They have to feel that they are placing their bets on a venture that has the potential to create disproportionate value within a relatively small timeframe as compared to other businesses. An obvious fact that many “green” entrepreneurs miss is that investors don’t invest because they like you, your idea or your company. Investors invest so that they can profit. Simple. This also has means it is very important that you present a believable and attractive exit strategy for investors.

A strong customer value proposition – this is really the basis of any company. In fact, it is quite simple – if customers are not clamoring for the value proposition your company represents, you don’t have a business. Even if you drive a taxi instead, you have better chance of being profitable.

A disruptive innovation – In a market that sees new ventures coming up every day, investors are always looking for that one idea that has the potential to change the landscape of that domain. It might be a radically innovative business model, or it could be founded on the basis of an incremental innovation – but one that will relentlessly change the competitive landscape.

Scalability – A great investment opportunity is not about earning peanuts. Plausible investment opportunities present a business that is anticipated to be a “rocket” performer. For the same amount of time and effort, they could invest in slow or small growth elsewhere that carries almost no risk in comparison. It is important for investors that the innovation or idea they are investing in has the potential to scale to a large size.

Leverage – Startups that leverage technology, knowledge of the marketplace, contacts, location or something else are attractive. For example, technology offers a competitive edge to any business that uses it effectively. From an investor’s perspective, if you are not leveraging, you don’t have competitive advantage. In fact, effective leverage is a common factor in all successful global companies anywhere.

Believe it or not, professional investors want to see all of the above, not just most. This is why only 1% make it.

The Very Lean Startup Method (Revised)

A Brief Introduction

The Very Lean Startup MethodTM or perhaps the Really Lean Startup MethodTM is but a natural extension of the Lean Startup Method. The latter approach to Entrepreneurship has been articulated exhaustively by Eric Reis in his book as well as by many others. In fact, there is now an industry around the methodology expressed in the Lean Startup book, and it has become a must read for any aspiring or practicing Entrepreneur.  One of the key teachings of The Lean Startup Method is the process of defining and creating the first functional product.

The Very Lean Startup Method focuses on identifying customers before an entrepreneur builds or perhaps even defines a product.

Why this is important

In reality, focusing on customers before a product idea is difficult, because most entrepreneurs and innovators work from passion first – they have an idea and they then try to make a business of it. In some cases they may not have an idea, but their experience, skills and interests determine what kind of products they are inclined to make. In fact, that last sentence carries the germ of success for the initial idea – experience and interest will often point an Entrepreneur to the problems that need to be solved in order to have a real business with real customers.

In fact, entrepreneurs often look for help when they have already built a product! They just want “Sales & Marketing Services” because they think their product or service is so great that all that is needed for a successful launch is to bring it in front of the customer. And very often, they will say in a self-deprecating manner “Oh, I am not a sales(wo)man, I am just an innovator…” Or worse “I am just an ideas person…” Those words and that attitude should be anathema to an entrepreneur.

Eric Reis has already talked in detail about the Lean Startup Method and how you create a Minimum Viable Product, so I won’t (re)address that concept here. However, the process he describes needs to dovetail into the process I am going to outline below.

The Very Lean Startup Method

Brainstorming and Informal “Research”

The rule is “Tell everybody about your idea”. This is a fail point and a possible innovation point. I say innovation is (only) “possible” because an idea may be so hare-brained as to defy possibility of any innovation to circumvent its fail point. Yet, the feedback received at this point is invaluable because it helps clarify the idea – sometimes the act of explaining alone can do that. It is important to understand that innovation, if possible starts as early as this point.

Identify possible customer demographics

The entrepreneur must identify several possible customer profiles for the product or service that s/he wants to create. This is fairly easy and at this stage since they can afford to be inclusive and broad. At this stage, because so little is known about the potential customer and product, the entrepreneur should not attempt to narrow the range of potential customer segments. In fact it is very likely that by narrowing at this stage, innovative business models will be overlooked. The exception is when an entrepreneur has significant previous experience of that specific market, and even then it is worthwhile at this time to be broad. This advice contradicts most advice to startups and perhaps may even seem counter-intuitive. However, keep in mind that the method being described here actually precedes the stages where typical management advice is offered. The goal is to test various customer demographics and find a “product-market fit”, and therefore no demographic should be abandoned before rational testing (described below) provides a clear negation.

