6 Hidden Reasons Why Investors Say Come Back Later

New entrepreneurs often seem to confuse viability with fundability. Certainly a non-viable business should be not fundable, but many viable businesses are also not fundable. Thus when an investor declines your funding request, you need to curb your anger and understand the real reason for this outcome.

In my experience, here are the most common issues that cause funding requests for potentially viable businesses to be rejected, in priority order:

1. Inadequate business plan. Some investors say half the ideas pitched to them don’t have any plan at all, even though some have great potential. Other entrepreneurs skip just a couple of the elements outlined in my previous article, “Investors Expect Ten Essentials in a Business Plan.” Investors know that entrepreneurs who start a business without a good written plan almost always fail.

2. Inexperienced team. Investors bet on the team, more than the business plan. Your business model may be very attractive, but if you are new to this, you may not be fundable. If you can find a partner who has deep domain knowledge and a track record of building businesses, I can assure you that your luck will improve.

3. Business domain is high risk or not squeaky clean. Certain business sectors have historical high failure rates and are routinely avoided by investors. These include food service, retail, consulting, work at home, and telemarketing. Also, don’t expect investor enthusiasm for your gambling site, porn site, gaming, or debt collection business.

4. Opportunity is not large or growing. Investors are looking for a large and growing market, to offset the huge risk of funding a startup. Rules of thumb include an opportunity projection that exceeds a billion dollars, with at least double-digit growth. Smaller numbers may easily make a viable business, but won’t attract investors.

5. No sustainable competitive advantage. The market may be large and growing, but you need some “secret sauce” or intellectual property to keep the big guys from jumping in, once they get the picture. Sleeping giants do wake up, and investors hate to see their money used to build a market for Microsoft, IBM, or Procter & Gamble.

6. Financial projections are too conservative or too optimistic. Investors won’t fund people who won’t push the limits, or inversely won’t recognize business realities. More rules of thumb. Your five-year revenue projections better reach at least $20M, but should not exceed Google’s actual revenues of $3B in the fifth year.

Don’t expect a straight answer on your rejection reason from most angels or venture capital people. They will probably tell you all looks good, but come back later, after you have finished the product, signed up a few customers, or reached some other future milestone. This is called “not burning any bridges,” in case you start to show traction and they want back in the deal.

Thus you need an experienced advisor who can do his own analysis of your plan, and follow-up informally with all investors to give you the real reason for your rejection, so you can fix it. I find it completely disheartening to see founders banging their head against the same wall over and over again with every investor, without even realizing their problem.

There were at least a half million startups last year, and only a few thousand received investor funding. In fact most of the others avoided all these rejections by simply using their own money (bootstrapping), or using the old standby funding source of friends, family, and fools.

Even if you don’t intend to “walk the gauntlet” of external investors, it will be worth your while to navigate your startup into a category that is both viable and fundable. Isn’t your personal risk just as important as investor risk?

Marty Zwilling

What Does a Startup Have To Do To Get Noticed?

The space for startups is more crowded than ever. First of all, it’s now international, so you have startups from every country in the world competing for your customer’s attention and their business. Then there is the Internet, delivered through every media, including your smart phone, where the volume of data spewing out is like a new Library of Congress every 15 minutes.

According to a recent study done by the Ewing Marion Kauffman Foundation, there were 565,000 new businesses created per month in 2010 in the US alone, which is a 15-year high. The days when you could launch your business with a new web site, and the phone would begin to ring, are long gone. Even the Google search engine crawlers may take up to two weeks to find you.

So what’s an entrepreneur to do to get his new business noticed these days? According to many experts, including Michael Hyatt, in his new book, “Platform: Get Noticed in a Noisy World,” you need to build the highest platform you can, to stand out and be heard above all the rest.

