Entrepreneurs and understandably passionate and eager to start their new business and, from my experience, it is difficult to get their attention once they have decided to launch. But, for the opportunity to blossom into a startup, secure funding, and realize its full potential a few “procedural” details should be rigorously followed. Here are my four most important questions to ask and answer first before significant investment in time, energy, and personal finance are committed.
- Does any other person or entity own this idea, invention, or innovation?
- Is there a significant market for products or services to be performed?
- Is there a business model that makes sense; that is, can the business be profitable?
- Can I write a persuasive business plan?
Let me explain my answers to these questions.
1. Does any other person or entity own this idea, invention, or innovation?
An idea by itself is not legally protectable unless kept as a trade secret (and not made public somewhere else) and even then another person or entity may come up with the same idea thus negating its value as a trade secret. An idea should drive further thought and, ideally, the creation of an innovation, a way of solving a new or existing problem differently and in a better way. The innovation should manifest itself, for instance, as a product that offers improved benefits or profitability. The innovation may also be a new or improved service or manufacturing process. The innovation must involve the development of technology that is new and unique. Innovations are best secured in the form of a patent though some may be better preserved as a trade secret. For something to be patentable it must satisfy a number of requirements (the subject of another blog), but the patent basically describes an invention. Patents are property and assets and offer important legal rights and protections for its owner.
The inventor/entrepreneur must be absolutely certain that any technology to be developed based on the idea, invention, or innovation is unique and provides the underpinning needed for securing legal protections (e.g., patents, software that may be kept as a trade secret, or perhaps copyrighted). This means the entrepreneur and patent attorney must perform a good amount of due diligence on technology and patents before having certainty that the answer must be NO in order to proceed.
Looking forward, if an entrepreneur anticipates taking-in professional money, then it should be expected that investors will diligently research competitive technology positions especially the patent landscape. For investment, the technology and legal positions (both current and anticipated) must be robust – reducing technology risk to near-zero is a prerequisite for investment.
The answer to Question #1 must be NO.
2. Is there a significant market for products to be made or services to be provided?
One of the more difficult issues for entrepreneurs to address relates to target markets and potential sales revenue.
It is critical at the earliest stage of planning and due diligence by founders to determine those markets (e.g., the target markets) that are sufficiently large and growing that they would support the entry of a new competitor (the entrepreneur’s new venture). Professional investors generally insist that target markets be large and growing so that missteps and errors on the part of the new venture can somewhat be compensated by the size of the market which presumably contains large competitors who are not particularly concerned with competing with a small, up-start, technology company. Nevertheless, venture capital firms, in particular, are interested in supporting companies that target billion dollar markets rather than those that target million dollar markets. Both the magnitude of investment considered and the interest of professional investors scale with the size of the markets to be served by the underlying technology.
The goal for an entrepreneur is to identify a number of potential target markets that collectively (in a summed sense) have a large size, presumably in the billions of dollars range. One of these target markets will eventually be selected as the entry market — that market that offers the best prospect for producing profit soon after funding. That initial target market need not be large, but it must be one for which success is highly probable.
The weakest part of any business plan will be the projection of sales revenue. Investors, for good reasons, dissect sales numbers and also carefully study the rationale behind the projections. The inability of the entrepreneur to adequately explain or validate how sales will be accomplished gives investors the opportunity to discount proposed valuations. The entrepreneur is usually ill-prepared to defend the business plan in the absence of a good, if not excellent, marketing and sales strategy and plan.
For a new venture without any evidence of sales, sales revenue needs to be projected using a combination of provable data about the markets and assumptions and judgments about how prospects are converted into customers. These assumptions and judgments will still be examined closely by investors but they are more defensible and subject to testing (surveys, focus group, for instance) at early stages by the new venture. With early testing, sales projections become more credible and less subject to discounting by investors. This provides a pathway for entrepreneurs to argue for greater pre-money valuations.
The answer to Question #2 must be YES.
3. Is there a business model that makes sense; that is, can the business be profitable?
Simply put, the business model describes how the company intends to make money and become sustainably profitable. It could also be said that the business model describes how the company will develop and deliver value to its customers, employees, and investors. Eventually, the full description of the business model will reside in the various elements of the business plan. The business model need not be fully expanded or given a label during the formative period of the company; however, the founders need to have an understanding of how their particular technology and products are going to be developed and sold into their selected markets.
Competitors exist in any market targeted by the new venture. By studying competitor models, entrepreneurs can gain an appreciation of how organizational details are deployed by other companies to enable them to create revenue, profit, and satisfied customers. Founders need to deeply understand the competitive landscape.
The analysis of the competitive landscape, along with a SWOT (strengths, weaknesses, opportunities, threats) analysis, prepares the founders to define the business model and identify the major elements of the strategic plan, starting with a delineation of the envisioned company’s unique competitive advantage (UCA) that the founders believe will enable their new venture to become successful (e.g., outperform their competitors). A UCA is simply that unique advantage the new venture has in comparison to competitors in the market. Of course, the UCA, along with other strategic actions that may be created, can only be anticipated during the early stages of the new venture; however, a proper business model and strategic plan enable the founders to develop a convincing message that will be read and heard by investors in the near future.
Once the UCA is identified, it is a valuable exercise to consider the other organizational functions of the business and how they will be designed and implemented to support a sustainable UCA. A sustainable UCA, as it implies, provides a rational basis for presuming the new venture can become a lasting and valuable company.
More information about the early thinking in regards to the business model is provided in an earlier post on LinkedIn http://tinyurl.com/m9v8k48.
The answer to Question #3 must be YES.
4. Can I write a persuasive business plan?
A persuasive business plan is one in which investors are induced/convinced that the business opportunity is good and investment should be made. Putting aside personal dynamics and intervening presentations, the written word (e.g., the business plan) will undergo scrutiny from investors in the supporting team of accountants and advisors. So, the business plan must carry the message in the absence of the entrepreneurial team.
The business plan must be based on facts and data which lead to conclusions and reductions to actions that can be executed in a logical and intelligent fashion. Those attributes must be reflected in the written business plan in a convincing fashion. Preparing the logical organization of the business plan along with the words (in the form of paragraphs) is a challenge for any of us.
In a previous blog (How to Overcome the Hesitancy to Write Your Business Plan http://tinyurl.com/lcblj2g), I explained how to get started. I have written many funded business plans for others over the years and that is the process I also follow. Finally, I refer entrepreneurs to my new book which provides details about how to go about the process of starting your business as well as building the business plan.
Surely, presentations and personal statements are very important, but at the end of the day it is imperative that the business plan be persuasive.
The answer to Question #4 is “YES.”
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