Start-up companies and large companies alike have a set of core competencies that define the company, their product and service offerings, and their position in the market.  More often than not it is this set of core competencies that provide the company with their baseline competitive advantage in the market.  Often, for start-up companies, these core competencies although unique do not necessarily provide them with a complete product offering or the ability to offer a new and different go to market strategy.  Many times these same start-up companies must look beyond their own core competencies to complete their product offering and at the same time provide a unique end-user experience.  This article focuses on looking beyond your core competencies to differentiate your start-up company and its product offering to help define your success in the market.

Beyond Core Competencies

Every start-up company must have a core competency that uniquely defines the company and at the same time provides a long-term competitive advantage in the market.   For most start-up companies this core competency is based on a patented technology, process or service offering.  Many times, this core competency, although unique, is not enough to define a “complete” product offering in the market.  So, as a start-up company, you need to define what it takes to compete in the market and at the same time differentiate your product offering beyond its baseline core competency.  This requires you, as an entrepreneur, to take a holistic approach to the market and define what other capabilities, features, functions, and services are required to compete in the market. Many of these market driven requirements are well beyond the core competencies of your start-up company and will require you to partner with other companies to provide a complete product offering and at the same time differentiate your product offering in the market.  So, as an entrepreneur, you need to realize that your start-up company’s core competencies may not be enough to effectively compete in the market.  At the same time, because of the investment requirements, and time to market issues, it is often more expedient to partner with other companies to complete your product offering and compete with a differentiated product in the market. 

Strategic Partners

Strategic partners can often be the key to expanding your start-up company’s product offering beyond its core competencies.  At the same time, strategic partners can provide your start-up company with the following:

• Access to new markets,
• Insight to the overall product development requirements,
• Sources of new revenue streams,
• Help to uniquely position your company in the market, and
• Provide a new and differentiated go to market strategy. 

Therefore, by working the appropriate strategic partners you can develop a “complete” product offering that you would not be able to develop and offer on your own.  This will help to define your product offering and in the long run will more often than not help provide your start-up company with additional success in the market.

The User Experience

One other consideration, when looking to expand your product offering beyond your company’s core competency, is to focus on the end user experience.  Is your product easy to use?  Does your product address all of the needs of the customer?  Does your product provide the customer with a satisfying experience?  Many times these things cannot be only addressed with your start-up company’s core competencies. They often require additional capabilities, features, functions, and services to address the complete end user experience.  This will again require you to look beyond your own start-up company’s capabilities to address these needs.  So when you are considering bringing your start-up company’s technology product or service offering to market, consider the end user experience and expectations. To do so, will allow you to look beyond your own core competencies and address the broader needs of the market.

Looking beyond your start-up company’s core competencies is a key to being successful in the market.  All companies, large and start-up alike need to do this to ultimately define their product offering. This often requires start-up companies to realize that they do not have a complete product offering and need to work with one or more strategic partners to define their final product offering.  In addition, taking into consideration the end user’s experience and their expectations are required to bring a successful product to market.  So, as an entrepreneur, remember, it often takes many more capabilities, features, functions, and services, than your start-up company’s core competency offers to provide a “complete” product offering to the market. So when you look to define your product offering take this into consideration as it will ultimately your start-up company with more long term success in the market.

It is said that venture capitalists invest in the entrepreneurial team.  This is the case for all start-up companies. After reviewing and getting the good understanding of the investment opportunity, the first thing venture capitalist look at is the team.  Why, because they need to understand that their investment will be well managed by individuals with the appropriate backgrounds, skill sets, and capabilities to bring their investment to a successful conclusion. That is, creating the necessary value such that the investors can secure the financial returns they expect, according to their financial risk. For these same investors, it is the underlying characteristics of the CEO of the start-up company, the leader of the team, that are the most important to them.  As investors, venture capitalists seek CEO’s with the necessary characteristics to create a successful start-up company. This article outlines the four characteristics venture capital investors look for in a strong CEO.  By having a CEO with these characteristics, these same investors are more likely to take the risk and invest in your start-up company.