Today’s platform is built of people, including yourself, contacts, connections, and followers, who can amplify your message through social media and spread it to your target customers. Most entrepreneurs I know are too busy creating a compelling product to give proper focus to the four phases of building a people and media platform that are equally critical for long-term success:

• Platform creation prior to launch. Make sure you have the five basic platform tools in place well before the launch – social media profiles with a great headshot (Twitter, Facebook, LinkedIn, and YouTube), website (with blog), business cards, email signature block, and an email address on your domain name. If these are not complete and consistent, your platform will always be splintered and lost in the noise.

• Building your home base with personal and product traction. Start your campaign and blog early, to get the message and vision out there (no selling), establish your value and expertise, show your commitment, and start building your home base of contacts and followers. Build a media kit, publicize endorsements from friends and beta customers, get dialogs going on Twitter, and optimize your website landing pages.

• Using the platform to expand your reach. For startups, you as the founder are the brand and the most important part of your platform. Be visible online and to traditional media, volunteer to lead, write guest posts for others, be responsive, give stuff away, and provide many ways to communicate. Nurture those links into other sites, and network to the max in relevant business organizations and trade shows.

• Make your customers your platform. Engage your customers through blog comments, product reviews, and personal customer service. Soon you will find that they are re-tweeting your messages, referring their friends to your products, and becoming your biggest evangelists. Your platform is now many times taller and stronger. Your customers will now be helping you to monitor, defend, and amplify your brand.

Success today is more than ever about who you are and who you know, and the platform is all about both of these. Your product or service is the “what,” and of course, that needs to have a “wow factor” to get above the noise, as well. Make sure you create products that exceed customer expectations, that you would personally use, and solve real problems.

The message here is that it’s necessary, but just not sufficient today to build a wow product. People are more distracted than ever, and competition has never been greater. You have to get your customer’s attention. Getting noticed is not about ego or being the center of attention. It’s about having something of value to others and finding the most powerful way of getting that message to those who can benefit from it.

The best entrepreneurs are stubborn, committed, and driven by their vision to produce a product with a wow factor, and to build a platform that rises above the noise. Their startups will get noticed. How about yours?

Marty Zwilling

Innovation to an Existing Business Can Limit Risk

If you are an entrepreneur starting a business for the first time, I recommend that you find a product concept that is already accepted and improve on it, rather than tackling that ultimate disruptive technology. Notice that I’m not suggesting that you steal someone else’s idea, but simply limit your risk by adding innovation to a proven entity.

Evidence of success using this approach is all around us. Look how the Japanese entered the auto industry, or how McDonalds imitated White Castle, or how Wal-Mart “perfected” the low-price high-volume approach. Once you have experience in running a successful startup this way, you may decide that the disruptive technology of your dreams was a bad idea in the first place.

It seems to me that in the startup world, imitation gets a bad rap. People tend to look down on “me too” entrants as inferior, or forced to copy because they have nothing original to offer. I can see many advantages to the imitation with innovation approach, beyond just limiting the risk to changing just one variable rather than many:

• Avoid initial major R&D cost. Statistically, the costs to the first inventor of a new technology are at least a third higher than to follow-on innovators in the same technology. Of course, the first one gets the patent. But patent disclosure requirements often make imitation easier, and smart technologists can work around most patents anyway.

• Learn from competitors and early adopters. Market research is more meaningful if there is already a market and real customers. Don’t just copy successful formats and strategies, but learn from what has worked and not worked for your competitors. Hopefully, you can skip some of the costly pivots made by them.

• Easier to find investors. Even banks, as well as equity investors, look more favorably on a proven business model than a new and unproven one. This is probably why banks will often support a franchise purchase for up to 70%, while they rarely if ever support any investment in startups.

• Imitation drives progress. If a product or process has already proven its value, more people working on it, determined to be more competitive, will find more and quicker ways to improve the base than if one company maintains a monopoly. Good imitators often disrupt the original innovator.

• Try a new country or market. Good imitators actively look for a new country or market as the innovation, rather than a new technology. Even though the world is getting smaller and smaller, very few startups can yet afford to patent or even sell their product in all the relevant countries at once. If that’s your home country, jump in first.

