Friday, August 22, 2014

Investors Love A Credible Entrepreneur Market Sizing

market-research-reportMany entrepreneurs are so enamored with their product vision that they believe their own hype, and are convinced that the market for their solution is so huge that no one will ask them for independent market-research data. They don’t realize that business projections with no third-party validation have no credibility with investors.

Every good business plan needs an early section that sizes the total market opportunity, and then breaks down that total into the most relevant segments for your focus. If 10 percent of these numbers, multiplied by your average product price, will get you the revenue you need to scale your business, you will get the love you need from angel and venture capital investors.

A common excuse I hear from entrepreneurs for not doing the work is that real market research takes too much time and costs too much money. Perhaps that was once true, but in this age of the Internet, big data and pervasive business intelligence in every industry, you can use the following steps to get the data you need with very little time and cost:

  1. Start your research with Google. Use your favorite search engine and keywords describing your solution to find online sales reports, trade association statistics and online newsletters with the latest statistics. The wealth of data available online is already much larger than the entire Library of Congress, and much more current.

  2. Modern libraries are still worth a visit. Universities and large municipalities still maintain subscriptions to the latest market-research reports from key sources, including Nielsen, International Data Corporation and Gartner Group. In most cases, these are available to the public for free access, and can be referenced and footnoted in your plan.

  3. Explore municipal-development resources. The local Small Business Association (SBA) offices, or their equivalent in other countries, can often provide statistics on key market domains in your area. New business-development specialists there can also provide good additional sources for the specific information you may need.

  4. Browse the business section of your favorite bookstore. These days, it’s a great way to get some work done, while enjoying a cup of coffee, so you may not even have to buy a book. Pay particular attention to the titles discussing the latest big opportunities, such as alternative energy, global warming and technology trends.

  5. Peruse company reports from your business domain. Competitor's annual reports, white papers, press releases and presentations are great sources of data and trends that you can use to support your own efforts. These are also important for your product positioning in the competitor section of your business plan.

  6. Conduct your own customized market research. With social media and the new survey tools, it’s easy and fast to set up and run your own focus group or opinion survey. Just make sure your results are statistically significant, rather than anecdotal, and avoid any personal biases in the questions that may be used against you.

You need to find just enough information to quantify the real need out there for your product or service. For example, if you are offering an accounting service for small-business owners, you would want to quantify the number of enterprises in your area, with the size, age and spending demographics that you are targeting.

Buying large detailed reports from market-research freelancers and name-brand providers usually costs several thousand dollars, and often is not required to find the summary data you need to satisfy investors. One of the free sources above, or just the teaser data from an online report advertisement, is often more than adequate as a third-party reference for credibility.

We all know that people can use statistics to prove any point they want, but not having any opportunity sizing is certain to raise a red flag above your whole business plan. On the other hand, spending your entire startup budget on market research won’t improve your odds of success or funding.

Successful entrepreneurs get the job done quickly, without breaking the bank.

Martin Zwilling

*** First published on Entrepreneur.com on 8/15/2014 ***


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Thursday, August 21, 2014

Startups Who Hide Early Work Only Fool Themselves

stealth-mode-startupsIt’s popular these days for startup founders to operate in stealth mode, meaning no details about the idea or progress are shared with anyone until the big reveal and rollout. The common reason given is that this prevents any competitor from stealing their idea and beating them to market. In my view, this paranoid approach costs them much more than the risk of being open.

I’m not suggesting that a startup should ever disclose patent details to others before filing, but I can’t imagine why a startup would not seek visibility and feedback for their idea and solution while they could still make changes with minimal cost. Pivots and corrections are inevitable for startups in this age of rapid change, and the earlier you make them, the quicker you get to success.

Being open is the new business culture around the world. Entrepreneurs talk to customers and competitors talk to each other about the new trends and technologies they see. Coopetition is the new mantra for growing your business faster. Here are seven key reasons that being open is better for your startup than trying to fly under the radar:

  1. Visibility generates interest. You can’t get any word-of-mouth or media activity by hiding. Before you finalize the product is the best time to talk about it and see if you can get some buzz started. This will do more for your first mover advantage than more time in the lab. Most people agree that even negative media attention is better than none.