High Moral Character

As in any business, the CEO of a start-up company must be of high moral character. That is, they must be trustworthy and make the appropriate moral decisions for both themselves and their start-up company.  The last thing investors want are moral or ethical situations that will result in a law suit for the start-up company.  Therefore, the investors do background checks and deep personal and professional character interviews to determine the underlying moral character of the CEO.  This high moral character, as with any individual, must permeate both in the CEO’s personal and the business lives. Remember, the CEO has both ethical and fiduciary responsibilities to the start-up company, and as such, needs to conduct themselves appropriately in both their personal life and the business life.  Anything less can have an adverse affect on the start-up company.  Therefore, investors first look into the moral character of the CEO, to determine if he or she is fit to both represent and run the start-up company.  If they are not, as investors, they will either move on or require a change in management before investing.

 Strong Leadership Capabilities

Leadership is important to any company, but having a strong leader at the top of a start-up company is especially important to a start-up company.  With all of responsibilities and the necessity to get many things accomplished on both a limited budget and in a limited time frame, the CEO of a start-up company must have the ability to lead the company and its team to accomplish, often insurmountable tasks. Accomplishing these tasks is often the difference between receiving and not receiving additional funding from these same investors.  Therefore, investors need to be assured that the CEO of the start-up company has the leadership abilities necessary to make the company successful.  Anything less will be a recipe for disaster, as investors necessarily do not need to take on the risks associated with a CEO that has weak leadership capabilities.  So, when reviewing the characteristics of the CEO of a start-up company investors need to be assured that this same individual have the necessary strong leadership capabilities to drive the company and its team to success.  Anything less will result in a poor investment for the venture capitalists.

Appropriate Background and Experience

Does the CEO have the appropriate background and experience?  This is one of the first questions the venture capitalists ask themselves.  A desirable background necessarily includes the corporate operational experience necessary to run the start-up organization from the top.  If the CEO does not have a similar level of experience, the investors will wonder if they will have the ability to grow into this position.  Remember, investors do not want the start-up company’s CEO to be learning on their dime. As such, they need to be assured that the person in charge will be able to make the appropriate operational decisions as the company grows and progresses through its development and expansion.  More often than not, this requires a CEO with the appropriate operational background and experience. In addition, it is the necessary requirement for the CEO to have had specific experience in the target industry of the start-up company is intending to address.  Again, anything less will require the CEO to learn about their specific industry on the fly and puts this same start-up company at competitive disadvantage in the market. Therefore, it is also important for the CEO of the start-up company to have specific industry experience and the appropriate operational background. This will provide for a much smoother development path for the start-up company and its investors.

Driven Personality

Start-up companies go through many ups and downs as well as changes in direction during their development.  The investors need to be assured that the CEO is driven to make their start-up company successful no matter what situation arises during its development.  Therefore, these same investors need to make an assessment as to whether the CEO has the necessary personal drive to power through the ups and downs of a start-up company.  If they do not believe this is the case, they will not invest.  It should be remembered that a start-up investment is often a marathon and not a sprint, and hence the necessity to have a driven CEO to guide the start-up company for the long-haul is often necessary for a successful start-up company. Therefore, investors need to consider how driven the CEO is to make the start-up company successful in the long term.

Evaluating the characteristics of the CEO of a start-up company is the necessary job of the venture capitalists.  This evaluation can make the difference between a successful investment and an unsuccessful investment.  As outlined here, venture capitalists look for four characteristics of the CEO in determining if they have the necessary characteristics to run the start-up company. This includes: a high moral character, strong leadership capabilities, the appropriate experience and background and a driven personality. By assessing these four characteristics, venture capitalists can gather the appropriate insight as to whether the CEO has what it takes to lead their start-up company to success in the market.  So entrepreneurs, when picking the CEO of your start-up company keep these four characteristics in mind, you can be assured your investors will be.

Venture capitalists have to consider many things when trying to understand a potential investment opportunity. From the management team, to the total amount of investment, to the nature of investment environment, venture capitalists are trying to identify potential risks and at the same time mitigate these same risks so that their investments have a higher probability of success in the market.  In addition, when venture capitalists consider and then assess the potential of a start-up company’s technology, product or service offering, these same investors necessarily focus on six items. These six individual product-focused items provide a complete picture and a realistic assessment as to whether the start-up company’s technology, product or service offering will be successful in the market.  This article addresses these six product-focused items and provides the reasoning as to why investors consider these things when assessing the potential success of a start-up company’s technology, product or service offering.