Of course, you still have to do your homework and market research. Just because something works in Silicon Valley, doesn’t mean it will work in Peoria. Also, imitations done without the normal operational discipline and strategic planning will fail, just like any other poorly run startup. Don’t assume imitation is reserved for children, animals, and dummies.

Just like apes learned the value of imitation to survive in an ancient hostile jungle, entrepreneurs need to learn the same value in the new business jungle. Fifty years ago, Harvard economist Theodore Levitt observed that the same companies that were serious about innovation often approached imitation in a much more casual manner. That mindset is still too prevalent today.

Thus, the place to start for new entrepreneurs is to look for a successful business (not a failing business) in your domain and think about how you could do it better. Your innovation may be simply a better location, better service, or a better price, or it could be a technology innovation. At minimum, it can give you the money and experience to take your dream step later with less risk. In fact, your imitation with innovation may BE the “next big thing.”

Marty Zwilling

Investors Reject Plans With No Clear Business Model

For survival, the objective of every business should be to bring in revenues which exceed their costs. Even non-profits have to do this to cover overhead costs, unless they rely totally on donations. Yet I continue to see business plans, or even talk to founders, and can’t find the specifics of the business model anywhere.

As Guy Kawasaki says in his book “The Art of the Start,” if you can’t describe your business model in ten words or less, you don’t have a business model. Avoid whatever business jargon is currently hip, like strategic, mission-critical, world-class, synergistic, first-mover, or scalable. Try something like, “the product costs $X, and we sell it for $Y.”

Guy also says and I agree that the smart approach is to copy somebody else. You can innovate in technology, markets, and customers, but inventing a new business model is a bad bet. Try to relate your business model to one that’s already successful and understood. Here is a summary of a half-dozen of the most common models:

• Facebook model. This is the most often attempted and failed business model today on the Internet – all the services are free, and you make money off the online advertising. This model only works once you have exceeded about one million page-views per month, and spent maybe $50 million to get there.

• eCommerce model. This was one of the first Internet business models, per Amazon.com, and still a popular one today. It’s the electronic version of a catalog and shopping cart, and today rarely involves any stock of product. Products are usually drop-shipped directly by the manufacturer.

• Shopkeeper model. This is the most traditional and successful approach in use for centuries. It implies setting up a store in a location where potential customers are likely to be, with products and services on display, being sold at some multiple of cost to cover the overhead and realize a profit.

• Bricks-and-clicks model. This is a hybrid of the shopkeeper and eCommerce models, in which a company integrates both offline (bricks) and online (clicks) presences. It is also known as click-and-mortar, as well as bricks, clicks and flips, with flips referring to catalogs. It’s great for big companies like Wal-Mart, but I don’t recommend it for startups.

• Razor-and-blades model. This one has been around for many years now, and is sometimes called the “bait and hook model” or the "tied products model". The premise is offering a basic product at a very low cost, often at a loss (the "bait"), then charging compensatory recurring amounts for refills or associated products or services (the "hook"). I’m sure you can think of many examples.

• Subscription or licensing model. Here a customer must pay a contracted price to have access to the product or service on a periodic basis (monthly, yearly, or seasonal). The model works online, offline, through magazines, newspapers, and television. The advantage is recurring revenue without finding new customers.

There are many more, with descriptive names like the auction model, direct sales model, value-added reseller model, multi-level marketing model, and the freemium model. Take a look at Wikipedia if you want more details.

The point I am making is – pick one and provide specifics in your business plan. Define clearly who is your customer, what will the customer pay for, how much will he pay, and how much do you expect it to cost for that revenue.

Then as investors, we can argue other equally important parts of the model, like how big is the opportunity, how fast it’s growing, and who are the competitors. Don’t let your business plan be tossed before you are in the game. What are the ten words that define your business model?

Marty Zwilling

Is Your Startup Relevant Enough to be Great?

Some investors seem to focus wholly on the strengths of your management team, or your sustainable competitive advantage, and in reality these are the core attributes for every funding equation. While these may be necessary for funding, they may not be sufficient to make your startup the great success embodied in your vision.