  2. Evaluate customer response prior to development. It’s never too early to get real feedback from the people who count. No matter how passionate and certain you are that your idea is perfect, the reality is that you will likely need to pivot at least once. Why not make the change before you have wasted significant time and money?

  3. Get competitors to surface early. You may be convinced that no competitors exist, which is very unlikely. If there really are no competitors, then there is likely no market opportunity, or you haven’t looked yet. If your position is so tentative that knowledge of your idea puts you in jeopardy, you need to know it sooner, rather than later.

  4. Demonstrate a minimum viable product (MVP). Surface your prototype, get customer feedback, make corrections, and iterate until you get it right. Startups in stealth mode often have a false sense of security that they can take extra time to do the job right the first time. Customer feedback is required to get it right, and hidden time is wasted time.

  5. Meet investors before asking for money. The time to build investor relationships is before you need the investment. It gives you credibility to mention your idea in general terms, without immediately asking for money. This can help you get in the door when you are ready, and asking questions early will give you insights on investor priorities.

  6. Pivots can be done gracefully at this point. Customer credibility actually improves when they see you making changes based on their input, and the cost of correcting mistakes early is lower. Operating in stealth mode for an extended period tends to convince entrepreneurs to believe their own biases, and visibly fight the need to change.

  7. Optimize your web history and presence. Stealth mode normally means no time for search engine optimization prior to product launch, not to mention relevant blogging activity, and link building. This means your whole startup effort will appear as very early stage for investors, and will likely not be adequately tuned for customers.

On the other hand, stealth mode does make sense for large companies, like Apple and IBM, who will likely be sued for pre-announcing a future product, since other companies have used this ploy in the past to freeze the market and lock out new competitors. Of course, even startups can get into serious trouble by talking about products and direction with no intent or ability to deliver.

I also realize that there are a limited set of startups, facing particularly entrenched and unscrupulous competitors, where early stealth mode is necessary. With most other classes of startups today, including smartphone apps, web services, and social media applications, early customer feedback is critical, and time to market is of the essence, so secrecy is more of an excuse than an advantage. Who are you fooling by not allowing your startup to be found?

Marty Zwilling


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Monday, August 18, 2014

Savvy Entrepreneurs Plan Both Business And Product

business-product-planMost technical entrepreneurs I know demand the discipline of a product specification or plan, and then assume that their great product will drive a great business. Serious investors, on the other hand, look for a professional business plan or summary first, and hardly ever look at the product plan. Is it any wonder why so few entrepreneurs ever find the professional investors they seek?

Just for clarification, I characterize a product plan as a formal description of your product or service, with a quick business description at the end for effect. A business plan is a careful layout of the business you are building, with a quick product overview in the intro to set the stage. In reality, you need both, to clarify for yourself and team that you have a viable business solution.

A product plan has tremendous value inward facing, telling your product people what to build, while the business plan has maximum value outward facing, explaining to the rest of the world how your new company will survive and prosper. A product plan is never a substitute for a business plan.

Because the product plan is aimed internally, it can assume the reader has the relevant technology and jargon background. Here are the major elements of the best product plans:

  • Market requirements section. This first section of every product plan defines the market, sizes the opportunity, and discusses individual needs and requirements that will be provided by your product and service. These requirements must be based on market analysis, expert input, and existing customer feedback.

  • Technology, architecture, and feature descriptions. This section of the product plan details every element of the product or service that is your solution. It allows all members of your team, including marketing, support, and sales, to size and build the business plan processes they need to find customers, deliver, and maintain grow the business.

  • Development schedule and checkpoints. A product plan must include the timeline and milestones involved in product research and development. Each of these activities should have associated costs and resource requirements. Related activities must be defined, including performance expectations, quality certification, and proof of concept.

  • Quality testing and approval processes. Product certification or product qualification requirements and processes are a key part of every product plan. This section of the plan would include the definition of specific test processes, how results will be measured, and who has responsibility for execution and approval.