Make Collateral

The next step is to create a brochure or website to engage the various segments identified. Depending on whether customers are mostly online or mostly offline a website or a brochure or both are appropriate. The collateral must provide details of the features you plan to provide but it is even more important to sell the benefits. Much has been written about this, so I am not going to go into too much depth on this. Suffice it to say that entrepreneurs (especially technologists!) tend to focus on features, whereas their customer will only buy when convinced of the benefits

Send out the Collateral

This has to be a broad effort. And here entrepreneurs shouldn’t get into the trap of asking friends or their mothers! They may not tell you the truth – only what you want to hear. Entrepreneurs must talk to strangers, both online and offline. They also shouldn’t hesitate to talk to potential customers in real life, even if the product is online.

It is important to be systematic at this point. There are hopefully a large number of segments that need to be analyzed now, and marketing programs should not overlap or taint each other. If that happens, you may end up choosing an incorrect customer segment and that could happen when it is too late, or at least too expensive to change your startup’s direction.

Send out variations with different pricing or offers

For each customer segment, the entrepreneur will have to experiment with various offering and price points – the equivalent of A/B testing. Sending out emails or other communication directing potential customers to a website is the quickest way to get results. The website can, for example, have landing pages that lead to different pricing for different segments. In fact, there can be multiple price points for a single segment; this is an opportunity to use that greatest of free market metrics – price discovery! Important: No public page on the website should link to these pricing pages. If that happens, potential customers will soon discover that different pricing schemes exist! That will obviously not have a very pleasant fallout.

An entrepreneur came to me for advice on starting a 3D Printing Service. I advised him to follow the Very Lean Startup Method. I asked him to begin asking companies, especially startups and incubators who could not afford their own machines if they would be interested in this service. We sat together and made a rough business plan focusing especially on what pricing would be needed to make it a sustainable business. However, when he went out and contacted people, he did not even discuss price – he simply presented the idea of using his machine for 3D Printing and ancillary services. To his surprise (and dismay) he found that no one responded to his queries. This was a fail point. Now he is rethinking the business model and meanwhile has also joined an accelerator. The latter gives him the opportunity to study startups close-up and determine their real needs.

The most important benefit of using the Very Lean Startup Method was that he didn’t invest any money, only some of his time, to find that there was no viable business. Other entrepreneurs would possibly have leased space and bought at least one 3D Printer before starting to offer their service. We put the marketing ahead of the product development and were able to save a lot of time, money and effort.

Identify the customers that respond and why

If an entrepreneur is lucky, some targets will respond. If not, it’s back to the drawing board – more on that later. It is imperative to find out why! Easy to say, harder to do! In short, it’s great that you got a few responses, but you need to know why you got those responses so that you can get more of them. Even at the expense of losing a few of them.

However, it is very likely that you won’t lose them. By engaging potential customers, you are more likely to create an unshakeable bond, because people like to connect to real people especially when they are spending their hard earned money. And it is surprising how many people respond if they are asked the right questions.

Find out why the non-responses didn’t respond

In business it’s perhaps more important to find critics than friends. The critics keep one grounded.  There may be many reasons or even a single small reason that some of the target audience didn’t respond. Maybe the message was not appropriate for that target demographic, maybe the timing was off, maybe the price was wrong and so on. But it could be that there is a very small piece of the puzzle that is missing and adding that could turn the tables, so to speak. This little piece may be easy for you to implement and may not even be a feature – it could, for example be financing, an external option.

Note that in any campaign to acquire customers, there are always many times more people who don’t respond than those that do, including those who want the product, but didn’t or couldn’t at that time. So, if one doesn’t go after this “silent majority”, one is missing out on getting some very valuable feedback.

 

Around 2009 Intuit introduced a product that allowed tax filers to photograph their W-2 forms (an earnings statement like the Form 16 in India required to be submitted with their tax filing) using their cell phones. The users could then transmit this to Inuit, who automatically associated this with their online tax filing application. The result? A big yawn from the marketplace. However, the team did not give up on the product. Instead (as quoted in the HBR Case Study “The Innovation Catalysts”),

[a] five-person team went “out in the wild,” [Carol Howe, a project manager and innovation catalyst] says, to observe dozens of smartphone users. It quickly narrowed in on millennials, whose income range made them likely candidates for the simplest tax experience.

