Cool is Not a Business Model: Five Questions to Ask Before You Launch a Startup
This is the second in a series of blogs on launching, growing and ultimately selling a technology company, with a corporate finance focus. Topics will include cap structures, equity plans, financing, corporate partnering, board matters and how to achieve a successful exit.
My last post was about helping entrepreneurs determine whether their startup was a lifestyle, niche business or venture opportunity — to save them some grief before they started chasing investment. This time, some advice to consider before quitting your day job to jump into startup world.
I get approached regularly by entrepreneurs who have launched their startup — or are just about to — for advice on how to grow their company. While many have done their homework, I am surprised by how many have leapt before taking a good look where they might land.
The results can be disastrous — good jobs left behind, friends and family money frittered away, houses mortgaged and lost, relationships ruined. While there is no way to guarantee a successful outcome for your startup, there are a few things you can do to test your assumptions early on and improve your chances for success.
Cool is not a business model, do you really have something the market wants?
First up is determining a reason for starting a company (over and above that you hate your day job). An idea for a technology product or solution that will require you to push your product into an unwilling or un-socialized market is tough sledding. Some entrepreneurs spin that situation by saying they’re “evangelists” (sounds pretty hip, yes?), but the reality of convincing a customer to buy something they don’t yet know or believe they need is another thing. Just because your idea is cool doesn’t necessarily mean it makes business sense.
One of the things professional investors (angels, VCs) look for is “market pull”. Is there a market out there that is dying for what you will build? One where the customers say, “If you build that I would definitely buy it”? And one where they would buy it for a price that would make sense for your business model? It’s a lot easier to raise money for a business idea when the investor you pitch gets it right away — and when they can see who your customers are and why they will buy.
Ask the questions you might be afraid to hear the answer to – it will save you some grief and maybe a lot of wasted investment!
So, how do you determine if you are solving a real market pain before jumping ship to form your startup? Easy. Ask your future customers. And ask as many of them as you can.
While it might go against human nature, entrepreneurs should always ask the questions they might be afraid to hear the answer to:
- Is there a market need for the product I want to build?
- Will the customers I have identified really buy once I have built it?
- Will they pay what I need to charge for my product in order to make money?
- Does the current market solution, or simply doing nothing, work just fine for them?
- Am I really better than the competition? Do I have a differentiator?
The sooner you can get in front of potential customers to get these answers the better. Not only will it validate your idea but it will also help you shape your product. And you might just be able to avoid having to answer to Aunty Peggy at the next family gathering as to why her seed investment in your company is going nowhere.
Next up in the series … You’re ready to take a leap, now where to start?
David practiced corporate finance law for 20 years representing numerous BC-based technology companies before retiring to co-found a venture capital fund where he was a partner and portfolio manager for ten years. He now provides corporate finance/M&A advice to a portfolio of early stage companies with a view to growing them to the point where they are ready to exit, and then leading that process.Back to blog