For many would-be entrepreneurs, there is the moment of brilliance when the product idea suddenly pops into their consciousness, but what needs to come next?
I can tell you what does follow for most entrepreneurs. They either start building the product, or start writing a formal business plan, or start searching for investors. One mistake is to develop the product in isolation without an understanding of the customer, only to discover that there are billions of people in the world and no one cares. Another mistake is to write a business that is a work of fiction for the sake of checking off the task as done. The result is an execution plan that is followed blindly when in fact, it is based wishful thinking. When I started evaluating project proposals I was taught to ignore the numbers and challenge the assumptions upon which they are based.
The real first step is to go from the first product concept to finding that viable starting point for a new business.
Forego the Corporate Paperwork for Now
Don’t waste your time just yet going through corporate filings and paperwork. Government organizations don’t approve of paperwork quickly, it’s usually a serial process, and it can take weeks or even months. You can print business cards, put up a website, and get a corporate email account, all without doing any filings at all. This is good enough to start talking with people about your idea. Once you’ve firmed up your product concept and business model, then go ahead with formalizing the company.
Forget the Business Plan, Start with the Concept Plan
Entrepreneurs need to create a concept proposal for potential customers, advisors, and investors. This is an advice-only proposal. It’s a very short version and precursor to a formal business plan. Its intent is to discover and gauge viability of the product and business. It introduces stakeholders and anyone you need to make the vision a reality into the business process early. The entrepreneur is searching for the right product, the right customers, and the right marketing. The goal is to find at least the starting point for the real market opportunity, a set of advisors for the project, and identify potential investors.
This is the phase where entrepreneurs say they network like they never have before.
Prove the Idea is Workable
So now the entrepreneur has a starting point, now it’s time to think about how the product can be built as quickly and as inexpensively as possible. What’s important in today’s business climate is to produce proof of concept as soon as possible. Too many entrepreneurs believe this means creating a demo, but that’s not enough. It also means proof that of customer acceptance and the business model, and revenue is the best way to prove this.
One mistake is believing that the process stops with the starting point. The process is iterative, as the start-up learns what the real market opportunity is. It’s rare if a start-up’s first product concept becomes the successful product. It usually takes one or two variations before the real product emerges. Both Twitter and Groupon were not the first products; both were one variation away from the starting point. If the start-up does three or more changes then the start-up usually fails. You don’t read about these failures in the news.
I know a company that started as a consumer entertainment start-up with a $799 device; even when they knew the price was excessive, they blindly pursued it. No surprise, parents weren’t paying for this toy. Then they tried to sell the product into the business video conferencing market. It sounded plausible – a less price sensitive customer. The problem was this is an established market with entrenched players, and their product wasn’t solving a pressing problem and wasn’t designed to provide new benefits to the users. It was a technology in search of being a product. It fell flat. Then they decided to chop up the design and sell the most valuable piece, a universal protocol and standards converter. It bombed. The problem was the team didn’t change (other than continually firing the sales guys for not bringing in revenue), they couldn’t define a viable product, and continued funding wasn’t going to help. After 5 years the start-up was shut down.
The Investors’ Perspective
When entrepreneurs approach investors, they often believe the investor will hear their pitch, fall in love with their product and fund the company. After all, the awesomeness of the product should be obvious to anyone. That’s not the psychology behind start-up investors, particularly seasoned ones. They don’t so much look for reasons to fund a start-up as much as they look for reasons to NOT fund a start-up. They hear thousands of pitches every year and only about 1% of proposals get funded. Investors look for the flaws, and if they can’t find them, then they consider the proposal as a possibility and it will be investigated further. Second, to the equity investor, the company itself is their product. They make their money by selling the company. They are far more concerned with the business of the product, then the product itself. Yet, most entrepreneurs want the investor to be enamored with the product, but the investor wants to fall in love with the business.
About the Author
Cynthia Kocialski (@ckocialski) is the founder of three tech start-ups companies. In the past 15 years, she has been involved in dozens of start-ups and has served on advisory boards. Cynthia has held various technical, marketing, and management positions at IBM and Matrox Electronics. Cynthia has engineering and mathematics degrees from the University of Rochester and the University of Virginia. Cynthia writes the popular Start-up Entrepreneurs’ Blog and is the author of the book, “Startup From The Ground Up – Practical Insights for Entrepreneurs, How to Go from an Idea to New Business”.