Now let’s talk about the basic components of a business plan. Since this document is outward facing, it is important to keep the terminology and tone consistent with that of your customer set, investors, and business partners. It does need to include a high-level summary of the components in the product plan, with key additional sections as follows:

  • Definition of customer problem, followed by your solution. The customer pain point must be defined before the solution is presented, so it doesn’t look like you have a solution looking for a problem. Use concrete terms to quantify the value of solution, like twice as fast or half the cost, rather than fuzzy terms, like cheaper and easier to use.

  • Opportunity segmentation and competitive environment. The market for your solution should be quantified in non-technical terms, with data sourced from professionals in the industry, rather than your own opinion. List key competitors and alternatives, highlighting your sustainable competitive advantages, such as patents and trademarks.

  • Provide details on the business model. Every business, including non-profits, needs a business model to survive. Providing your product or service free to customers may sound attractive in marketing materials, but you need revenue sources to survive. Free is a dirty word to investors, since it’s hard to get a financial return from free.

  • Executives, marketing & sales, financial projections, and funding. These are additional critical sections of a business plan to define who is running the business, business strategy activities, and financial expectations. There are many good books and Internet articles describing each of these sections, so I won’t cover the details here.

In principle, there is very little overlap between these two plans, so it never makes sense for an entrepreneur to build one without the other. Yet I’m still often approached by aspiring entrepreneurs who have neither. If you are still in the idea stage, meaning you have nothing but a passionate verbal description of an idea, approaching investors is a waste of time and a recipe for failure.

Savvy entrepreneurs always remember that they are the key investor in their company, so they measure themselves against the same standards as professional investors. That means they invest first in a set of plans.

Marty Zwilling


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Sunday, August 17, 2014

5 Clues To Investor-Friendly Financial Estimates

financial-projectionsMost entrepreneurs struggle with financial projections, not wanting to commit to numbers they can’t deliver, and having no clue what investors might consider reasonable. However, making no projections, or non-credible projections will get your startup marked as unfundable. I recommend a simple set of guidelines, which work for at least 80% of the business domains I see.

Equally important, you need to make these projections first as goals for your own use, to convince the team as well as investors that you have a business which is achievable. Projecting the financials should be the last step of your business plan preparation, since it assumes you already know the opportunity size, customer buying habits, pricing, costs, and competition.

Here are some basic “rules of thumb” that every Angel or venture capital equity investor uses, to help you anticipate their reactions. The rules are obviously not absolute, but you must be prepared to explain to potential investors why your startup is the exception to these guidelines:

  1. Five-year financial projections are the norm. According to a recent Dow Jones VentureSource report, the average time to liquidity of an equity investment in a startup is now about five years. Thus most investors ask for 5-year projections, to get a sense of the opportunity and trajectory that you’re envisioning while their money is tied up.

  2. Aggressive revenue projections and growth rate. The first filter applied by most investors is to identify high-growth investable startups from ones that may be a good family business with organic growth, but could never generate a 10x return. Revenue in the fifth year should be at least $20 million, with a growth rate average of 100% per year.

    But don’t go crazy with this number. If your fifth year projection exceeds $100 million, that puts you in the rare category of the next Google, and probably won’t be credible with investors, unless you have a track record in this range. In other words, revenue projections are not the place to be too conservative or wildly optimistic.

  3. Gross margins greater than 50%. Most entrepreneurs, with no experience, believe that they can make good money with lower margins than competitors. The reality is that even if you eat Raman noodles and do survive with low margins, your growth rate will be stunted, yielding a low return for investors.

    Financial projections for investors should always show an annual cost of goods sold and gross margins line, as well as revenue. Low gross margins in the first couple of years are expected, but they better climb to the 60% range by year five.

  4. Show red ink to match your funding request. Financial projections shown to investors should always be pre-funding projections, to illustrate what revenues and expenses you think are possible, and how much your current funding falls short. Don’t ask for funding if your projections imply you don’t need it. Investors don’t like their money used frivolously.

