Tuesday, February 7, 2012

Investors Fund Solutions Rather Than Technology

Too many entrepreneurs develop a new product without regard to market demand, then build an entire strategy based on creating a need, rather than acting on an existing market need. Investors characterize this approach as a “solution looking for a problem.” These don’t get funded.

The best startups find a way to drive the market with their technology, rather than push their new technology-driven ‘solution’ on the marketplace. An example of market-driven technology is the basic automobile, but combining a car with an airplane is technology looking for a market.

New technology really doesn’t have any value, until it is integrated into a market-driven solution. Here are a few thoughts on a process that will keep you on the right track:

  • Get real customer input first. Temper your product with actual market and customer feedback. Everyone's personal perspectives and interests are different, so the key is starting from market problems, and going from there to technology - not vice versa. Show your prototype to real customers, and listen.

  • Quantify the pain points. Measure the major pain points in time or dollars, based on feedback from intended users of your product or service. Users that ‘like’ your product, but have no pain, will not pay real money or endure change for your product (even early adopters won’t make a market).

  • Keep it simple and easy to use. Have you solved the user problems in the simplest possible way, with the fewest possible features? Or have many features been thrown in, just because the technology can deliver them? Easy to use and lots of features are usually contradictory statements.

  • Analyze how competition will react. If you are tempted to respond with “We have no competition,” then you almost certainly have a solution looking for a problem. Think about how your customers have survived all these years without your product, and how many will pay your price to change. Will your competitors quickly copy you, or under-price you?

  • Experience the pain first-hand. The best entrepreneurs solve problems that they and their team have personally experienced. This will keep you laser-focused on the solution, and make you more effective and credible in selling the solution.

    I’m sure that some of you are thinking by now that if all entrepreneurs followed these guidelines, the world would have missed many great leaps in technology, like the laser, television, and the Internet. These are usually called ‘disruptive’ technologies.

    Disruptive technologies and grand new solutions can ultimately change the world, and create a large opportunity, but they are not exciting to early-stage investors for the following reasons:

  • Fundamental changes take a long time to happen. According to the Gartner Hype Cycle, every major new technology goes through four stages before reaching general acceptance, and that can take as long as 20 years. Investors are looking for a big return in five years. Only people and organizations with their own big resources will survive.

  • Creating a need is much more costly than marketing to an existing need. To build a new market, you have to educate people on the concept, create the “need” in their mind, and solidify it by constant repetition. This means building a brand, viral marketing, and multiple expensive promotions. Early-stage investors won’t risk this much.

So, if you have a new technology that you believe can change the world, you need to team with someone who has really deep pockets. Angel investors can’t help you, and most venture capitalists won’t be interested in contributing the first several million.

Perhaps a better alternative is to focus on existing problems with real pain points, and customers that have money to spend on a better solution today. You will get help from investors, feel the near-term satisfaction of success, and build your skills and your bank account for that earth-shaking new technology the next time around.

Marty Zwilling


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1 comment:

  1. Excellent suggestions on putting yourself in the right perspective *before* moving forward -- if you don't have an eye toward your market and what they actually need, you're not going to inspire anyone to throw money at your project!

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