Many times entrepreneurs start with a business “concept” or “idea” with little or no real knowledge of the market, their competitors, potential strategic partners or the customer requirements. Accordingly, the genesis of an entrepreneur’s business “concept” or “idea” can be based on many different things, including a hunch, a gut feeling, a discussion with a friend or colleague, or even some real market-based experience.  Many times, this “concept” or “idea” initially envisioned by the entrepreneur is correct in terms of the underlying supposition regarding the market need or problem they are trying to solve.  But in the end, the final configuration of their product offering is often very different than their original “concept” or “idea”. The reason for this is that the market realities necessarily dictate the final configuration of a start-up company’s business “concept” or “idea”. Therefore, entrepreneurs often end up with a substantially different product offering than they originally begin with.  This is not a bad thing, and ultimately often results in a much higher level of success in the market.   This article addresses the underlying reasons that an entrepreneur’s original business “concept” or “idea” changes as they become more familiar with the realities of the market.  In the end, the result is a better final product offering that has a much high potential for success in the market.

Review the Markets

With the instantiation of their start-up company and their associated business “concept” or “idea”, entrepreneurs often have a target market in mind for their final product offering. From the beginning, this target market is their primary focus and often they are not to be dissuaded from their single market focus.  This myopic approach to looking at the market(s) is often a big mistake and can result in a failed start-up company. As such, many of these same entrepreneurs often forgo the opportunity to review all the potential market opportunities that can be addressed with their technology, product or service offering.

A much better approach is for the entrepreneur is to step back and review all potential markets from the 30,000 foot level.   With this level of market-separation, the entrepreneur can now take into consideration all of the other potential markets that may be complementary or supplementary to their initial, primary target market.  This approach of reviewing all of the potential markets available for the entrepreneur’s product offering is invaluable for many reasons, including:

• It allows the entrepreneur to examine the underlying characteristics (e.g., size, growth, competition, etc.) of their primary target market and all other potential markets of interest on their individual merits,
• It provides the entrepreneur with the ability to identify other new, potential revenue generating opportunities,
• It provides a market-based approach for the entrepreneur to prioritize the necessary features, functions, and capabilities of their final product offering according to the market needs,
• It allows the entrepreneur to prioritize all of their potential markets into primary, secondary and tertiary market opportunities, and
• It provides the entrepreneur with necessary information to determine which markets will provide the highest potential return on investment for their start-up company.

This high-level market analysis is invaluable, as it provides the entrepreneur with the necessary knowledge to make an informed decision on bringing their technology, product or service offering to market.  Having now identified which target markets make sense for their product offering, the entrepreneur can now prioritize these same market opportunities appropriately.  As often is the case, from this high-level market review, the entrepreneur more often than not decides to target another, different market than they originally intended as their initial primary market focus for their start-up company’s technology, product or service offering.  Consequently, this change in market focus often drives the entrepreneur to develop additional and/or different features, functions, and capabilities for their final product offering than originally envisioned at conception. This is a good thing, as this enhanced final product offering can often support multiple revenue streams and a substantially higher return on investment than originally anticipated.

Study the Competition

Often, an initial business “concept” or “idea” by its very nature is half baked. The reason for this is that there is little or no market reality integrated into this initial business “concept” or “idea”.  Therefore, to get these same market realities into the features, functions and capabilities of their product offering and to further develop their start-up company’s business “concept” or “idea”, the entrepreneur must study their competition.

To most entrepreneurs the thought of developing a competitive analysis sounds like a difficult and painful task. More often than not, these same entrepreneurs do not want to spend the time necessary or the due diligence effort required to analyze the competition and their product offerings.  While it is true that developing a thorough competitive analysis is a difficult task that can take a significant amount of time, it can very beneficial to the entrepreneur and their start-up company.  Some of the benefits of developing a complete competitive analysis include:

• Identifying all the necessary features, functions, and capabilities of their start-up company’s product offering. 
• Defining the key features, functions and capabilities that differentiate their product offering to that of their competitors.
• Determining how to position their product offering against their competitors based on these same defining features.

The end result is that through the development of a thorough competitive analysis the startup company’s final product offering is often much different than that of the entrepreneur’s original business “concept” or “idea”.  But, again, this is okay, because this same entrepreneur and their start-up company now has a product offering that provides a competitive advantage in the market and at the same time provides significant value to the end customers.