I have always struggled to communicate the multiple other relevant priorities, and the other intangibles required for a great execution. I found many of these in a new book, “Great From the Start,” by John B. Montgomery, which does a great job of laying out specifics, but also starts with a good summary of the intangibles, summarized as the five rules of relevancy, by Mark Zawacki:

1. A startup needs to be relevant and stay relevant. Relevancy for an early-stage company is the discovery and understanding of the real addressable market for a product or service. This is not the total opportunity out there, and not the total target market, but the subset of customers who have and will spend the money you need to cure their pain.

2. A startup needs to find a voice relevant to its ecosystem. These days, you have to foster a community of support for your business. That means educating targeted supporters is key, even before you start to sell. Selling too early triggers customer defenses and drives them away. Everyone hates being sold to; we all prefer to buy.

3. A startup must gain traction. This is not just sales traction, but a proper balance between resources, product, and customers. It means building a viable and desirable product before selling, assembling the right team with funding, and recruiting and educating enthusiastic customers who will be your best advocates.

4. A startup must form partnerships and alliances within its ecosystem. Today’s ultracompetitive global environment demands that you make alliances early. Startups often pay lip service to strategic partnerships, but they schedule these efforts far down the road. The right partnership strategy can make a company relevant.

5. A startup must maintain a laser focus. Too many early-stage companies are so desperate for customers that they operate in a frantic and random sales mode. They sell into multiple verticals, or pursue multiple revenue streams, such that they can’t develop a repeatable, scalable sales process, and don’t do anything well.

Of course, relevancy doesn’t work if you don’t have a winning business model. In the traditional business environment, this means the priority is an adequate return for your stakeholders, but today it also means your company should provide a material positive impact on society and the environment.

Great companies recognize that there are now multiple interdependent stakeholders, including customers, business partners, and social groups, who need to be part of your equation since they can drive or limit your success, in addition to management and stockholders.

In other words, your startup needs to be a “conscious” entity, constantly aware of the complex eco-system around it, and the factors driving change and evolution. This requires conscious leaders who are passionately committed to personal and professional growth, as well as the greater good of society. These leaders then cultivate the consciousness of their team members.

In reality, your people are the consciousness and relevance of your startup, and your customers judge your startup as they would judge a person. No relevant company can afford to focus on short-term wins over the long-term effects of its behavior on other stakeholders. How much time and how many measures has your startup applied regularly to the relevance issues above?

Marty Zwilling

5 Ways to Hire People Who May be Smarter Than You

Helpers do what you say, while good help does what you need, without you saying anything. People who can help you the most are actually smarter than you, at least in their domain. Top entrepreneurs spend more time putting the right team in place to accomplish their objectives than they spend on any other components of their job.

Some entrepreneurs are so in love with themselves (narcissistic) that they insist on answering every question, and making every decision. That’s not only impossible, but also counterproductive. Effective entrepreneurs team with or employ people who can provide the answers directly, pertinent to their particular area of expertise.

True leaders also know how to move out of the way to let others do what they do best. If you’re working too many hours and following up on every detail you may want to look closer at your team to ensure you’ve surrounded yourself with the right people.

In short, if you can find people with more passion, more knowledge, and more desire to succeed than you have, it will push you to be better and take the organization to new levels. Here are some key characteristics to look for:

1. Gets things done. Smart people know what’s required, or can figure it out, and are confident enough to make decisions without you. Getting things done is crucial to running a business. Often people with advanced degrees have academic smarts, but are not closers. You can’t afford to make every decision, or follow-up on every action item.

2. Recommend their own ideas. How often do the people around you recommend sound ideas that you never knew were possibilities? If you’re teaming with people who are smarter than you, you should be frequently surprised with their new ideas and solutions. You will be constantly learning from them.

3. Passionate and positive. The smart people you want are as positive and passionate about your business as you are. They take ownership and responsibility for their actions. They convince you with their actions and questions that they understand the big picture. They speak confidently and deliberately, rather than defensively.

