Startups often focus so much energy on Service & Product Innovation, Marketing, and Distribution that it’s easy to lose track of the most important issues facing a new company. You think you have everything under control. You have your idea ready, you have a team ready to create it, and a back room or garage set aside to start things up. Maybe even some prospective customers too. Everything is looking good.
You also need money to pay the startup bills. But you know how good your idea is and you are absolutely confident any Angel investor or Venture Capitalist would just die to have the first shot at investing in your little brainchild. So you prepare your pitch, get the prototypes ready, bring in the early customer testimonials, and get the VCs lined up to lay out that important early cash.
But when you get to that first meeting, something goes wrong. The VCs or Angels just didn’t get it. So you have a second meeting, and that group doesn’t get it either. By the time the fourth or fifth meeting comes up and the same thing happens, it slowly begins to dawn on you that maybe there is something missing in more than just your pitch. And unfortunately you may have at that point lost valuable time and perhaps some of the best chances at fully funding that startup.
How can you avoid the mistakes “those guys I was just writing about” made? By carefully working through the answers to three critical questions about your business. Questions you need to think through thoroughly before you talk with even the first Angel Investor, Venture Capital group, or earliest Customers.
#1) What is it your company is doing that’s different
and why does it matter?
Most prospective entrepreneurs you run into will already have thought about this first question quite a bit, even in the earliest creative stages. They already know they’re doing something different. That’s also often the most exciting thing about the new venture, way ahead of the potential to make money. But when you dig deeper you often find there are several issues they haven’t considered — even in the answer to this most basic of startup questions.
One of those issues is to separate, especially in your own mind, the core essence of the new product or service you’re planning to offer from the impact you hope to achieve in the market.
Consider for example the massive success of Apple’s iPod in the portable music player business. It was a masterpiece of design from the beginning and that might have been enough to drive sales. But the core essence of Apple’s innovation in the digital music business wasn’t design or even the iPod itself. Because — even if the iPod was well executed — there were already other competitive and highly regarded products in this category when it first went into production.
The most significant innovation in all this – and the real “engine” driving the business growth for the iPod – was Apple’s carefully crafted creation of its iTunes digital music distribution business. For the first time it made buying and downloading almost any music you might want easier than ever before. All thanks to a combination of tight partnership agreements with the main players in the music publishing industry, great store and backup software (first on Macs only but which soon ported to Microsoft Windows OS, an important early decision), and an excellent music player.
When the digital smoke had cleared, Apple had completely redefined the way the music industry worked. By doing so it also – seemingly out of nowhere – ended up with a virtual domination of the digital music business.
So even if the first of the three questions for entrepreneurs may seem easy for you, you need to take some time thinking about it before giving your answer. Because the core differentiator between your company and every other one out there is going to drive everything from your spending, your hiring, your intellectual property strategy, and how you work with your strategic partners. Apple understood it well and so should you.
#2: How do you plan to make money?
Like the first question, this one is more subtle than it sounds. Just saying you’re planning to ask people to pay isn’t enough. Even worse is something I’ve heard too many times, that the way you’ll compete is to offer “better value”. If that’s just one of those “buzz phrases” you’ll get kicked out of the VC meeting almost before you start. And if what you really mean is you’re planning to give a big price break as your strategic idea, just remember there is always someone else out there working on a way to undercut even your lowest price.
This is where the concept of your whole Business Model kicks in. You need to be able to address how it differentiates you from others from the beginning and why it will be sustainable over time.
As an example here, consider Google’s entry into the search business with their now well-known page rank algorithm. When the World Wide Web first emerged on the scene back in the early days of the Mosaic and Netscape browsers, and even just after that when Bill Gates rammed Internet Explorer into the market so Microsoft didn’t get locked out as a player, just finding stuff “out there” was a major nightmare. So early search engines such as W3Catalog, Lycos, and WebCrawler showed up, using often very much human-powered research to help guide the early internet explorers to find things of use. All of these operated pretty much “for free” without much of a business model to keep them going.
But now that little startup with the funny name showed up on the search engine scene.
Google’s initial patent search concept, developed first at Stanford University, was indeed a true killer idea. Instead of relying on curated lists or just crawling the web for matches with a search term, their search engine gave back answers ranked based not just on how good the matches were, but also on how often those matches were linked to. The end result was the answers were often so good, so much better, so much more accurate than any of the competitors, that people quickly learned the place to go to search for things was Google.
So far all good but it became very clear people were not going to pay to go to Google’s search engine site. Even if it was the best one in the universe. So — and it wasn’t initially clear this was going to work — the answer for how Google ended up making money was by charging for advertising associated with their search results. And because that advertising could only appear when you did a search using Google’s engine it gave them a long-term edge in the business.
And when you look at everything else Google has done going forward, they’ve maintained that model for most of their business. It is part of why their high-demand search engine technology, their Chrome browser, Gmail, QuickOffice software, and Google Docs are all available for free on all major platforms. It keeps you part of the Google ecosystem, and makes the advertising links connected to each of these even more valuable than ever before. Plus because Google’s search is the best out there, both technically and in the mindshare it holds with customers, it keeps you coming back to where the money-making advertisements will appear.
You’re probably thinking that “my product (or service) is different” and so your situation isn’t as complicated. Maybe so. But even if you have a hardware product there must be consideration for why people will pay the price you’re setting for it, as well as how the business will scale when your volumes increase. And if it’s a “soft” product (like an online or digital service), the question of making money is an even bigger question. Because just because you have something great the odds these days are there’s something available that’s almost as good and maybe even available for free.
#3: Why should You be the one to run this?
The answer — in case you’re wondering — is not “because it was my idea”. Even if you have filed for and maybe even been granted patents, owning the idea isn’t enough. Most importantly because coming up with an idea and converting that into a profitable business are two very different things. And also partly because generally any business requires far more than “just the idea” to make it happen.
The sad truth on this last question is that in many cases there may actually be someone better than you to run the business. Someone who is already in the industry who may have a better chance cutting the deals to create the new ecosystem your idea requires, for example. In the case of Apple’s digital music business, it is possible the music industry leaders themselves could have come together first — before Apple — to develop the software, digital music encoding technology, download systems, and micro payment structures to dominate the industry that we now know as iTunes, the iPod, and its successors the iPad and iPhone — as parts of that system.
But they didn’t. So why did Steve Jobs win here when others (such as Sony Music, for example) more connected and with the tech smarts to deliver didn’t get there before him? Why did Amazon become the online sales and distribution powerhouse for books and beyond that we know today? Once again it certainly wasn’t because Jeff Bezos owned the key technology patents for selling things online. In both cases it’s because of what they did to prepare their company to execute on their strategies, an execution approach that ultimately demonstrates why they were the best ones to carry those ideas forward.
The answer to this last question of the three, then — which you’ll need to seek out for yourself — often lies in a combination of your own (and maybe not that unique, though good) abilities to drive the products you’re creating to market, plus your ability to cut the early and exclusive strategic partnership deals needed to drive the early critical market share growth for your business. It does take something unique that you have to offer, including personal drive, a track record for the right kind of innovation, leadership brilliance, and more than a bit of charisma. But beyond that it also often takes just the right amount of humility and salesmanship, to know you can’t do it all alone and to then take your to the right group of others, to lock in the rest of what you need to grow that business.
When you have that done you’ll have the answer to that third question. And with all three answers you’re more than ready to approach the Angel investors and Venture Capitalists for funds, plus those Early Adopters who will eventually help convince the world that you are on to something truly big.