Does the Product Offering Have a Long-Term Sustainable Advantage?

Investors are always looking at the big picture.  One thing they need to understand regarding a start-up company’s product offering is its ability to remain competitive over time.  That is, does the product have a long term sustainable competitive advantage in the marketplace? Why, because a long-term sustainable advantage facilitates exceptional revenue generation capabilities and a much higher return on investment.

From the potential investor’s point of view, a long-term sustainable competitive advantage really has two components. First, is the technology, product or service offering disruptive in nature? A disruptive product offering changes the basis of competition in the market and often results in a paradigm shift for a given market.  This disruptive nature is necessarily “revolutionary” and not “evolutionary” in nature.  A revolutionary change can address any or all of the following:

• A shift in the structure or nature of the technology offering in the market,
• A significant reduction in the average selling price,
• A significant reduction in the time to market and
• A new avenue for sales channel logistics.

Overall, the underlying theme of a disruptive product offering is that it provides the means and justification for the target customer base to change their status quo and go with the start-up company’s technology, product or service offering, as a means to obtain a competitive advantage in the market. 

The second aspect of a long-term sustainable advantage is the fact that there is intellectual property or patents associated with the start-up company’s technology, product or service offering.  Patents are used to provide legal recourse against competitor infringement, or the copying of certain proprietary aspects of a start-up company’s technology, product or service offering. Using patents to protect a product offering can provide the start-up company with a long-term sustainable competitive advantage in the market.  Accordingly, investors are interested in patents for several reasons, including:

• The ability to protect the start-up company’s market position,
• The potential to provide enhanced revenue and gross margins,
• Perceived “value” in which to sell the start-up company at a higher price. 

Having a sustainable long-term competitive advantage in the market is one sure way of securing the attention of potential investors.

Who is the Competition?

Venture capitalists are always interested in understanding the competitive landscape. Why, because having a good understanding of a start-up company’s competitors and their product offerings provide the start-up company and their potential investors a good idea on how to position their technology, product or service offering in the market.  In addition, knowing the specific details of a start-up company’s competitors and their product offerings also gives these same investors a level of comfort regarding the potential of success in the market for the start-up company and their technology, product or service offering. 

As investors know, potential customers always evaluate a start-up company’s technology, product or service offering against their competitors’ offerings. This provides the necessary justification as to why a customer is willing to move from the status quo to a new product offering.  Whether it is pricing, lower system integration costs, lower power consumption or enhanced services, investors need to understand the compelling features, functions and capabilities of a start-up company’s product offering and how it stacks up to the competition on a feature-by-feature basis.  This information will allow them to make an informed decision when considering investing in a start-up company. Therefore, know the competition. This will facilitate the potential investors in making their investment decision.

Is This a One-Product, One-Market Investment Opportunity?

Potential investors always want to avoid one-product, one-market investment opportunities.  Why, because if the product fails for any reason, they have lost their monies and there is little to no recourse to recoup their investment. So, venture capitalists prefer to invest in start-up companies with a technology, product or service offering that can be used to develop multiple product offerings across several targeted markets.  This multiple product, multiple market investment approach substantially lowers the venture investors risk by creating the potential for multiple revenue streams.  In addition, this investment approach is preferred by venture capitalists as it has the ability for substantially increasing their return on investment.  Remember, venture investors are all about mitigating their risks and increasing their potential returns, so a multiple product, multiple market approach is preferred by potential investors.

What is the Size of the Target Markets of Interest?

Venture capitalists prefer to invest in start-up companies that have the potential for high returns. To do this, these same start-up companies need to address large market opportunities.  Therefore, as part of their analysis for determining if a start-up company and its technology, product or service offering is of interest, these same investors are always interested in understanding the total addressable size of the markets of interest.  The bigger the size of the addressable market, the better. Why, because larger markets provide the potential for higher returns on investment and at the same time lowers the market risk for investors.  So, when targeting their markets of interest, entrepreneurs need to take this investor mentality into consideration. This will provide you more credibility with your potential investors and also enhance your start-up company’s potential returns. 

Is the Product Offering a Complete Product?

