The 3 Ques­tions Ev­ery En­trepreneur Needs to An­swer

Trillions - - In This Issue - By Brad Red­der­sen

Start-ups of­ten fo­cus so much en­ergy on ser­vice and prod­uct in­no­va­tion, mar­ket­ing and dis­tri­bu­tion that it’s easy to lose track of the most im­por­tant issues fac­ing a new com­pany. You think you have ev­ery­thing un­der con­trol. You have your idea ready, and you have a team ready to cre­ate it and a back room or garage set aside to start things up. Maybe you even have some prospec­tive cus­tomers too. Ev­ery­thing is look­ing good.

You also need money to pay the start-up bills. But you know how good your idea is, and you are con­fi­dent that any an­gel in­vestor or ven­ture cap­i­tal­ist would just die to have the first shot at in­vest­ing in your lit­tle brain­child. So you pre­pare your pitch, get the pro­to­types ready, bring in the early cus­tomer tes­ti­mo­ni­als and get the VCS lined up to lay out that im­por­tant early cash.

But when you get to that first meet­ing, some­thing goes wrong. The VCS or an­gels just didn’t get it. So you have a sec­ond meet­ing, and that group doesn’t get it ei­ther. By the time the fourth or fifth meet­ing comes up and the same thing hap­pens, it slowly be­gins to dawn on you that maybe there is some­thing miss­ing in more than just your pitch. And un­for­tu­nately you may have by that point lost valu­able time and per­haps some of the best chances for fully fund­ing that start-up.

How can you avoid the mis­takes “those guys” made? By care­fully work­ing through the an­swers to three crit­i­cal ques­tions about your busi­ness – ques­tions you need to think through thor­oughly be­fore you talk with even the first an­gel in­vestor, first VC group or ear­li­est cus­tomers.

1) What is it that your com­pany is do­ing that’s dif­fer­ent, and why does it mat­ter?

Most prospec­tive en­trepreneurs you run into will al­ready have thought about this first ques­tion quite a bit – even in the ear­li­est cre­ative stages. They al­ready know they’re do­ing some­thing dif­fer­ent. That’s also of­ten the most ex­cit­ing thing about the new ven­ture, way ahead of the po­ten­tial to make money. But when you dig deeper, you of­ten find there are sev­eral issues they haven’t con­sid­ered – even in the an­swer to this most ba­sic of start-up ques­tions.

One of those issues is to sep­a­rate, es­pe­cially in your own mind, the core essence of the new prod­uct or ser­vice you’re plan­ning to of­fer from the im­pact you hope to achieve in the mar­ket.

Con­sider for ex­am­ple the mas­sive suc­cess of Ap­ple’s ipod in the por­ta­ble mu­sic player busi­ness. It was a mas­ter­piece of de­sign from the be­gin­ning, and that might have been enough to drive sales. But the core essence of Ap­ple’s in­no­va­tion in the dig­i­tal mu­sic busi-

ness wasn’t de­sign or even the ipod it­self, be­cause even if the ipod was well ex­e­cuted, there were al­ready other com­pet­i­tive and highly re­garded prod­ucts in this cat­e­gory when it first went into pro­duc­tion.

The most sig­nif­i­cant in­no­va­tion in all of this – and the real “en­gine” driv­ing the busi­ness growth for the ipod – was Ap­ple’s care­fully crafted cre­ation of its itunes dig­i­tal mu­sic dis­tri­bu­tion busi­ness. It made buy­ing and down­load­ing al­most any mu­sic you might want eas­ier than ever be­fore – all thanks to a com­bi­na­tion of tight part­ner­ship agree­ments with the main play­ers in the mu­sic pub­lish­ing in­dus­try, great store and backup soft­ware (first on Macs only but then soon ported to Mi­crosoft Win­dows OS, an im­por­tant early de­ci­sion) and an ex­cel­lent mu­sic player.

When the dig­i­tal smoke had cleared, Ap­ple had com­pletely re­de­fined the way the mu­sic in­dus­try worked. By do­ing so, it also – seem­ingly out of nowhere – ended up with a vir­tual dom­i­na­tion of the dig­i­tal mu­sic busi­ness.

So even if the first of the three ques­tions for en­trepreneurs may seem easy for you, you need to take some time to think about it be­fore giv­ing your an­swer, be­cause the core dif­fer­en­tia­tor be­tween your com­pany and ev­ery other one out there is go­ing to drive ev­ery­thing from your spend­ing, your hir­ing, your in­tel­lec­tual prop­erty strat­egy and how you work with your strate­gic part­ners. Ap­ple un­der­stood this well, and so should you.

2) How do you plan to make money?

Like the first ques­tion, this one is sub­tler than it sounds. Just say­ing you’re plan­ning to ask peo­ple to pay isn’t enough. Even worse is some­thing I’ve heard too many times – that the way you’ll com­pete is to of­fer “bet­ter value.” If that’s just one of your “buzz phrases,” you’ll get kicked out of the VC meet­ing al­most be­fore you start. And if what you re­ally mean is you’re plan­ning to give a big price break as your strate­gic idea, just re­mem­ber there is al­ways some­one else out there work­ing on a way to un­der­cut even your low­est price.

This is where the con­cept of your whole busi­ness model kicks in. You need to be able to ad­dress how it dif­fer­en­ti­ates you from oth­ers from the be­gin­ning and why it will be sus­tain­able over time.