They were told during casual conversations that users resented having to go back online to file, and these users wanted to be able to complete their tax forms on the smartphone itself (as long it was the simple 1040EZ). And thus was born the most successful product in Intuit’s stable in almost a decade!

Ask the responding customers to pay

This is perhaps the most important step in the entire process – this is where one gets to see whether an idea for a product or service can actually be a viable business.

Take this common life example as a parallel to what happens when people have to actually commit to some time or expense.

Let’s say you are putting together a trip to a holiday location with your friends or relatives. You are sitting talking about it and you all agree that it would be fun to go to the Bahamas or the Grand Canyon for a holiday. It’s not very expensive, but the cost is not trivial. Everybody is excited and they agree to go. Now you ask them to decide on a date and also ask them to fork out the money, so you can book the tickets and the hotels. Suddenly everybody finds an excuse, or they find another topic of discussion.

This is also true when people buy products or services. When someone presents an offering to people, they most likely are supportive and will agree that it makes sense to adopt or buy it. How many times do we hear, “Sure, I’ll buy that for $X!”. However, when asked to pull out their wallets and actually buy it, they have various excuses – “Let me think about it some more” or “Hmm, I’m a little short of cash right now, but maybe in a couple of months…”. Alternately, if the seller is lucky, they will start asking questions, for example about warranties, about specific features they want (and probably don’t exist in the current offering).

In fact, their objections, if real, are a great form of feedback that could significantly improve a product/service. Listening at this stage and asking more questions is a goldmine of market research information.

Do the math on cost of customer acquisition & pricing

Okay, so let us say people are willing to pay for the offered product or service. But wait! The next important question is this – is it priced right? Enough to make a profit? It’s easy to get customers if the pricing is artificially low. But that price may not be enough to make a profit. If there exists a business plan with some pricing (and cost) assumptions, it’s now time to revisit that. Is the promised service level doable in the cost structure previously assumed?

At this stage you also have some idea of how many customers you can acquire and at what cost. The current marketing campaign’s budget should be divided by the number of customers you actually acquired.

This is a crucial fail point and an innovation point.

Adjust the cost of feature development in the business model

This step makes use of the information in the previous step and rejiggers the business plan to take into account the additional costs of the features that customers want (or say they want). This is an important step and not to be glossed over – business models invariably need to be tweaked as new costs are recognized based on new features or changes to the business model.

Modify offering – product/price/placement/target customer

Now it is time to take a look at the big picture again and check if the business is still viable with the new costs. If not, the product and/or the target customer needs to be rethought. If, on the other hand, the business still makes sense, it is time to take the next step and actually build the product.

Repeat

…till you have a viable business model

Conclusion

Much of this paper is theoretical in the sense that the process has not gone through robust testing against facts. However, it should be treated as a set of hypotheses that need to be proven experimentally. Of course the hypotheses are derived from my extensive experience in starting and running my own companies as well as entrepreneurs I have advised and mentored. That several entrepreneurs have benefited from this approach is sufficient proof that there is some merit here. However, like the process itself, I am testing these hypotheses by approaching potential consumers of the concept!

 

7 Paths to Entrepreneurship

Introduction

A lot of people ask me “How does one become an Entrepreneur?”. Below, I’ve listed seven paths that you can take to reach that goal. Of course this is only a partial answer and attitude, mindset and many other steps have to be simultaneously explored. But choosing one of these paths is necessary to begin something and take the longest – so start thinking about them or even better, doing!

I’ll elaborate on each of these in separate posts, because a single post will become too long. But this is a start.

