Page Impressions Ltd Blogcetera: Ten Things for Start-ups to avoid.

Thursday, February 19, 2009

Ten Things for Start-ups to avoid.

Over the last ten years I have been involved with a lot of start-ups. Sometimes as an analyst for a VC and sometimes as part of the management team. Some of these ventures have quickly imploded before going beyond the idea stage, some have gone on to become successful businesses and generate significant rewards for those investors who took the early risk. However, all were guilty at some point of exaggerating many aspects of the product or service. So I have updated Guy Kawasaki's excellent The Top Ten Lies of Entrepreneurs from 2006 with a few of my own experiences to help start-ups to avoid certain pitfalls if you are looking for money from angels or VCs.
  1.  “No one is doing what we're doing.” Oh yes they can! The same is true of major corporations. When I was with BT many moons ago, I could be sure there were at least two other BT funded groups working on the same idea in some “parallel universe” of which I was unaware. Same is true of the Internet. There will be many people working on the same idea as you and depending on their abilities to get to market , they may ultimately become your competition. Your idea will seldom be unique, but finding a new angle makes the difference and may be worth funding or just do it better. Google have done quite well without being particularly original - just better. Be realistic and do your research. If you’re a business angel and you haven’t the resources of a VC, just take a few minutes to search Google and check out the entrepreneurs claim.
  2. “No one can do what we're doing.” The first cousin of number 1 and the same answer. Yes they can and the chances are they will. VCs get hundreds and thousands of new ideas thrust at them every year and there is a good chance they will have seen something like your idea before. Show that you can create a successful and sensible market for your product and have a clear plan to get to market.
  3. “Our projections are conservative.” No entrepreneur's projections are ever conservative – correction – no one’s initial projections are conservative. We tend to exaggerate our expectations by default. I would have millions by now if I had a pound for every time that some new start-up suggests they will be as big as Google – one I recall suggested his idea was going to be bigger! Generally, an entrepreneur has no idea what their sales will be, so they guess and will be miles out. However, VC’s tend to encourage this behaviour suggesting that unless the concept looks “interesting” the idea will not get backed. Interesting invariably means double digit growth and profitable inside three years. So we have a problem, if you do project a “hockey stick” revenue growth, no one will believe you and if you don’t, the idea will not get funded. Finding the middle way is very hard.
  4. “Forrester/McKinsey/Bain etc says our market will be $50 billion in 2014.” Analysts create reports to serve their market of large corporate analysts and seldom have any more idea of market size than anyone else, but unless the market is projected as big who will bother buying the report. In planning, it is generally accepted that you can get close to a forecast over 1 year, but projecting 5 years out is pure fantasy. Entrepreneurs should simply remove any reference to future market size estimates from consulting firms. Empirical research and bottom up modelling will give a sounder basis for your projections. The only thing that will happen is that your forecast will change!
  5. “All we have to do is get 1% of the market.” There are two problems with this line. First, no investor is interested in a company that is looking to get 1% or so of a market. VCs are looking for companies to face anti-trust issues because of their market dominance not just another business. Secondly, it really isn’t that easy to get 1% of any market, so you look silly pretending that it is. Once again empirical research and bottom up modelling will give you a sounder basis for your projections. It's much better for entrepreneurs to show a realistic appreciation of the difficulty of building a successful company.
  6. Virgin/BT/Vodafone etc… is about to sign our purchase order next week.” This line never has any traction. It seldom happens. The entrepreneur claims they are just about to sign some major corporation and naturally it just doesn’t happen. The only way to play this card is after the purchase order is signed because no investor whose money you'd want will fall for this one.
  7. “Key employees are set to join us as soon as we get funded.” Be prepared for the VC to insist on calling your prospective employee. If it's true that key employees are ready to leave their safe salaried senior positions that is great. Either have them at the meeting or have them call the venture capitalist after the meeting and testify to this effect.
  8. “Hurry because several other venture capital firms are interested.” VCs and angels are very polite people and seldom say “not interested” or "go away" instead they say “maybe” or “we will look at it in the next financing round” or “we will fund post first revenue” etc. If they are interested they will pursue you straight away. They tend not to wait. Other investors know this and also genuine interest will be covered by a very strict non-disclosure agreement and the entrepreneur will not be able to make such claims.
  9. “We have a proven management team.” Um…what exactly proven in this case? Being a senior manager at Microsoft or even Google these days, doesn’t mean that they can run a bath, let alone a successful start-up. Truly “proven”, in a venture capitalist’s eyes, is the founder of a company that returned billions to its investors and they are rarer than hen’s teeth. Being an experienced team is an easier case to prove, but ensure that the senior director from BT you want to bring in, is happy to share some grotty open plan office with a bunch of hippy engineers, get his own coffee and can run Excel. Along with experience come flexibility and an ability to adapt. Make he or she really fits the bill.
  10. “Patents make our product defensible.” No it won’t. It is nice to have a patent and by that I mean a patent that has been “granted” not just filed, but you will need very deep pockets to defend it and quite frankly that will not stop all manner of people poaching your idea. A granted patent may impress Business Angels or some newbie VC, but people who know their business are aware of the limited importance in the start-up market. It will take 4-5 years for it to be granted in any case and be very a very costly exercise. Patents are good, but getting to the market fastest is more important.
Ideas that are based on sound research and market insight are the ones that get the majority of funding. Honesty is a much more important virtue in an entrepreneur than being able to spin a story. You may get some initial funding projecting dubious facts, but ultimately if the promises do not materialise the VC will be back for his pound of flesh and that is altogether a more painful experience. Things go wrong and businesses fail and entrepreneurs who have been through such experience are often much better investment risks than those who make the “outrageous” claim. Do your homework and build a credible business and remember that the most important commodity will be a large share of luck.

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