This article, by James F Coffey, a partner at Nutter McClennen & Fish LLP, discusses the key principles an early-stage startup requires to move from an interesting concept to a company worthy of securing angel funding. Perhaps even more interesting is the overall concept that a company’s value lies not in its idea, but in it’s actual solution, or execution to a given problem.
A Startup’s Key to Securing Early Stage Funding
As a lawyer who specializes in emerging companies and a member of the Boston Harbor Angels, I hear 10-20 pitches a month by entrepreneurs seeking angel funding. There are several factors that account for success or failure in a new company’s ability to attract funding. However, one common theme always rings true: all successful businesses are based on great ideas, but not all great ideas become successful businesses. [Editor’s Note: For a really interesting take on why ideas matter so much for a startup see Sam Altman’s Lecture at Stanford].
Let’s say you’re an entrepreneur. You present your slide deck to an angel group and deliver your presentation without a hitch. You think it went well. However, the angels don’t like it. One of them tells you “great idea, but this isn’t a business.” What on earth does that mean, and where do you go from here?
Investable Businesses versus Ideas
There are plenty of great business ideas—but not all ideas and innovations generate the kind of returns that justify angel investor financing. Angel investors invest in solutions, not ideas. They take significant risk in deploying their capital, and so they naturally expect a large return. This means that there must be a large market for your business if they are going to consider an investment. Providing a solution to a major business problem that exists in a large, clearly defined and targeted market (e.g., $100+ million) will separate your business from the rest of the pack. It’s essential to capturing angel investor interest, and the difference between the winners and the losers.
Go-to Market Strategy is Key
Your business solution must also accompany a well–developed go–to–market strategy to rapidly claim significant market share (e.g., 20 percent–plus). [Editor’s Note: Why 20%? Market leaders capture most of the value of an industry, and that appears to be true no matter the industry. See VC Firm Firstround’s post for more]. As much as your solution needs to be well thought out and easy to use, if you haven’t fully developed your thoughts on how to deploy it in the marketplace, you’ll have problems. Moreover, if the solution isn’t wholly unique, i.e., there are other competing solutions in the marketplace, it needs to be significantly better than the others. Keep in mind that angels prefer innovative solutions over incremental enhancements to common products and services. Your proposed solution can’t be an “optional” one, i.e., non–essential. It should be a need–to–have product or service.
Which Means Knowing the Target Customer
Before making your pitch to present your solution and demonstrate how it fits in the market, clearly identify your target customer. You must have an identifiable market segment and show that you have a clear understanding of the end-user/customer. Your ability to demonstrate a significant demand for your proposed solution from a targeted customer base will help clear the path for funding.
Consider these two companies. The first company, Bad Co., was a platform technology company in the social networking space. It had literally millions of dollars worth of infrastructure (including intellectual property) that had been purchased, pennies–on–the–dollar, from the trustee of an insolvent company. The entrepreneurs used this pre–existing base to create a niche, online marketplace that brought together buyers and sellers of goods and services. Bad Co. established strong, strategic corporate partnerships and it marketed itself to targeted customers in the Latino community. Neat idea, but they forgot about eBay, Craigslist, and the dozens of other competitive sites already up and running. Bad Co. didn’t get funded.
The second company, Good Co., struggled at first trying to define its business model. Good Co. had developed an interesting technology using proprietary algorithms that allowed it to measure and collect carbon credits generated through the implementation of its bike sharing program. These carbon credits could later be sold and traded in Europe. However, after speaking with their business advisors and prospective investors, they soon recognized that in order to be successful, they needed a solution for the marketplace, not just a great idea. Moreover, they needed to provide a solution for a market that existed, not one that they hoped would exist. Once they demonstrated that their technology was a solution for customers in a targeted marketplace, specifically the “Zipcar for bikes,” they were on the path to funding. Good Co.’s real name is Zagster, and it’s one of the hottest new technology companies in Boston, having been selected as a TechStars and MassChallenge finalist.
The Key Takeaway for Pitch Time
So at pitch time, remember that your well–crafted explanation of the problem you solve, how you solve it, and how big of a market there is for your solution, is what you need in front of the angels. Don’t waste your time talking about ideas. Solutions are heralded over good ideas all the time.
James F. Coffey, Partner
Jim Coffey is a partner in Nutter McClennen & Fish’s Business Department. He is a member of its Emerging Companies, Venture Capital, Mergers and Acquisitions, and Workout, Restructuring and Bankruptcy practice groups. Jim has particular expertise representing companies in critical phases of transition. From start-ups or early stage development companies seeking angel funding to fully mature businesses seeking an intelligent exit strategy, Jim provides strategic counsel, contacts, and expertise to help clear the path to success.
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