The 7 Paths

1. The Trader
• Starts trading the goods he wants to sell or something similar, but most importantly to the market/customer he wants to address
• Can start understanding the market/customer but also the entire value chain
• This can include a Franchisee, Distributor or Retailer. These three do require capital for inventory and sometimes fees
• Here, the Very Lean Startup can be applied. For example, put up a website or store announcing the products to be sold and offer discounts for early signup

2. The Pirate
• Like a trader but goes one step further – selling goods under his own brand
• Again, ethical and even legal conflicts – may be difficult to recover brand image
• Should limit yourself to selling just enough to test the market

3. The Employee
• Takes a job in an organization that may be a potential competitor i.e. engaged in the same/similar business
• Must work hard – see the Fable of the carpenter
• Diligence will be rewarded with promotions – so s/he will know more about the business
• Avoid ethical conflicts

4. The Journalist
• Wanted to call it the researcher, but connotation is not sufficiently action oriented
• Looking for “scoops”
• Not about writing, but document everything
• Focus on a market segment
• Can also blog on the relevant topics

5. The Customer
• Become a customer for the product or similar product
• Helps you to identify weaknesses in competition
• …as well as weakness in product or its delivery
• Gives insight into the “need”

6. The Integrator
• Puts together a solution from existing products or services.
• Important that no fixed cost or infrastructure is built up
• Low barrier to entry (beware of competition)

7. The Innovator
• My favorite
• Goes in with the mindset of innovating a product
• Nothing to sell
• How can I solve your problem?
• Looking for customers
• Lean or Very Lean Startup is best bet

Startups shouldn’t pursue patents

Starting up? Forget about patents – at least for a while. While there are definitely exceptions, 99% of startups shouldn’t try to “patent their idea” or even attempt to patent processes or products that will be at best, half-baked.

Twice last week, I was called upon to give advice about patents and intellectual property in general. For the latter see respectip.org – another blog that I just got started on. The first of those opportunities was to a group of about 40 entrepreneurs and would-be entrepreneurs at an accelerator called SparkPluggers. The fact that so many were interested in such a session clearly showed (no offense intended) of their lack of understanding of Intellectual Property. Of course there were knowledgeable people in the audience, but in general, their interest in patenting anything from their “business model” (forget about it) to actual prototypes of medical prostheses demonstrated a range of understanding from naive to sophisticated.

The second time was a one on one session with a very bright entrepreneur who wanted some protection to pursue his business without having to worry about someone copying him and getting ahead of the game because they had more resources. He was interested in attracting investors and wanted them to feel that they were reducing their risk, because the “idea” was protected.

Both of these are valid reasons to look into getting Patents, perhaps into trademarks or copyrights (although the latter two are typically weaker protection for a business). But it is important to be very clear about the costs – both in time and money of pursuing patents, because it simply is not for everybody.

Here are five reasons why a startup shouldn’t worry about patents for a while – at least until they have customers.

  1. Rarely are raw “ideas” good enough to patent. When ideas are actually deployed in practice, you discover flaws in the “implementability” of those ideas – primarily because you simply can’t think of everything, but equally because the customer needs you are trying to serve are not well understood. And nor is the fit between your idea and the customer needs well understood. If they were well understood, someone else would have also understood them and would have been serving those needs. Solving those real problems of market deployment as well as the internal processes that allow you to create a good solution changes your idea so it is actually different from others who have had the same idea (trust me there are many) and you actually derive innovative processes in the implementation phase. And processes are what really makes a patent. Detailed, step-by-step processes are the result of attempting to implement an idea in the real world.
  1. Patents are costly. I have spent over $100,000 to date and we are not all done yet! This is for five US patents and 1 Indian Patent plus four pending applications. Not only are there initial costs, but the examination is a costly process and a surprise to many first-time patent seekers. Every time the examiner raised an object and we had to respond, my attorney’s fees were in the thousands of dollars!
  1. Patents take a lot of your time. I took eight months of doing nothing else. I would have been better off refining my product and then patenting it. And I would have been benefited from pursuing customers at that stage, which would have really helped cash flow.
  1. Solving problems for customers in an innovative way is the way patents are created. No longer in R&D labs, but in the hustle of serving a customer. And customers give a better perspective into the actual usage of the product or process so that it is more “useful”. It is important to recognize patents are utility patents, in other words they must be useful. Plus, the patents, even if granted, are not going to have much value if they don’t address real problems faced by potential users.
  1. Investors are not going to be impressed by patent applications – most applications either don’t result in patents or result in very narrow patents that are not much use at all. So, patent applications don’t really mitigate risk for investors, which is the supposed intent of filing patents.