4. More listening than talking. Look for team members who are active listeners, where you can see yourself seeking them out for answers, rather than always the other way around. It’s great to team with inexperienced people who are growing so fast, that you can envision working for them soon, or having them take the helm of your business.

5. Avoid the narcissists. Their energy, self-confidence, and charm make them look smart, but they resist accepting suggestions, thinking it will make them appear weak, and they don't believe that others have anything useful to tell them. Narcissists will take credit for all successes, and always find someone to blame for their failures and shortcomings.

One of the most important jobs of every entrepreneur, and definitely one of the toughest, is to find and nurture people who are smarter in their roles than you. Resumes don’t provide much of a picture in this regard. Supplement this with networking input, references, and your own personal interactions.

If you are looking for a potential business partner, count on building a relationship over several months, before you really know the person. The business relationship at that level is just as important as a personal relationship before marrying (no overnight affairs). If you are hiring, make sure you have multiple interviews, and input from multiple people on the team to balance your view.

In my view, one of the most important aspects of being a successful entrepreneur is surrounding yourself with people smarter than you. Don’t let your ego get in the way. It’s the best way for you to grow the business, as well as yourself.

Marty Zwilling

Don’t be Too Busy to Do Some Reflective Thinking

Startups and entrepreneurs are drowning in the information overload, where the volume of data created is like a new Library of Congress every 15 minutes. That creates a huge gap between data and meaning, and makes quick decisions and action ever more difficult. We all need to take a little more time to think.

On the other end of the spectrum, some people “over-think” things to the point of inaction. Acting without thinking, and thinking without action, are both deadly to a startup. The challenge is to find the right balance, and to make the thinking deep and reflective thinking.

In his recent book, “Consider,” Daniel Patrick Forrester talks about how some successful entrepreneurs, like Bill Gates, former CEO of Microsoft, force some think time in their schedule by abandoning the office for a cabin in the woods every few months for some reflective thinking. Others simply reserve an hour every morning for private thinking, despite a densely packed schedule.

What are the issues and questions that these successful leaders reflect on within their own organizations, and related to their own behavior? Here is a summary as put forth by the research from Mr. Forrester:

• Control we assert. While none of us can stop the flow of data and the creation of content that swirls around us, we can control how we structure the moments that arise and our responses. As leaders, the control we assert in problem solving sets a tone that will be followed by the whole organization.

• Level of attention given. Now we work in a state of giving our “continuous partial attention” to issues before us. While not all matters require deep thought, we find the ones that do are afforded equal footing with ones that don’t. We must come to a conclusion about the consequences of giving only partial attention to top initiatives.

• Type of communication used. If email or text messaging is the default way you interact, then you have already declared where it sits in your hierarchy. While technology allows for speed and immediacy, it doesn’t usually convey the texture and empathy of face-to-face interaction that is key to many important issues.

• Value of disconnected short dialogues. In many ways, problem solving has devolved into a series of dialogues that take place across digital transmissions with occasional face-to-face interactions. Failure to think deeply about forward-looking events and big ideas will come at a cost.

• Time booked for your thoughts. With the tethering to technology that happens to us throughout the course of a day, it is clear that we treat time with our thoughts as a low-level priority. Even if you can’t book a week away to thin, it isn’t hard to book a meeting with yourself, when you are off-limits to everything but your thoughts.

• Reflecting before delivering messages. When people demand immediacy from you, do you consider how the people on the other end will receive it, before you dash off a message? Sometimes multiple crafting and editing iterations are required as you think about the ramifications. Is an electronic message even the right answer?

Think-time and reflection don’t just happen when we are alone. Startups will inevitably engage in discourse and dialogue through meetings. You need to insure effective discourse in meetings (“thinking out loud”) by making sure there are no negative consequences to dissent and debate. Otherwise meetings will be perceived as a waste of time by the people who count.

While technology and the Internet allow you to act and react more quickly than ever before, you need more than ever to consider decisions reflectively before making them. In addition to solving problems the right way, make sure you are solving the right problems.

Marty Zwilling