Start-up company technologies, products or service offerings as initially defined by the entrepreneur and their management team are usually incomplete from the market perspective.  Often the “core” capabilities that define the start-up company’s product offering need to be augmented with additional technologies, products or services to make this same product offering a “complete” product that addresses the necessary needs as defined by the target customers in the defined markets of interest.  Product “completeness” is a concern for investors. Why, because incomplete product offerings often require substantial additional investment, identification of the appropriate strategic partnerships, and additional integration time. All of these items individually and together will delay the time to first revenue, and as a result, lower the return on investment potential for the venture capital investors.  So, as an entrepreneur, define your product offering as complete as possible.  This means talking to your customers.  If done appropriately, you can define a complete product offering and gain credibility with both your customers and your potential investors.

Is There a Product Road Map and What Does it Look Like?

Many times an entrepreneur has failed to develop a product road map for their technology, product or service offering. The lack of a product road map will cause concern for your potential investors.  Why, because investors want to know that as an entrepreneur and the CEO of your start-up company you have a clear understanding of both the macro- and micro-economic trends in your target markets of interest.  They also know that, very seldom is a first product a homerun product and it often takes several generations of products with the necessary evolving features, functions and capabilities to secure significant traction and hence substantial revenue flow.  Therefore, these same potential investors necessarily need to see a product road map with defined, multi-generation features, functions, and capabilities.  This will ensure multiple things for your potential investors, including:

• You understand the macro- and micro economic market trends,
• You are not trying to do too much with your initial product offering,
• You have a firm grasp of the future anticipated development costs associated with your product offering, and
• You have defined a product road map with a long-term, sustainable competitive advantage in the market.

Therefore, as an entrepreneur, it is imperative that you develop a product road map for your proposed technology, product or service offerings. Again, this will provide your investors with confidence in you and your start-up company.

Venture capitalists have to consider many things when trying to assess the market value of a start-up company’s product offering and its ability to secure market traction.   As an entrepreneur, when presenting your technology, product or service offering to potential investors, you need to be aware of the six, basic product-related considerations that these same potential investors necessarily concern themselves with when making a go, no-go investment decision. This article has outlined these six product-focused items that if not addressed in detail will often make your potential investors pass on your start-up company and the associated investment opportunity.  Therefore, you need to be aware of these product-related, investment considerations when presenting your start-up company and its technology, product or service offering to potential investors. This will provide you with a good starting point when considering securing funding from venture capitalists.

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.

Every year millions of individuals come up with a business “idea” or “concept” that they believe could be the beginning of a fundable start-up venture.  While many of these ideas or concepts may have merit at the 30,000 foot level, it is the process of taking a business idea or concept and making it a valuable business proposition that makes the difference between a fundable start-up company with a technology, product or service offering, or just a business idea or concept, to be left by the potential entrepreneur as a passing thought. This article addresses some of the basic steps that need to be addressed to take your business idea or concept and create a real business proposition that can then be presented to the venture funding community.

Is There a Market for your Business Idea or Concept?

As a potential entrepreneur interested in developing your business idea or concept, the first place to start in your due diligence planning process is to analyze the market.  Here, you need to identify and then determine which target market or markets are addressable with your proposed technology, product or service offering.  No market means no potential for selling your business idea or concept. Remember, the last thing you want to do is develop a product that is looking for a market. You need to solve a “problem” or “market need”. That being said, you not only have to identify which markets may use your product offering, you have to determine the basic characteristics of these markets including:

• Market size (Revenue and Unit Sales), and
• Market growth (High Growth, Low Growth, Declining Growth).

Both of these market characteristics have an effect on the ability to sell your idea or concept and at the same time generate a “scalable” business that will be attractive to potential venture investors.  For these given market characteristics, you want to identify markets that are large and are growing. These are the ideal characteristics of the target markets for your proposed business idea or concept. 

 Does your Business Idea or Concept Have a Long-Term Sustainable Competitive Advantage in the Market?

Just having an idea or concept does not necessarily imply that you will be successful in the market.  From an investor’s point of view, you also need to have a long-term sustainable competitive advantage in the market. Here, investors look to invest in start-up companies with an idea or concept that they consider to be “disruptive” in nature.  That is, the idea or concept needs to change the “basis of competition” within the targeted market(s) or sub-market(s) of interest. A disruptive technology, product, or service offering, with a long-term sustainable competitive advantage does not invoke an evolutionary change in the basis of competition (e.g., 10% cost reduction), but a revolutionary change that results in a new competitive paradigm shift for a given market. A revolutionary idea or concept can address any or all of the following:

• A shift in the structure or nature of the technology offering in the market,
• A significant reduction in the average selling price,
• A significant reduction in the time-to-market, and
• A new avenue for sales channel logistics.

