How entrepreneurs get started

April 27, 2010 · 2 comments

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From a question on LinkedIn by Robert Saric: “Do you agree — first build the product everyone wants, then raise enough money to build the business?”

I agree, Robert. If you don’t have a workable product, then you cannot demonstrate that everybody wants it. Without this evidence, nobody will invest in you.

Creativity and innovation are hard; building a business around these is much easier (though still difficult). Creativity and innovation are rare, business skills are much more common, investment capital is plentiful. But investors want strong evidence that you can give them a 5x return.

Thus most businesses are initially self-funded, or rely on “3F funding”: family, friends, and fools. You go into hock to build your prototype and see if you can generate some market buzz. Then you go after angel or VC backers. You get some seed capital, do more marketing, produce more results, then go after 2nd round financing.

You build stepwise in this manner. You hire only those who are essential to get your product to the next level.

Pre-dot-bomb and pre-“great recession” rules were much different, but this is 2010, and investors hold their cash with an iron fist.

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If you’re in this situation, and don’t see where the capital is going to come from, let me know. I’ll be glad to talk you through it.

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Robert Saric April 27, 2010 at 12:09 pm

Hi Mike,
I appreciate your response to my question on LinkedIn – great points! I have another quick question, that relates to Andrei’s response, he noted in his forth point that “Building a business around one product is a very risky idea. I would rather build it on an intellectual platform allowing multiple products and markets”. Do you believe this to be imperative? The analogy that comes to mind is from the auto sector, since 2000, engineers were tasked with building standard engines that suit multiple makes/models. Is this recommended when attempting to build a minimum viable product to get market traction? I’m of the mindset that an intellectual framework needs to be agile and have the ability to pivot as fast as the market demands. I’d love to get your thoughts on this.

Respectfully,
Robert

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mvh April 28, 2010 at 12:01 pm

Robert

Apple, Microsoft, and Ford Motors are all companies built initially around a single product. You could say that Google even now has a single product. But all these became companies built around an “intellectual platform allowing multiple products and markets.” So I don’t see Andrei’s distinction as an either/or.

Smaller companies–esp. service providers–are often of necessity built around a single offering. Once established, many diversify. My company has long led peer advisory and problem-solving groups for business owners; groups meet face-to-face. I’m now trying to diversify to work with remote business owners via the internet, applying my same tools and core competency. It’s not yet clear to me whether my efforts to diversify will pay off better than would sticking with my local groups.

As companies mature, they naturally do this. Companies that are strategic from start-up will lay the groundwork for creating multiple products and markets on their intellectual platform. Yet they can’t do everything at once. I’m involved as an angel investor in a start-up company with an innovative internet platform that is already seeing revenues curving upward. We all see the possible lucrative applications in other niches, and in fact large corporations have approached the company. But the wisest advisor says, “Focus. Master this one niche before even thinking about going after the new ones. Don’t dilute your effort.”

So it’s a balance and timing issue. The investors get their biggest return by making sure the company stays focused until it proves its growth potential, staying power, and margins in one niche, and only then jump into other applications.

However, I have urged the CEO/founder to design his job so that he gets out of day-to-day operations as soon as possible, and frees himself up to begin looking at the second-tier opportunities. But that depends on having a strong #2 to stay focused on the original operation. And initially they cannot afford this person.

But the company is designed to remain agile and be able to pivot as the market demands.

So I basically agree with Andrei, with the caveat that timing is everything.

mvh

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