    If you show a negative cash flow of $800 thousand before the business turns cashflow positive, it is fair to buffer that amount by 20% and ask for a $1 million investment, since we all know that there will be un-anticipated additional costs.

  5. Build a path to 10x return. The only path to any return for equity investments is a liquidity event, like a merger or acquisition (M&A), or IPO. That’s why investors want to hear about your exit strategy. If you don’t have one, or intend to buy out investors with their own money, you probably won’t get much interest.

    What investors want to hear is that your company will demonstrate that high rate of growth to get you to $50 million in revenue in 5 years, making you a premium acquisition alternative to one of your partners, selling for 5 times revenue, for a total of $250 million. That makes their $1 million investment for 10% equity worth $25 million, or 25x.

Be aware that investors will be testing your financial projections in real time against your opportunity numbers, volume projections, pricing model, and performance to date. If you have no data in one of these areas, be prepared for the “come back when you have more traction” message. Investors don’t want to antagonize a potential winner, but you are not fundable yet.

Of course, the quality of your management team, or demonstrated performance in prior similar ventures, can override any or all of these rules of thumb. On the other hand, you must remember that only about one percent of Angel investor funding requests get satisfied, according to the Angel Capital Association. Venture capital requests that get satisfied are even lower.

Overall, financial projections that make sense in your business domain, and cross-foot with available data from independent market analysts are no guarantee that you can deliver. They do show you already stand out from the crowd of talk-only entrepreneurs, understand financial realities, and are willing to commit. What more could an investor ask, since he is really investing in you, not the numbers?

Marty Zwilling


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Saturday, August 16, 2014

Street-Smart Entrepreneurs Need High-Tech Partners

Zappos CEO Tony HsiehTechnology is so key to every business these days that experienced business-smart but non-tech entrepreneurs are falling deeper and deeper in the hole. Even if they realize that they need real technical strength at the top, they are not sure how to attract and select the talent and expertise they really need. Should they go after high-tech nerds for partners, or professional technologists?

The right answer for a good business partner today is neither of the above. Startups succeed most often when the founding partners know how to build and run a business, rather than how to build and run technology. Only one component of running a business is managing technology, but it is a critical component, so no entrepreneur can afford to ignore it or totally delegate it.

That means every entrepreneur needs to learn how to attract, hire and manage technical people for their team. Just like you don’t have to be a financial guru to recognize a good CFO, or a marketing genius to hire a VP of marketing, you can find the right technical partner or team member by using the right evaluation and hiring steps, including the following:

  1. Engage a technical advisor to assist with recruiting and early interviews. Much like executive recruiters recognize the best executives, a technical expert in your business domain will recognize the right combination of skill, creativity and experience you need for a co-founder or key team member. Don’t fall for a technical pitch you can’t comprehend.

  2. Look for a match in culture and values, as well as technical strength. A great technical LinkedIn profile is a good start, but not enough to assure success in your environment. The non-technical leadership attributes of excellent communication skills, high integrity, passion and perseverance are critical for the success of the whole team.

  3. Spend time informally with candidate peers and former employers. This approach works best with business associates that know you, peers that you meet at industry conferences, or technical gurus that have no business connections to the candidate. Former employers will normally only give you candidate employment dates or good news.

  4. Let candidates educate you on attributes you need. The key here is to do more listening than talking in both formal and informal interviews. I find that many entrepreneurs are so passionate about their own idea that they can’t stop selling it to potential partners. They are attracted to people who agree, although may not be able to help.

  5. Evaluate their problem-solving ability in the context of your business. A business startup is not an academic environment, or a big company research organization. Practical problem solving and communicating to business people is often a big challenge for technical experts. Test them with problems outside their comfort zone.

  6. Challenge current team members to bring in the best and the brightest. Start with existing co-founders, extend the request to advisors and investors and finally to existing team members. Make them part of the interview and decision process, since they all have a large stake in the ultimate success of the new venture.

  7. Continually ramp up your own technical competence. Although technology is getting more pervasive in business, it’s not rocket science. If your kids can use computers by age six, every entrepreneur ought to be able to stay current with the latest social-media marketing and ecommerce technologies. You can’t manage a technical team or negotiate with technical partners without understanding their view of the business.

