I couldn’t agree more. As an consultant who conducts due diligence on startups for early-stage investors, I am often struck at how many entrepreneurs approach investors with me-too ideas for startups with basically the same business model, market entry approach, etc.

If the business you are copying is wildly successful (hence the reason for copying it), what makes you think your startup can unseat it as the market leader? If the business you are copying is languishing, then why in the world would you have the same exact business model and marketing strategy?

As you are honing the business plan for your startup idea, take care not to fall into the trap of looking just at the obvious. Think outside the box and think what it could be if you do the opposite!

© Eye on Startups & The Startup Guidebook

It’s not simply a matter of identifying the target market, you need to be able to articulate who the buyer is, why they will buy your product or service, and how you expect the market to grow.

A few years ago, an entrepreneur was pitching an idea for a startup to an investor client — a device to allow older generation mobile phones to have speaker phone capability. The idea was that this would appeal to many business phone users that wanted speaker phone capability on their cell phones.

During this period of time, speakerphone-capable cell phones were just then beginning to be introduced to the market, so at first blush, there would seem to be a ready market for this product idea.

But there’s a disconnect here: the target market they were trying to sell to, i.e., the business cell phone users that need speaker phone capability — are generally the high-powered successful business person that has no qualms upgrading to newer phone models. So, the question remains: who will buy it?

The other thing to note is that by its very nature, a “retrofit” market is a declining market — there will be buyers as long as there are old phones to retrofit, but as users start to upgrade to newer phones, the market eventually dries up. So while there is a market initially, it’s not a growing market.

Asking investors for money is hard enough. If your primary target market is a question mark and your overall market is shrinking, it will be impossible to convince any investor to bite on your story.

In the end, the entrepreneur ended up using a combination of SBA loans and bank loans to fund the company. I don’t know what this says about the SBA or banks, but I guess it is a good thing that these institutions have different metrics for making their decisions.

But you have to wonder, did they ask the question: Who Will Buy It?

© Eye on Startups & The Startup Guidebook

In one case, the CEO’s role was quite clear. The CEO lied to customers about product development times in an attempt to land deals, and then lied to the board about revenue projections using these unsigned deals. It was
a case where one lie led to another lie, snowballing into one giant catastrophe.

Sometimes, the company can survive after a bad CEO is ousted. This one could not. By the time it was clear that there were no deals forthcoming and that the product was way behind schedule, the company had burned through millions and the investors were ready to write it off.

This was definitely one of those cases where the right CEO could have made a difference and made this company a success.

In another case, a newly-appointed CEO came in and fired the accountant to “save money” by doing the books himself. He then proceeded to go and hire employees out of state — spending MORE on administrative costs, payroll processing, state unemployment insurance coverage, and tax filings.

The company eventually folded for a number of different reasons, but the actions of the CEO clearly should have merited a review by the board. While the CEO may not have done anything wrong besides being inept in the area of financial controls, his firing of the accountant should have been a red flag. It is NEVER a good sign when the CEO says he wants to do the books himself.

How well do you know your CEO?

If you are a technology entrepreneur seeking a business-minded CEO to take your company to the next level, make sure you know your prospective CEO. Competence and experience are absolute requirements for the job, but so should integrity.

Dig deep when doing your reference calls to see what this person is really like. Know your CEO.

© Eye on Startups & The Startup Guidebook

While entrepreneurs understand that starting a startup is risky business, they also know that being employed by a company during a recession isn’t all that secure either – U.S. employers slashed 80,000 jobs in March, the most in five years and the third straight month of losses.

The good news for entrepreneurs is that angel investors, as a group, are decidedly more optimistic than the general populace. Angel investors are high net-worth individuals who invest in startups and entrepreneurial ventures, and as a group, invest just about as much as the venture capital (VC) firms do.

In the Angel Confidence Report survey released by the Angel Capital Association (ACA) about six weeks ago, 55 percent of the respondents said the number and total dollars invested will increase this year, while 32 percent expected it to be the same as 2007. This is good news, indeed, as angel groups prefer to invest in seed and startup companies (81%) and early-stage firms (85%) as reported by that same survey.

I think part of this optimism is rooted in the fact that angel investors are an optimistic bunch in the first place — you have to be, to invest in a seed and early stage startups. But it is also because angel investors know they are investing for long term growth, not immediate returns. They expect that their investment will grow into something substantial years from now.

So if you are an entrepreneur, go ahead and ditch that cubicle. If you have a great idea and a solid business plan, chances are you’ll be able to get some angels to help get your startup off the ground.

© Eye on Startups & The Startup Guidebook

Some time back, an entrepreneur came to my office seeking advice on an investor presentation he was creating to pitch his idea to investors. While the basic idea has been around for years now, his implementation is unique (which I won’t divulge). At any rate, the general idea is quite compelling.

It is a Medical IT application that would enable primary care physicians to more easily share patient information with other doctors and specialists. By eliminating the prevailing practice of doctors sending paper copies of patient files to a specialist where the same information is usually retyped, this application has the potential to reduce errors and maybe even save lives.

He went on to explain that if this was standardized (as the medical community was asking), it could also be used to share medical data with the patient’s insurance company. This would reduce the time to approve procedures and at the same time eliminate the paperwork swamping insurance companies. “Looks like a win-win for everyone,” I thought.

And then he said, “and then we are going to put in an interface for social networks like MySpace and Facebook.”

Huh?

If he were presenting to an investor, he just basically kissed his credibility goodbye.

With all the concern about privacy, social networks are clearly not the place to be sharing medical information. Everyone knows this. Investors will wonder just how well this entrepreneur really knows his market if he doesn’t know this!

As you are building your pitch to investors, be very wary of falling into the trap of latching on to the current hype. Instead, make sure you do your homework and know everything there is to know about your target market, and then hone your pitch around your core value proposition to this market.

In the end, investors won’t fund your idea simply because it is somehow part of a new movement. First and foremost, investors invest in people — credibility counts for way more than any hype.

© Eye on Startups & The Startup Guidebook