Overall this also fits into the “Lean Startup” and my own “Very Lean Startup” philosophy, because a startup’s focus should be on recognizing and delivering on customer need – everything else is irrelevant.

Why the #AppleWatch is sheer genius!

Really, <faceplam> moment – why didn’t I think of this? A watch? That you wear on your wrist? And call it the launch of the wearables movement? Sheer genius!

Seriously, we have been wearing watches for centuries. Genius is when you can sell the concept of wearing a watch to the whole world, and make it seem like you invented the damn thing!

AppleWatch
I stopped wearing a watch years ago – yes when my mobile phone became permanently attached to me. Do I now want to spend anywhere from $549 to $1,099 to acquire some annoying thing that clings to my wrist? No! In fact, a good friend Cawas, who owns a string of watch stores locally has been trying to save my soul by selling me a watch, but I have resisted.

My first watch was a hand-me-down from my father, when I graduated high school. Even in college I didn’t often wear a watch. I just don’t like stuff like chains and rings that encumber me. So when “wearables” become ubiquitous, what do I do? Bury my love for tech? Or change who I am?

Maybe Apple will come up with something for me then. Like a shirt. With apps.

Don’t look for Funding, Generate Revenue instead

Less than 1% of startups get funding at the seed or startup phase. Of those that get seed funding, less than 1% get future rounds of funding. In America, the Small Business Administration estimates that “only 0.1 percent to 0.2 percent of funding requests made to VC firms result in an investment”. In other words, companies that raise multiple rounds of funding are literally less than one in a million.

Of course there are exceptions – if you are Elon Musk, you can raise funding with just an idea. But investors, unless they’ve lost their marbles do not invest in “ideas”. They invest in businesses that will turn a profit which they can leverage (typically) into a sale. Naïve entrepreneurs (and I meet many) often confuse investors with donors. They feel that investors should love their bright idea.

Therefore, startups should focus on revenue instead of funding. Paradoxically, companies who generate revenue are the ones that often get funded. But given the above information that investors are looking for companies that generate revenue and that either do or will eventually generate profits, maybe that isn’t so paradoxical after all.

The thumb rule is that startups need to expect to generate at least $10 million in sales within six years of starting for most external investors to consider investing. Most startups will never reach those kinds of numbers, yet they think they will and try to convince investors (who know better) otherwise.  Scott Shane (http://www.bloomberg.com/bw/authors/2250-scott-shane), author of Fool’s Gold: The Truth Behind Angel Investing in America estimates that 0.4% of startups achieve $100 million in sales in six years yet thousands of business plans show projected revenue of that order in their business plans.

The favorite company for investors is one which generates revenue AND when funded by them will generate profits. Thus, they are needed i.e. the entrepreneur cannot succeed without the investment, and their investment will generate returns (from the profits or from a sale).  How much should that return be? That’s another blog’s worth. Coming soon….

The Very Lean Startup

Here is a cleaned up and more formal version of the below.

I decided to follow my own advice and publish the following online before it was finished.  This is a very rough first draft, so please excuse the blemishes and mistakes.  I am looking for feedback and your thoughts on what I have outlined below.

Brief Introduction

The Very Lean Startup Method© or perhaps the Really Lean Startup Method© is but a natural extension of the Lean Startup Method. This approach to entrepreneurship has been articulated exhaustively by Eric Reis in his eponymous book as well as by many others. In fact, there is now an industry around the philosophy expressed in the book. Any aspiring or practicing Entrepreneur must read it. I strongly recommend that you read it right after you read this blog and certainly before you start using the ideas in this blog. You want to be prepared for success – once you start getting customers, you need to develop the product and there is no better source than Eric’s book.

I will elaborate more on the process but let me explain the concept in a few words. The Very Lean Startup Method focuses on finding customers before you build or perhaps even define a product.

Why that’s good and why that’s not so good

Now, in reality that is difficult to do because most entrepreneurs and innovators work from passion first – they have an idea and then try to make a business of it. In some cases they may not have an idea, but their experience, skills and interests determine what kind of business they are inclined to do. In fact, the latter is more useful than just an idea – experience and interest will often point you to the problems that need to be solved in order to have a real business with real customers.