  8. For non-core technical strength, look for outside partners. Outsourcing to expert freelancers or business partners is often a better solution for startups than managing everyone into the inside team. You may not have the breadth of technical challenge, or the budget, to lure in and keep motivated the caliber of technical expert you need.

Even if your company doesn’t sell high-tech products, for example, Zappos, having and using the right technology in the business, for distribution, marketing and customer support, can easily make the difference between winning and losing in today’s high-tech world. It’s no anomaly that Zappos CEO Tony Hsieh graduated from Harvard with a degree in computer science.

On the other hand, there are many technology companies successfully started and run by non-technologists. For example, Richard Branson, CEO of Virgin Group, with no technical background at all, has started and run many technical companies, including the futuristic Spaceship One and a new orbital space launch system, and reportedly does his own social-media work.

Thus non-technical entrepreneurs must not shy away from technical issues, and must also learn to find and effectively work with technical partners, inside their company and outside. Street-smart today means the ability to survive and prosper in a technical world. Are you there?

Martin Zwilling

*** First published on Entrepreneur.com on 8/8/2014 ***


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Thursday, August 14, 2014

Investor Secrets For Smart Competitive Positioning

hydrogen-engineIn their passion and excitement about a new product or service, entrepreneurs tend to continually narrow the scope of potential competitors, and often claim to have no direct competitors. This raises a big red flag with potential investors, who conclude that no competitors means no market, or you haven’t looked, and the new startup is likely not investable.

They are looking for startups that have a sustainable advantage over direct and indirect competitor offerings, as well as obvious value to customers living without your product today. First to market, for example, is not normally a sustainable advantage for startups. They simply don’t have the resources to keep ahead of large competitors who see initial traction and go after it.

A narrow scope doesn’t help your case either. Competition for your new hydrogen fuel auto engine is not limited to other hydrogen auto engine offerings, or even other autos. Remember the transportation transitions from horses to autos to trains to airplanes. All of these are competitors in terms of speed, price, or luxury.

A sustainable advantage also has to be quantifiable and large enough to overcome the natural resistance everyone has to change, or learning a new approach. My perspective as an Angel investor is that once you get past early adopters, most people won’t switch to a new approach unless they perceive a cost or time savings or speed advantage of at least 20 percent. Non-specific terms, like better usability and low cost don’t incite customers to action these days.

So what are some of the key points that you should highlight in your investor slides to convince investors that you indeed do have a long-term competitive advantage over other alternatives in the marketplace? Here are some of the key ones:

  1. Patent protection in place as a barrier to entry. Investors understand that patents can be broken by unscrupulous competitors, but they prove your conviction that you have created something innovative, and are willing to do the work to defend it. Other intellectual property has similar value, including trade secrets, copyrights and trademarks.

  2. Your solution is just the beginning, not the only solution. Your startup needs to be focused on a specific solution, but you need to show a long-term plan for a continuously innovative product line, or a series of follow-on solutions, that will keep you ahead of competitors. No investor wants to be tied to a “one-trick pony.”

  3. Order-of-magnitude cost reduction or productivity increase. Entrepreneurs often proclaim that they will work harder and more efficiently than competitors, thus reducing costs and improving productivity. This approach is not convincing. Investors are looking for technology, process, or business model breakthroughs, to move costs to a new level.

  4. Startup team with experience and connections is this domain. Teams that have worked together in a previous startup are always a plus. Expert knowledge in the relevant business domain is another plus. Warm connections to required distributors, suppliers, and large potential investors is a major plus. Investors check connections.

  5. Thought leadership position in your market and customer set. Prior recognition and visibility in the target market is invaluable from a competitive perspective. Successful entrepreneurs start early building their own brand through social media, industry forums, scheduled events, book publishing, and speaking engagements.

  6. Clear product differentiation and a singular focus. Solutions that primarily integrate the functions of several existing products will likely not provide a sustainable competitive advantage. The focus is diluted, it’s hard to keep up with individual product changes, and you will always be on the defensive. Investors want focus and breakthrough innovation.