Overall, the underlying theme of a disruptive idea or concept is that it provides the means and justification for the target customer base to change their status quo and go with your start-up company with its new technology, product, or service offering as a way to facilitate and obtain a competitive advantage in the market. Historically, there have been many companies with unique, disruptive technologies that have changed the basis of competition in the market and at the same time created a long-term sustainable competitive advantage in the market, some of these companies include: Ford Motor Company, Apple Computer, Google, Netflix, etc.

Does the Business Model of Your Idea or Concept Reflect an Industry Standard Business Model?

Venture investors are risk adverse.  This concept is not really intuitive for potential entrepreneurs, but by the very nature of their business they need to “manage” risk to protect their investments, and at the same time secure a return for themselves and their limited partners.  That is, investors do not invest to lose money!  With that being said, typically investors look for ideas or concepts that have business models that reflect well understood standard business operations for a given industry.  This allows these same investors to weigh the advantages of your business idea or concept over an industry standard financial model to see where and how you are going to secure a financial advantage over your competitors. Therefore, when developing your business idea or concept, look to the industry leaders in your market and model your financial statements (e.g. income statement, balance sheet and statement of cash flows) after these competitors.  This will provide your investors with a basis for their financial analysis, and at the same time provide a historical reference point to measure your projected financial success in the market. 

What is the Projected Return on Investment for your Business Idea or Concept?

As part of developing a legitimate business idea or concept, you need to determine what the potential financial investment returns are for your prospective investors.  This concept, although not foreign to most potential entrepreneurs, does provide issues for most first time entrepreneurs, from a practical point of view.  In general, it is understood that venture investors look for a 5 to 10 times their invested capital in a 3 to 5 year period, respectively.  These numbers reflect expected historical financial returns and should only be used as a reference point. Some venture investors expect more, some will take less, but the key here is to develop financial pro forma statements that meet the expected returns of potential investors and at the same time are defendable.  Here, the best thing to do is develop three financial scenarios for your business idea or concept, including a:

• Best case scenario,
• Typical case scenario, and
• Worst case scenario.

By doing this, you will have fully analyzed all financial aspects for your proposed product idea or concept.  In the end, you will have to pick one financial scenario to present to your potential investors.  But, by going through this financial scenario analysis, you will have a good solid basis for discussing the expected financial returns of your business idea or concept with your potential investors.

Who are Your Customers and How are You Going to Bring Your Idea of Concept to Market?

Another key attribute to developing your idea or concept is to identify your target customers and determine your appropriate sales channels for your technology, product or service offering.  These items are often over looked by first time entrepreneurs, and together are often a stumbling point for presenting your business idea or concept to your potential investors.  Here, one of the best things to do first is to identify your customer base and then break it down into tier one and tier two customers.  This will allow you to position your potential customers and determine, in your go to market strategy, which customers you talk with first and then second. In my experience, it is better to talk to your first tier customers second.  This will allow you to work out any issues regarding the presentation of your idea or concept to your customer base.  Then, by the time you talk with you first tier customers you will have already been exposed to most of their questions, and at the same time, this strategy will facilitate for a much smoother presentation.

Finally, you need to identify the sales channels you will develop to address your customers.  Whether, direct, indirect, or virtual, you need to spend the time to think through your sales channel strategy and determine why this will support your product idea or concept and at the same time provide the level of market penetration to allow you to be successful in the market. Here, a successful channel strategy can accelerate your time to market and break even, increasing the return on investment for your start-up company and your investors.

Having an interesting idea or concept is not enough to get venture investors’ attention.  As a potential entrepreneur, you need to develop your idea or concept into fundable business proposition.  Addressing the market, competition, business model, expected financial returns, customers and channel strategy, will get you moving in the right direction for developing a fundable business proposition.  The steps outlined here should be used as a baseline for any entrepreneur working to develop their idea or concept into a fundable business proposition and moving it to the next level with potential investors.