In fact, I often meet entrepreneurs who are looking for help, and they have already built a product! They just want Sales & Marketing services (which we provide) because they think their product or service is so great, they just want someone to get in front of the customer. And very often, they will say in a self-deprecating manner “Oh, I am not a sales(wo)man, I am just an innovator…” Or worse “I am just an ideas person…” Well, they don’t realize how unclued they are.

Eric Reis has already talked in detail about the Lean Startup Method and how you create a Minimum Viable Product, so I won’t (re)address those. I think though that process will come after the process I am going to outline below.

The Very Lean Startup Method

Brainstorming and Informal “Research”

The rule is “Tell everybody about your idea”. This is a fail point and a possible innovation point. I say innovation is (only) possible because your idea may be so hare-brained as to defy possibility of any innovation to circumvent its fail point.

Identify possible customer demographics

First, identify who might be the customer for the product or service you want to create. This is fairly easy and at this stage you can afford to be broad. Remember that you are most likely to be wrong, unless you have been in that market before, so try to be as exhaustive as possible. Our goal is test various customer demographics and find a “product-market fit”.

Make a brochure or website

The next step is to create collaterals to engage the various segments you have identified. Depending on whether you customers are online or offline you would make a website or a brochure or both. Provide details of the features you plan to provide but at the same time, sell the benefits. Much has been written about this, so I am not going to go into too much depth on this. Suffice it to say that you need to convince people to want the benefits and they won’t give a damn about the features.

Send it out to a few specific target customer types/demographics

This has to be broad. And don’t get into the trap of asking your friends or your mother. They may not tell you the truth. And even if they do, you may not believe them! Talk to strangers online and offline. Don’t hesitate to talk to potential customers in real life, even if your product is online.

Send out variations with different pricing or offers

For each segment you will have to experiment with various offering and price points. Your website can for example have a landing page that leads to the pricing for that particular demographic. Important: None of these pricing pages should be linked from any public page on your website. Naturally, if you do, people will soon discover that you have different pricing schemes and different offerings! That will obviously not have a very pleasant fallout.

Identify the ones that respond and why

If you are lucky, some of your targets will respond. Find out why. Easy to say, harder to do. You obviously don’t want to look a gift horse in the mouth, but you do need to know what color it is. In other words, it’s great that you got a few responses, but you need to know why you got those responses so that you can get more of them. Even at the expense of losing a few of them.

However, it is very likely that you won’t lose them. By engaging them, you are more likely to create an unshakeable bond, because people like to connect. And you will be surprised how many people respond if you ask the right questions.

Find out why the non-responses didn’t respond

It’s perhaps more important to find critics than friends in business. The critics keep you honest. There may be many reasons or even a single small reason that people didn’t respond. Maybe the message was not appropriate for that target demographic, maybe the timing was off, maybe the price was wrong and so on. But it could be that there is a very small piece of the puzzle that is missing and adding that could turn the tables, so to speak. This little piece may be easy for you to implement and may not even be a feature – it could, for example be financing, an external option.

Note that in any campaign to acquire customers, there are always many times more people who don’t respond than those that do. So, if you don’t go after the silent majority, you are missing out on getting some very valuable feedback.

Ask the responding customers to pay

This is perhaps the most important step – this is where you get to see whether your idea for a product or service can actually be a viable business.

Take this life example as a parallel to what happens when people have to actually commit to some time or expense. Let’s say you are putting together a trip to a holiday location with your friends or relatives. You are sitting talking about it and you all agree that it would be fun to go to the Bahamas or the Grand Canyon for a holiday. It’s not very expensive, but the cost is not trivial. Everybody is excited and agree to go. Now you ask them to decide on a date and also ask them to fork out the money, so you can book the tickets and the hotels. Suddenly everybody finds an excuse, or they find another topic of discussion.