Almost as bad as positioning no competitors is trying to position a large list of competitors (ten or more). I recommend never naming more than three specific ones, and using each of these as representative of a group of competitors. For example, “Company A is representative of many who provide commodity solutions in this space.” Investors are wary of a crowded space.

Of course, a great competitive advantage won’t do you much good if your market opportunity is small or not growing, or you don’t have the resources to deliver. Investors like billion dollar opportunities with double digit growth rates.

Now that I think about it, your biggest competitive positioning challenge with investors may be your peer startups down the street, also looking for investor dollars. How do you stack up against the ones you know?

Marty Zwilling


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Tuesday, August 12, 2014

Every Small Business Founder Needs An Advisor

business-advisorSponsored by VISA Business

Friends tell you what you want to hear. Advisors tell you what you need to hear. When the message is the same from both, you don’t need the advisor anymore. In that sense, you should think of an advisor more like your mentor who has done all he can. You always need the friend.

Also don’t confuse a business advisor with a business coach. An advisor’s aim is to teach you what to do and how, in specific situations, unlike a coach who helps you develop your generic skills for deciding what to do and how. The advisor helps the entrepreneur fill an experience gap, and a coach helps fill a skill gap. Both may be required.

Before you are ready for an advisor, you must know yourself. Have you assessed your strengths and weaknesses? What are your goals? Where are you heading? Unless you know these things, no one can help you. Also, you need to be prepared to take advice and criticism if it is honest, helpful, and given in a friendly way.

Once you are ready, what are some attributes of a good advisor that you should look for? You need someone who:

  1. Applies pragmatics to your ideas. Most entrepreneurs have lots of ideas. Some can be put into practice easily, but others will be off-the-wall and need refinement to implement. A good mentor will have some knowledge and some perspective on almost every business subject, which compounds their effectiveness.

  2. Challenges your accountability. Entrepreneurs tend to be driven by the crisis of the moment. As such, it is easy to neglect the real priorities of growing the business. Sharing your goals with your advisor means that if you don't complete them, you have a credible voice to remind you and help get you back on the right track.

  3. Able to extrapolate the business. A successful business never stands still. You need a constant stream of ideas for scaling and expanding, with a realistic understanding of the costs and resources required. Then, there is the exit strategy which needs planning, connections, and forethought.

  4. Has the contacts you need. When you need contacts for investors, equipment, and legal or accounting advice, your mentor has the contacts and knows where to find the information. More importantly, the advisor tells you what you need to do to build and maintain your own list of contacts.

  5. Provides perspective as someone from the outside, looking in. An advisor knows what to look for, and sees what your customers see. It’s natural to become so immersed in your business that you forget to step back and look in from the outside. Like living next to the railroad tracks; after a while you don't hear the trains.

How do you find a person who meets these criteria? Sometimes an advisor just appears naturally, but continues to network among friends and colleagues. Look for a person who could be a good role model, someone who has the skills and personality that match your chemistry.

This person could be a professional who does this for a living, or a role model in a related business who is willing to help you. An ideal candidate is someone from the Boomer generation, who is semi-retired, but still active in local organizations or the investment community.

I don’t mean to imply that an entrepreneur needs an advisor more than a friend, just that friends are not normally positioned for double-duty as mentors. You need at least one of each, and the ability to tell the difference.

Marty Zwilling

Disclosure: This blog entry sponsored by Visa Business and I received compensation for my time from Visa for sharing my views in this post, but the views expressed here are solely mine, not Visa's. Visit http://facebook.com/visasmallbiz to take a look at the reinvented Facebook Page: Well Sourced by Visa Business.

The Page serves as a space where small business owners can access educational resources, read success stories from other business owners, engage with peers, and find tips to help businesses run more efficiently.

Every month, the Page will introduce a new theme that will focus on a topic important to a small business owner's success. For additional tips and advice, and information about Visa's small business solutions, follow @VisaSmallBiz and visit http://visa.com/business.


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