Identify Strategic Partners

Most start-up companies go to market with a core technology, product or service offering.  At the same time, from the customers’ point of view, this core technology, product or service offering is often “incomplete” and many times requires one or more complementary technologies, products or services to make it a “complete” product offering to properly service the market.  Therefore, to develop a “complete” product offering, it is often necessary for the entrepreneur to identify potential strategic partner candidates that can provide the necessary complementary technology, product or service offerings. These strategic partners can range from hardware providers, to software developers to service partners, etc. By identifying the appropriate strategic partners, the entrepreneur is taking the proper initiative to make their initial business “concept” or “idea” into a “complete” product offering, further ensuring their success in the market.

Finally, take the necessary time to identify and analyze potential strategic partners. Remember, great strategic partners will add significant value to your start-up company beyond their technology, product or services.  In addition, take the time to also consider their market position, customer base and channel access.  These items can add significant value to your start-up company and its ability to secure and create a long term defensible position in the market.

Talk to Your Customers

All of the market research and analysis in the world does not mean much unless it is verified with your start-up company’s customer base.  Also, it is this customer verification process that many times causes a start-up company’s final product offering to vary significantly from its initial business “concept” or “idea”. What an entrepreneur initially believes are both important and necessary features, functions, and capabilities for their product offering are often much different from the end-customers point of view.  This is a significant point, as often, entrepreneurs never talk to their customers and therefore do not really understand what is important to their customer base.  Obtaining customer feedback is invaluable to an entrepreneur and to their start-up company.  It not only allows the entrepreneur to validate or invalidate their initial business “concept” or “idea”, it provides them with the ability to prioritize the necessary features, functions and capabilities of their product offering. Therefore, by talking to their customers, entrepreneurs often find out that their final product offering will be much different than originally envisioned at the business “concept” or “idea” stage.  This is necessarily a good thing in that it provides the entrepreneur and their start-up company with a final product offering that targets the needs of their target customer base.

A business “concept” or “idea” is only the first step in the development of a valuable product offering.  As often is the case, a start-up company’s final product offering will be much different than the entrepreneur’s original business “concept” or “idea”. This is necessarily part of the process of developing a product that addresses a market need, and at the same time provide a long-term, sustainable competitive advantage in the market. So, as an entrepreneur you need to review the markets, study your competition, identify strategic partners, and talk to your customers.  Your start-up company’s final product, although much different than your original business “concept” or “idea”, will be much more valuable to your customers and at the same time put you on a path to success in the market.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.  For more information on the book go to www.carlsbadpublishing.com.

Most entrepreneurs realize that their potential investors require a substantial return on investment (ROI) for the money they put at risk by investing in their start-up company. This is a given, and even to the most naive entrepreneur this makes sense.  On the other hand, what these same entrepreneurs do not often realize that it is market traction and not ROI that is the real differentiator for potential investors.  Gaining market traction early can definitively make the difference between a successful start-up company and one that languishes on and on, continuing to spend investor’s monies, with no real return in sight.  This article addresses some of the reasons why market traction is the real differentiator for your potential investors.

Is Developing a ROI for Your Company’s Sufficient to Secure Funding?

As part of promoting your start-up company to prospective investors, you need to determine what the potential financial return on investment is for these same investors.  This concept, although not foreign to most potential entrepreneurs, does cause pause for most first time entrepreneurs, as they rarely understand corporate financials and often leave this task for last, expending little effort to develop representative, defendable financial statements.   In general, it is well understood that to get the attention of potential venture investors it is necessary to present a return on investment opportunity that provides at least 5 to 10 times return on their invested capital in a 3 to 5 year period, respectively.  These numbers reflect expected venture-based financial returns and should be only used as a reference point, as venture investors seldom receive these types of returns on their investments. Some venture investors expect more, some will take less, but the key here is to develop financial pro forma statements that necessarily meet the expected returns of potential investors and at the same time are defendable.  Therefore, developing a ROI that represents these traditional industry accepted investment return norms is necessary for any entrepreneur expecting to get the attention of potential investors, but on the other hand your start-up company’s ROI may not be sufficient to secure an investment from these same investors. The reason for this is that these expected financial returns are only one baseline component for opening the door to secure investors attention and in general are not considered a real differentiator when considering the various investment opportunities that are available to your potential investors.

 ROI Projections May Not Stand-up to Financial Due Diligence?