This is also true when people buy products or services. If you explain your offering to people, they most likely tell you they are definitely for it. How many times have you heard “Sure, I’ll buy that for $X!”. However, when you ask them to pull out their wallets and actually buy it, they have various excuses – “Let me think about it some more” or “Hmm, I’m a little short of cash right now, but maybe in a couple of months…”. Alternately, if you are lucky, they will start asking questions, for example about warranties, about specific features they want (and you probably don’t have).

In fact, their objections, if real, are a great form of feedback that could significantly improve your product/service. Listening at this stage and asking more questions could be a goldmine of market research information.

Do the math on cost of acquisition of customer

Okay, so you got people to pay. But wait! Don’t jump for joy quite yet! Sorry, to be a wet blanket but the next important question is… Are you charging enough? It’s easy to get customers if you low-ball your price. But that price may not be enough to make a profit. If you have made a business plan with some pricing (and cost) assumptions, it’s now time to revisit that. Is the promised service level doable in the cost structure you had previously assumed?

This is a fail point and an innovation point.

Apply the above and the cost of development to the business model

Modify offering – product/price/placement/target customer

Repeat

…till you have a viable business model

Now read Eric’s book on The Lean Startup Model and it will go a lot quicker and a lot smoother.

Conclusion

What does it take to be an Entrepreneur?

Being an entrepreneur takes passion and belief in yourself.  It takes flexibility and perseverance and a lot of qualities not seen in most people.  Being an entrepreneur takes also takes courage, humility, focus and above all, a first class idea that has merit to real customers in the real world.

You may have heard this before, but bear with me a moment because most people buy this superficially but don’t think deeply enough about it.  Whether it is when they plan to become entrepreneurs or when they look at an entrepreneur and appreciate (or not) her/him, people should understand the “real deal”.

Let’s take it piecemeal…

“Passion…”
Let’s face it – in any thing you do, there are moments when you wish you could just walk away.  Whether it’s a relationship or a business, there are always those moments, and the only thing that prevents you from doing some incredibly stupid is the realization that there is nothing you care about more.  That’s passion.

But there are other benefits.  When you have passion for something, it rubs off.  Co-founders, employees, customers and yes, even vendors and partners will be attracted to you because they will feel excited about what you are doing.  They know that you will not walk away (see above) and will see things through.  And so, you will attract the best, the most committed people, to your enterprise.  That’s worth more than all the venture capital in the world.

And now listen to this:

“I never trust anyone who’s more excited about success than about doing the thing they want to be successful at.” ~Randall Munroe

So be careful what your passion is.  If it’s “making the big bucks” or “being on the cover of xyz”, forget it, you’d be better off in entertainment or politics.  What I am trying to say here, if you haven’t already got it, is that you need to be passionate about your product or service – whatever it is that you are offering.  Not passionate solely about making money (although as I will show you later, you need to be focused on making money too).  You need to be excited about getting up in the morning because you want to work on your passion.

“…belief in yourself…”
I will write someday about the link between innovation and entrepreneurship, but for now, suffice it to say that they go together like love and marriage, or peanuts and beer.  This means however, that you are most likely going to be doing something different or differently, in other words, innovative.  And no one else will like it, at least initially.

If you are doing something really great it will most likely be something that no one has thought about it.  That means everyone will deride you, maybe openly laugh at you.  They will tell you it can’t be done, that no one will buy it and many such negative things.  The thing is THEY MAY BE RIGHT, some of the time.  And that will make you lose heart.  But don’t.  Because you will be right, eventually, if you keep adapting, modifying, and sticking to it.  Which brings us to…

Flexibility, tenacity, perseverance
”Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful people with talent. Genius will not; unrewarded genius is almost a proverb.  Education will not; the world is full of educated derelicts.  Persistence and determination alone are omnipotent. The slogan ‘press on’ has solved and always will solve the problems of the human race.”
– Calvin Coolidge, President of the United States 1924-1928

Of course this applies no matter what you are doing, not just in entrepreneurship.  But, in entrepreneurship, you have to fight against massive odds, and failures are almost a given.  In fact, innovation (which again, I believe to be fundamental to entrepreneurship) requires many failures in order to perfect the offering.  In fact innovation and therefore failure, and the ability to overcome failure by solving the problem has to be your culture and that of your company.

This is becoming long, so I will continue in another post…watch this space.

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