As an ex­am­ple, con­sider Google’s en­try into the search busi­ness with its now-well-known Pager­ank al­go­rithm. When the World Wide Web first emerged on the scene, back in the early days of the Mo­saic and Netscape browsers and even just af­ter that, when Bill Gates rammed In­ter­net Ex­plorer onto the mar­ket

so Mi­crosoft wouldn’t get locked out as a player, just find­ing stuff “out there” was a ma­jor night­mare. So early search en­gines such as W3 Cat­a­log, Ly­cos and We­bcrawler showed up, us­ing of­ten very much hu­man-pow­ered re­search to help guide the early In­ter­net ex­plor­ers to find things of use. All of these op­er­ated pretty much “for free” with­out much of a busi­ness model to keep them go­ing.

But now that lit­tle start-up with the funny name showed up on the search en­gine scene.

Google’s ini­tial In­ter­net search con­cept, de­vel­oped first at Stan­ford Uni­ver­sity, was in­deed a true killer idea. In­stead of re­ly­ing on cu­rated lists or just crawl­ing the web for matches with a search term, its search en­gine gave back an­swers ranked not just on how good the matches were but also on how of­ten those matches were linked to. The end re­sult was the an­swers were of­ten so good, so much bet­ter and so much more ac­cu­rate than any of the com­peti­tors that peo­ple quickly learned the place to go to search for things was Google.

So far all good, but it be­came very clear that peo­ple were not go­ing to pay to go to Google’s search en­gine site even if it was the best one in the uni­verse. So – and it wasn’t ini­tially clear this was go­ing to work – the an­swer for how Google ended up making money was by charg­ing for ad­ver­tis­ing as­so­ci­ated with its search re­sults. And be­cause that ad­ver­tis­ing could only ap­pear when you did a search us­ing Google’s en­gine, it gave Google a long-term edge in the busi­ness.

And when you look at ev­ery­thing else Google has done go­ing for­ward, it has main­tained that model for most of its busi­ness. This is part of why its high-de­mand search en­gine tech­nol­ogy and its Chrome browser, Gmail, Quick­of­fice soft­ware and Google Docs are all avail­able for free on all ma­jor plat­forms. It keeps you part of the Google ecosys­tem and makes the ad­ver­tis­ing links con­nected to each of these even more valu­able than ever be­fore. Plus, be­cause Google’s search is the best out there, both tech­ni­cally and in the mind share it holds with cus­tomers, it keeps you com­ing back to where the money-making ad­ver­tise­ments will ap­pear.

You’re prob­a­bly think­ing “my prod­uct (or ser­vice) is dif­fer­ent” and so your sit­u­a­tion isn’t as com­pli­cated. Maybe so. But even if you have a hard­ware prod­uct, con­sid­er­a­tion must be given to why peo­ple will pay the price you’re set­ting for it as well as how the busi­ness will scale when your vol­umes in­crease. And if it’s a “soft” prod­uct (like an on­line or dig­i­tal ser­vice), the ques­tion of making money is an even big­ger one, as just be­cause you have some­thing great, the odds

these days are that there’s some­thing else avail­able that’s al­most as good and maybe even avail­able for free.

3) Why should you be the one to run this?

The an­swer – in case you’re won­der­ing – is not “be­cause it was my idea.” Even if you have filed for and maybe even been granted patents, own­ing an idea isn’t enough, most im­por­tantly be­cause com­ing up with an idea and con­vert­ing that into a prof­itable busi­ness are two very dif­fer­ent things and also partly be­cause gen­er­ally any busi­ness re­quires far more than “just an idea” to make it hap­pen.

The sad truth about this last ques­tion is that in many cases there may ac­tu­ally be some­one bet­ter than you to run the busi­ness – some­one who is al­ready in the in­dus­try who may have a bet­ter chance of cut­ting the deals to cre­ate the new ecosys­tem your idea re­quires, for ex­am­ple. In the case of Ap­ple’s dig­i­tal mu­sic busi­ness, it is pos­si­ble that the mu­sic in­dus­try lead­ers them­selves could have come to­gether first – be­fore Ap­ple – to de­velop the soft­ware and dig­i­tal mu­sic en­cod­ing tech­nol­ogy and down­load the sys­tems and mi­cro pay­ment struc­tures to dom­i­nate the in­dus­try that we now know as itunes, the ipod and its suc­ces­sors the ipad and iphone as parts of that sys­tem.

But they didn’t. So why did Steve Jobs win here when oth­ers (such as Sony Mu­sic, for ex­am­ple) more con­nected and with the tech smarts to de­liver didn’t get there be­fore him? Why did Ama­zon be­come the on­line sales and dis­tri­bu­tion pow­er­house for books and be­yond that we know to­day? Once again it cer­tainly wasn’t be­cause Jeff Be­zos owned the key tech­nol­ogy patents for sell­ing things on­line. In both cases, it’s be­cause of what they did to pre­pare their com­pany to ex­e­cute their strate­gies, an ex­e­cu­tion ap­proach that ul­ti­mately demon­strates why they were the best ones to carry those ideas for­ward.

The an­swer to this last ques­tion of the three, then – which you’ll need to seek out for your­self – of­ten lies in a com­bi­na­tion of your own (and maybe not that unique, though good) abil­i­ties to drive the prod­ucts you’re cre­at­ing to mar­ket plus your abil­ity to cut the early and ex­clu­sive strate­gic part­ner­ship deals needed to drive the early crit­i­cal mar­ket share growth for your busi­ness. It does take some­thing unique to of­fer, in­clud­ing per­sonal drive, a track record for the right kind of in­no­va­tion, lead­er­ship bril­liance and more than a bit of charisma. But be­yond that, it also of­ten takes just the right amount of hu­mil­ity and sales­man­ship to know you can’t do it all alone and to then meet with the right group of out­side in­vestors to lock in the rest of what you need to grow that busi­ness.

Image: Khakimullin Alek­sandr / shutterstock.com

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