As stated, ROI projections are expected by all potential investors when considering any start-up company as an investment opportunity.  Depending on the entrepreneur’s research and diligence in putting together their ROI projections, many times these same financial pro forma statements will not stand up to the scrutiny of a sophisticated investor.  Too often the financial projections, put together by inexperienced entrepreneurs, are unrealistic in their market penetration objectives, too optimistic in their gross margin projections, and more often than not, do not represent typical industry standards when compared to the market leaders in the same given market space. As an entrepreneur, you must realize, as a matter of first priority, by potential investors, that your financial pro forma statements will be subjected to a significant amount of financial scrutiny by these same sophisticated venture investors.  This should cause you to pause, as by not passing this initial financial review bar can make the difference between receiving a pass from potential investors or receiving an invitation for an initial meeting. 

It should be also noted that during their financial due diligence process most investors discount an entrepreneur’s start-up company financial projections by at least 40%, from the presented projected returns.  This discounting reflects their expected financial risk, the market risk, development risk, etc.  Therefore, your financial pro forma statements, as presented, are often deemed “rudimentary projections” by these same investors, and they will rely on their own financial management expertise and financial models to determine the potential expected returns for your start-up company. This financial due diligence analysis may cause your pro forma statement to not pass the smell test for these same investors. Therefore, again ROI statements are only used as one component in considering your start-up company as a potential investment opportunity, and more often than not are not a true differentiator.

Market Traction is a Key Differentiator for Potential Investors

Unlike financial projections that are based on an underlying set of assumptions that can be arguably acceptable or unacceptable to your potential investors, securing market traction with a customer base is one item that gets investors attention.  The fact that you have secured a paying customer or multiple paying customers gives investors some hard evidence, based on the realities of the market, in which to make an investment decision.  On the other hand, only relying on financial projections, based on a given set of assumptions, requires these same potential investors to take a leap of faith in the investment decision making process.  By securing customers early on, this gives your potential investors much more assurance that there is demand for your technology, product or service offering in the market and substantially reduces the investment risk, if only in their minds.  Therefore, as an entrepreneur, looking to secure funding for your start-up company, the one key differentiator that will set you apart from the competition is securing a customer or multiple customers early on in the funding process.  

Market Traction Proves You Know the Market

Securing market traction early proves one thing to your potential investors – that you know the market.  Unlike financial ROI projections, securing paying customers is not based on assumptions, it is based on real interaction with your target customer base and can be used as a lynch pin to secure funding from venture investors.  This shows your investors that there is “perceived” value for your start-up company’s technology, product or service offering in the market.  By securing paying customers early, you have proved to these same investors, at a first level due diligence that you have at least indentified a market “need” and/or solved a “problem” in the market, and at the same time, customers are willing to purchase your start-up company’s same product offering. Determining the long term market trends and whether your technology, product or service offering provides a sustainable competitive advantage in the market must still be reviewed by your investors, but by securing customers early you have proven that your technology, product or service offering, as a minimum addresses a market need and can then be used as basis to secure additional market traction and expand your customer base.

Market Traction Necessarily Facilitates Your Start-up Company’s ROI

Securing market traction also necessarily facilitates your start-up company’s return on investment projections.  More often than not, start-up companies are unable to secure paying customers as early on as originally projected in their financial pro forma statements.  Given that ROI projections are all about generating revenue early in time, by securing market traction with your technology, product or service offering you are necessarily facilitating your start-up company’s ROI projections.  This is essential and a true differentiator, as having the ability to sustain your start-up company’s projected financial returns, in a timely manner, is the most important risk consideration for your potential investors.  Too often start-up companies get caught in the “Catch 22” in which they need to secure customers, but the market has not developed – both of which will have a detrimental effect on their financial projections.  Therefore, by securing customers early you can gain the necessary market traction in which to validate your start-up company’s projected financial returns and secure funding from investors. This is a true differentiator for your potential investors and substantially reduces investment risk.

As discussed, developing ROI financial pro forma statements are necessary to present your start-up company to potential venture investors.  But, due to the nature of financial pro forma statements, they may not sufficient to secure funding from these same venture investors.  On the other hand, securing paying customers early and proving you can gain market traction is a key differentiator for investors as it validates to these same investors that you know the market.  At the same time, securing customers facilitates your start-up company’s projected ROI and substantially reduces the investment risk for your potential investors. Therefore, if you want to get the attention of venture investors and differentiate your start-up company from the crowd, prove you can get early market traction with your customer base.